Carlyle Credit Income Fund: Get 15% Yield From The Newest CEF That Holds CLO Equity

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Carlyle Credit Income Fund: Get 15% Yield From The Newest CEF That Holds CLO Equity

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BsWei/iStock via Getty Images As a recent retiree who seeks passive income from my investments to help support my lifestyle while I no longer receive a steady paycheck, I look for strong performing ...

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There are many advantages to investing in CEFs. These include the ability to buy the funds discounted to NAV, the ability of fund managers to use leverage to boost the distribution, and the ability to grow the fund’s share count (and potentially the NAV) by using ATM offerings and rights offerings. CEF holders have the potential to increase returns by reinvesting monthly distributions into more shares, especially when the funds offer a discount to reinvest. If you are interested in generating passive income from your investments, you may want to further explore the advantages of CEFs. In my latest article that discussed the benefits of investing in CEFs that hold CLOs (collateralized loan obligations) like OXLC and OCCI with yields as high as 20%, I mentioned another CEF from Carlyle that I also own in my Income Compounder portfolio. That fund, which is one of the newest publicly traded CEFs that invests in CLOs to generate high-yield income, is the Carlyle Credit Income Fund (NYSE:CCIF). I last covered CCIF back in December 2023 when I wrote about how Carlyle transformed a stodgy old CEF into a successful new one. This is what I quoted in that article, which was taken from the CCIF Annual Report dated September 2023: On July 17, 2023 Vertical Capital Income Fund (\"VCIF\") announced that it changed its name from VCIF to Carlyle Credit Income Fund (\"CCIF\") in connection with the transaction pursuant to which Carlyle Global Credit Investment Management L.L.C. became the investment adviser to the Fund. In connection with the transaction, the Fund's investment mandate changed to focus on investing in equity and debt tranches of collateralized loan obligations (\"CLOs\") to drive potential shareholder value. At that time, I rated CCIF a Strong Buy, and it has delivered a total return beating even the S&P 500 (although that is not the objective) since the article was published.   Seeking Alpha Because CCIF has only been investing in CLOs for a little over a year now, I thought it might be a good time to revisit the fund and provide an update. With the fiscal Q3 2024 earnings results due to be announced on August 21 after the market close, this may be a good opportunity to analyze fund performance and future income potential. About CCIF From the fund’s website, the fund's objectives and relationship with Carlyle is explained in this summary:  CCIF’s investment objective is to generate current income and capital appreciation primarily through investing in equity and junior debt tranches of collateralized loan obligations, or “CLOs,” that are collateralized by a diversified portfolio of senior secured loans. As a prominent player in the CLO market (both as a CLO manager and CLO investor), Carlyle’s market presence facilitates access to a wide range of market opportunities. Carlyle intends to source investment opportunities from the broad network of dealer, investor, and manager relationships that it has developed during its 25-year history in the CLO market.  Currently, CCIF holds just over $105M in net assets, and the current dividend yield based on dividends declared through August 2024 amounts to 15%, according to the latest monthly report for July. The fund holdings include less than 3% legacy real estate holdings from the former VCIF fund.   Carlyle Back in December, the net assets amounted to $93.7M and the dividend amount was $0.0994. In March of this year, the monthly dividend was increased to $0.105 per share, where it has remained since then. As of July 2024, the fund holdings consisted of mostly CLO Equity (over 95%). As I have explained in previous articles regarding CLO funds, the equity tranches in particular are in a sweet spot in 2024 and that concept is further explained in detail on the fund’s web page titled, Why CLO Equity. I will leave it to readers of this analysis to explore the details on that web page rather than copying and pasting the information here. However, suffice to say that CLOs benefit from volatility. That is one reason why the timing has been good for CCIF in terms of building the fund assets during several periods of market volatility in the past year. Another benefit of investing in CLOs is transparency in reporting, including detailed monthly reporting by an independent trustee. The CCIF web page is well-designed and includes lots of detailed information about the fund, and much of that data is summarized in the monthly reports. For example, details of the underlying loans in the CLOs that CCIF holds are shown in each monthly report.   Carlyle Another key point is that CLOs have attractive financing structures that are long-term (typically 13 years) and are not subject to margin calls or covenants that require forced liquidation during market crashes. The CLO market is large and growing, providing ample opportunity for new CLO creation. CCIF Q2 2024 Earnings Results From the company’s Q2 2024 earnings presentation published on May 31, the financial results were very encouraging. The fund NII increased over the previous quarter, and recurring cash flows more than covered the high-yield distribution, with plenty of cushion to potentially lead to another future increase in the dividend. NAV was estimated at $7.88 per share as of March 31.   Q224 earnings presentation As of today, August 12, CCIF is trading at a slight premium to NAV and the yield at the closing market price of $8.19 remains above 15%. The NAV as of July 31 dropped a bit to $7.64 and has been trending down for most of the year. However, that does not concern me too much because of the way the NAV is determined for CLOs, which has a lot to do with the market value of the underlying loans. The distribution comes mostly from NII and recurring cash flows, which are independent of the loan value. As long as the loans continue to be paid each month (and quarterly waterfall cashflows from the equity tranches continue to be paid), there is ample room to cover the monthly dividend. As CEO Lauren Basmadjian explained on the Q2 earnings call, interest rates remaining higher for longer in 2024 have actually helped CLO equity to deliver strong results. The market is currently pricing in 1 to 2 rate cuts down from the approximate 7 rate cuts projected at the beginning of the year. This better reflects Carlyle's initial 2024 outlook and believe that even if we do experience rate cuts this year, we will be operating in a higher rate environment for some time. We think this is a positive for CLO equity distributions as they benefit from higher base rates as long as defaults and distressed exchanges don't increase significantly. For example, the second quarter median CLO equity distributions based on April payments were 4.8%, the highest the CLO market has experienced since the fourth quarter of 2015. Comparison to Peers Because CCIF is relatively new to the publicly traded CLO CEF market, there is not a lot of history available to compare to peer funds like OXLC, ECC, and OCCI. However, in the relatively short time since the fund converted to CLO holdings, it has performed on par with those peer CEFs and has delivered a total return that is only exceeded (barely) by OXLC in the past year.   Seeking Alpha With both OXLC and OCCI recently increasing the distributions from their CLO equity positions, it would appear that CCIF may be in a good position to increase theirs as well. This is based on the excess recurring cash flows that amounts to undistributed taxable income, or UTI. As an RIC (Regulated Investment Company), the fund needs to pay out at least 90% of its taxable income each year to avoid a tax penalty. To that point, on the Q2 earnings call, one analyst asked about the status of any UTI given the excess amount of recurring cash flows.  Q: I wanted to ask you where the undistributed taxable income stands, considering how high cash flow per share is running, which is sort of a surrogate for taxable income versus the distribution? And what's the board thinking about doing in terms of managing UTI? A: (Nishil Mehta, Portfolio Manager) So it's -- the dividend policy is something that we discuss with the Board every quarter. As I think everyone might be aware of, taxable income for CLOs can be pretty hard to predict. You did mention that recurring cash flows could be a good proxy, but then taxable income can vary significantly whether it's due to refinancings and resets or just the underlying trading that CLO managers complete in the portfolios. So it is something that we're tracking and fully appreciate that. If taxable income is closer to the recurring cash flow, then we're currently not close to meeting the regulatory requirement. But at this point, we feel comfortable with our current dividend policy, but we'll continue to assess that on a quarterly basis.  Keep in mind that this is based on just two quarters worth of earnings for the fiscal year of the fund, so the answer provided was relatively non-committal. We will know more in about a week when the next earnings report comes out. Based on what I am seeing with other CLO equity funds announcing dividend increases, it would not surprise me to see another increase from CCIF as well. Summary: CCIF Still a Strong Buy CLO equity continues to deliver strong returns in 2024 and CCIF is a well-managed fund that has the backing and experience of a significant player in the CLO market in the form of Carlyle (see the One Carlyle Advantage). I have been impressed with the progress made in just the past year and look forward to the Q3 earnings results to be announced on August 21. The fund has been growing net assets, increasing both NII and recurring cash flows, and building a long-term high-yield income vehicle with potential for some capital appreciation. According to Yahoo Finance, there are only two analysts following CCIF, but they give it 1 Buy and 1 Strong Buy rating with an average price target of $8.75. Of course, I am more interested in the income that is paid monthly and currently amounts to an annual yield over 15%. I expect that the dividends will continue at that level or may be increased next quarter if the income and recurring cash flows continue to increase as they did in the previous quarter. I will be listening in on the upcoming earnings call on August 22 to learn if there is anything that has changed with the fund, and will add comments to this article if there is any news worth sharing. Meanwhile, do yourself a favor and do your own due diligence on this fund if you are interested in securing high yield passive income in your portfolio.  Editor's Note: This article covers one or more microcap stocks. 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