Blackstone Secured Lending Fund: Fiscal Year 2020 Summary
Business context and reporting period
Blackstone Secured Lending Fund filed its Form 10-K for the year ended December 31, 2020. The company is a non-diversified, closed-end business development company and regulated investment company managed by Blackstone Credit BDC Advisors LLC. Its objective is to generate current income and, to a lesser extent, long-term capital appreciation, primarily through first-lien senior secured and unitranche loans to U.S. middle-market companies.
At December 31, 2020, the portfolio included 81 companies, compared with 56 at December 31, 2019. Based on fair value, 98.51% of investments were first-lien debt, 0.90% were second-lien debt and 0.59% were equity. All debt investments were floating-rate, and 88.0% had interest-rate floors above zero. The company changed its name from Blackstone / GSO Secured Lending Fund to Blackstone Secured Lending Fund effective December 10, 2020.
Financial performance and key metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total investment income | $389.6 million | $148.0 million |
| Net investment income after excise tax | $239.6 million | $73.9 million |
| Net realized and unrealized gain (loss) | $(20.9) million | $32.4 million |
| Net increase in net assets from operations | $218.6 million | $106.2 million |
| Net investment income per share | $2.51 | $2.18 |
| Earnings per share | $2.29 | $3.14 |
| NAV per share, year-end | $25.20 | $26.02 |
| Total return based on NAV | 6.46% | 14.43% |
| Distributions declared per share | $2.30 | $2.00 |
| Net assets, year-end | $3.268 billion | $1.673 billion |
| Investment portfolio at fair value | $5.586 billion | $3.092 billion |
Investment income growth was driven primarily by substantial portfolio expansion, higher prepayment-related income and a full year of operations. Non-recurring income, including prepayment premiums and accelerated accretion of fees and discounts, was $48.9 million in 2020 compared with $3.7 million in 2019. Interest income was $381.8 million, payment-in-kind interest was $7.1 million and fee income was $0.7 million.
Net investment income before excise tax was $240.1 million. Net expenses were $149.5 million, including $65.9 million of interest expense, $32.9 million of management fees and $42.0 million of income-based incentive fees. A $3.1 million reversal of previously accrued capital-gains incentive fees benefited expenses because of current-period realized and unrealized losses.
Cash and cash equivalents were $218.0 million at year-end. Cash used in operating activities was $2.320 billion, largely reflecting $4.485 billion of investment purchases, partially offset by $2.031 billion of investment-sale proceeds. Financing activities provided $2.473 billion, including $1.583 billion from share issuances and $1.045 billion from net debt financing, partially offset by $145.1 million of cash dividends.
Material changes versus the prior comparable period
- Fair value of investments increased 80.6% to $5.586 billion, while the number of portfolio companies increased from 56 to 81.
- New investments purchased increased to $4.537 billion from $3.078 billion; investments sold or repaid increased to $2.075 billion from $573 million.
- Weighted-average yield at fair value declined to 7.68% from 8.57%, reflecting lower market rates and portfolio changes, although portfolio growth more than offset the yield decline.
- Average principal debt outstanding increased to $1.903 billion from $777 million, while the weighted-average borrowing rate declined to 3.26% from 4.36%.
- Debt increased to $2.515 billion of principal outstanding from $1.454 billion. Asset coverage improved to 230.0% from 215.1%.
- NAV per share declined by $0.82, or 3.2%, despite $2.30 per share of distributions, primarily because of $16.6 million of net unrealized depreciation and $4.4 million of net realized losses.
- Realized losses included a $20.5 million loss related to Travelport Finance S.A.R.L. No portfolio loans were on non-accrual status at either year-end.
- Capital commitments increased to $3.926 billion, of which $713.3 million remained undrawn, compared with $1.598 billion undrawn at December 31, 2019.
- Unfunded delayed-draw and revolver commitments increased to $432.3 million from $179.4 million.
Guidance, outlook, risks and unusual items
The filing does not provide numerical earnings or distribution guidance. Management expects to continue investing primarily in secured floating-rate loans and to distribute substantially all available earnings quarterly, but distributions remain subject to earnings, liquidity, asset-coverage requirements, regulatory compliance and Board discretion. On February 24, 2021, the Board declared a $0.50 per-share distribution payable May 14, 2021 to shareholders of record March 31, 2021.
COVID-19 caused significant credit-market volatility and contributed to 2020 valuation losses. Management cautioned that additional effects could include lower portfolio-company cash interest payments, defaults, investment losses, reduced financing availability, higher collateral requirements, difficulty valuing illiquid assets and limits on future distributions. The ultimate impact remained uncertain as of the filing date.
The company uses substantial leverage. At December 31, 2020, debt included $400 million of 3.650% notes due 2023 and $800 million of 3.625% notes due 2026, in addition to secured revolving facilities. The filing identifies refinancing risk, covenant compliance, borrowing-base reductions and potential forced asset sales as material risks. The company was in compliance with its debt covenants at year-end.
Interest-rate risk is material because all debt investments were floating-rate while borrowings also generally bear floating rates. The filing estimates that a 100-basis-point increase in base rates would increase annualized net income by approximately $4.7 million, while a 100-basis-point decrease would increase annualized net income by approximately $1.6 million after considering floors and borrowing costs. The transition away from LIBOR may create documentation, valuation, operational and financing risks.
Fair-value risk is significant: $4.785 billion of investments were classified as Level 3, including $4.261 billion of debt investments valued using yield analysis. The filing notes that fair values may differ materially from amounts ultimately realized in a sale, particularly in stressed or forced-liquidation conditions.
Shares had no established public market at December 31, 2020. Prior to an exchange listing, liquidity is expected to be limited to potential quarterly repurchase offers, which the Board may not adopt or may amend, suspend or terminate. The company expects an exchange listing by the fourth anniversary of the end of the initial closing period, subject to market conditions, but provides no assurance that a listing will occur.
Most important facts an investor should verify
- Whether COVID-19-related credit deterioration, defaults or valuation changes have affected portfolio performance after December 31, 2020.
- The collectability and timing of the $432.3 million of unfunded portfolio commitments and the $713.3 million of undrawn shareholder capital commitments.
- Debt maturities, refinancing plans and available borrowing capacity, including the 2023 and 2026 notes.
- The sustainability of the $2.30 per-share 2020 distribution and the extent to which future distributions are supported by recurring cash income rather than prepayments, realized gains, borrowings or capital.
- Changes in NAV and the valuation of the $4.785 billion Level 3 portfolio, including sensitivity to discount rates and borrower credit quality.
- LIBOR-transition provisions in portfolio investments and credit facilities.
- The terms, timing and actual availability of any share repurchase program or future exchange listing.
- Management and incentive-fee conflicts, affiliated transactions, co-investment allocations and expenses charged through Blackstone-related service providers.