Business Context and Reporting Period
Blackstone / GSO Secured Lending Fund is a newly formed, non-diversified business development company and externally managed regulated investment company. It was formed on March 26, 2018, began investment activities on November 20, 2018, and filed its first Form 10-K for the fiscal year ended December 31, 2018. The reported operating period therefore covers only November 20 through December 31, 2018, and no prior comparable operating period exists.
The fund seeks current income and, to a lesser extent, long-term capital appreciation by investing primarily in floating-rate secured debt of private U.S. small and middle-market companies. GSO Asset Management LLC is the investment adviser and GSO Capital Partners LP provides administrative services.
Financial and Portfolio Metrics
| Metric | Period or date | Value |
|---|---|---|
| Total investment income | Nov. 20–Dec. 31, 2018 | $3.174 million |
| Net investment income | Nov. 20–Dec. 31, 2018 | $1.287 million |
| Net realized loss | Nov. 20–Dec. 31, 2018 | $0.581 million |
| Net unrealized depreciation | Nov. 20–Dec. 31, 2018 | $3.650 million |
| Net decrease in net assets from operations | Nov. 20–Dec. 31, 2018 | $2.944 million |
| Net investment income per share | Period | $0.17 |
| Loss per share | Period | $0.39 |
| Net asset value per share | Dec. 31, 2018 | $24.57 |
| Total net assets | Dec. 31, 2018 | $236.365 million |
| Investments at fair value | Dec. 31, 2018 | $545.325 million |
| Cash and cash equivalents | Dec. 31, 2018 | $6.228 million |
| Total debt | Dec. 31, 2018 | $185.0 million |
| Asset coverage ratio | Dec. 31, 2018 | 227.8% |
| Weighted average portfolio yield at fair value | Dec. 31, 2018 | 8.76% |
| Weighted average portfolio yield at amortized cost | Dec. 31, 2018 | 8.70% |
The portfolio comprised 61 companies with a fair value of $545.3 million. First-lien debt represented 98.84% of investments at fair value and second-lien debt represented 1.16%. All debt investments were floating-rate and subject to interest-rate floors. The largest industry exposures were health care at approximately 26% and hotels, restaurants and leisure at approximately 17% of portfolio fair value.
The fund acquired $616.9 million of aggregate principal investments, including $54.7 million of unfunded commitments. Five delayed-draw term loans represented the unfunded commitments. Approximately 98.94% of portfolio fair value was attributable to U.S. investments and 1.06% to U.K. investments.
Cash Flow, Liquidity and Debt
- Cash used in operating activities was $349.8 million, primarily reflecting portfolio investment funding.
- Cash provided by financing activities was $356.0 million, including $239.3 million from share issuances and $120.0 million of net credit-facility borrowings.
- The fund had $715.0 million of unused committed credit capacity, although only $202.2 million was available based on borrowing-base and other limitations.
- Capital commitments totaled $952.2 million, of which $712.9 million remained undrawn at year-end.
- The weighted average interest rate on outstanding borrowings was 4.95%, and average principal debt outstanding during the period was $162.0 million.
- Outstanding facilities included the $200 million Subscription Facility, the $300 million JPM SPV Facility and the $400 million BNP SPV Facility. The SPV facilities are secured by subsidiary portfolios and are non-recourse to the fund, subject to the value of its subsidiary investments.
Material Changes and Unusual Items
- The fund was in its initial ramp-up period and had no prior comparable operating results. It issued 9.6 million shares for aggregate proceeds of $239.3 million during the period.
- Net investment income was positive, but fair-value depreciation and a realized loss associated with acquiring the Syndicated Warehouse produced an overall net operating loss.
- The Adviser provided $1.696 million of expense support. These payments may be reimbursable to the Adviser in future periods under the Expense Support and Conditional Reimbursement Agreement.
- The fund acquired the Syndicated Warehouse on December 11, 2018 and recorded a $0.6 million realized loss related to the transaction. The warehouse was subsequently merged into the fund’s wholly owned Breckenridge Funding subsidiary.
- The Middle Market Warehouse created a forward purchase obligation with approximately $29.8 million of contractual obligations at year-end and a $0.2 million unrealized loss.
- No dividends were declared or paid during the 2018 operating period. Subsequent to year-end, the Board declared distributions of $0.1239 per share and $0.3536 per share, both payable May 15, 2019.
- No loans were on non-accrual status at December 31, 2018.
- Approximately $328.1 million, or about 60% of investment fair value, was classified as Level 3 and therefore relied on significant unobservable inputs and valuation judgment.
Outlook, Guidance and Principal Risks
Management expects to continue raising capital through private-offering closings and deploying capital primarily into first-lien, unitranche and other secured floating-rate loans. The filing does not provide formal earnings, distribution, portfolio-growth or return guidance. The fund intends to distribute substantially all available taxable earnings quarterly, but distributions remain discretionary and are not assured.
- Leverage can magnify losses, reduce net investment income and restrict distributions if asset coverage falls below the required 150% threshold.
- Portfolio values are subject to credit deterioration, defaults, economic downturns, illiquidity and changes in interest rates. The portfolio is concentrated in health care and hotels, restaurants and leisure.
- All debt investments were floating-rate, creating both potential income benefits from higher rates and risks from increased borrower costs, declining values or higher borrowing expense.
- The fund depends on GSO personnel, origination relationships and allocation decisions. The Adviser manages other clients with potentially competing investment objectives, creating conflicts of interest.
- The management fee is based on gross assets, including assets purchased with leverage. Income and capital-gains incentive fees may encourage risk-taking and may be payable on accrued income even if cash has not been received.
- There was no public market for the shares at year-end. Transfers are restricted, and any future repurchase program would be discretionary and limited, initially contemplated at no more than 2.5% of outstanding shares quarterly.
- The fund must maintain its BDC and RIC qualifications. Failure to meet regulatory, diversification or distribution requirements could result in reduced operating flexibility or corporate-level taxation.
- The filing identifies risks from LIBOR transition, valuation uncertainty, warehouse transactions, unfunded commitments, cybersecurity, regulatory change and limited operating history.
Important Facts for Investors to Verify
- Confirm the distinction between the requested company name, Blackstone Secured Lending Fund, and the filing’s registrant name, Blackstone / GSO Secured Lending Fund.
- Reconcile the $185.0 million of debt, $202.2 million of borrowing availability and $715.0 million of unused commitments with the applicable borrowing-base and covenant calculations.
- Assess whether the $1.696 million of Adviser expense support is ultimately reimbursed and how reimbursement would affect future distributions.
- Review the valuation support for the $328.1 million of Level 3 investments and the sensitivity of NAV to discount rates, broker quotes and credit assumptions.
- Evaluate concentration in health care and hotels, restaurants and leisure, as well as exposure to five delayed-draw commitments totaling $54.7 million.
- Confirm subsequent capital calls, share issuances and declared distributions disclosed through March 18, 2019.
- Review the terms and potential economic effects of the Middle Market Warehouse forward purchase obligation and the Syndicated Warehouse acquisition.
- Verify the absence of non-accrual loans and monitor whether portfolio companies remain current as the portfolio seasons.