Blackstone Secured Lending Fund quarterly report, Q2 FY2019

Business Context and Reporting Period

Blackstone / GSO Secured Lending Fund filed this unaudited Form 10-Q for the quarter and six months ended June 30, 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 37,580,097 shares outstanding as of August 8, 2019 and no publicly listed securities.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30, 2019	Six Months Ended June 30, 2019
Total investment income	$29.6 million	$44.9 million
Net expenses	$16.6 million	$25.3 million
Net investment income	$13.0 million	$19.6 million
Net realized gain	$1.6 million	$3.3 million
Net unrealized appreciation	$9.0 million	$14.7 million
Net increase in net assets from operations	$23.6 million	$37.6 million
Net investment income per share	$0.51	$0.98
Earnings per share	$0.92	$1.88
Distributions declared per share	$0.50	$1.00

Net asset value increased to $963.7 million, or $25.64 per share, from $236.4 million, or $24.57 per share, at December 31, 2018.
Total investment income was primarily interest income of $44.3 million for the six-month period; fee income was $0.6 million.
Annualized six-month ratios included net expenses of 9.88% of average net assets and net investment income of 7.65%. Total return based on NAV was 8.50%.
The investment portfolio at fair value was $1.520 billion, consisting of 97.52% first-lien debt, 2.14% second-lien debt and 0.34% equity investments. The portfolio included 47 companies, and no loans were on non-accrual status.
Weighted-average yield on debt and income-producing securities was 9.04% at cost and 8.97% at fair value. All debt investments were floating rate.

Cash Flow, Debt and Liquidity

Operating activities used $1.072 billion of cash, principally reflecting $1.274 billion of investment purchases, partly offset by $320.5 million of investment sale proceeds and principal repayments.
Financing activities provided $1.107 billion, including $648.2 million from share issuances and $465.9 million of net credit-facility borrowings, partly offset by $6.6 million of cash dividends.
Cash and cash equivalents were $40.8 million at June 30, 2019.
Debt outstanding was $651.2 million, compared with $185.0 million at December 31, 2018. The weighted-average borrowing rate, including unused fees, was 4.53% for the quarter and 4.67% for the six-month period.
Credit facilities had aggregate commitments of $1.075 billion, unused capacity of $423.8 million and borrowing-base-adjusted availability of $294.1 million.
Asset coverage was 248.0%, above the 150% regulatory minimum.
Total capital commitments were $2.457 billion, of which $1.508 billion remained undrawn at quarter end.

Material Changes Versus the Prior Comparable Period

The filing does not provide a meaningful year-ago income statement comparison because the company had not yet been capitalized, incurred expenses or generated revenue during the corresponding prior-year period. Comparisons are primarily against December 31, 2018.

Fair value of investments increased from $545.3 million to $1.520 billion, reflecting substantial deployment of capital and leverage.
Debt increased from $185.0 million to $651.2 million, while net assets increased from $236.4 million to $963.7 million.
Shares outstanding increased from 9.6 million to 37.6 million. The company issued 27.9 million shares for aggregate offering proceeds of approximately $709.3 million during the six months.
The BNP SPV Facility was increased from $400 million to $575 million. The portfolio expanded from 61 investments at December 31, 2018 to 47 portfolio companies at June 30, 2019, with a significantly larger average investment size.
Industry exposure shifted materially toward air freight and logistics, building products, distributors and specialty retail, while health care providers and hotels, restaurants and leisure represented smaller percentages of the expanded portfolio than at year-end.
Unfunded delayed-draw commitments increased from $54.7 million to $108.8 million. Total unfunded commitments, including the forward purchase obligation, were $195.5 million.

Outlook, Risks, Contingencies and Unusual Items

Management expects to continue raising equity capital through additional private-offering closings and deploying capital primarily into secured debt investments. No formal earnings or distribution guidance was provided.
The Middle Market Warehouse contained approximately $87.6 million of principal investments subject to a forward purchase obligation of approximately $86.9 million. The company purchased these investments on July 12, 2019 for $86.9 million.
A $61.0 million subscription receivable outstanding at June 30, 2019 was collected in July 2019. Additional capital commitments of $121.5 million were entered into in July, and a further $36.1 million capital call was issued on July 26, 2019.
The Subscription Facility had a stated maturity of November 6, 2019, subject to potential extensions of up to two additional terms of no more than 364 days each, subject to lender consent and other conditions.
Key risks include leverage, refinancing and borrowing-base availability, interest-rate changes, credit losses, illiquidity and valuation uncertainty, unfunded commitments, reliance on the Adviser, related-party transactions, conflicts of interest, regulatory and tax qualification, and the ability to raise additional capital.
Approximately $886.5 million, or most of the investment portfolio subject to Level 3 measurement, used significant unobservable inputs. Forced-sale values could differ materially from reported fair values.
A hypothetical 100-basis-point increase in base rates was estimated to increase annualized net income by $8.9 million; a 100-basis-point decrease was estimated to reduce it by $8.9 million, subject to stated assumptions.
The company reported no material litigation, no defaults upon senior securities and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
The Board subsequently declared a $0.2120 per-share distribution payable November 14, 2019 to shareholders of record as of August 8, 2019.

Important Facts for Investors to Verify

Confirm the availability, maturity and extension status of the Subscription Facility and the borrowing-base capacity of all three credit facilities.
Review portfolio company credit performance, non-accrual status, covenant compliance and concentration by issuer, industry and security ranking.
Assess the reasonableness and sensitivity of Level 3 valuations, including discount rates, broker quotes and performance multiples.
Verify the funding requirements and timing for the $108.8 million of delayed-draw commitments and the $86.7 million forward purchase obligation fair value.
Evaluate whether investment income and realized gains support the $1.00 per-share six-month distribution and future distributions after incentive fees and interest expense.
Monitor capital-call collections, remaining undrawn commitments, share issuance terms and dilution implications.
Review the company’s related-party arrangements, incentive-fee accruals and potential future reimbursement of expense support.