Conference Transcript - BXSL 2026-03-04

Robert Bass, Board Member

So next up we have Braxton Secure Lending, the public BDC boardroom world's largest BDC complex, and a pretty good-sized aspirin from other areas as well. We have Justin Farshidi and Teddy Deloge. I was going to make a joke, but I changed my mind.

Justin Farshidi

Thanks. Thanks, Robert. Good joke, Robert. Yeah, great joke, and thank you for the intro. As Robert said, I'm Justin Farshidi. I'm a principal at Blackstone alongside Teddy Deloge, Senior Managing Director, Portfolio Manager, and Chief Financial Officer of BXSL. We're going to start off with a few general macro views that we're seeing in the space, and then we'll get into more details on BXSL. We just announced our quarterly and year-end performance last week, so this is opportune time. And then in addition, we'll share some views on what we're seeing with AI and software and how we use our investment approach to evaluate those two trends right now. But with that, I'll hand it off to Teddy. And once we get the presentation up, we'll share that as well.

Teddy Deloge, CFO

Thank you, Justin. And thanks, everyone, for joining this morning. I'll start on the macro side, and then we'll just dive right into performance and the portfolio. And you may have heard some of this from our earnings call last week. I think taking a step back, despite periods of volatility over the past year, including tariff uncertainty, geopolitical instability, and elevated headlines, we continue to see a fundamentally healthy economic backdrop. Corporate earnings has remained resilient, consumer continues to demonstrate strength, and fiscal and monetary conditions do remain supportive. and what we've seen within our own portfolio is rate declines have had a direct positive impact on free cash flow of our companies. We'll spend more time on that. So there are factors contributing to what we see as sustained economic momentum, which we see in our portfolios. A key driver of that momentum more broadly is the ongoing AI-driven investment cycle coupled with encouraging signs of lower inflation. We've seen this translate really into three areas across our business at Blackstone Credit. Number one is overall stable performance across our portfolios. We'll spend more time on that. High single-digit EBITDA growth for the LTM period. Increasing interest coverage ratios, lower non-accruals. Number two, capital flows. We're coming off of a period of very strong demand from really all channels from the investor side in 2025, and particularly strong demand from institutional channel more recently. And then the last is deployment. Q4 was one of our most active quarters of investing since 2021. We sit here across our platform with about 40 billion of dry powder to invest in private credit and sub-investment grade private credit, and market remains highly receptive to direct private credit solutions. So with that, just moving to performance, we did report Q4 last week. The fourth quarter total return on NAV was just over 2%, 2.1%. That brings year-to-date return to 9.6%, outperforming leveraged loans by approximately 360 basis points. On earnings, we generated $0.80 of net investment income per share. That represented about 11.8% annualized NII, fully covering our current dividend. And importantly, we continue to see a high-quality income source with over 91% generated from cash sources. So that excludes payment-in-kind fees and dividends. And as I take a big step back, we launched BXSL seven years ago with a relatively simple approach. And that approach was, if we can offer a structure with the highest degree of investor alignment, among the lowest fee structure across PDCs, then we can scale and access a larger, higher quality part of the market. And we do that with the lowest operating financing costs, all while leveraging Blackstone's resources to mitigate losses. We've now out-earned our dividend 25 consecutive quarters. We've delivered an annualized inception-to-date return on NAV of 11.2%, and we've done so with, on the right side of this page, a first lien portfolio capital structure set up with more than 50% equity cushion and businesses in the larger end of the market that we believe are more defensive with below market non-accrual rates in the portfolio. Moving to the portfolio more broadly, we've applied what we see as a consistent and disciplined strategy to portfolio construction since inception. We're diversified across 316 portfolio companies. 98% of our investments are first lien senior secured, where historically over 80% of which we are lead or sole in the capital structure. We're in control of negotiating our credit agreements. We are set up exposure through low 40s LTV, and we've focused more on the larger end of the market, EBITDA north of 200 million, either owned by deep-pocketed, sophisticated sponsors or large public companies with market caps over five billion dollars. As a result, non-accruals have remained below market as of Q4. There are about 60 basis points on cost, and that's versus the traded BDC peer set of over three percent. Our fair market value in the portfolio is over 14 billion as of the fourth quarter. The portfolio grew last year by just under 10 percent, and Q4 was our second most active quarter since 2021, deploying about a billion dollars on a gross basis. We'll dig into that a little bit more. Digging just a level deeper on industry concentration, I'd say we've focused primarily on U.S. businesses in less capital-intensive sectors that have historically experienced lower default rates through cycles. Professional services, healthcare, and software have been our largest exposures where we've seen margin resilience and high single-digit EBITDA growth. Focusing on software specifically, obviously a lot of external narratives and focus on AI's impact on the overall economy and the sector in general. And I wanted to start with just some context for Blackstone and how we think about it. First and foremost, this is not new to We have deep resources across Blackstone as the largest alternative manager globally, supporting our credit business. We have a large specialized technology vertical that's supporting and informing activity across the broader platform. We have over a thousand people that report to our CTO, John Stetcher, often supporting product-level diligence on the credit side. And then we also have this centralized Blackstone operating team, led by a gentleman named Rodney Zemel, who joined us in the last year from McKinsey, after 20 years, most recently head of AI and digital transformation. So we've focused, as we've thought about underwriting, we've focused on deeply embedded, high retention businesses with domain expertise in the larger part of the market. And we believe you cannot paint software with a broad brush. Subverticals with proprietary systems, huge data lakes, and incumbent long-term relationships may be more protected or see tailwinds from AI adoption. Vertical software, ERP, data infrastructure, data management, and cybersecurity are examples of that. These account for the majority of BXSL's software exposure. in our areas where we've seen over 40% EBITDA growth since underwrite. And today, these businesses generate over two times interest coverage ratio. On the other hand, BXCI has typically avoided the less differentiated business models. I would put horizontal software or content businesses as an area where we see higher potential risk of displacement near term. These areas represent less than 5% of our overall exposure. previewed on our last earnings call. So this will be evolving and there may be issues, but taking a step back, if you look across the entire market, what has happened? Software evaluations have compressed from what was 18 times multiple in the public market to 13 to 14 times. With the more protected sub verticals I went through still trading in the 15 to 20 times EBITDA range. This This implies two times enterprise value coverage to our first lean exposure. And the other point I wanted to make is we're looking beyond just software as we think about risks and opportunities with AI. Within healthcare, we look at healthcare IT or life sciences. Within healthcare IT, lower risk of disruption. Well positioned from a regulated end market. Many data rich players may actually see a tailwind. Within life sciences, key vertical for us, still early but accelerating drug development and synthetic clinical trial activity. Within services, it's a bit of a mix depending on subsector. Blue-collar or commercial services largely not exposed, more mixed with white-collar or professional services with potential exposure to low-skilled or commoditized labor, all areas we have deprioritized. Scaled players with good brand names and reputation may actually see a benefit. With an insurance brokerage and services, we see risks to more differentiated or less differentiated products and personal lines within insurance, where complex and specialty products within property and casual and commercial insurance may be more insulated. Then there's the entire ecosystem supporting the infrastructure behind AI. Think service business models, power gen transformation, and equipment manufacturing, selling in data centers. These are all areas where we've been deploying our capital across Blackstone. So in short, we're taking an AI lens and applying it to every underwriting process regardless of sectors. We have the expertise, the data, and the resources behind Blackstone, which is core to our investment process. Turning to our earnings profile, as previously mentioned, we've covered our dividend every quarter since inception. In the fourth quarter, BXSL generated $186 million, or $0.80 per share. That represented 104% coverage to our dividend, and importantly, as I mentioned, earnings quality continues to remain healthy. Income less PIC, fees, and dividends represents over 90% of our investment income. And specifically on payment in kind, it was about flat quarter over quarter in the fourth quarter versus the third quarter. Payment in kind represents about 30% lower than our traded peers as a percentage of total income, which we believe is a reflection of the firstly in exposure and quality of the portfolio. and less than 2% of our gross pick income is generated from assets marked below 85. So taking a step back, we generated 11.8% NII yield versus 11.4% dividend yield, and that's with a predominantly first lien portfolio and among the lowest operating and financing costs across the industry. We did mention we will continue to assess our dividend with our board as lower base rates flow through a 100% floating rate portfolio. On recent activity, we're coming off of what was our second most active quarter since 2021. BXSL funded over $1 billion for the second consecutive quarter and committed over $900 million. Net funded investment activity was $400 million after about $630 million of repayments and sales. That was up nearly 45% quarter over quarter. And our repayments represented an annualized repayment rate of about 15% of the portfolio at fair market value. To put that in context, repayments a year ago, same quarter, closer to 6%. 60% of our activity in the quarter were to existing companies, 40% to new. And to give a sense for the quality and the profile of new deals, Average loan-to-value at underwrite was around 41% in the quarter. Average EBITDA on the larger end of the market, $175 million. And spreads were about so for $515 all in. That's flat versus the third quarter and actually up 10 basis points year over year. A couple examples of just the larger deals done in the quarter. We made a senior loan 100% sole to Mankind. That's a $2 billion public biopharma business. IEM is an electrical equipment manufacturer supplying data centers, and then Sabre we announced on the call, an engineering firm and provider of electrical infrastructure services in the U.S. So these are all areas where, one, we were sole or lead in the transaction, and they represent higher conviction areas of the market where we see the best underlying trends across our portfolio. Today, we're tracking elevated repayments, so we announced over $550 million of potential repayments for the first six months of the year, which would create additional balance sheet capacity. Lastly, just in terms of our liability profile, our liabilities remain diverse across multiple financing markets. That includes $10.5 billion and $8.1 billion of committed and funded debt, respectively. That includes a $2.4 billion commitment to our corporate revolver facility that's priced at SOFR plus 153 at its tightest levels, which we believe is the lowest-priced revolver across the traded peer set. We also have $2.7 billion committed to our asset-based facilities with multiple banks. over $450 million of CLO debt outstanding and nearly $5 billion of unsecureds outstanding as of the fourth quarter. And in 2025, BXSL had the tightest public bond spread issuance among its traded peers. So if you take all of that together, our all-in cost of debt for the fourth quarter was 4.9%. percent. That's down from what was 5.25 percent in the fourth quarter of 2024. Liquidity at the end of the fourth quarter was healthy at two and a half billion. That includes unrestricted cash and undrawn debt available to borrow. And ending leverage was 1.3 turns on a gross basis and one a quarter turns on a net basis, net of cash. Our portfolio quality and balance sheet strength have supported BXSL in achieving ratings among the top three when compared to our traded BDC peers, with BAA2 in stable outlook by Moody's, BBB minus in positive outlook by S&P, and BBB flat in stable outlook by Fitch. We also did announce on our call last week the board approved a $250 million share repurchase plan. That's $250 million in aggregate of our outstanding shares in the open market at below its net asset value. So as we continue to see repayment activity create additional capacity, we will continuously evaluate capital allocation decisions between new opportunities and buying back shares. Looking ahead, just despite the headlines, we see a constructive macro environment. stable credit fundamentals, which we think positions BXSL well from both a performance and investing standpoint. We've been investing in direct lending now for over 20 years. That's through multiple cycles and periods of volatility. And over that time period, we've invested about $150 billion in North American direct lending with an average annualized loss rate of less than 10 basis points. We're most focused on continuing to deliver performance despite headlines. We're leveraging the advantage of Blackstone's scale and expertise, which we believe will continue to support excellent long-term results for our investors.

Justin Farshidi

I'll also add, it's a great presentation today, any questions that we can answer in addition to the breakout session, all of our information is available on our website, whether it's through our 10K, whether it's through our earnings presentation or our investor presentation. So you're always welcome to take a look and we're available to answer questions directly as well.

Robert Bass, Board Member

Thank you, guys. Yeah, we have some time for Q&A now and there is a breakout in Cordova 6 downstairs following this. So any questions?

Speaker 5

Thank you. Lots of mics. Thank you very much for the presentation. I'd just be interested to know, I appreciate you've got very little exposure to horizontal software, but are you leaning into allocating incremental capital to some of the areas in software you think are more protected, the ERP and the vertical and some of those areas, or is the intention to reduce the share of software in the book?

Teddy Deloge, CFO

Yeah, it's a good question. First and foremost, as you look at our software exposure, so 21% of fair market value, that's diversified across over sub-different categories. It's also diversified north of 10 different end markets. We have focused towards the larger end of the market, so you can think across our platform, north of $4 billion enterprise value, average loan-to-value of 37%. And this also has been one of the highest-performing sectors across our portfolio, close to 10% EBITDA growth, which interest coverage ratio is north of two times. As we look for the next two or three years, what we've said is we're near the high end of where we want to be. It is diversified across multiple different subcategories within software. where we think we have more exposure to the right parts of the market where we see tailwinds or more insulation, but certainly the bar is higher from an underwriting perspective for new deals.

Speaker 2

I guess I am curious. You talk about your headline costs being down, which is great, but you're in the spread business. Didn't you do the most recent bond issuance at 200 over? I think it was marketed at 225 and ended up settling on 200.

Teddy Deloge, CFO

But last year you were doing them at 150 over. so are your costs getting squeezed and is that going to be a problem yes you're right after our call we did go out with a bond it was a five and five four hundred million dollar bond just over three and a half year maturity at t plus p plus 200 a very strong reception in the market to that at the high end over close to four times over subscribed as we look at issuing we're going to be issuing through cycles, right? What are we managing to? It's to, you know, a capital structure that supports investment-grade ratings. As we look at the environment last year, the investment-grade bond market, and specifically BDCs, were at all-time tights. You're right, we issued the tightest price bond across our traded pure set last year. We'll continue to watch opportunistically where the market is we also are seeing significant demand from banks full access to the market you know that was received with a lot of receptivity we do have flexibility given we sit with two and a half billion of of liquidity in our capital structure any other questions i mean i have some you just you very helpfully gave the the two times interest cover uh aggregate for the software portfolio, but have you got any more color as to what proportion is under one and a half times?

Speaker 1

Is that an average number? Any more detail you could give about that whole 21% of the book in terms of interest cover rather than loan-to-value?

Teddy Deloge, CFO

Yeah, that's a weighted average number two times. One thing we did mention on the call was that our watch list actually declined quarter over quarter. We have given the exposure below one times historically. That's been relatively flat. It's about 7% of exposure below one times coverage. The vast majority of that is between 0.9 and a turn of interest coverage.

Speaker 1

And is that in the software book?

Teddy Deloge, CFO

That's across the entire portfolio.

Speaker 1

So would the software book be the same as that?

Teddy Deloge, CFO

Relatively consistent across the entire portfolio.

Robert Bass, Board Member

On the software, I mean, you mentioned 5% is in the more horizontal. I mean, what's the average maturity remaining on that? I mean, how fast do you expect that to maybe be reduced?

Teddy Deloge, CFO

Yeah, so as we look at the 5% that we have defined as more AI in focus, which is a subsector analysis, first and foremost, some of those companies are performing well. We have some companies that have been more front-footed in terms of building AI into their product suite. They have very good market position domain expertise. As we think about the maturity profile, on average, our legal maturity is six to seven years. Our average hold period is two to two and a half years. And our average remaining maturity across that part of the portfolio is what you would expect. It's three to four years. So we have some sort of room to go before we're coming up against maturities. As I take a big step back and we look at our software exposure, again, it comes back down to enterprise value coverage. Even with the market re-rating close to 40%, take a 13 times multiple in the public market, apply it to our portfolio and our loan-to-value setup at sub-40%, that implies still 50% equity cushion below our exposure.

Robert Bass, Board Member

Got it. Thank you.

Speaker 2

So the payout on the dividend is 104%. The market seems to be anticipating base rates coming down. Should we be anticipating a dividend cut of $0.07 or more or less?

Teddy Deloge, CFO

I mean, yeah, we've said that we'll continue to assess our dividend. We have out-earned our dividend 25 consecutive quarters in a row. Certainly it's 100% floating rate portfolio, so it's just math. As base rates have come down, earnings have also compressed. So we'll continue to assess that. We do have some near-term maturities, as you highlighted as well, that will roll over this year. On the other hand, we've also seen some offset of base rate declines from deployment and from leverage. We're now operating towards the high end of the range. I did mention repayments in the fourth quarter were 15% annualized, up from 6% the prior quarter, the prior year, the same quarter the prior year. So there are some upside drivers to return as base rates come down, but we'll continue to assess our dividend with our board as we do every quarter.

Robert Bass, Board Member

On the software, how do you expect spreads and pricing to evolve in that? Obviously, there's a lot of disruption. There's capital flows changing, shall we say, and we've seen some data on that recently from one of your vehicles. I mean, how do you think that's going to play out in terms of pricing and the risk reward on software going forward?

Speaker 5

I mean, you're at the high end.

Robert Bass, Board Member

Maybe you want to shrink it a little bit, but if pricing widens, does that change your opinion?

Teddy Deloge, CFO

Yeah, I think there's a couple dynamics at play. Number one, look at the public loan market, right? There's some bifurcation that's happening. You have two-thirds of the loan market trading at 99 and above, relatively healthy. You then have a third of the loan market that's either in software, businesses that are capital structures more at risk of potential LMEs or underperforming that's trading at discounted levels. Within the private market, there were a couple very large deals that got done north of $5 billion, $6 billion of enterprise value at premium multiples in subsectors that are more insulated or seeing tailwinds. So I think as we think about it, across our platform, we still have close to $40 billion of dry powder to invest. If spreads do widen from here across the market, we'd view that as an opportunity. Got it. Thank you. And there is a breakout in Cordova 6 downstairs.