Blackstone Secured Lending Fund annual report, Q4 FY2021

Blackstone Secured Lending Fund: FY2021 Form 10-K Summary

Business context and reporting period

Blackstone Secured Lending Fund is a non-diversified, externally managed business development company and regulated investment company. The fund seeks 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 fiscal year ended December 31, 2021, with comparative information for 2020 and 2019.

BXSL completed its initial public offering on October 28, 2021, issuing 9.18 million shares at $26.15 per share, followed by 1.377 million additional shares through the underwriters’ option. Net IPO proceeds before offering expenses totaled approximately $264.4 million. The shares began trading on the NYSE under the ticker BXSL.

Financial performance and key metrics

Metric	2021	2020	Change
Total investment income	$624.7 million	$389.6 million	60.3% increase
Net investment income after excise tax	$351.7 million	$239.6 million	46.8% increase
Net unrealized appreciation	$104.2 million	$(16.6) million	Improved by $120.8 million
Net realized gain	$4.6 million	$(4.4) million	Improved by $8.9 million
Net increase in net assets from operations	$460.4 million	$218.6 million	110.6% increase
Net investment income per share	$2.43	$2.51	Declined due to share growth and timing
Earnings per share	$3.19	$2.29	39.3% increase
Net asset value per share, year-end	$26.27	$25.20	4.2% increase
Total return based on NAV	12.63%	6.46%	Improved

Net investment income after excise tax represented approximately 56.3% of total investment income. The 2021 results benefited from greater portfolio scale, higher prepayment-related income and recovery in credit markets following the COVID-19-related volatility. Non-recurring interest income was $60.9 million, including prepayment premiums and accelerated accretion of fees and discounts, compared with $48.9 million in 2020.

At December 31, 2021, total assets were $10.18 billion, net assets were $4.45 billion, and investments at fair value were $9.86 billion. The portfolio included 148 companies, compared with 81 companies at the end of 2020. No portfolio loans were on non-accrual status at either year-end.

Portfolio, margins, debt and liquidity

97.63% of investments at fair value were first-lien debt, 0.64% were second-lien debt and 1.73% were equity investments.
99.9% of debt investments were floating-rate; 93.9% had interest-rate floors above zero.
Weighted average yield on income-producing investments at fair value was 7.21%, down from 7.68% in 2020.
Average loan-to-value declined to 44.0% from 45.8%.
Health care providers and services represented 13.97% of investments at fair value, software 13.22%, professional services 7.91%, insurance 6.87% and commercial services and supplies 6.75%.
Approximately 94.48% of investments at fair value were in U.S. issuers, 5.01% in Canada and 0.51% in Europe.
Level 3 investments totaled $9.50 billion, or approximately 96.4% of investments at fair value, making valuation a significant judgment area.
Total debt outstanding was $5.54 billion at principal amount, with a carrying value of $5.50 billion, compared with $2.51 billion and $2.50 billion, respectively, in 2020.
Asset coverage declined to 180.2% from 230.0%, but remained above the 150% regulatory minimum.
Available borrowing capacity was $705.7 million before borrowing-base limitations and $567.3 million after such limitations. Cash and cash equivalents were $102.9 million.
Unfunded delayed-draw and revolving commitments increased to $1.41 billion from $432.3 million.
Weighted average borrowing cost, including applicable fees and debt-cost amortization, declined to 2.92% from 3.26%, while average principal debt outstanding increased to $4.00 billion from $1.90 billion.

Cash used in operating activities was $3.83 billion, primarily reflecting $6.82 billion of investment purchases, partially offset by $2.73 billion of investment sales and repayments. Financing activities provided $3.71 billion, including net debt borrowings and unsecured debt issuances of $3.00 billion and common-share issuance proceeds of $981.1 million, partially offset by $253.8 million of cash dividends.

Material changes versus the prior comparable period

Investment fair value increased 76.4%, from $5.59 billion to $9.86 billion, while the number of portfolio companies increased from 81 to 148.
New investments purchased increased to $6.83 billion from $4.54 billion; aggregate investment acquisitions, including unfunded commitments, increased to $8.38 billion from $4.91 billion.
The portfolio shifted further toward first-lien debt and expanded exposure to software, health care, insurance and professional services.
Debt increased by approximately $3.03 billion, primarily supporting portfolio growth. The Revolving Credit Facility commitment increased to $1.325 billion, and the fund issued new 2026, 2027 and 2028 unsecured notes.
Net unrealized appreciation reversed the prior-year unrealized loss, reflecting tighter credit spreads, stronger loan markets and improved portfolio-company fundamentals.
Regular distributions declined to $2.03 per share from $2.30 per share, although the Board declared additional special distributions totaling $0.65 per share for payment in 2022.
The Adviser waived $4.2 million of management fees and $2.3 million of income-based incentive fees. During the two-year waiver period following the IPO, effective fee rates remained at 0.75% for management fees and 15% for income-based and capital-gains incentive fees rather than the contractual post-IPO rates of 1.0% and 17.5%.
The Company initiated a Rule 10b5-1 share repurchase plan for up to approximately $262 million at prices below NAV, but made no repurchases during 2021.

Guidance, outlook, management commentary, risks and unusual items

The filing does not provide formal earnings, dividend or portfolio-growth guidance. Management expects to continue using leverage and distributing substantially all available earnings quarterly, but states that distributions are discretionary and cannot be assured.

Management characterized the portfolio as defensive and income-oriented, with an emphasis on principal protection, conservative leverage and secured lending. The fund benefited from the recovery in credit markets during 2021, but noted that future COVID-19 variants, inflation, supply-chain disruptions, rising interest rates, geopolitical developments and economic deterioration could adversely affect portfolio companies, valuations, liquidity and distributions.

Rising rates may increase income on floating-rate investments, but may also increase borrowing costs, incentive fees, portfolio-company defaults and valuation pressure. A 100-basis-point increase in base rates was estimated to increase annual net income by approximately $13.2 million, assuming no structural changes.
LIBOR transition creates operational, documentation, valuation and litigation risks for investments and borrowings that reference LIBOR.
Leverage magnifies both gains and losses. A decline in asset values could reduce NAV, breach asset-coverage requirements, restrict distributions and require asset sales or debt repayment at unfavorable prices.
The fund faces refinancing risk on unsecured notes maturing from 2023 through 2028, including $400 million of 2023 Notes and $1.5 billion of notes with 2026 maturities.
Private and illiquid investments are primarily valued using Level 3 inputs. Fair values may differ materially from amounts ultimately realized, particularly in a forced sale.
Concentration in health care and software exposes results to sector-specific regulation, competition, technology, reimbursement, product and operating risks.
The Adviser’s management and incentive fees, affiliated service providers, co-investment arrangements and allocation of opportunities among Blackstone clients create potential conflicts of interest.
The Company had no material pending or threatened litigation reported at year-end and stated that it was in compliance with its debt-facility and unsecured-note covenants.
Subsequent to year-end, Robert Busch resigned as chief accounting officer and treasurer effective March 11, 2022, and David Goldberg was appointed interim successor. The Board declared a $0.53 per-share distribution payable May 13, 2022.

Most important facts for an investor to verify

Whether the 7.21% portfolio yield and 2021 level of non-recurring prepayment income are sustainable.
The sensitivity of net investment income, NAV and distributions to higher rates, higher funding costs and LIBOR replacement.
Whether the $1.41 billion of unfunded commitments can be funded without materially increasing leverage or reducing liquidity.
The quality and independence of Level 3 valuation assumptions, including discount rates and enterprise-value multiples.
Asset coverage, borrowing-base availability and refinancing plans for debt maturities from 2023 through 2028.
Portfolio-company credit performance, including any subsequent non-accruals, covenant breaches, restructurings or realized losses.
The effect of fee waivers expiring after the two-year post-IPO waiver period on net investment income and distributions.
The sustainability and tax characterization of the $2.03 per-share 2021 distributions and the $0.65 per-share special distributions.
Actual share repurchases under the 10b5-1 plan and whether repurchases could create NAV dilution or support the market price.
Potential conflicts arising from affiliated transactions, co-investments, allocation practices and Blackstone-affiliated service providers.