Business Context and Reporting Period
Blackstone / GSO Secured Lending Fund is a newly formed, externally managed, non-diversified business development company and regulated investment company. Its objective is to generate current income and, to a lesser extent, long-term capital appreciation by investing primarily in secured loans to private U.S. middle-market companies. The filing covers the fiscal year ended December 31, 2019. The 2018 comparison covers only November 20, 2018 through December 31, 2018, when investment operations commenced.
- At December 31, 2019, the portfolio included 56 companies with fair value of $3.092 billion.
- Portfolio composition by fair value was 98.50% first-lien debt, 1.05% second-lien debt and 0.45% equity.
- All debt investments were floating-rate and subject to interest-rate floors; no loans were on non-accrual status.
- The fund had no established public market for its shares and was conducting a private offering through capital commitments and drawdowns.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total investment income | $148.0 million | $3.2 million |
| Net investment income after excise tax | $73.9 million | $1.3 million |
| Net realized gain | $4.0 million | $(0.6) million |
| Net unrealized appreciation | $28.3 million | $(3.7) million |
| Net increase in net assets from operations | $106.2 million | $(2.9) million |
| Net investment income per share | $2.18 | $0.17 |
| Earnings per share | $3.14 | $(0.39) |
| Net asset value per share | $26.02 | $24.57 |
| Total return based on NAV | 14.43% | (1.72)% |
| Net investment income margin | 49.9% of investment income | 40.6% of investment income |
Investment income consisted primarily of $146.4 million of interest income, plus $1.0 million of payment-in-kind interest and $0.7 million of fee income. The weighted-average yield was 8.64% at amortized cost and 8.57% at fair value, compared with 8.70% and 8.76%, respectively, in 2018.
- Total assets were $3.190 billion and net assets were $1.673 billion at year-end.
- Cash and cash equivalents were $65.5 million.
- Total debt was $1.454 billion, versus $185.0 million at December 31, 2018.
- Asset coverage was 215.1%, down from 227.8%, but above the 150% statutory threshold.
- Weighted-average borrowing cost, including unused fees, was 4.36%, compared with 5.42% in 2018.
- Available borrowing capacity was $820.8 million, subject to borrowing-base limitations, and undrawn capital commitments were $1.598 billion.
- Cash used in operating activities was $2.558 billion, primarily reflecting $3.077 billion of portfolio investment purchases. Financing activities provided $2.618 billion, including $1.388 billion of equity proceeds and $1.269 billion of net borrowings.
- Declared distributions totaled $2.00 per share, or $67.5 million, all characterized as ordinary income for tax purposes. Approximately $4.3 million was reinvested through the dividend reinvestment plan.
Material Changes Versus the Prior Comparable Period
- The portfolio expanded from $545.3 million to $3.092 billion of fair value, while the number of portfolio companies declined from 61 to 56 as the fund substantially ramped its investment program.
- Capital commitments increased from $952.2 million to $3.231 billion; contributed capital increased to 50.55% of commitments from 25.13%.
- Debt increased by $1.269 billion, supported by expanded Subscription, Jackson Hole and Breckenridge facilities and the addition of the $400 million Big Sky facility.
- The portfolio became more concentrated in Distributors, Building Products and Air Freight & Logistics, representing 18.5%, 12.2% and 11.0% of fair value, respectively. The largest 2018 concentrations in healthcare and hotels, restaurants and leisure declined materially.
- Net investment income and realized and unrealized gains turned positive as the fund moved from a partial start-up period to a full year of operations.
- Expense growth reflected the larger portfolio and higher leverage. Interest expense rose to $35.4 million, management fees to $12.6 million and income-based incentive fees to $13.8 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing provides no formal earnings or distribution guidance. Management expects to continue investing primarily in first-lien senior secured and unitranche loans to private middle-market companies, generally targeting borrowers with $25 million to $75 million of EBITDA and seeking conservative leverage, favorable covenants and principal protection. The fund generally intends to distribute substantially all available earnings quarterly, but distributions remain subject to Board discretion, earnings, asset-coverage requirements and tax considerations.
- Management expects to raise additional equity through the private offering and continue using leverage to fund investments.
- Unfunded delayed-draw commitments were $179.4 million, up from $54.7 million, creating future funding requirements.
- Incentive fees may be payable on accrued, non-cash income and may be payable even when the fund experiences capital losses. A $4.2 million capital-gains incentive fee was accrued but was not payable at year-end.
- Fair value relies substantially on Level 3 and other illiquid measurements: $2.255 billion, or approximately 73% of investment fair value, was classified as Level 3. Valuation changes may not equal amounts ultimately realized.
- Key risks include leverage, rising borrowing costs, interest-rate and LIBOR transition risk, credit losses, portfolio concentration, illiquidity, borrower defaults, competition, dependence on GSO personnel, related-party conflicts and allocation of opportunities among affiliated funds.
- The fund had no material pending or threatened litigation and reported compliance with covenants on its credit facilities.
- Subsequent to year-end, the fund received $5.9 million of remaining capital-call proceeds, called an additional $440.9 million of commitments and issued approximately 16.9 million shares. The Board declared additional distributions totaling $0.50 per share payable May 15, 2020.
Important Facts for Investors to Verify
- Whether portfolio fair values, particularly Level 3 valuations, remain supported by borrower performance, market yields and collateral values.
- The amount and timing of non-accrual loans, realized losses, PIK income and other non-cash income in subsequent periods.
- Available borrowing capacity, borrowing-base compliance, facility maturities and the effect of leverage on NAV and distributions.
- Whether the $179.4 million of unfunded portfolio commitments and future capital calls can be funded without reducing liquidity or investment flexibility.
- The sustainability of the $2.00 per-share 2019 distribution and the portion funded from recurring cash investment income rather than realized gains, borrowings or capital.
- The effect of LIBOR replacement and changes in benchmark rates on portfolio yields, borrowing costs and incentive-fee calculations.
- Allocation of investments, co-investments and expenses between the fund and other Blackstone or GSO-managed vehicles, including related-party service arrangements.
- The absence of a public trading market and the limited, discretionary nature of any future share-repurchase program or liquidity event.