Business Context and Reporting Period
Blackstone Secured Lending Fund is an externally managed, non-diversified closed-end business development company and regulated investment company. It primarily invests in first-lien senior secured and unitranche loans to private U.S. companies, with the objectives of generating current income and, to a lesser extent, long-term capital appreciation. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparative periods ended September 30, 2020.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total investment income | $166.9 million, versus $91.6 million | $432.7 million, versus $253.0 million |
| Net investment income after excise tax | $93.8 million, versus $55.3 million | $241.1 million, versus $154.4 million |
| Net realized and unrealized gain | $16.2 million, versus $121.0 million | $97.3 million, versus $(56.6) million |
| Net increase in net assets from operations | $110.0 million, versus $176.3 million | $338.5 million, versus $97.8 million |
| Net investment income per share | $0.63, versus $0.55 | $1.76, versus $1.70 |
| Earnings per share | $0.74, versus $1.75 | $2.47, versus $1.08 |
| Distributions declared per share | $0.50, versus $0.50 | $1.50, versus $1.50 |
At September 30, 2021, net assets were $4.14 billion, NAV per share was $26.15, total investments at fair value were $8.22 billion, and cash and cash equivalents were $259.6 million. The portfolio comprised 117 portfolio companies and was 98.1% first-lien debt at fair value. No portfolio loans were on non-accrual status.
The nine-month total return based on NAV was 9.90%, compared with 1.99% in the prior-year period. The ratio of net investment income to average net assets was 9.03%, compared with 9.54%; the ratio of net expenses to average net assets was 7.17%, compared with 6.09%. Portfolio turnover was 28.18%, compared with 17.13%.
Cash Flow, Debt and Liquidity
- Operating activities used $2.44 billion during the nine months, principally reflecting $4.44 billion of investment purchases partly offset by $1.95 billion of investment sales and principal repayments.
- Financing activities provided $2.48 billion, including $1.96 billion of net debt borrowings and $716.7 million from common-share issuances, partly offset by $189.7 million of cash dividends.
- Debt carrying value was $4.46 billion at September 30, 2021, versus $2.50 billion at December 31, 2020. Aggregate outstanding principal was $4.50 billion.
- Available capacity under credit facilities was $1.75 billion, subject to borrowing-base limitations. Asset coverage was 192.0%, versus 230.0% at December 31, 2020, above the 150% regulatory minimum.
- The weighted-average interest rate on borrowings was 2.83% for the quarter and 2.92% for the nine months, compared with 2.96% and 3.36%, respectively, in the prior-year periods.
- Unfunded portfolio commitments increased to $1.24 billion from $432.3 million at December 31, 2020. The Company also estimated $1.25 billion of committed but not yet funded investments.
Material Changes Versus Prior Comparable Period
- Investment portfolio fair value increased approximately 68% from $4.88 billion at September 30, 2020 to $8.22 billion at September 30, 2021, primarily from significant capital deployment and financing activity.
- Investment income rose substantially due to the larger portfolio, despite a decline in weighted-average debt yield at fair value to 7.28% from 7.87%.
- Interest expense increased to $32.7 million for the quarter and $81.1 million for the nine months, driven by higher borrowings, while average debt outstanding increased materially.
- Unrealized appreciation was $92.0 million for the nine months, compared with unrealized depreciation of $59.1 million in the prior-year period, reflecting recovery from COVID-19-related market volatility.
- Capital gains incentive fee expense was $14.6 million for the nine months, compared with a $4.2 million reversal in the prior-year period.
- The Company completed its final private-offering capital drawdowns in September 2021. All $3.93 billion of capital commitments had been drawn as of September 8, 2021.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings guidance. Management stated that cash and cash equivalents, together with available credit capacity, were expected to be sufficient for near-term investing and operating needs. Management also noted that future investment activity will depend on capital availability, merger and acquisition activity, economic conditions, loan prices and competition.
Non-recurring interest income was $16.4 million for the quarter and $41.0 million for the nine months, primarily from prepayment premiums and accelerated accretion of fees and discounts. Payment-in-kind interest income was $1.0 million for the quarter and $3.3 million for the nine months.
Following the reporting date, the Company completed its IPO on October 28, 2021, issuing 9.18 million shares at $26.15 per share and receiving $230.6 million of net proceeds before offering expenses. The underwriters subsequently exercised their option for an additional 1.377 million shares, generating $33.8 million of net proceeds before offering expenses. The shares began trading on the NYSE under the symbol BXSL.
After the IPO, the Adviser agreed to maintain the management fee and incentive fee rates at 0.75% and 15.0%, respectively, for two years, rather than increasing them to 1.00% and 17.5%. The Board also increased the regular quarterly distribution to $0.53 per share and declared special distributions totaling $0.65 per share for 2022 payment dates.
Principal risks include COVID-19 and variants, inflation and supply-chain disruption, portfolio-company credit losses, valuation uncertainty for largely illiquid Level 3 investments, interest-rate and leverage risk, financing availability, foreign-currency exposure, LIBOR transition, regulatory and tax requirements, potential conflicts with the Adviser, and volatility or discounts in the public trading price relative to NAV. The filing states that 99.9% of debt investments at fair value were floating-rate and that approximately 93.0% of the portfolio had a base-rate floor above zero.
Management reported compliance with debt-facility covenants and no material pending or threatened litigation as of September 30, 2021. Disclosure controls and procedures were determined to be effective.
Important Facts for Investors to Verify
- Reconcile the substantial increase in leverage, including $4.50 billion of outstanding principal, against the 192.0% asset-coverage ratio and available borrowing capacity.
- Assess the sustainability of earnings excluding $41.0 million of nine-month non-recurring interest income and gains from fair-value changes.
- Review the $1.24 billion of unfunded portfolio commitments and the additional $1.25 billion of committed but unfunded investments for potential liquidity demands.
- Evaluate concentration in first-lien private credit, Level 3 valuations, and sectors including health care providers and services, commercial services, insurance and software.
- Monitor the effect of the IPO, subsequent share issuance, post-IPO fee structure, distribution increases and the proposed share-repurchase plan on NAV and per-share earnings.
- Verify the impact of COVID-19, inflation, supply-chain disruption, interest-rate changes and any future portfolio-company non-accruals or restructurings.