Blackstone/GSO Secured Lending Fund — 10-Q Summary
Business context and reporting period
Blackstone/GSO Secured Lending Fund is an externally managed, non-diversified closed-end investment company that has elected regulated business development company and regulated investment company status. Its objective is to generate current income and, to a lesser extent, long-term capital appreciation primarily through loans and other securities of private U.S. small and middle-market companies. The filing covers the quarter and six months ended June 30, 2020; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Total investment income | $81.2 million | $161.4 million |
| Net investment income after excise tax | $48.4 million | $99.1 million |
| Net realized gain | $1.7 million | $2.4 million |
| Net unrealized appreciation/(depreciation) | $178.9 million | $(180.0) million |
| Net increase/(decrease) in net assets from operations | $229.0 million | $(78.5) million |
| Earnings/(loss) per share | $2.41 | $(0.92) |
| Distributions declared per share | $0.50 | $1.00 |
| Balance sheet and portfolio metric | June 30, 2020 | December 31, 2019 |
|---|---|---|
| Investment portfolio at fair value | $4.035 billion | $3.092 billion |
| Total assets | $4.168 billion | $3.190 billion |
| Debt | $1.708 billion | $1.454 billion |
| Net assets | $2.281 billion | $1.673 billion |
| NAV per share | $23.68 | $26.02 |
| Cash and cash equivalents | $73.9 million | $65.5 million |
| Asset coverage ratio | 233.5% | 215.1% |
The portfolio was 99.15% first-lien debt by fair value, with second-lien debt, unsecured debt and equity comprising the remainder. Approximately 99.9% of debt investments at fair value carried floating rates. No portfolio loans were on non-accrual status at June 30, 2020.
Material changes versus comparable periods
- Six-month investment income increased to $161.4 million from $44.9 million, primarily because the investment portfolio expanded substantially through additional capital deployment.
- Six-month net investment income after excise tax increased to $99.1 million from $19.6 million.
- Despite stronger recurring investment income, the six-month period included $180.0 million of net unrealized depreciation, compared with $14.7 million of unrealized appreciation in the prior-year period. This produced a six-month net loss from operations of $78.5 million versus income of $37.6 million.
- NAV per share declined from $26.02 at year-end 2019 to $23.68 at June 30, 2020. Management attributed the decline primarily to COVID-19-related market volatility and lower debt investment valuations.
- Debt increased by $254.3 million from year-end 2019, while total committed credit capacity increased from $2.275 billion to $3.275 billion. Available borrowing capacity at June 30, 2020 was $1.023 billion, subject to borrowing-base limitations.
- The fund issued 31.7 million shares for aggregate proceeds of $764.9 million during the six months. Total capital commitments were $3.766 billion, including $1.368 billion remaining undrawn.
- Weighted average borrowing costs declined to 3.36% for the second quarter and 3.59% for the six-month period, from 4.53% and 4.67%, respectively, in the comparable 2019 periods, while average debt outstanding increased materially.
Cash flow, liquidity and leverage
For the six months ended June 30, 2020, operating activities used $951.4 million, primarily reflecting $1.511 billion of investment purchases, partly offset by $410.3 million of investment sale proceeds. Financing activities provided $959.8 million, including $770.8 million from common-share issuances and $254.2 million of net credit-facility borrowings, partly offset by $58.6 million of cash dividends.
Management stated that cash, $1.567 billion of available credit capacity and $1.368 billion of uncalled capital commitments were expected to support near-term investment and operating needs. Unfunded portfolio commitments totaled $188.1 million, and the fund estimated an additional $194.5 million of committed but not yet funded investments.
Guidance, outlook, risks and unusual items
- The filing does not provide formal earnings or NAV guidance. Management expects COVID-19-related effects to continue to create material uncertainty for portfolio company performance, valuations, liquidity, financing access and distributions.
- Second-quarter unrealized appreciation of $178.9 million reflected a partial recovery in loan markets and tighter spreads from first-quarter lows. For the six months, valuations remained negatively affected by COVID-19-related volatility.
- COVID-19 may impair portfolio company revenues and cash flows, delay or prevent interest payments, increase defaults and losses, reduce investment income, and constrain the fund’s ability to access financing or make new investments.
- Valuation risk is significant because $3.174 billion of investments were classified as Level 3, requiring substantial judgment and unobservable inputs. A 10% change in quoted debt investments could produce an estimated $126.7 million unrealized gain or loss.
- Interest-rate sensitivity was asymmetric because of base-rate floors: the filing estimates annualized net income would increase by $1.1 million for a 100-basis-point rate increase, while a 100- or 200-basis-point decrease would increase net income by $2.2 million under the stated assumptions.
- Capital gains incentive fee accrual was negative $4.2 million for the six months and zero for the quarter because cumulative realized and unrealized losses eliminated the accrued capital gains fee. Income-based incentive fees were $16.9 million for the six months.
- Subsequent to quarter-end, the fund issued $400.0 million of 3.650% unsecured notes due July 2023. The fund also received the $125.6 million June 30 capital call and reduced the Jackson Hole Funding Facility commitment from $600 million to $400 million in July.
Important facts for investors to verify
- Whether COVID-19-related credit deterioration leads to non-accruals, additional unrealized depreciation or realized losses after June 30, 2020.
- The composition, concentration and valuation of the $4.035 billion portfolio, particularly the Level 3 investments and exposures to economically sensitive industries.
- Borrowing-base availability, facility maturities, covenant compliance and the effect of the subsequent $400 million notes issuance on leverage and liquidity.
- The ability and timing of portfolio companies to fund $188.1 million of unfunded commitments and the fund’s additional $194.5 million of committed but unfunded investments.
- Whether recurring net investment income remains sufficient to support the stated distribution policy, including the impact of non-cash PIK income and incentive fees.
- Future NAV changes and the reliability of fair-value estimates in illiquid markets.