Blackstone Secured Lending (NYSE:BXSL) is one of the few large cap BDCs that I have not covered so far. As probably most of my followers have noticed it, I am rather bullish on the BDC space given the secular tailwinds and the attractiveness of yields that can be accessed in this particular field.
However, in the meantime, I think that it just makes sense from the risk and reward perspective to really focus on high quality and relatively de-risked BDCs. This is because, at the end of the day, we are talking about just a couple of hundred basis points in yield that could be potentially captured by going far up in the risk curve. While in many cases such a yield difference is a game changer for income seeking investors, in the context of BDCs, on average, the initial or starting yield is already close to or even at a double-digit level. From the yield perspective, I think that most dividend investors should be already satisfied with such levels so that the next relevant question is not on how to enhance the yield even further, but rather on how to make sure that the initial current income streams are not cut in the future.
With this in mind and considering that BXSL currently offers a FWD dividend yield of ~ 10.2%, let’s take a look on whether the underlying fundamentals are strong enough to accommodate sustainable income streams on a go forward basis.
Thesis
The overarching takeaway from the analysis of BXSL’s fundamentals is this: no matter at which key metric we look at, we will conclude that BXSL is indeed one of the strongest and highest quality BDCs out there.
Let me explain.
First, approximately 99% of BXSL’s portfolio in placed in first lien senior secured loans, where the lion’s share of these loan investments are channeled towards companies owned by equity sponsors, who typically have a relatively large ownership exposure in these businesses. Just to remind us – first lien senior secured segment is the highest quality and most defensive exposure BDCs can get in their portfolios. Plus, the presence of a financial sponsor introduces a very favorable dynamic, where the sponsor has an inherent interest of making sure that the company does not go belly up as the motivation is to at some point in time sell at higher multiple than at which the company was initially acquired. For a lender like BXSL this is very beneficial.
Second, since BXSL ranks as the fourth largest BDC in terms of the NAV base, there is automatically an extra benefit stemming from the size aspect. Namely, the average single investment concentration in BXSL’s portfolio is circa 1% (measured on a fair value basis). Similarly, there are ~ 230 companies spread across multiple sectors with the Top 10 companies accounting only for ~ 25% of the total exposure (i.e., this is relatively low for BDCs). The diversification angle enables to clearly de-risk the overall profile of BXSL.
Third, the underlying portfolio is very strong, exhibiting favorable dynamics. For instance, the average LTM EBITDA of the investment companies landed at $206 million as of Q2, 2024, which marks an increase of 13% from last year. According to the Management, this implies more than 2 times larger EBITDA growth rate than what has been recorded in the broader private credit market. On top of this, the interest coverage ratio component is also at a strong level for BXSL’s companies. The LTM EBITDA coverage based on average LTM EBITDA for BXSL companies came in at 1.7x in Q2, 2024, which is also above the sector average. A clear testament of the robust portfolio quality is the non-accrual statistic, which as of Q2, 2024 stood at only 0.3% (at cost).
Fourth, as opposed to many BDCs out there, BXSL has managed to extract the benefit of its larger asset manager arm to source sufficient deal volumes in order to make sure that the investment repayments do not exceed the new investment fundings. This is necessary to both protect the existing adjusted NII generation and provide tailwinds for further growth. For instance, during Q2, 2024 BXSL committed ~ $1.3 billion, with the net funded investment activity in the quarter landing at $800 million, which marks an uptick of 50% relative to the prior quarter. What is critical to underscore here is that these new investments have been conducted without relaxing the standards of underwriting policy (e.g., the newly funded investments had a weighted average LTV of only 37.9%).
Fifth, the dividend coverage is also relatively strong – at 113% as of Q2, 2024. An importance nuance to consider in this context is that BXSL carries one of the highest quality earnings generation profiles, meaning that more than 93% of the total income stems from pure play interest income flows instead of non-cash PIK, volatile fee and dividend income.
The bottom line
In a nutshell, BXSL could be deemed as one of the safest BDCs from multiple perspectives. The portfolio consists of the highest-ranking capital structure debt instruments and the quality of these investments is high as implied by immaterial non-accruals and strong credit ratio statistics. There is also an element of diversification and enhanced ability to source new deal volumes due to BXSL’s size and ties to the Blackstone global platform.
Theoretically, we could pinpoint to two risks: (1) dividend coverage could be a bit higher, and (2) BXSL trades at a 12% premium to NAV. Now, when it comes to the first one, I would not be that worried given the aforementioned elements of quality that help significantly de-risk the situation, rendering the ~13% coverage surplus a decent and sufficient margin of safety. About the second one, I would not be concerned either, as the primary objective of investing in BDCs is the yield and not the speculative process of hoping for multiple expansion. Furthermore, we have to understand why the premium exists there – and the reason is simple, it is related to the above-average quality that is embedded in BXSL’s structure. From my perspective, it makes sense to pay a premium in order to get a more stable BDC business in a portfolio, especially against the current macroeconomic backdrop.
As a result of this, Blackstone Secured Lending is a clear buy for me.
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