Business Context and Reporting Period
Blackstone / GSO Secured Lending Fund filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The externally managed, non-diversified BDC and regulated investment company seeks current income and, to a lesser extent, long-term capital appreciation through primarily first-lien senior secured loans to private U.S. middle-market companies.
The portfolio comprised 78 companies at September 30, 2020 and was concentrated in first-lien debt. The fund had 101.98 million shares outstanding and net asset value of $24.91 per share.
Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total investment income | $91.6 million | $253.0 million |
| Net investment income after excise tax | $55.3 million | $154.4 million |
| Net realized gain | $0.1 million | $2.5 million |
| Net unrealized appreciation/(depreciation) | $120.9 million | $(59.1) million |
| Net increase in net assets from operations | $176.3 million | $97.8 million |
| Net investment income per share | $0.55 | $1.70 |
| Earnings per share | $1.75 | $1.08 |
| Distributions declared per share | $0.50 | $1.50 |
- Net assets were $2.54 billion, compared with $1.67 billion at December 31, 2019. NAV per share declined from $26.02 to $24.91.
- Investments at fair value were $4.88 billion, versus $3.09 billion at year-end 2019. First-lien debt represented 99.01% of investments at fair value; second-lien debt represented 0.63% and equity 0.36%.
- Cash and cash equivalents were $77.3 million. Nine-month cash used in operating activities was $1.66 billion, primarily reflecting $2.50 billion of investment purchases. Financing activities provided $1.67 billion, including equity proceeds and net debt borrowings.
- Total debt carrying value was $2.34 billion, compared with $1.45 billion at year-end 2019. Asset coverage was 208.5%, above the 150% statutory requirement.
- Available borrowing capacity was $848.7 million, subject to borrowing-base and other limitations, and uncalled capital commitments totaled $1.24 billion.
- The weighted-average interest rate on borrowings was 2.96% for the quarter and 3.36% for the nine-month period. Average principal debt outstanding was $1.87 billion and $1.71 billion, respectively.
- Approximately 99.5% of debt investments at fair value bore floating rates, and 80.1% of the portfolio had a base-rate floor above zero.
- The reported nine-month ratio of net investment income to average net assets was 9.54%; the ratio of net expenses to average net assets was 6.09%.
Material Changes Versus Prior Comparable Period
- Nine-month investment income increased to $253.0 million from $83.5 million, primarily because the investment portfolio expanded substantially through capital deployment.
- Nine-month net investment income increased to $154.4 million from $40.7 million, while income per share increased to $1.70 from $1.53.
- Nine-month earnings fell to $1.08 per share from $2.15 because 2020 included $59.1 million of net unrealized depreciation, compared with $13.0 million of net unrealized appreciation in 2019. The quarterly comparison benefited from a $120.9 million unrealized gain in 2020.
- Fair value of investments increased to $4.88 billion from $2.03 billion at September 30, 2019. Shares outstanding increased to 101.98 million from 53.74 million.
- Debt increased materially, while borrowing costs declined: average debt outstanding for the nine months rose to $1.71 billion from $580.3 million, but the weighted-average borrowing rate declined to 3.36% from 4.59%.
- Nine-month distributions remained $1.50 per share, although total distributions increased to $136.0 million from $39.7 million because of the larger share base.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific earnings or NAV guidance. It stated that available cash, borrowing capacity and uncalled commitments were expected to support investing and operations in the near term.
- COVID-19 caused significant market volatility and reduced portfolio valuations during the first nine months. Management noted that the third quarter benefited from credit-spread tightening and recovery in leveraged-loan markets, but further portfolio-company credit deterioration, missed interest payments, investment losses and liquidity constraints remain possible.
- All debt investments were classified as performing at September 30, 2020. One investment entered non-accrual status during the quarter but returned to accrual status following a September restructuring.
- Unfunded portfolio-company commitments were $239.2 million, and the fund estimated an additional $147.3 million of committed but not yet funded investments.
- The portfolio includes significant Level 3 assets: $3.79 billion of investments were valued using significant unobservable inputs. Fair values may differ materially from amounts ultimately realized.
- LIBOR was the reference rate for most investments and borrowings. The expected phaseout of LIBOR after 2021 could require contract amendments, create operational and legal risks, and affect borrowing costs, investment values and net investment income.
- The fund issued $400 million of 3.650% unsecured notes due 2023 in July 2020. Subsequent to quarter-end, it issued $500 million of 3.625% unsecured notes due 2026, increased its revolving facility commitment to $745 million, and received additional capital commitments.
- Management reported no material pending litigation and stated that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Reconcile NAV performance with the $59.1 million nine-month unrealized depreciation and assess the sensitivity of Level 3 valuations to discount rates and market prices.
- Review debt maturities, borrowing-base availability, secured collateral, covenant compliance and the November 6, 2020 stated maturity of the subscription facility.
- Assess liquidity coverage for $239.2 million of unfunded portfolio commitments, the estimated $147.3 million of additional commitments and distributions.
- Evaluate the sustainability of net investment income given lower benchmark rates, floating-rate floors, PIK income of $6.5 million for the nine months and non-recurring income of $12.6 million.
- Monitor COVID-19 effects on portfolio-company cash flows, non-accrual levels, restructurings, credit losses and future distributions.
- Track the transition from LIBOR to alternative reference rates across portfolio investments and borrowings.
- Verify post-quarter-end financing and capital activity, including the 2026 Notes, the $115.4 million capital call and the final $3.93 billion of capital commitments reported for the initial closing period.