Blackstone Secured Lending Fund

Welcome to the Blackstone Secured Lending First Quarter 2022 Investor Call. At this time, all participant lines are in listen-only mode. If you wish to ask a question later in the call, please press star 1 on your device. If you need operator assistance, kindly press star 0. Please realize that the call is being recorded for replay purposes. With that, I would like to hand the call over to Michael Needham, Head of Investor Relations. Please go ahead.

Thanks, Shandor. Good morning and welcome to Blackstone Secured Lending's first quarter call. Joining me today are Brad Marshall, Chief Executive Officer, and Steve Kuppenheimer, Chief Financial Officer. Earlier today, I wish you to press release with a presentation of our results and file their 10-Q, both 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 materially from actual results. We do not undertake any duty to update these statements. For some of the risks that could affect results, please see the risk factors section of our 10K and 10Q. This audio cast is copyright material of Blackstone and may not be duplicated without consent. On to our results. We reported gap net income of 63 cents per share for the first quarter and net investment income of 61 cents per share. With that, I'll turn the call over to Brad.

Great. Thanks, Michael, and good morning, everyone, and thanks for joining our call this morning. BXSL, as Michael reported, a strong first quarter, highlighted by 2.4% quarterly total return based on NAV, along with outstanding credit performance and a well-covered dividend. That brings our inception-to-date annualized total return based on NAV to 10.1%. While we'd be pleased with these results in most markets, what's truly remarkable is that this happened during a quarter in which equity and credit markets declined materially, with the S&P 500 down 5% and the S&P leveraged loan index down 0.1%. As we have highlighted in the past, VXSL was built for challenging market environments like the one we find ourselves in today. By leading the market with low fees and expenses, We can take less portfolio risk and drive more defensive returns for investors over time. The XSL is not only focused at the very top of the capital structure with 98% of the portfolio invested in first lien senior secured loans with less than 50% loan to value, but also focused on investing in larger companies with more durable business models in industries with strong secular tailwinds. As compared to other scale BDCs, defined as those with more than 750 million of assets at year end, BXSL has the lowest fee structure, the highest first lien senior secured focus, and the lowest concentration of assets on non-accrual at zero. In the first quarter, we delivered a regular dividend of 53 cents per share, which increased from 50 cents starting in the fourth quarter. That higher regular dividend was well covered by net investment income, with a dividend coverage ratio of 115%, despite a market environment characterized by lower deal activity and lower prepayment fees. In addition to our regular dividend, there were two special dividends in the quarter, totaling 25 cents, and we have declared two more special dividends to be paid later this year for an additional 40 cents per share. excluding the impact of special dividends, NAV would have increased 0.4% during the quarter. While BXSL's performance was steady during a volatile first quarter, we are most excited about what lies ahead. Even though there may be macro economic headwinds on the horizon, we believe that BXSL's defensive portfolio composition and attractive liability structure make us well positioned for an environment of rising inflation and rising interest rates. So 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 our robust investment platform enhancements we're making on that front. Second, the defensiveness of our portfolio in the current environment. Third, potential income upside over time from higher interest rates and from normalization of prepayment income over time. And fourth, our operating team, Blackstone Advantage, is an important tool in most environments, but especially in today's environment to help companies mitigate inflationary pressures. Starting with our BDC franchise, we have vast pools of capital as the largest BDC manager in the industry. BXSL benefits from that because it can finance large transactions for high-quality companies when it has available capital. Year-to-date, Blackstone Credit committed to 10 mega Unitron transactions with deal values exceeding $1 billion. In the past 12 months, Blackstone Credit led or was the largest lender to $17 billion plus transactions. Blackstone has further cemented itself as the market leader for the largest private financing. Our BDC platform was recognized by private debt investors earlier this year as BDC Manager of the Year, along with winning Global Fund Manager of the Year and Deal of the Year in Americas for one of our large transactions. Across Blackstone Credit, there are over 400 employees, 15 regional offices around the world, deep sector teams, and over 2,300 corporate debt investments. That gives us tremendous insight origination, and overall connectivity in the credit markets. Across the larger Blackstone platform, with over 4,000 employees and nearly 1 trillion in assets under management, that connectivity is multiplied many times over. For example, BXSL's investment team has access to over 100 Blackstone senior advisors across various areas of expertise. And it's not just the scale of Blackstone, but how we leverage it to advantage our investors. As Blackstone's credit capital base has expanded, it has invested in more capabilities that benefit DXSL across origination, sector expertise, and other support areas. Blackstone Credit is also meaningfully expanding its headcount by targeting over 100 new hires by year end, which will bolster our origination, and sector expertise, including enhancements to our technology and healthcare verticals where we see attractive long-term opportunities. Those verticals also happen to be BXSL's largest sector exposure today. Second, BXSL's portfolio was designed to protect investors' capital in challenging market environments. As of quarter end, none of our portfolio companies are on non-accrual. And in aggregate, our companies are experiencing healthy revenue and EVTA growth, as well as expanding margins. However, the overall business environment has undoubtedly become more challenging. Inflation is at a 40-year high in the U.S. Supply chains are disrupted in certain areas, and interest rates are rising along with financing costs. We expect those challenges to be felt unevenly across the economy. with some areas more protected, especially where revenue growth can offset inflation pressure. We believe other areas, such as certain industrial businesses, will bear more of the brunt given capital expenditure requirements and rising input costs. We believe these risks generally are amplified as you move into smaller companies and as you move further down the capital structure into, secondly, an unsecured debt and equity. The advantage we gained from being part of the Blackstone platform is that we get an early read on economic trends and inflection points from many thousands of investments managed across the firm. In this case, we saw inflationary pressures developing and built our portfolio around that theme. We've largely avoided secular disrupted businesses, which protect us as debt holders. Most of our portfolios comprise of non-cyclical sectors And our privately originated loans have an average loan to value of 44% with significant equity and subordinated debt below us. We've built a largely senior secured portfolio and focus on lending to larger companies that have more pricing power, more experienced management teams, and are backed by sophisticated sponsors with financial and operational support. Looking ahead, we feel very good about the quality in the resiliency of our portfolio. Third, we see income growth potential over time from rates and prepayment fees. Our asset liability profile enables BXSL to benefit from rising interest rates. Nearly 100% of our debt investments are floating rate, and nearly 60% of our liabilities are fixed rate at an average interest rate of 2.97%. we decided not to swap those liabilities back to floating, giving us powerful upside earnings potential, while still protecting us to the downside with interest rate floors on our assets. Since our earnings call last quarter, short-term interest rates have increased significantly, with three-month LIBOR increasing from 21 basis points to 96 basis points out of the quarter end and 140 basis points today. Short-term interest rates are now above BXSL's interest rate floors, which have averaged 84 basis points on all our investments. Given the significant quarter-to-date move in LIBOR and the timing of rate resets, we expect most of the benefit from recent moves to begin in the third quarter of this year, given the timing of three-month LIBOR contracts rolling over. Based on quarter end LIBOR, we estimate that 100 basis point increase in LIBOR would result in incremental earnings per share of 9 cents per year, 18 cents from a 200 basis point increase, and 28 basis points from a 300 basis point increase. Since quarter end, rates have already increased by 44 basis points. While spreads may compress in a higher rate environment which could partially offset the benefit from rising from higher rates for BXSL. This will come as the portfolio turns over, which will drive incremental income from prepayment fees. In the quarter end, investment activity was fairly light, driven primarily by our desire to maintain leverage at 1.25 times. On the positive side, we are able to optimize BXSL's investment activity around its capital availability. which was limited due to lower prepayment activity. The flip side to that is that prepayment income was at a historically low level for BXSL due to this lower portfolio turnover. Prepayment fees accounted for only one penny of our 61 cents of net investment income. Even if those fees were zero, we would have meaningfully covered our dividend. While prepayment fees could remain subdued over the near term, we expect that that coverage will grow over time with rising rates. Fourth and lastly, our Blackstone Advantage program is helping our companies combat inflation. Last quarter, we talked about how we believe in delivering a superior value proposition to our board. One of those services is expense reduction through procurement. which has been in high demand given rising costs and supply chain bottlenecks. We believe we can help mitigate those pressures on our borrowers by taking an active role. For example, one of our portfolio companies was experiencing challenges obtaining raw materials and controlling its overall cost inflation. We've been working closely with that company to leverage our group purchasing offering as well as building out RFPs and supplier auctions on their behalf. So far, we've helped them identify more than $3 million of cost savings. We're also helping, we're also working to map their carbon emission footprint, procure energy resources, and identify renewable energy projects, all of which should lead to reduced costs and lower emissions. Across the Blackstone credit platform, we've identified total annual savings of nearly $200 million for companies through this program. which has created billions of dollars of enterprise value for our sponsors. I'll close by saying that I'm extremely excited about what lies ahead for BXSL. We've built a high quality portfolio that is designed to withstand challenging environments and deliver an attractive, durable yield. Our platform is unmatched in scale, sourcing, and providing operational support to our companies. And Blackstone is investing even more into that platform. We think that BXSL represents the best version of a public business development company with stable, high-quality, defensive portfolio that is well-positioned for this environment. Pairing that with a low-cost structure and attractive upside from higher interest rates creates a powerful economic engine that we believe will drive strong results for our investors going forward.