Business Context and Reporting Period
Blackstone / GSO Secured Lending Fund filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The company is an externally managed, non-diversified business development company and intends to qualify as a regulated investment company. It commenced loan origination and investment activities on November 20, 2018, focusing primarily on floating-rate first-lien senior secured loans to U.S. small and middle-market companies.
The company had 25,106,231 shares outstanding as of May 9, 2019. Because operations began after the comparable prior-year period, the filing does not present meaningful year-over-year operating comparisons.
Key Financial Metrics
| Metric | March 31, 2019 / Three Months Ended |
|---|---|
| Total investment income | $15.2 million |
| Net investment income | $6.6 million |
| Net realized gain | $1.7 million |
| Net unrealized appreciation | $5.7 million |
| Net increase in net assets from operations | $14.0 million |
| Net investment income per share | $0.46 |
| Earnings per share | $0.98 |
| Distributions declared per share | $0.50 |
| Net asset value per share | $25.20, versus $24.57 at December 31, 2018 |
| Net assets | $632.8 million, versus $236.4 million at December 31, 2018 |
| Cash and cash equivalents | $20.6 million |
| Investment portfolio at fair value | $935.2 million, versus $545.3 million at December 31, 2018 |
| Total debt | $284.0 million, versus $185.0 million at December 31, 2018 |
| Asset coverage ratio | 322.8%, versus 227.8% at December 31, 2018 |
Interest income was $15.2 million and fee income was $13 thousand. Net expenses were $8.7 million after a $570 thousand expense-support payment from the Adviser. Total expenses included $4.7 million of interest expense, $1.5 million of management fees, $1.1 million of income-based incentive fees and $475 thousand of capital-gains incentive fees.
Cash used in operating activities was $441.0 million, principally reflecting $540.3 million of investment purchases. Cash provided by financing activities was $455.4 million, including $356.5 million from share issuances and $99.0 million of net borrowings. Ending cash increased by $14.4 million from December 31, 2018.
Portfolio, Leverage and Liquidity
- The portfolio comprised 54 companies with fair value of $935.2 million.
- First-lien debt represented 98.0% of investments at fair value; second-lien debt represented 2.0%.
- All debt investments bore floating rates; the weighted average yield was 8.86% at cost and 8.84% at fair value.
- Credit facilities had $900.0 million of aggregate commitments, $284.0 million outstanding and $401.5 million of borrowing-base availability.
- Capital commitments totaled $1.391 billion, of which $762.1 million remained undrawn at quarter-end.
- Delayed-draw portfolio commitments increased to $83.2 million from $54.7 million at December 31, 2018.
- The company reported no portfolio loans on non-accrual status.
Material Changes Versus the Prior Comparable Period
No prior-year comparable quarter is presented because the company had not yet been capitalized or operating during that period. Compared with December 31, 2018, the company materially expanded its balance sheet and investment activity:
- Net assets increased by $396.4 million, primarily from $389.6 million of share issuances and $14.0 million of operating gains, partly offset by $7.2 million of distributions.
- Investment fair value increased by $389.9 million, reflecting $540.3 million of purchases partly offset by $158.5 million of sales and repayments, plus valuation gains.
- Debt increased by $99.0 million, driven by additional borrowings under the Subscription and BNP SPV facilities.
- The portfolio became more diversified by company count, increasing from 61 to 54 companies only because of portfolio repositioning and consolidation of holdings; the filing does not characterize this as a deterioration.
- Capital commitments increased to $1.391 billion, supporting continued portfolio deployment.
Outlook, Commentary, Risks and Unusual Items
Management expects to continue raising equity capital through additional private-offering closings and investing primarily in secured debt. From April 1 through May 8, 2019, the company made approximately $581 million of new investment commitments, of which approximately $529 million had been funded.
Management stated that cash, available credit capacity and uncalled capital commitments were expected to be sufficient for near-term investing and operating needs. The Subscription Facility had a stated maturity of November 6, 2019, subject to potential extensions, while the JPM and BNP SPV facilities were scheduled to mature in 2023.
- Investment valuations involve significant judgment; $540.4 million, or approximately 57.8% of the investment portfolio, was classified as Level 3.
- Higher discount rates, weaker credit markets or forced sales could reduce fair values materially.
- Interest-rate exposure is significant because 100% of debt investments and borrowings are floating-rate or benchmark-linked. Management estimated that a 100-basis-point increase in base rates would increase annualized net income by approximately $6.7 million, before other changes.
- The company had $135.5 million of total unfunded commitments, including $83.2 million of delayed-draw loans and a $52.3 million forward purchase obligation.
- The Middle Market Warehouse forward purchase obligation matures September 10, 2019 and covered $52.8 million of underlying debt investments at quarter-end.
- The Adviser had made $2.3 million of expense-support payments since commencement of operations, including $570 thousand during the quarter. These amounts may be reimbursable in future periods, although the Adviser waived reimbursement rights through March 31, 2019.
- There were no material litigation matters, defaults under senior securities or material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Reconcile portfolio fair values and Level 3 valuation assumptions, particularly discount rates and broker-quoted prices.
- Monitor the September 2019 Middle Market Warehouse obligation and the November 2019 Subscription Facility maturity or extension.
- Assess liquidity relative to $83.2 million of delayed-draw commitments, the $52.3 million forward purchase obligation and future portfolio deployment.
- Review the effect of incentive fees, management fees and potentially reimbursable Adviser expense support on distributable income and NAV.
- Confirm the timing and source of the $0.50 per-share distribution and the company’s continued ability to satisfy RIC distribution requirements.
- Evaluate concentration in floating-rate credit investments and the sensitivity of net income and NAV to interest rates, credit spreads and borrower performance.
- Confirm receipt in April 2019 of the $33.1 million subscription receivable outstanding at March 31, 2019.