Blackstone Secured Lending Fund

Good day and welcome to the Blackstone Secured Lending Fourth Quarter and Full Year 2025 Investor Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. If you require operator assistance, please press star zero. If you would like to ask a question, please signal by pressing star one. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. At this time, I'd like to turn the call over to Stacey Wang, Head of Stakeholder Relations. Please go ahead.

Thank you, Katie. Good morning and welcome to Blackstone Secure Lending Fund's fourth quarter and full year results conference call. Joining me today are Brad Marshall, Co-Chief Executive Officer, and Teddy Deloge, Chief Financial Officer, along with other members of the management team available for Q&A, including John Bach, Co-Chief Executive Officer, and Carlos Whitaker, President. Earlier today, we issued a press release with a presentation of our results and filed our 10-K, both of which are available on the shareholder resources section of our website, www.bxsl.com. We will be referring to that presentation throughout today's call. I'd like to remind you that this call may include forward-looking statements which are certain 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 factor section of our Form 10-K filed earlier today. This audio cast is copyright material of Blackstone and may not be duplicated with outcome sense. With that, I'll turn the call over to Brad Marshall.

Thank you, and good morning, everyone. Before highlighting the results from the quarter and some key observations, I would like to take a moment to share our macroeconomic views heading into 2026. Stepping back to the broader macro environment, despite periods of volatility over the past year, including tariff uncertainty, geopolitical instability, and elevated headline risk, we continue to see a fundamentally healthy economic backdrop. Overall, corporate earnings growth has remained resilient, the consumer continues to demonstrate strength, and fiscal and monetary conditions remain supportive. These factors are contributing to sustained economic momentum. The key driver of that momentum is the ongoing technology and AI-driven investment cycle, which I will provide more details on shortly. We believe we are in the early stages of a significant capital expenditure build-out focused on AI, digital infrastructure, and related technologies, providing a durable support to growth across multiple sectors. particularly when you couple that with encouraging signs on inflation. We believe this macro and investment backdrop has translated into robust capital inflows into Blackstone's private credit strategies over 2025, and particularly strong demand from the institutional channel most recently. We are coming off one of our most active quarters of investing for BXCI, and have over 50, $40 billion of dry powder to invest in direct lending into a market that, in our view, remains highly receptive to direct private credit solutions. Looking ahead, we believe this combination of a constructive macro environment, improving credit fundamentals, and a defensive first lien orientation positions the BXSL portfolio well from a performance and investing standpoint. On earnings, BXSL reported another strong quarter with our net investment income, or NAI, of 80 cents per share, representing an 11.8% annualized return on equity made up overwhelmingly of interest income rather than income from PIC or dividends. Our distribution of 77 cents per share was 104% covered by our net investment income per share and represents an 11.4% annualized distribution yield on NAV. BXSL delivered a 9.6% net return for the year, outperforming the leveraged loan market by 360 basis points with an 11.2% annualized return since inception seven years ago. BXSL at the outset was designed to have a lower cost structure so that it could focus on what we believe is a higher quality portfolio. and you are seeing that durability reflected in quarterly performance. A few core topics I'll discuss from the quarter include a busy quarter of deployment, recent headlines around private credit, and related concerns around software companies and the impact that AI may have on them. On deployment, the fourth quarter was our second most active quarter of funding since 2021. We increased our overall portfolio to 316 companies, including 40 industries funding 13 new credits, which had an average LTV at underwrite of 41% and an average spread near 500 basis points, and completed 15 add-ons to incumbent names. Some of the larger fundings during the quarter were to AmTrust, an insurance managing general agent focused on specialty programs, Mankind, a public biopharma business, IEM, an electrical equipment manufacturer supplying data centers, and Saber Power, an engineering firm that is a provider of electrical infrastructure services. BXCI led all four of these senior secure transactions and was the sole lender in three of them. Additionally, another large investment during the quarter was BXCI co-led was for a digital aviation solutions business called Jeppesen sold by Boeing for $10.5 billion. We believe this company has a dominant market position, is performing exceptionally well post-close, and is categorized by BXCI as being well positioned from AI risk given its deep entrenchment in the aerospace industry and high cost of failure. These deals highlight how we are investing around some of our core themes at Blackstone. including life science and AI infrastructure. Despite positive trends in deal activity, as outlined during last quarter's call as well, external narratives around bubbles in the credit market continue to percolate in the news. What we are seeing on the ground and across the over 300 credits we are invested in in BXSL is broadly inconsistent with this. In fact, if you look at the top 90% of our names in the portfolio, These companies are growing EVTA at 9% over the past 12 months and have interest coverage over two times and have an average mark of 99. This is consistent with my comments earlier about a healthy economic backdrop and the benefits of lower interest expenses for our portfolio companies. Meanwhile, there has been significant external focus on AI's impact on the overall economy and on software companies specifically. It's helpful as a starting point to highlight that Blackstone has been at the forefront of AI and its impact for many years with its deep technology vertical supporting and informing investment activity across the broader platform. This is one of the big advantages of being part of the world's largest alternative asset manager and has helped drive our focus on deeply embedded high retention businesses. Blackstone sees the AI revolution creating generational opportunities, and we want to stay ahead of this as leaders in the space. We receive real-time insights through our firm-wide resources and use that to make us better investors. Additionally, Blackstone is one of the largest investors in the entire AI ecosystem, including the infrastructure around it. As the largest owner of data centers globally, leaders across the firm focus on AI are active dialogue with the AI market leaders such as OpenAI, Anthropic, Google, Meta, and others. These relationships help inform our perspective on where the industry is headed, and we believe that BXCI, with the help of the broader Blackstone platform, has incredibly well-informed view on AI. It is also important to understand that you cannot paint software with a broad brush. There are sub-verticals of software with proprietary systems, huge data lakes, and incumbent long-term customer relationships that may be more protected or see tailwinds from AI adoption, while other areas will be more at risk of displacement. The XAI has typically avoided the less differentiated business model. Sub-verticals that we believe are likely to be protected are vertical software ERP, data infrastructure, data management, and security. These account for the majority of BXSL software exposure where we have seen 40% EBITDA growth since underwrite. And today, these businesses generate over two times interest coverage. Importantly, the public market is differentiating in a similar way. While software evaluations have compressed from 18 times NTM EVTA last September to 14 times today. These sub-verticals that I mentioned earlier continue to trade in the 15 to 20 times EVTA range, implying well over two times enterprise value coverage of BXSL's first lien exposure. We also put significant value on partnering with larger companies with sophisticated ownership, and forward-leaning management teams to drive adoption of AI technology. As a reminder, 99% of our portfolio companies are private equity-owned or large public companies with market caps exceeding $5 billion. On Medallia, a name that we have discussed in previous quarters, we continue to mark the asset now at 77.75, which implies over a 70% reduction to its setup enterprise value. due to a slower-than-expected turnaround. For background, BXCI led a first-lane term loan through 26% LTV at Underwrite, supporting the $6.4 billion take-private acquisition of Medallia by the current sponsor, Tomar Bravo, who together with its co-investors have funded over $5 billion in cash equity for this deal today. The company has been underperforming, not because of anything related to AI, but due to what we believe to be execution-driven issues, particularly in its go-to-market function. Early last year, Tomer Bravo installed a new leadership team, and they are working through a turnaround plan. We also expect there to be discussions around the capital structure. If I zoom in on the rest of the bottom 10% of performers in the portfolio, a common thread is operational challenges rather than any secular concerns. As such, these companies have been marked lower to an average mark of 82. On average, these companies have been modestly down from an EBITDA growth perspective since underwrite and were set up at underwrite with an average 42% LTV. The good news with these names is that over half of them have seen further equity and junior capital commitments by the sponsor or are experiencing improving performance overall. In fact, we saw the watch list decline this quarter compared to last quarter as a result of some of these trends. However, to provide some illustrative framing, if you take this bottom 10% and just punitively assume that companies all defaulted, which again, we do not, I underscore, do not expect to see this happen. And BXSL recovers 65% over the next four years in line with long-term recovery of first lien public loans. And based on where they are marked today, this would only impact the equity by approximately 100 basis points per year. I state these numbers just to reinforce what I mentioned earlier. BXSL's model was designed to be defensive by focusing on first lien larger private equity-owned businesses across a portfolio with diversified industries. In reality, underperforming companies can recover. Just this quarter, for example, SelectQuote, Colony, and Alliance Ground were three underperformers and at their lows had a weighted average mark of 93. All have been paid or expected to repay this quarter at par, generating nearly $100 million of liquidity. So putting it all together, we encouraged by deal activity from the quarter as improved portfolio turnover and funding efficiency, which in turn should support ongoing earnings, and we remain very comfortable with the overall portfolio mix and positioning. We've seen similar market dislocations before, including during COVID, and even following the post-tariff news this time last year. And in periods like this, our focus, is on providing as much transparency and clear facts as possible to help investors look through the headlines and assess the facts on the ground. For context, this is my 21st year of Blackstone's credit business. Across multiple cycles and periods of volatility, BXCI has invested over $155 billion in our North American direct lending strategy with an annualized loss rate of less than 10 basis points. This is a result of focusing on investing defensively, as I just mentioned. But equally important is leveraging the advantage of Blackstone's scale and expertise, all of which we believe will continue to support excellent long-term results for our investors. With that, I'll turn it over to Teddy.