Blackstone Secured Lending Fund: Adding To This Relatively Defensive BDC

Summary

  • We take a look at BXSL - a Business Development Company with a strong track record, relatively defensive profile, and an 8.5% regular dividend yield.
  • The stock has outperformed the sector in Q1 of this year in total NAV terms as its valuation has cheapened considerably.
  • BXSL is likely to see some volatility given a sizable lock-up expiration in July, mitigated partly by its buyback program.
  • We recently added BXSL to our High Income Portfolio when it traded down to a valuation of around 95%.
  • I do much more than just articles at Systematic Income: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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This article was first released to Systematic Income subscribers and free trials on May 16.

In this article, we provide a Q1 update for the Business Development Company Blackstone Secured Lending (NYSE:BXSL). BXSL is a very large BDC with over $10bn of assets with a focus almost entirely on first-lien assets alongside a relatively shareholder-friendly fee structure.

BXSL has seen its valuation fall sharply since its IPO due to a number of lock-up expirations. A final sizable one is expected in July which will be partly mitigated by its share buyback program.

BXSL buyback

BXSL

BXSL is paying out a regular dividend of $0.53 which equates to a yield of 8.5%. This is on the lower side of the BDC sector where the median regular dividend yield is 1% higher at 9.5%.

This is partly explained by 1) its conservative regular dividend (i.e. high regular dividend coverage) - by contrast, the company features a net income price yield of 9.8% - more in line with the sector average, 2) its defensive first-lien allocation stance and 3) its sizable special dividends - the last one is scheduled for July - equivalent to an 11.4% annualized yield which is well above the sector.

BXSL distributions

BXSL

In our view, BXSL is likely to either continue its special dividends or increase its regular dividend closer to the sector average.

Q1 Update

Total income fell about 3%, primarily driven by a drop in prepayment income. Unfortunately, BXSL doesn't appear to break out prepayment income which makes it difficult to track. This drop in prepayment income is a theme we have highlighted before that was expected to play out in Q1. The key point here is that the broad rise in income across the sector that we saw in Q4 was not sustainable and we should judge Q1 numbers relative to Q3 levels.

Blackstone Secured Lending Fund Q1 update

Systematic Income BDC Tool

Net investment income fell around 8.4% from Q4 levels.

Blackstone Secured Lending Fund dividends and income

Systematic Income BDC Tool

Coverage of the regular dividend remains high at 115%. The regular dividend was increased from $0.50 last year and will, likely, continue to be increased given the company's high and consistent coverage - NII exceeded current regular dividend in the last 7 quarters. Its high income sensitivity to rising short-term rates should further boost coverage, all else equal.

The NAV fell 0.5% from the previous quarter which is about average for the sector.

Blackstone Secured Lending Fund Q1 NAV change

Systematic Income BDC Tool

However, as the NAV bridge below shows, this was entirely due to the large special dividend which was nearly half the regular dividend. The special dividend schedule will taper from $0.25 in Q1 to $0.20 each in Q2 and Q3. Ex-special dividend, the NAV rose by 0.4% - a lot of which is due to the relatively low regular dividend. Most importantly, the net realized / unrealized gains were positive which is what we want to see and is a very strong result in a period of lower credit and equity prices.

BXSL Q1 2022 net asset value bridge

BXSL

Income Profile

BXSL is well-positioned to grow its income in response to rising short-term rates. Its net income sensitivity to Libor rising to 2% (i.e. an increase by 1% in the chart below) is +17.5%. With Libor at 1.4%, it's close to halfway there already. This is well above the sector average of +7% net income increase.

Obviously, some spread compression is likely to dampen this increase; however, two factors should mitigate its impact. First, spread compression will typically come along with prepayment fees for those loan borrowers that choose to refinance prior to maturity. And two, the overall level of prepayments is likely to remain subdued given the overall increase in credit spreads recently. With high-yield bond credit spreads having risen from 3% to 4.5%, spread compression is unlikely to be very widespread. Management confirmed this on the call saying that they have not seen material spread compression so far year-to-date despite a 1.2% rise in Libor.

Blackstone Secured Lending Fund - Rate Impact on NII

Systematic Income BDC Tool

BXSL has been one of the few BDCs without a, what we call, net income valley, or a drop in income for a rise in LIBOR to 1%. This is due to its relatively high leverage, high allocation to floating-rate assets and a relatively low weighted-average LIBOR floor. This means its income has already started to increase into the end of Q1 as LIBOR approached 1%.

Leverage has risen to 1.28x - slightly above the 1.25x upper target. This suggests that we shouldn't expect significant increases in leverage going forward which will remove this previous income tailwind. At the same time, management indicated it does not expect to take leverage materially lower, so it should not become a significant headwind to income either.

Blackstone Secured Lending Fund Leverage

Systematic Income BDC Tool

Weighted-average yield on the asset-side of the balance sheet held steady at 7.2% after a long slide. In our view, it should start to increase, supported by positive net investments over the last few quarters and rising short-term rates. The liability side of the balance sheet also increased by 0.26% to around 3% given the sizable floating-rate debt at 44% - in line with the sector average.

Blackstone Secured Lending Fund - Weighted average yield on debt assets and liabilities

Systematic Income BDC Tool

The company did a great job in timing its recent bond issuance. The chart below plots the timing of its $2bn bond issuance which makes up about a third of its total debt and 63% of its total fixed-rate debt again BBB-rated yields. The company has a BBB- rating from Fitch and a Baa3 (equivalent to BBB-) rating from Moody's.

BBB US corporate index effective yield

FRED

The average coupon of these bonds was 2.575% across 2026, 2027 and 2028 maturities. For comparison, 5Y Treasury yield is currently 2.9%. The earliest maturity is their $400m July-2023 bond with a 3.65% coupon which makes up 6.4% of their debt stack. If rates and credit spreads remain where they are, BXSL may need to pay around 4.75% on a 5-year issuance to refinance it, so the impact on net income will be fairly marginal or about 1%.

Non-accruals have remained at zero which is very unusual in the sector.

PIK income has increased significantly in the last two quarters and bears watching though it is still below average.

Blackstone Secured Lending Fund PIK Income

Systematic Income BDC Tool

Performance Profile

BXSL outperformed the broader sector in Q1 with a 2.4% total NAV return versus a 1.8% average. Its total return since inception, according to its commentary, is 10.1%, which looks similar to the sector average.

Blackstone Secured Lending Fund NAV returns

Systematic Income

Valuation Profile

The stock's valuation has fallen significantly and converged with the sector average. It has been under pressure from lock-up expirations highlighted above. At a below sector-average valuation, it starts to look attractive, particularly given its lower fee structure and more defensive profile.

BXSL valuation

Systematic Income

The company put in place a share repurchase program which gives it the ability to acquire shares below the NAV. The size of the program is equal to $262 million, or the size of the IPO was put into place. The program is triggered when shares trade below the NAV and is due to end in November.

Takeaways

BXSL offers a somewhat defensive stance in the sector given its consistent zero non-accrual track record and strong focus on first-lien loans. Its Q1 performance confirmed this stance with an increase in net realized / unrealized gains versus a drop for most BDCs.

BXSL is also an attractive holding given the sheer scale of its platform, depth of its analyst bench and company support team, its fairly friendly fee structure, its historical returns as well as its high income sensitivity to rising short-term rates.

We recently initiated a position in BXSL in the High Income Portfolio. And although we wouldn't be surprised to see some near-term volatility around the final lock-up expiration, a valuation level in the mid-90s (i.e. at a price of around or under $25) based on its Q1 NAV makes it a "Buy" in our view.

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This article was written by

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Disclosure: I/we have a beneficial long position in the shares of BXSL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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