Blackstone Secured Lending Fund (NYSE: BXSL) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. BXSL is an externally managed business development company (BDC) and regulated investment company (RIC), focused primarily on senior secured lending to private U.S. companies. Its objectives are current income and, to a lesser extent, long-term capital appreciation. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Total investment income | $264.9 | $185.6 |
| Net expenses, before excise tax | $113.1 | $81.5 |
| Net investment income after excise tax | $149.2 | $102.7 |
| Net realized and unrealized loss | $(10.4) | $4.5 gain |
| Increase in net assets from operations | $138.8 | $107.2 |
| Net investment income per share | $0.93 | $0.61 |
| Earnings per share | $0.86 | $0.63 |
| NAV per share | $26.10 at March 31 | $25.93 at December 31 |
| Cash and cash equivalents | $103.0 at March 31 | $131.3 at December 31 |
| Debt carrying value, net of issuance costs | $5,451.9 at March 31 | $5,527.7 at December 31 |
- Investment income rose 43% year over year, primarily as higher reference rates lifted interest income. Interest income was $254.2 million; payment-in-kind (PIK) interest was $9.8 million, or 3.7% of investment income.
- Interest expense increased 66% to $66.7 million. The average borrowing rate rose to 4.68% from 2.79%, while average principal debt outstanding was broadly flat at $5.619 billion versus $5.622 billion.
- Net unrealized depreciation was $14.5 million, including $11.4 million on investments and $3.1 million from foreign-currency translation. Net realized gains of $4.2 million included $7.7 million of foreign-currency gains, partly offset by investment losses.
- Quarterly NAV total return was 3.36%; market-value total return was 14.26%. The filing reports annualized net-expense and net-investment-income ratios of 11.69% and 13.36%, respectively; these BDC ratios are calculated against average net assets and should not be read as conventional operating margins.
Portfolio, debt and liquidity
- Investment fair value was $9.626 billion, slightly above $9.617 billion at year-end. First-lien debt comprised 97.9% of investments at fair value; second-lien debt was 0.5%, and equity investments were 1.6%.
- The debt portfolio was 99.92% floating-rate. Weighted-average yield on debt and income-producing investments was 11.40% at fair value, up from 10.73% at year-end. Average loan-to-value was 45.2%, compared with 47.5%.
- The portfolio included 181 companies, up from 176. Sector exposures included software at 14.77%, health care providers and services at 11.78%, and professional services at 8.84% of investment fair value.
- One borrower, across two loans, was on non-accrual at quarter-end; non-accrual investments were 0.07% of investment fair value. The schedule identifies Benefytt Technologies loans as non-accrual.
- Senior securities outstanding were $5.485 billion, and statutory asset coverage was 176.4%, above the 150% minimum. Available credit-facility capacity was $1.065 billion, subject to borrowing-base limits. Management said cash plus available capacity was expected to be sufficient for near-term investing and operations.
- Cash provided by operating activities was $155.9 million, compared with $19.2 million used in Q1 2022. Financing activities used $186.8 million, including $92.7 million of net debt repayments and $91.8 million of cash dividends. Cash declined by $30.9 million during the quarter.
- Unfunded delayed-draw and revolving loan commitments were $598.8 million, down from $690.3 million at year-end. These commitments may require future funding.
Material changes and capital returns
- Income growth was more than offset in part by higher financing costs and greater unrealized depreciation; reported net investment income after excise tax nevertheless increased 45% year over year.
- Q1 investment purchases were $114.6 million and sales or repayments were $109.1 million. The fund reported five new portfolio-company commitments, versus eight in Q1 2022; new-commitment weighted-average yield was 12.58%, versus 7.00%.
- The Board declared a $0.70-per-share distribution for Q1, totaling $112.4 million, payable April 27, 2023. On May 10, 2023, it declared another $0.70 per share, payable July 27 to holders of record June 30.
- In February 2023, the Board authorized a one-year plan to repurchase up to $250 million of shares at prices below NAV. No shares were repurchased in Q1.
Outlook, commentary and risks
- The filing provides no quantified earnings, yield, or portfolio guidance. Management said investment income will vary with originations, repayments, and interest rates.
- Management described Q1 markets as turbulent amid slowing-growth concerns and stress in U.S. and European banking. Tighter financing conditions could create deployment opportunities for private credit, but market dislocation could reduce asset liquidity and impair sale prices or timing.
- Higher rates may increase income, but can also pressure borrowers’ free cash flow, credit quality, and ability to pay interest and principal—particularly if rate increases coincide with economic weakness. Inflation, recession risk, funding costs, and access to financing are additional stated risks.
- Most investments are privately held and valued using significant unobservable inputs (Level 3). The filing cautions that fair values involve judgment, may differ materially from realizable values, and could be lower in a forced sale.
- The company reported compliance with its credit-facility and note covenants and no material pending legal proceedings. It reported no subsequent event requiring recognition, apart from the later-declared distribution.
- Effective May 10, 2023, the Board appointed Teddy Desloge CFO, Matthew Alcide Chief Accounting Officer, Kris Corbett Controller and Treasurer, and Stacy Wang Head of Stakeholder Relations. The filing says the departing interim officers’ resignations were not due to disagreements.
Important facts for investors to verify
- How portfolio-company performance and borrower coverage evolve as floating-rate costs rise, especially for the two non-accrual loans and other PIK-bearing exposures.
- Whether the $11.4 million investment valuation decline and the larger reported unrealized loss persist, and how much portfolio value depends on Level 3 assumptions.
- Debt refinancing and repayment needs, including the $400 million 3.65% notes due July 2023, available facility capacity, and the 176.4% asset-coverage cushion.
- The ability to fund up to $598.8 million of unfunded commitments while maintaining liquidity and asset coverage, and the sustainability of the $0.70-per-share quarterly distribution.
- The transition of legacy LIBOR-linked investments and contracts as U.S. dollar LIBOR publication was scheduled to cease after June 30, 2023, and any resulting operational or economic effects.
- How the new repurchase authorization is used, if at all, and the effect of related-party advisory fees and temporary fee waivers on shareholder returns.