Blackstone Secured Lending Fund — Q3 2023 Form 10-Q
Business context and period. Blackstone Secured Lending Fund (NYSE: BXSL) is an externally managed business development company and regulated investment company focused primarily on secured loans to private companies. This unaudited quarterly report covers the three and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $284.0 | $226.8 | $839.3 | $599.4 |
| Net investment income after excise tax | $160.8 | $132.1 | $481.5 | $340.1 |
| Net realized and unrealized gain (loss) | $10.2 | $(36.2) | $(26.8) | $(57.3) |
| Increase in net assets from operations | $171.0 | $95.9 | $454.6 | $282.8 |
| Net investment income per share | $0.95 | $0.80 | $2.94 | $2.02 |
Q3 investment income increased 25% year over year, primarily as higher benchmark rates lifted portfolio interest income. Net investment income after excise tax rose about 22%, while operating results increased about 78%, helped by a positive Q3 unrealized valuation change versus a loss a year earlier. Nine-month investment income increased 40% and net investment income after excise tax increased about 42%; investment results remained affected by net realized and unrealized losses.
- Portfolio and NAV: Fair-value investments were $9.50 billion, compared with $9.62 billion at year-end 2022. Net assets were $4.60 billion, up from $4.16 billion; NAV per share was $26.54 versus $25.93. The filing reports a nine-month NAV total return of 11.04%.
- Portfolio income and risk: The portfolio contained 188 companies. Weighted-average yield on debt and income-producing investments was 11.82% at amortized cost and 11.93% at fair value, up from 10.64% and 10.73%, respectively, at year-end. 99.9% of debt investments bore floating rates. One borrower, representing less than 0.1% of investment fair value, was on non-accrual. Software and healthcare providers and services were the largest industry exposures, at 16.18% and 12.00% of investment fair value.
- Cash flow and liquidity: Nine-month operating cash flow was $586.8 million; financing activities used $584.4 million. Cash and cash equivalents were $145.8 million at September 30. The company reported $1.31 billion of available capacity under credit facilities, subject to borrowing-base limits, and stated these resources were expected to meet near-term investment and operating needs.
- Debt and leverage: Debt carrying value was $4.96 billion, down from $5.53 billion at year-end; outstanding principal was $4.99 billion. Asset coverage was 192.2%, versus 174.8% at year-end, above the stated 150% minimum. The weighted-average borrowing rate was 4.94% in Q3 versus 3.67% in Q3 2022, and 4.80% for the nine months versus 3.18% in the prior-year period.
- Distributions and equity: The company declared $2.17 per share in distributions during the first nine months, including $0.77 for the quarter. It raised $335.5 million net from common-share issuance during the nine months, including a follow-on offering and at-the-market sales. No shares were repurchased in 2023 through September 30.
Material changes and notable items
- Higher rates increased portfolio income, but also increased financing costs: nine-month interest expense rose 41% to $198.1 million despite lower average debt outstanding. Management cautioned that further rate increases could weaken borrower cash flows and credit quality.
- Investment fair value was $51.1 million below cost at September 30. Nine-month net unrealized depreciation was $31.3 million; nine-month realized gains were $4.5 million, including foreign-currency transaction gains that partly offset investment losses.
- Management fee and income-incentive-fee waivers kept fees at reduced rates through October 28, 2023. The waiver period has ended; contractual fee rates are higher after that date. The filing does not quantify the resulting future effect on shareholder returns.
- Excise tax expense was $5.0 million in Q3 and $12.6 million for the nine months, compared with none in Q3 2022 and $1.4 million for the prior-year nine months.
- Unfunded portfolio-company commitments totaled $760.6 million, up from $690.3 million at year-end; the company separately estimated $359.9 million of committed but not yet funded investments, versus $16.5 million at year-end.
- Subsequent to quarter-end, the Breckenridge Funding Facility commitment increased from $825 million to $1.025 billion. On November 8, the Board declared a $0.77-per-share distribution payable January 26, 2024 to holders of record December 31, 2023.
Outlook, risks and contingencies
Management provided no specific earnings or portfolio guidance. It expects investment income to vary with origination and repayment activity and interest rates. The filing highlights inflation, higher rates and funding costs, slower growth or recession, geopolitical and political uncertainty, banking-sector stress, and market illiquidity as risks to borrower performance, collateral values, investment valuations, financing access and the ability to sell assets promptly or at attractive prices. Nearly all investments are Level 3, valued using significant unobservable inputs, so reported fair values may differ materially from eventual realizations. The company reported compliance with financing covenants, effective disclosure controls, and no material pending legal proceedings or material changes to previously disclosed risk factors.
Important facts for investors to verify
- How borrower performance, non-accruals and credit quality evolve as higher rates affect portfolio-company interest burdens.
- Whether fair values and Level 3 valuation assumptions are supported by borrower results and market evidence, particularly for the largest sector and borrower exposures.
- The effect of the October 2023 expiration of fee waivers on future expenses, net investment income and distributions.
- Available liquidity after considering borrowing-base restrictions, $760.6 million of unfunded commitments and the additional estimated commitments awaiting funding.
- Whether distributions remain supported by cash income, given PIK income and the company’s reported excise-tax expense.
- Debt maturities, refinancing terms and asset coverage, including the capacity and terms of the expanded Breckenridge facility.