Blackstone Secured Lending Fund: 10-Q Summary
Business context and reporting period
Blackstone Secured Lending Fund is an externally managed, non-diversified BDC and regulated investment company focused primarily on originated and syndicated senior secured loans to U.S. small and middle-market companies. Its objectives are current income and, to a lesser extent, long-term capital appreciation. This unaudited Form 10-Q covers the three and six months ended June 30, 2021.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total investment income | $135.1 million, versus $81.2 million | $265.8 million, versus $161.4 million |
| Net investment income after excise tax | $71.4 million, versus $48.4 million | $147.3 million, versus $99.1 million |
| Net realized and unrealized gain | $45.3 million, versus $180.6 million | $81.1 million, versus $(177.6) million |
| Net increase in net assets from operations | $116.7 million, versus $229.0 million | $228.5 million, versus $(78.5) million |
| Earnings per share | $0.87, versus $2.41 | $1.73, versus $(0.92) |
| Distributions per share | $0.50 | $1.00 |
- Net investment income margin was approximately 52.9% for the quarter and 55.4% for the six-month period, based on net investment income after excise tax divided by total investment income.
- Net asset value increased to $3.741 billion, or $25.92 per share, from $3.268 billion, or $25.20 per share, at December 31, 2020. Six-month total return based on NAV was 6.89%.
- The investment portfolio at fair value was $7.357 billion, up from $5.586 billion at year-end 2020. First-lien debt represented 98.1% of investments at fair value; second-lien and unsecured debt represented 0.8% and 0.1%, respectively.
- The portfolio included 111 portfolio companies, compared with 74 in the prior-year quarter. Health care providers and services represented 12.7% of investments at fair value, commercial services and supplies 9.5%, and software 6.2%.
- Cash and cash equivalents were $181.6 million at June 30, 2021.
- Cash used in operating activities was $1.516 billion, principally reflecting $2.593 billion of investment purchases, partly offset by $939.4 million of investment sale proceeds. Financing activities provided $1.479 billion.
- Total debt carrying value was $3.761 billion, compared with $2.500 billion at December 31, 2020. Available capacity under credit facilities was $1.019 billion, subject to borrowing-base limitations.
- Weighted-average borrowing cost was 3.06% for both the quarter and six-month period, compared with 3.36% and 3.59%, respectively, in the prior-year periods. Average principal debt outstanding increased to $3.451 billion for the quarter and $3.068 billion for the six-month period.
- Asset coverage was 198.9%, above the 150% regulatory minimum. The company reported compliance with all debt-facility and note covenants.
Material changes versus comparable periods
- Investment income increased 66.4% for the quarter and 64.8% for the six-month period, primarily from substantial portfolio growth and deployment of capital. The increase was partly offset by a decline in weighted-average debt yield at fair value to 7.40% from 7.98% in the prior-year comparison.
- Net investment income increased 47.5% for the quarter and 48.7% for the six-month period, despite higher interest expense, management fees and incentive fees.
- Quarterly net gains were materially lower than in 2020 because the prior-year quarter benefited from a significant post-COVID-19 market recovery. Six-month results improved from a loss in 2020 to a gain in 2021 as 2020 reflected pandemic-related valuation declines.
- Debt increased by approximately $1.260 billion from year-end 2020, while total committed debt capacity increased from $3.570 billion to $4.800 billion. The Revolving Credit Facility was expanded to $1.275 billion, and the company issued $700 million of 2.750% notes due 2026 during March and April 2021.
- Capital commitments totaled $3.926 billion, with $356.3 million remaining undrawn. Unfunded portfolio-company commitments increased to $882.2 million from $432.3 million, and investments committed but not yet funded were estimated at $1.244 billion.
- Non-accrual loans were zero at both June 30, 2021 and December 31, 2020.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or distribution guidance. Management states that cash of $181.6 million, available credit capacity of $1.019 billion and undrawn capital commitments of $356.3 million are expected to be sufficient for near-term investing and operating needs.
- COVID-19, including new variants, could disrupt portfolio-company operations, reduce cash interest payments, impair investment values and restrict access to financing.
- Approximately 99.7% of performing debt investments were floating rate, while borrowings also carry floating-rate exposure. The filing estimates that a 100-basis-point increase in base rates would increase annualized net income by approximately $0.6 million after considering floors and borrowing costs; a 100-basis-point decrease would increase annualized net income by approximately $1.6 million under the stated assumptions.
- Most investments are illiquid and valued using Level 3 inputs. Level 3 investments totaled $6.723 billion, or approximately 91% of the investment portfolio at fair value. Higher discount rates or lower valuation multiples could materially reduce NAV.
- Non-recurring interest income from prepayment premiums and accelerated fee or discount accretion was $6.2 million for the quarter and $24.6 million for the six-month period. Fee income was $4.0 million and $4.8 million, respectively.
- Capital gains incentive fee expense was $6.8 million for the quarter and $12.2 million for the six-month period, compared with no expense and a $4.2 million reversal, respectively, in the prior-year periods.
- Subsequent to quarter-end, holders exchanged privately placed notes for substantially similar registered notes, and the company issued $650 million of 2.125% notes due 2027 on July 23, 2021. The board appointed Kate Rubenstein as Chief Operating Officer effective August 4, 2021.
- Management reported no material pending or threatened litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile portfolio growth, debt expansion and the $882.2 million of unfunded investment commitments with available borrowing capacity and the 198.9% asset-coverage ratio.
- Assess the sustainability of net investment income excluding $24.6 million of six-month non-recurring interest income and $4.8 million of fee income.
- Review concentration in health care, commercial services, software and other industries, as well as exposure to the largest individual portfolio positions.
- Evaluate the sensitivity of NAV and income to Level 3 valuation assumptions, credit spreads, portfolio-company performance and COVID-19 developments.
- Review the terms, maturities and refinancing needs of the 2023, 2026, New 2026 and subsequent 2027 notes, together with secured-facility borrowing-base requirements.
- Confirm the timing and terms of declared distributions, including the portion reinvested through the dividend reinvestment plan and the related tax consequences.