Blackstone / GSO Secured Lending Fund — Form 10-Q Summary
Business Context and Reporting Period
For the quarter and nine months ended September 30, 2019, the Fund operated as an externally managed, non-diversified business development company and regulated investment company. It commenced loan origination and investment activities on November 20, 2018. Its objective is to generate current income and, to a lesser extent, long-term capital appreciation through primarily senior secured loans to private U.S. small and middle-market companies.
The filing is unaudited. Because the Fund had not commenced operations during the year-ago period, comparable prior-period operating results are not presented.
Financial Position and Key Metrics
| Metric | September 30, 2019 | December 31, 2018 |
|---|---|---|
| Total assets | $2,191.4 million | $574.7 million |
| Investment portfolio at fair value | $2,028.5 million | $545.3 million |
| Cash and cash equivalents | $135.5 million | $6.2 million |
| Debt | $777.4 million | $185.0 million |
| Net assets | $1,378.7 million | $236.4 million |
| NAV per share | $25.66 | $24.57 |
| Shares outstanding | 53.7 million | 9.6 million |
| Asset coverage ratio | 277.3% | 227.8% |
- The portfolio was 98.0% first-lien debt, 1.6% second-lien debt and 0.4% equity at fair value.
- The portfolio comprised 50 portfolio companies at September 30, 2019, compared with 61 at year-end 2018, reflecting significant portfolio expansion and repositioning.
- All debt investments bore floating rates; the weighted average yield on debt and income-producing securities was 8.75% at cost and 8.71% at fair value.
- No portfolio loans were on non-accrual status at September 30, 2019.
Results of Operations
| Metric | Three months ended September 30, 2019 | Nine months ended September 30, 2019 |
|---|---|---|
| Total investment income | $38.6 million | $83.5 million |
| Net expenses | $17.5 million | $42.8 million |
| Net investment income | $21.1 million | $40.7 million |
| Net realized gain | $0.1 million | $3.4 million |
| Net unrealized gain | $(1.7) million | $13.0 million |
| Net increase in net assets from operations | $19.5 million | $57.1 million |
| Net investment income per share | $0.54 | $1.53 |
| Earnings per share | $0.49 | $2.15 |
| Distributions declared per share | $0.50 | $1.50 |
Net investment income was supported primarily by interest income of $38.5 million for the quarter and $82.8 million for the nine months. Annualized net investment income was 7.98% of average net assets for the nine-month period, while the ratio of net expenses to average net assets was 8.39%.
Cash Flow, Capitalization and Liquidity
- Operating activities used $1,557.1 million during the nine months, primarily due to $1,831.4 million of investment purchases, partly offset by $367.7 million of investment sale proceeds and principal repayments.
- Financing activities provided $1,686.3 million, including $1,113.5 million from share issuances and $593.1 million of net borrowings, partly offset by $17.7 million of cash dividends.
- Cash increased from $6.2 million to $135.5 million during the nine months.
- Total capital commitments were $2,688.5 million, of which $1,326.5 million remained undrawn at September 30, 2019.
- Available capacity under credit facilities was $1,097.6 million, subject to borrowing-base and other limitations. Management stated that cash, available facility capacity and uncalled capital commitments were expected to be sufficient for near-term investing and operating needs.
Material Changes and Unusual Items
- Investment fair value increased by $1,483.1 million from year-end 2018, while debt increased by $592.4 million and net assets increased by $1,142.3 million.
- The Fund issued 44.0 million shares for aggregate offering proceeds of $1,122.7 million during the nine months.
- The Subscription Facility commitment increased from $200 million to $400 million; the JPM SPV Facility increased from $300 million to $600 million; and the BNP SPV Facility increased from $400 million to $875 million.
- The Middle Market Warehouse was fully purchased for $86.9 million and terminated on September 10, 2019.
- The Fund accrued $7.5 million of income-based incentive fees and $1.8 million of capital-gains incentive fees for the nine months. The quarter included a $(0.2) million capital-gains incentive-fee adjustment.
- The Fund had $102.1 million of unfunded delayed-draw loan commitments at quarter-end, compared with $54.7 million at year-end 2018.
- From October 1 through November 12, 2019, the Fund made approximately $1,004 million of new investment commitments, of which approximately $893 million had been funded.
- The remaining $9.2 million from the September capital call was received in October and November 2019.
Debt, Risks and Management Commentary
Total outstanding debt was $777.4 million against aggregate commitments of $1.875 billion. The weighted average borrowing rate was 4.48% for the quarter and 4.59% for the nine months, including unused fees. The facilities were secured by investment assets or undrawn investor commitments, and the Fund reported compliance with all covenants.
Interest-rate exposure is material because all debt investments and borrowings are floating rate. Management estimated that a 100-basis-point increase in base rates would increase annualized net income by approximately $12.8 million, while a 100-basis-point decrease would reduce annualized net income by approximately $12.8 million, subject to the assumptions disclosed in the filing.
Primary risks include valuation uncertainty for illiquid Level 3 investments, credit losses at portfolio companies, leverage and refinancing risk, interest-rate movements, unfunded loan commitments, liquidity constraints, conflicts with the Adviser and the ability to maintain BDC and RIC status. Approximately $1,453.2 million, or 71.6% of portfolio fair value, was classified as Level 3. Management reported no material litigation, no defaults on senior securities and no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether the rapid increase in portfolio assets and leverage can be sustained without deterioration in credit quality or NAV.
- The valuation assumptions and sensitivity of the $1.45 billion Level 3 portfolio to discount rates, broker quotes and performance multiples.
- The ability of portfolio companies to fund the $102.1 million of delayed-draw commitments and the Fund’s liquidity to meet those commitments.
- Future borrowing costs, facility maturities, covenant compliance and available borrowing-base capacity.
- The sustainability of the $1.50 per-share distribution declared for the nine-month period relative to net investment income and taxable income.
- The effect of incentive fees, related-party expenses and potential reimbursement obligations under the Expense Support Agreement.
- Execution and credit performance of the approximately $1,004 million of commitments made after quarter-end.