Blackstone Secured Lending Fund Q2 FY2024 Earnings Call

Thank you, Jennifer. Good morning and welcome to Blackstone Secured Lending Fund's second quarter conference call. Joining me today are Brad Marshal; and Jonathan Bock, Co-Chief Executive Officers; Carlos Whitaker, President; and Teddy Desloge, Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation of our results and filed our 10-Q, both of which are available on the shareholder section of our website, www.bxsl.com. We will be referring to that presentation throughout today's call. I'd like to remind you that today's call may include forward-looking statements, which are uncertain and outside of the firm's control and may differ materially from actual results. We do not undertake any duty in updating these statements. For some of the risks that could affect results, please see the risk factors section of our most recent annual report on Form 10-K. This audio cast is copyright material of Blackstone and may not be duplicated without consent. With that, I'd like to turn over the call to Brad Marshall.

Thank you, Stacy and good morning everyone. Thanks for joining our call this morning. Turning to the agenda, I'll start with some high-level thoughts before turning over to Jon, Carlos, and Teddy to go into details of our portfolio and second quarter results. Turning to Slide 4 of the presentation. In my view, these results reflect the strength of our platform, leveraging the advantages of Blackstone's scale across our $1.1 trillion ecosystem and putting it to work for our investors. We're pleased that BXSL reported the best quarter of earnings on a dollar basis and the highest net asset value per share since our IPO, as well as increases in net investment income per share and net income per share compared to last quarter. Our NII of $0.89 per share, representing a 13.2% annualized return on equity is up from $0.87 per share in the prior quarter and net income of $1.01 per share is up from $0.96 per share in the prior quarter. Further, net asset value per share increased by $0.32 or 1.2% to $27.19 from $26.87 per share last quarter. Our dividend of $0.70 per share is well covered at 116% and represents an 11.3% annualized dividend yield, one of the highest among our traded BDC peers with as much of their portfolio invested in first lien senior secured assets with BXSL at 98.6%. Return drivers remain strong. As of quarter end, BXSL had an 11.6% weighted average yield on debt investments with less than 0.3% investments on non-accrual at cost. And we were able to amend our corporate revolver post quarter end, leveraging the tighter market environment, as you will hear later from Teddy. Moving to Slide 5. The second quarter was our most active quarter for originations for both committed and funded investments since 2021, with $1.3 billion in new commitments and $891 million in fundings, this also marks the third consecutive quarter of over $1 billion in commitments. As a result of our broad coverage model and Blackstone's global reach, we get to see a broad range of deals that come to market, large, medium, small, and we seek to offer investors exposure to what we believe are compelling risk-adjusted opportunities at any given point in time. This quarter, we funded more middle market companies compared to recent quarters and what we believe were high-quality transactions at lower LTVs and attractive spreads. Overall, our new fundings into new portfolio companies for the quarter were nearly 100% first lien senior secured debt with an average weighted average spread of approximately 524 basis points, an average OID of 1.3% in nearly 1.5 years of call protection and an average LTM EBITDA of $119 million. Importantly, these assets had an average LTV of 37.9%, well below that of the portfolio in prior years. So, while we have seen some spread compression in the private markets, these new deals funded in the quarter had a greater spread to LTV ratio of what we would call spread per unit of risk. And while we have a large team focused on our assets, we also strive to minimize the company's expenses. We start with a lower headline fee structure compared to the average of our traded BDC peer set, which we believe investors recognize; we then further aim to minimize other expenses and the cost of our liabilities. Teddy will talk about our liabilities a bit later. But since quarter end, we negotiated lowering the spread of our nearly $2.1 billion revolving credit facility to the lowest among our traded BDC peers. At the same time, we further diversified our lender base by adding additional banks to our revolver group with now over 15 participants. Finally, with recent market volatility, we believe private capital solutions will remain attractive to scale borrowers given certainty of execution by private lenders. I'm very pleased with this quarter's progress in every regard. We had robust origination at what we view as attractive spread per unit of risk. We continue to see strong earnings as measured by income and NAV, and we have repriced our cost of our capital after quarter end to position BXSL to operate in an environment where rates are likely to come in. For us, it's about seeking to maximize results in every area of BXSL for the benefit of our shareholders. With that, I will pass over to my colleague, Jon.

Thank you, Brad, and let's jump to Slide 6. We ended the quarter with $11.3 billion of investments, over an 8% increase from the $10.4 billion in Q1 across 231 portfolio companies. This resulted in an increase in ending leverage to 1.13 times and average leverage of 1.09 times given the timing of some of our investment fundings, moving up to the middle of our target range of 1 times to 1.25 times debt equity. We maintained our strong liquidity position at $1.2 billion, and that's comprised of cash, available borrowing capacity across our revolving credit facilities, and that includes ABLs to lean into that expanded pipeline. Now, our weighted average yield on debt investments at fair value held steady at 11.6% this quarter compared to 11.8% last quarter. The yields on new debt investment fundings and assets sold and repaid during the quarter averaged 10.9% and 11.7%, respectively. And let's take a look at the portfolio and turn to Slide 7. Approximately 99% of BXSL investments are in first lien senior secured loans, and 99% of those loans are to companies owned by financial sponsors, who generally have significant equity value in these capital structures demonstrated by an average loan-to-value of 47.4%. Now, it's worth noting, the average single sponsor concentration in our portfolio is approximately 1% of fair value. Now, our portfolio also has what we believe is a strong LTM EBITDA base that's averaging $206 million and it's a 13% increase from last year. This is more than 2 times larger than the private credit market, where we also see continued strength and performance from larger companies, the bedrock of our portfolio relative to their smaller EBITDA counterparts on both growth and default. But however, Brad mentioned this, we continue to see a broad range of deals as we invested more this past quarter across the EBITDA spectrum with that $119 million weighted average LTM EBITDA. Now, BXSL portfolio companies have seen growth rates in line with the broader private credit market as measured by the Lincoln International Private Markets database and over 15% more profitability on an LTM EBITDA margin basis. Now, since BXSL's inception, we believe we've been disciplined in building our portfolio to focus on first lien secured debt and do so in lower default rate industries as we believe that's a defensive place for investors, especially in an elevated or uncertain interest rate environment. Now, despite a slight uptick this quarter, non-accruals were at 0.3% at cost, and they remain minimal compared to our traded BDC peer average of nearly 3%, and that's compared to last quarter. Now, we continue to emphasize the importance of interest coverage. The LTM EBITDA coverage based on average LTM EBITDA for BXSL portfolio companies over the last 12 months was 1.7 times in the second quarter, which again compares favorably to the Lincoln database for the broader private credit market at 1.4 times average coverage in the second quarter. Now, looking at the share of those private credit portfolio of our private credit portfolio below 1 times interest coverage, excluding recurring revenue loans, BXSL is at 5% of fair value versus the Lincoln private credit market index being over 3 times larger at nearly 18%. And we've seen some increase in this figure for BXSL quarter-over-quarter, and that's because growth has slowed for some portfolio companies and additional companies' interest coverage is coming just below 1 times. However, interest coverage is only one screen that we use to identify credits with which to be proactive. Our interest coverage analysis helps us to identify companies that we believe could benefit from, for instance, in early discussion with the sponsor or an introduction to the operations-focused professionals on our BXCI value creation team. And so when we think about stress in our portfolio, instead, in our view, better represented by those assets that are marked below 80, which constitute less than 1% of the book at cost. Now, looking now at how we're growing the portfolio and designing it top down, Slide 8 focuses on our industry exposure. And as I mentioned earlier, in the second quarter, the number of portfolio companies in BXCL increased to 231, while we maintain nearly 90% of our exposure to historically lower default rate industries. And this is similarly reflected in our investment activity this quarter, as Brad mentioned, with 70% of our new funded portfolio companies being in historically lower default rate industries, such as software, health care providers and services, et cetera. Now, I'll conclude with a point on amendment activity. Amendment activity continues to be relatively benign as performance of the portfolio remains strong. In the second quarter, amendments affected roughly 65 private borrowers, over 95% of which were associated with add-ons, M&A, DDTL extension, and imperial technical matters on changes to terms. Now, three issuers that saw amendments related to the portfolio we had incurred with three portfolio companies, all of which were marked below 80 and in total represent less than 80 basis points of the portfolio at cost. And with that, I'd like to turn it over to my colleague, Carlos.

Thanks, Jon. Turning to Slide 9. BXCL maintained its dividend distribution of $0.77 per share. As you can see, we have continued to focus on delivering yield to shareholders, building a level of confidence through steady regular dividends, while also growing NAV per share. We expect this approach to continue as we believe we are heading into a heightened period for deal activity. For instance, helping to meet this quarter's portfolio growth, we issued $190 million of additional equity under our ATM or at-the-market program this quarter at a premium to NAV. And we raised a $400 million bond that was swapped to SOFR plus 138, which we observed was well inside the price of new secured debt capacity. As we often discuss, after we make investments, we aim to add value by driving operational improvements and revenue-generating opportunities for our portfolio companies. We have outlined our BXCI value creation program on prior calls. And we believe a partnership with BXCI is valued by private equity sponsors. And with increased competition in the private credit market, we seek to distinguish ourselves by providing more than just capital to our portfolio companies. For instance, Park Place, a name we have discussed in the past, won two new clients through our BX-preferred program in the second quarter, resulting in the borrower increasing its annual recurring revenue by $1.1 million. We also continue to work with Park Place's business development team on additional opportunities with Blackstone invested companies that have meaningful spend on data centers. As a reminder, BXSL borrowers are offered full access to BXCI's value creation program, which provides borrowers with revenue-generating opportunities, cost savings procurement, and capabilities, including cybersecurity and data science, all at no additional cost because we understand the potential benefit to both BXSL's investment portfolio and shareholder returns. And with that, I'll turn it over to Teddy.

Thanks, Carlos. I'll start with our operating results on Slide 10. In the second quarter, BXSL's net investment income was $173 million or $0.89 per share. BXSL recorded its highest quarterly GAAP net income on a dollar basis and tied its highest quarterly earnings per share since IPO at $196 million and $1.01 per share, respectively, up 12% from a year ago. Total investment income for the quarter was up $37 million or 11% year-over-year, driven by increased interest income primarily due to higher interest rates. As a reminder, we amortized 100% of OID earned over the life of each loan versus taking fees upfront, which we believe leads to greater stability over the long-term. Interest income, excluding PIC fees and dividends represented nearly 93% of our total investment income in the quarter. Turning to our balance sheet on Slide 11. We ended the quarter with $11.3 billion of total portfolio investments at fair value, $6.1 billion of outstanding debt, and $5.4 billion of total net assets. NAV per share increased to $27.9, up 1.2%, up from $26.87 last quarter, driven by excess earnings, stable portfolio fundamentals, and share issuance above NAV. This represents the seventh consecutive quarter of NAV per share growth. Moving to Slide 12. In addition, we saw the fifth consecutive quarter of commitment growth, as Brad outlined, with BXCL committing to approximately $1.3 billion in the quarter, funding nearly $900 million and an estimated additional $261 million committed by BXCI and earmarked for BXSL as of June 30th. Net funded investment activity in the quarter was $800 million, up over 50% sequentially from the first quarter. Further, despite the spread tightening cycle across fixed income markets so far this year and an increase in broadly syndicated activity, we continue to experience muted repayment activity as Brad outlined. In the second quarter, we saw $89 million of repayments or a 3% annualized repayment rate, bringing our year-to-date repayment rate to 4%, which compares to 10% for all of 2023. In fact, we did not have any exposure refinanced out by the syndicated market in the second quarter. It is also worth noting that in a declining rate environment, one may naturally expect an increase in portfolio turnover, but our portfolio had few realizations in the quarter. Next, Slide 13 outlines what we believe to be an attractive and diverse liability profile, which includes 46% of drawn debt and unsecured fixed bonds that are not swapped. Our unsecured fixed rate bonds have a weighted average fixed coupon of just under 3%, which we view as a key advantage in this elevated rate environment and contributed to an overall weighted average interest rate on our borrowings of 5.26%. This compares to a weighted average yield at fair value on our debt investments of 11.6%. As a reminder, we have a 16-person team within our CIO office that focuses on our liabilities and has access to diverse financing sources. As spreads have tightened across secured and unsecured markets, our team has been focused on driving down financing costs and further improving our balance sheet. To that end, on the heels of a full notch upgrade by Fitch to BBB flat in the first quarter, we issued a new $400 million 3.5-year bond in the second quarter, which priced at 140 basis points over treasuries and swapped to 138 basis points over SOFR. In addition, post Q2, we upsized our corporate revolver by $300 million and simultaneously dropped the drawn spread by 22.5 basis points to 152.5 basis points while bringing in our unused fee rate as well. We have no maturities on our funded liabilities until 2026, and our debt and funded facilities have an overall weighted average maturity of 2.9 years. We continue to explore means of further optimizing our cost of capital. Total liquidity at quarter end was $1.2 billion in cash and undrawn debt available to borrow, and ending leverage as of June 30th was 1.13 turns, up sequentially from 1.03 turns in the first quarter, near the midpoint of our target range of 1 times to 1.25 times. We have positioned our balance sheet with significant excess capacity to support continued pipeline momentum we see through year-end as rates may begin to fall. In closing, we are moving forward from what we believe is a position of strength with underlying earnings power, credit performance, and liabilities that distinguish us in the market. We will strive to remain laser-focused on delivering returns and protecting investors' capital. With that, I'll ask the operator to open it up for questions. Thank you.

Thank you. We'll go first to Finian O'Shea with Wells Fargo Securities.

Good morning, everyone. My first question is about the restructuring at Pluralsight and its impact on various BDCs. Although I know you’re not directly involved, we’re attempting to understand the landscape of issuers or portfolio companies that might have interest coverage below 1, yet still have their sponsors investing additional funds. Would that scenario be reflected in your metric for interest coverage below 1, and how common is this arrangement within your portfolio?

Hey Fin, it's Brad. So, I'll just give a high-level comment, Teddy can give the statistics on the portfolio. So, Pluralsight, you're right, we're not in it. So we're not super close to that asset. I will make the comment, though, on the positive, which is the handover of Pluralsight to its lenders was actually quite orderly, which is one of the advantages of private credit. This was in the public markets. I think it would have languished; it would have been stuck in bankruptcy. So, it was nice to see kind of the private markets working fairly well. In terms of kind of overall credit and coverage, maybe Teddy, you can hit on the kind of what's captured in our statistics.

Yes. I think your question, Fin, directly is a percentage of exposure below 1 times coverage and then specifically what we're seeing in terms of equity investments. Back went through it, but we had 65 amendments, 95% benign or positive. We had three issuers that had material amendments. Those three represented less than 1% of the overall portfolio. Generally speaking, in situations that are underperforming, that is our first response is to work consensually with the company to see equity come into the structure. I can't speak specifically to those three companies, but it is something that we do ask in those types of situations.

Okay, that's helpful. Thanks. And as a follow-up with the WHCG, it looks like you're joining the partial accrual movement. Can you talk about your policy there and if this will be commonplace going forward?

Yes, I'm happy to start. Again, can't speak to that situation specifically. Generally speaking, Fin, I think as you've probably noticed historically, we haven't put assets on partial non-accrual unless there's a very clear potential restructuring that reflects that, in fact. More to come on that situation in the next quarter.

I'd also say if you're going to make kind of the reference of how we think about both non-accruals, et cetera, Fin, if you start to see assets that have traded clearly below 80 or in some discounted mark territory, you can see that as an indicator of stress and we outline it. Maybe perhaps what you don't see here is an asset that has marched close to par that goes on non-accrual the next quarter. So, I'd say that you'll see the page turn, but also in terms of that movement, you kind of have to reflect that if we have operating knowledge to have that mark and see where that mark is post restructuring, that could give you some indication of how we think about non-accruals.

To address both comments regarding the financials, we aim to negotiate equity in our businesses, which has been a consistent practice in most of our restructurings. Secondly, Mark, we are likely to observe a gradual decline, and analysts and investors should pay attention to the marks below 80, as this signifies real challenges in the business. These conditions may fluctuate between quarters. However, what is crucial is that we have an asset in that area. We are actively engaging with the sponsor to secure equity. Our CIO team consists of 80 members, which is larger than most investment platforms, and their sole focus is on enhancing the value of our investments, whether through our value-added program as Carlos mentioned or by being proactive in any necessary restructuring.

Thanks everybody.

We'll go next to Robert Dodd with Raymond James.

Hi everyone. I hope you can hear me. First, regarding the size you mentioned, you noted that you've engaged more with middle market companies for smaller firms, specifically those with $100 million in EBITDA, which hasn't been the norm. Can you provide any insights on the industries you are focusing on when considering smaller companies like that? You've mentioned that larger size is generally better, but the neighborhood also matters, along with the relevant industries. So, could you elaborate on which industries you would pursue for a $250 million EBITDA company that you wouldn't consider for a $100 million EBITDA company? Any insights on how industry appeal shifts based on company size would be helpful.

Thank you, Robert. This is Brad. I’ll address that. It’s not only about the sector; it's also about the capital structure. When evaluating any deal, we focus on the senior part of the capital structure, as you know. We're assessing the quality of the business, and historically, we’ve pointed out that larger companies tend to be superior. We're also considering which sectors and neighborhoods are involved, going deeper to ensure we're in the best locations. For businesses with around $100 million in EBITDA, we focus on three main sectors: technology and software, healthcare and life sciences, and business services. These sectors are characterized as historically low-default areas, known for generating good cash flow and typically outgrowing the economy, which is crucial in the current environment. Regarding our investments, I wouldn’t label them as small; they are at the upper end of the middle market. About capital structure, as mentioned in our prepared remarks, our investments this quarter had a loan-to-value ratio of 37.9%. Thus, the risk profile for these companies is relatively low compared to some of the larger businesses, which have typically been in the mid-40s range.

Thank you. I have a follow-up regarding Pluralsight, which was mentioned earlier. You are not involved. The opportunity originated in the second quarter of 2021 when you had $7 billion in assets under management, and that year was particularly active. I'm assuming you had the chance to participate in Pluralsight. Could you clarify whether you did not see the deal or if you saw it and chose not to participate? If you did decline, what was the reasoning at that time? It wasn't too long ago.

Yes, we've encountered that situation twice and chose not to proceed both times, as our assessment of the credit differed from others. One of the advantages of our platform is having 900 technologists from the Blackstone platform who provide valuable insights into technology businesses, which we utilize for every deal we engage in, along with our 50 data scientists. This often leads us to have a different perspective than the market. I prefer not to delve into the specific reasons for our decisions, but we did see the opportunity twice and opted not to move forward both times.

Got it. Thank you.

And at this time, we will go next to Paul Johnson, KBW.

Hey good morning. Thanks for taking my questions here. Just wanted to squeeze in. I just wanted to know about a specific credit in the portfolio and just kind of give your thoughts on performance, but maybe a little bit of an explanation of what the company is? Snoopy Bidco, large loan in the portfolio. I believe it's on full pick at this point, but it seems to be marked fairly well. Just wondering to get some ideas on how that company is performing and that's all?

Unfortunately, we can't share too much information about the private companies. The business focuses on vet care. The current mark is approximately 97.25% across the securities, indicating it is performing as expected. At the time of the deal, we were through the senior debt, which represents our investment and translates to a 32% loan to value. We have a significant amount of equity backing us, and the sponsors are continuing to support the business, which is generally performing flat.

Got it. Would you say that this is the majority of the PIC income in the portfolio? Or are there other segments?

Yes, I'm happy to take that. No real change quarter-over-quarter in terms of PIC income, it represents 7% of income. 80% of our PIC is from the top five assets similar to last quarter. Those, as Brad said, are all performing, all marked above 97%, and there were no new PIC amendments in the quarter.

Got it. Appreciate it. And congrats on the good quarter. Thanks guys.

Thanks Paul.

We'll go next to Mark Hughes with Truist.

Yes, thank you. Good morning. Sorry if I missed this; joined late, but the repayments were pretty low this quarter. Is that just idiosyncratic quarter? Or is there some broader theme, something about your portfolio and kind of give any expectations you can share regarding how you expect that to play out?

Yes, I'm happy to address that. The annualized repayment rate was 3%, which is lower than we would expect in a typical M&A environment. There are a couple of factors contributing to this. First, overall M&A volumes have increased but remain relatively subdued. We've been focusing our deployment primarily on assets where we already have a presence, which accounts for about half of what we're deploying. It is possible that we could see repayments increase as M&A activity grows and interest rates decline. However, for the moment, they have stayed relatively low.

Mark, I'd just add, that's also a function of an item we mentioned last quarter, which is a proactive view on effective defense. So, here in the quarter, we had repricing activity where what we have is a company that's effectively coming close to moving off call protection. And you have the ability to work with the company that you know and do so at a market price that's well above your current cost of capital and end up earning or extending the life of that loan and its current benefit to ROE. So, if you look at across the board, give or take, our focus there in those active defense is also what will keep assets on the books for longer, allowing us to grow accretively as we also issue equity and low-cost debt.

Is the process of repricing becoming more competitive? Is there increased negotiation about spreads as companies might be evaluating the current market conditions?

It's all a market dynamic, right? And it's clearly in an environment where you have a good amount of capital looking at a finite amount of deals that's simply a market phenomenon. Overall, it's around if you look at some of the reprices, is core is about 70-ish basis points of, we'll call it, tightening, if you will, which is in line with where we've started to see kind of market trends move overall. But I'd say a clear to my colleagues here, but it does find itself kind of just natural as it relates to where the broadly syndicated loan market is today and that perhaps can change with current volatility.

So, Mark, we have call protection in these deals, so it gives us a low leverage. And certainly, as repayments as the market gets more active, you'll probably see more repayments, and that will either give us the opportunity to stay with the credit or take our call protection and accelerated fee income to help drive earnings. So, for us, it's a little bit of a win-win. Investors either in a more active environment will get more fee income, or we get to kind of hold on to our better assets at market spreads.

Hey, good morning. Thanks for taking my question. And I just jumping around from calls, so I apologize if this was covered already, but could you go over some of the key drivers for the unrealized gains that were reported in the quarter? Thanks.

Yes, I'm glad to address that. We had unrealized gains of $23 million for the quarter, which included a few markups and some markdowns. I wouldn't say there was anything particularly noteworthy. We did observe that spreads tightened somewhat during the quarter, which contributed positively to March, considering the current market conditions, but there's nothing major to highlight.

Got you. And then one follow-up, if I may. In terms of recent deal activity, you talked about some of the spreads that you're seeing, but just wondering, in terms of terms and documentation, what are you seeing in terms of some of the more recent activity, any timing or changes there? Thanks.

Yes, I would say there are no specific trends. Following Pluralsight, the provision in the document that allowed the sponsor to move assets has been tightened. Lenders have identified this as a weakness in documents and for new deals, this loophole has been addressed. In the middle market, documents generally tend to be stricter than those in the larger segment, which competes with the syndicated market. For us, during the quarter, the documents were quite solid. However, during a very active liquid market, some provisions tend to get tested, and we observed some of that earlier in the quarter. Currently, the liquid markets are experiencing some volatility, which indicates changes, but we'll monitor how this evolves throughout the year.

Got you. Very helpful there. Thanks again.

Thanks, Ken.

And at this time, I'll turn the call back to Stacy Wang for closing comments.

Thank you, everyone, for joining our call today. We look forward to speaking to you next quarter. Thanks, everyone.

Goodbye.