Business Context and Reporting Period
Blackstone / GSO Secured Lending Fund, now Blackstone Secured Lending Fund, is an externally managed, non-diversified business development company and regulated investment company. It primarily invests in first-lien senior secured and unitranche loans to small and middle-market private companies, with the objectives of generating current income and, to a lesser extent, long-term capital appreciation. This unaudited Form 10-Q covers the three months ended March 31, 2020, with comparisons to March 31, 2019 and December 31, 2019.
Key Financial Metrics
| Metric | Three months ended March 31, 2020 | Comparable period or date |
|---|---|---|
| Total investment income | $80.2 million | $15.2 million in Q1 2019 |
| Net investment income after excise tax | $50.7 million; $0.67 per share | $6.6 million; $0.46 per share in Q1 2019 |
| Net realized gain | $0.7 million | $1.7 million in Q1 2019 |
| Net unrealized depreciation | $(358.8) million | $5.7 million appreciation in Q1 2019 |
| Net increase/(decrease) in net assets from operations | $(307.5) million; $(4.05) per share | $14.0 million; $0.98 per share in Q1 2019 |
| Net asset value per share | $21.80 | $26.02 at December 31, 2019; $25.20 at March 31, 2019 |
| Total return based on NAV | (14.32)% for the quarter | 4.60% in Q1 2019 |
| Investment portfolio fair value | $3.64 billion | $3.09 billion at December 31, 2019 |
| Cash and cash equivalents | $106.0 million | $65.5 million at December 31, 2019 |
| Total debt | $1.79 billion | $1.45 billion at December 31, 2019 |
| Asset coverage ratio | 198.7% | 215.1% at December 31, 2019 |
Investment income increased primarily because of substantially greater deployment of capital. Interest income was $77.6 million, including $2.6 million of payment-in-kind interest. Net expenses were $29.4 million, including $16.1 million of interest expense, $6.5 million of management fees and $8.3 million of income-based incentive fees. The capital gains incentive fee was reduced by $4.2 million because cumulative realized and unrealized losses eliminated the prior accrual.
The portfolio was 98.84% first-lien debt, 0.73% second-lien debt and 0.43% equity investments at fair value. The weighted average yield was 8.04% at cost and 8.78% at fair value; 100% of debt investments bore floating rates. No loans were on non-accrual status at March 31, 2020.
Cash Flow, Debt and Liquidity
- Operating activities used $721.8 million, principally reflecting $1.02 billion of investment purchases, partly offset by $130.1 million of investment proceeds and a $145.8 million increase in investment purchase payables.
- Financing activities provided $762.4 million, including $446.8 million from share issuances and $340.5 million of net borrowings, partly offset by $24.9 million of cash dividends.
- Total credit facility commitments were $2.275 billion, of which $1.794 billion was outstanding and $480.9 million was unused. Borrowing-base limitations reduced immediately available capacity to approximately $209.9 million.
- Capital commitments totaled $3.24 billion, with $1.17 billion undrawn at March 31, 2020. Management stated that cash, available facility capacity and uncalled commitments were expected to support near-term operations and investments, but noted that COVID-19 had restricted access to financing.
- Unfunded portfolio-company commitments totaled $185.7 million, and an estimated $194.5 million of additional investments were committed but not yet funded.
Material Changes Versus Prior Period
- The investment portfolio expanded materially from $3.09 billion to $3.64 billion at fair value from December 31, 2019, while debt increased from $1.45 billion to $1.79 billion.
- Despite higher recurring investment income, the Company reported a substantial net loss because of $358.8 million of unrealized depreciation, driven by widening credit spreads, market volatility and COVID-19-related selling pressure.
- NAV per share declined 16.2% from $26.02 at year-end 2019 to $21.80 at March 31, 2020.
- Capital deployment increased: the Company acquired approximately $1.07 billion of investments in Q1 2020 versus $579.8 million in Q1 2019. The portfolio grew to 80 companies from 54 companies a year earlier.
- The weighted average borrowing rate declined to 3.82% from 4.95% in Q1 2019, while average principal debt outstanding increased to $1.62 billion from $353.7 million.
- The percentage of the portfolio with a base-rate floor declined to 65.9% from 79.1% at December 31, 2019, increasing sensitivity to further declines in short-term rates.
Outlook, Risks and Unusual Items
The filing provides no formal earnings or NAV guidance. Management identified COVID-19 as a material source of uncertainty that could reduce portfolio-company interest payments, impair loan recoveries, depress investment valuations, restrict financing access and limit future distributions. Travel and leisure, energy and other affected industries experienced particularly significant valuation pressure.
Most investments are illiquid and approximately $2.86 billion of investments were classified as Level 3 fair value measurements. A forced liquidation could produce proceeds materially below reported fair values. A 10% change in quoted debt investment values was estimated to affect unrealized gains or losses by approximately $123.6 million.
All debt investments were floating-rate. Management estimated that, assuming no changes in the portfolio or borrowing structure, a 100-basis-point increase in base rates would increase annualized net income by approximately $21.6 million, while a 100-basis-point decrease would reduce annualized net income by approximately $4.7 million.
Subsequent to quarter-end, the Company received the $324.0 million capital call issued in March, increased the Breckenridge Funding Facility commitment to $1.125 billion, obtained $105.8 million of additional capital commitments, and declared a $0.0385 per-share distribution payable August 14, 2020. The filing states that the Company remained in compliance with its borrowing covenants and had no material pending litigation.
Facts Investors Should Verify
- Whether COVID-19-related valuation declines, defaults, restructurings or non-accruals increased after March 31, 2020.
- Current NAV per share and the extent to which Level 3 valuation assumptions, credit spreads and quoted loan prices have changed.
- Actual borrowing-base availability, covenant headroom and maturity or extension plans for the $213.3 million Subscription Facility maturing November 6, 2020.
- Funding requirements for the $185.7 million of unfunded portfolio commitments and the estimated $194.5 million of committed but unfunded investments.
- Sustainability of the $0.50 quarterly distribution in light of liquidity, taxable income, portfolio-company cash interest collections and the RIC distribution requirements.
- Whether the absence of non-accrual loans as of March 31, 2020 remained accurate in subsequent reporting periods.