Blackstone Secured Lending Fund (BXSL) — Q3 2022 Form 10-Q
Business context and period. BXSL is an externally managed business development company and regulated investment company focused primarily on senior secured lending. This unaudited filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. Financial statement amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Investment income | $226.8 | $166.9 | $599.4 | $432.7 |
| Net investment income after excise tax | $132.1 | $93.8 | $340.1 | $241.1 |
| Net realized and unrealized gain (loss) | $(36.2) | $16.2 | $(57.3) | $97.3 |
| Increase in net assets from operations | $95.9 | $110.0 | $282.8 | $338.5 |
| Earnings per share | $0.58 | $0.74 | $1.68 | $2.47 |
- Portfolio and NAV: Investments at fair value were $9.67 billion, down from $9.86 billion at year-end. Net assets were $4.17 billion, versus $4.45 billion, and NAV per share declined to $25.76 from $26.27.
- Income and costs: Q3 investment income rose 36% year over year, driven mainly by higher interest rates and a larger portfolio; net investment income rose about 41%. Q3 interest expense increased to $55.3 million from $32.7 million. Nine-month interest expense was $140.7 million, versus $81.1 million.
- Cash flow and liquidity: Nine-month operating cash flow was $505.1 million; financing cash use was $476.8 million, including $305.8 million of cash dividends and $215.6 million of share repurchases. Cash was $131.2 million at quarter-end. Management cited a further $999.4 million of available credit capacity, subject to borrowing-base limits.
- Debt and coverage: Debt carrying value was $5.51 billion (principal outstanding $5.55 billion). Asset coverage was 175.1%, down from 180.2% at year-end; the statutory minimum cited is 150%. Average borrowing rates were 3.67% for Q3 and 3.18% for the nine-month period.
- Distributions and capital: Distributions declared were $2.31 per share for the first nine months, including special distributions. The regular quarterly distribution was raised from $0.53 to $0.60 per share. The company repurchased 8.96 million shares for $215.6 million during the period.
Material changes and portfolio profile
- Rising rates increased floating-rate investment income, but also raised borrowing costs. About 99.9% of performing debt investments were floating rate; 94.3% of portfolio fair value had a base-rate floor above zero.
- Portfolio fair-value depreciation was $70.6 million in Q3 and $100.0 million for the nine months, compared with appreciation in the comparable 2021 periods. Management attributed the depreciation in part to rising rates and inflation. Realized gains partly offset unrealized losses.
- First-lien debt represented 97.9% of investments at fair value. Software was 14.6% of the portfolio and health-care providers and services 11.6%. Approximately $9.59 billion of $9.67 billion in investments was Level 3, involving significant unobservable valuation inputs.
- PIK interest income increased to $10.9 million in Q3 and $30.4 million for the nine months, from $1.0 million and $3.3 million, respectively. PIK income is accrued rather than received in cash. No loans were on non-accrual at quarter-end.
- Unfunded delayed-draw and revolving commitments were $849.0 million, down from $1.41 billion at year-end.
Outlook, risks and unusual items
- Management said cash and available facility capacity were expected to cover near-term investment activity and operations. No numerical earnings or investment guidance was provided.
- Management noted that rising rates may benefit BXSL’s income given its floating-rate portfolio, but could impair borrowers’ cash flow, credit quality and ability to pay interest. Inflation, higher operating costs, economic weakness and market disruption could also pressure portfolio companies and asset liquidity.
- Investment fair values rely substantially on Level 3 estimates; realized proceeds in a forced sale could differ materially from reported values. The filing also identifies financing-access, leverage, foreign-exchange and benchmark-rate transition risks.
- Adviser fee waivers reduced Q3 expenses by $10.1 million and nine-month expenses by $29.0 million; waived amounts are not recoupable. Q3 capital-gains incentive fees were a negative $5.4 million accrual, reflecting a reduction in previously accrued expense.
- After quarter-end, the Board declared a $0.60-per-share distribution payable January 31, 2023. BXSL repurchased an additional 2.00 million shares for $47.4 million after September 30; the repurchase plan reached its approximately $262.8 million limit and terminated October 26, 2022.
Important facts for investors to verify
- Whether investment income growth and distributions remain supported by cash interest collections, particularly as PIK income has increased.
- Portfolio credit quality, borrower performance and any subsequent non-accruals or covenant issues; reported non-accrual loans were zero at September 30.
- Level 3 valuation assumptions and the effects of higher market yields on reported NAV and ultimate realizable values.
- Debt costs, borrowing-base availability, asset coverage and ability to fund $849.0 million of unfunded commitments while maintaining liquidity.
- The sustainability of the $0.60 quarterly distribution relative to realized cash earnings, taxes and RIC distribution requirements.