Blackstone Secured Lending Fund

Welcome everyone to the Blackstone Secured Lending fourth quarter and year-end 2021 investor call. My name is Tommy and I'm your event manager. During the presentation, your lines will remain on listen only. If you require assistance at any time, please press star zero on your phone and the coordinator will be happy to assist you. If you wish to ask a question, please press star one. I would like to advise all parties the conference is being recorded for replay purposes, and now I'd like to hand it over to Weston Tucker, head of shareholder relations. Please go ahead, sir.

Great. Thanks, Thomas, and good morning, and welcome to Blackstone Secured Lending's fourth quarter call. I'm sitting in today for Mike Needham, BXSL's head of investor relations, who is on paternity leave with his first child. Big congrats to Mike and his wife, Vicki. Joining me on today's call are Brad Marshall, chief executive officer, and Steve Kuppenheimer, chief financial officer. Earlier today, we issued a press release with a presentation of our results and filed our 10-K, all of which are available on our website. I'd like to remind you that today's call may include forward-looking statements which are uncertain and outside of the firm's control and may differ from actual results materially. We do not undertake any duty to update these statements. For discussion of some of the risks that could affect results, please see the risk factors section of our latest 10-K. Certain information discussed on this call and the accompanying presentation, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. Accordingly, BXSL makes no representation or warranty with respect to this information. This audio cast is copyrighted material of Blackstone and may not be duplicated without our consent. Go on to results. We reported gap net income of 73 cents per share for the fourth quarter. Net investment income was 67 cents per share. With that, I'll turn the call over to Brad.

Thank you, Weston, and good morning, and thanks, everyone, for joining the call today. As Weston mentioned, BXSL reported a strong fourth quarter and full year results, highlighted by growth in net asset value, strong credit performance, and a well-covered dividend. For the full year, the company delivered a total return of 12.6% based on NAV, including $2.03 per share of dividends. Looking ahead, we expect dividends to remain strong. Our regular fourth quarter dividend yields an annualized 8% on quarter end NAV, and we've declared a series of special dividends for 2022 that adds 2.5% to our regular dividend yield. We entered 2022 on solid footing with a portfolio that is very well positioned. We believe that BXSL has one of the most secure portfolios among public BDCs with approximately 98% invested in first lien senior secured loans and 99.9% of debt is floating rate. The XSL is also the only BDC among the large public peers with over 750 million of assets that has no loans on non-accrual based on the latest available information. In fact, across Blackstone's entire direct lending portfolio of over $60 billion, there were no loans on non-accrual at year end, Were there any loans marked below 90? We've accompanied that by following a simple formula. Have some of the lowest fees and expenses in the industry. Build a high-quality portfolio. Stay disciplined in an environment where others are tempted to chase risk and return. And leverage the power and scale of the Blackstone expansive platform. Today, I'd like to cover a few key themes before turning it over to Steve to review our financial results. First, I'll discuss DXSL's competitive advantages and superior risk return profile. Second, I'll provide an update on our portfolio in the current market. Third, we'll outline potential benefit from a rising rate environment. And lastly, we'll cover deployment opportunities. So firstly, we're seeing our competitive advantages play out. DXSL was designed to pass through more cash flow to investors from the loans that we originate. We have some of the lowest management fees of all public BDCs before and after our fee waiver. We also have some of the lowest G&A expenses as a percentage of NAV among public BDCs with more than 750 million of assets. And some of the lowest cost liabilities despite having 58% in unsecured fixed rate debt based on drawn amounts. Taken together, this creates a structural advantage that we believe enables us to stay invested in the highest quality part of the market and produce attractive and defensive returns for our investors. As of year end, 98% of BXSL's portfolios comprise of first lien senior secured loans, and the other 2% is predominantly in equity provided alongside our first lien senior secured loans. We intend to maintain that focus going forward. BXSL benefits meaningfully from Blackstone's scale and expertise. Blackstone is the number one BDC manager by AUM. That buying power enables BXSL to move upmarket and lend to large companies that often have better risk profiles, which we believe further de-risk the portfolio. Furthermore, Blackstone's credit platform has over 400 employees, regional offices around the country, deep sector teams, over 2,000 corporate investments, and is supported by the overall Blackstone ecosystem. The senior team in Blackstone Credit has worked together for over 16 years, which provides extensive market relationships and incumbency. For the borrowers, we differentiate ourselves by offering a better product. They benefit from our scale, speed, certainty of execution, and access to a suite of value-added services from Blackstone. Those services range from procurement to operational support and cross-selling opportunities. We call it the Blackstone Advantage and believe it's a unique program in the industry with over 100 Blackstone professionals available to help our portfolio company. In one example, Blackstone helped a portfolio company generate over $2 million of revenue by expanding their client base in a time of strategic change. Blackstone also identified over $4 million of cost savings for that same company through our procurement services. And they took advantage of other Blackstone corporate services, including cybersecurity evaluation and healthcare consulting. The Blackstone Advantage Program has a dedicated team within Blackstone Credit whose sole mission is to help drive value creation for our sponsors and our companies. That partnership builds upon itself, increasing the likelihood of us winning future investment opportunities. As we mentioned earlier, today Black BXSL's portfolio is in great shape. As of quarter end, all loans are performing, none are in covenant relief, and company fundamentals are broadly healthy. Across the private portfolio, revenue and EBITDA grew nicely in 2021, and margins expanded. Net asset value per share increased 0.5% in the fourth quarter, and 4.2% in 2021, to $26.27 net of $2.03 per share of dividend payments. We're focused on investing in good neighborhoods and avoiding secularly disrupted businesses. Most of the portfolios comprise of non-cyclical sectors, and for loans originated pre-COVID, borrowers' aggregate revenue and EBITDA are generally above their 2019 levels. Our privately originated loans have an average loan-to-value of 44%, with significant equity or subordinated debt below us. We're investing in many companies that have leading positions in their industries. That's evidenced by a weighted average EBITDA of $116 million across the private loan portfolio. Larger companies tend to have stronger competitive positions, including more pricing power in an inflationary environment, and are more diversified, which we believe helps eliminate single points of risk. Looking ahead, we feel very good about the quality and resiliency of the portfolio. Interest rates have begun to rise due to higher inflation and likelihood of Fed hikes. If that trend continues, our investment income should benefit. Ten-year treasuries are now yielding just below 2%, up from 1.5% at the year-end 2021. The short end of the curve has also risen, with three-month LIBOR currently at 52 basis points. We believe that private floating rate debt is one of the best assets to invest in, against a backdrop of rising rates. BXSL's debt portfolio on a fair value basis is 99.9% floating rate, while 58% of its liabilities are fixed rate based on drawn amounts, creating attractive upside potential. The XSL is currently benefiting from interest rate floors on most of its assets. The three-month LIBOR would have to rise above these floors, which average about 80 basis points, for us to start seeing a benefit to investment income. Beyond that point, we estimate that 100 basis point increase in LIBOR would result in incremental earnings of 8 cents per share, 52 cents per share from a 200 basis point increase, and 96 cents per share on a 300 basis point increase. Our weighted average cost of debt in the fourth quarter was 2.9%, which we believe is one of the lowest in our industry. Our scale, reputation, and quality of our portfolio gives us a major advantage in the financing markets. Low-cost debt directly contributes to higher investor returns by creating a wider asset liability spread. We executed on attractive deployment opportunities in the fourth quarter, and our portfolio is fully invested. BXSL invested $2.4 billion across 41 portfolio companies in the fourth quarter and $6.8 billion for the full year. That brought the portfolio to $9.9 billion at year end, which was well diversified across issuers with 148 total loans and an average position size of less than 1%. No single loan accounts for more than 5% of the portfolio. The large-scale segment, private debt markets, is growing as financial sponsors are increasingly working with private lenders versus going to the syndicated markets. We think that trend is here to stay, which could bode well for BXSL as we optimize the portfolio when we have available capital to invest. Blackstone is winning in this area, leading the majority of the largest Unitranche loans in 2021 and so far in 2022. We see a healthy backlog of large transactions today and believe Blackstone will remain in that pole position. While we believe the risk profile is generally better at the larger end of the market, we will continue to evaluate small, medium, and large transactions for BXSL. The funnel has widened. The outlook for BXSL is exceptionally bright. We've proven out our model by financing strong companies, which builds upon itself as we bolster our reputation as a differentiated lender. We think BXSL represents the best version of a public business development company with a stable, high-quality portfolio and competitive advantages that make us the lender of choice for companies looking to finance their growth. and is backed by a leading alternative investment platform which offers additional support around sourcing, diligence, and financing. We've married that expertise with low management fees, low operating costs, and attractive financing rates to create a powerful economic engine that we think will drive results for our investors going forward.