Blackstone Secured Lending Fund: Q1 2022 10-Q Summary
Business context and reporting period
Blackstone Secured Lending Fund is an externally managed, non-diversified business development company and regulated investment company. Its objectives are current income and, to a lesser extent, long-term capital appreciation, primarily through first-lien senior secured and unitranche loans to private U.S. companies. The filing covers the unaudited quarter ended March 31, 2022; common shares trade on the NYSE under BXSL.
Financial and portfolio metrics
| Metric | Q1 2022 | Comparable / prior period |
|---|---|---|
| Total investment income | $185.6 million | $130.7 million in Q1 2021 |
| Net investment income after excise tax | $102.7 million | $75.9 million in Q1 2021 |
| Net increase in net assets from operations | $107.2 million | $111.8 million in Q1 2021 |
| Net investment income per share | $0.61 | $0.58 in Q1 2021 |
| Earnings per share | $0.63 | $0.86 in Q1 2021 |
| Distributions declared per share | $0.78, including $0.25 of special distributions | $0.50 in Q1 2021 |
| Net asset value per share | $26.13 at March 31, 2022 | $26.27 at December 31, 2021; $25.56 at March 31, 2021 |
| Cash and cash equivalents | $140.9 million | $102.9 million at December 31, 2021 |
| Debt carrying value | $5.64 billion | $5.50 billion at December 31, 2021 |
| Asset coverage ratio | 178.1% | 180.2% at December 31, 2021; 212.0% at March 31, 2021 |
Investment income increased 42.0% year over year, while net investment income after excise tax increased 35.3%. Net investment income after excise tax represented approximately 55.3% of investment income. Net expenses before waivers were $91.0 million, including $40.3 million of interest expense, $25.6 million of management fees and $21.3 million of income-based incentive fees. Management and incentive fee waivers reduced expenses by $9.4 million.
The investment portfolio had a fair value of $10.02 billion at March 31, 2022, compared with $9.86 billion at December 31, 2021. First-lien debt represented 97.6% of investments at fair value, second-lien debt 0.7%, and equity investments 1.7%. The portfolio included 152 companies, had a weighted average loan-to-value ratio of 44.3%, and had a weighted average yield on debt and income-producing investments of 7.22% at fair value. Approximately 99.9% of performing debt investments bore floating-rate interest, and no loans were on non-accrual status.
Industry exposure was concentrated in health care providers and services, software, professional services, insurance, and commercial services and supplies. Approximately 94.4% of investments at fair value were in the United States, 5.1% in Canada, and 0.5% in Europe. Approximately 97.3% of investments were valued using Level 3 inputs, reflecting limited market price transparency and significant valuation judgment.
Cash flow, debt and liquidity
- Operating activities used $19.2 million of cash, reflecting $277.7 million of investment purchases and $133.1 million of investment sale proceeds and principal repayments.
- Financing activities provided $57.2 million, primarily from $136.9 million of net debt borrowings, partially offset by $78.2 million of cash distributions.
- Available capacity under credit facilities was $569.5 million, subject to borrowing-base limitations, in addition to $140.9 million of cash.
- Total outstanding principal debt was $5.68 billion against $6.25 billion of aggregate commitments. Unfunded portfolio commitments were $1.26 billion.
- The company was in compliance with its credit facility and unsecured note covenants at March 31, 2022, including the 150% minimum asset coverage requirement.
Material changes versus comparable periods
- The portfolio and gross assets expanded substantially, supporting higher interest income, but average debt outstanding also increased to $5.62 billion from $2.68 billion in Q1 2021.
- Interest expense rose to $40.3 million from $21.1 million, primarily because of higher borrowings and unsecured bond issuance, although the weighted average borrowing rate declined to 2.79% from 3.05%.
- Weighted average yield on debt investments at fair value declined to 7.22% from 7.60%, and total portfolio yield at fair value declined to 7.09% from 7.52%.
- Net unrealized depreciation was $1.4 million versus $32.1 million of net unrealized appreciation in Q1 2021, reducing total earnings despite higher recurring investment income.
- Non-recurring income declined to approximately $1.0 million from $18.4 million, primarily due to lower prepayment premiums and accelerated fee accretion.
- Payment-in-kind interest increased to $8.7 million from $1.9 million and represented 4.7% of investment income, increasing the portion of earnings not collected in cash.
- NAV total return was 2.44%; market-value total return was negative 15.67% for the quarter. No shares were repurchased under the $262 million 10b5-1 repurchase plan.
Outlook, commentary, risks and unusual items
The filing does not provide formal earnings or distribution guidance. Management expects investment income to vary with the pace of originations, repayments, prepayments, portfolio yields and the ability of portfolio companies to make cash interest payments. The Board declared an additional $0.53 per-share distribution payable August 12, 2022 to shareholders of record June 30, 2022.
The Adviser waived $6.4 million of management fees and $3.0 million of incentive fees during the quarter. The fee waiver keeps the effective management fee at 0.75% and the income and capital gains incentive fee rates at 15% for two years following the IPO; waived amounts are not subject to recoupment.
Key risks include valuation uncertainty for illiquid Level 3 investments, leverage and covenant compliance, refinancing and liquidity risk, rising interest rates, inflation, supply-chain disruptions, labor shortages, COVID-19 effects, geopolitical developments involving Russia and Ukraine, foreign-currency exposure, and potential deterioration in portfolio-company credit quality. Because nearly all debt investments are floating rate, higher rates may increase investment income, but higher funding costs and portfolio-company stress could offset that benefit. Management estimated that a 100-basis-point increase in base rates would increase annualized net income by approximately $72.1 million before income-based incentive fees, assuming no changes in the investment or borrowing structure.
Important facts for investors to verify
- Whether the $1.26 billion of unfunded commitments and $569.5 million of available debt capacity remain adequately supported by liquidity and asset coverage.
- The sustainability of the $0.61 quarterly net investment income per share compared with the $0.78 distribution, particularly given PIK income and special distributions.
- Changes in portfolio-company credit quality, non-accrual status, valuation marks and the concentration of Level 3 investments.
- The effect of higher benchmark rates on both portfolio yields and borrowing costs, including the impact of incentive fees.
- Refinancing needs for the $400 million of 2023 Notes and other unsecured and secured facilities approaching maturity.
- The market-price discount or premium to NAV, given the negative market-value total return during the quarter.
- Continued compliance with RIC and BDC requirements, debt covenants and the 150% asset coverage ratio.