Welcome to the Blackstone Secured Lending First Quarter 2022 Investor Call. At this time all participant lines are in listen only mode. Please note, 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 . Good morning and welcome to Blackstone Secured Lending's first quarter call. Joining me today are Brad Marshall, Chief Executive Officer and Stephan Kuppenheimer, Chief Financial Officer. Earlier today, we issued a press release with a presentation of our results and filed our 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 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 10-K and 10-Q. This audio cast is copyrighted material at Blackstone I mean and may not be duplicated without consent. On to our results, we reported GAAP net income of $0.63 per share for the first quarter and net investment income of $0.61 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. The BXSL as Michael reported a strong first quarter highlighted by 2.5, 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, BXSL 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. BXSL 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 tailwind. 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 $0.53 per share, which increased from $0.50 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…

Thank you, Brad. And thank you all for your time today. BXSL produce very strong results for the first quarter of 2022 and is well positioned for the current market environment. Today I'll focus on a few topics highlighting these themes including our financial performance, our investment activity and evolution of our portfolio and our liability structure. In terms of yields the returns, we generated a dividend yield of 8.8% over the last 12-months, based on quarter and NAV, which included a regular dividend of $0.53 per share, and two special dividends totaling $ 0.25 per share in the current quarter. Going into our balance sheet and dividend performance BXSL ended the first quarter with total portfolio investments of $10 billion, outstanding debt of $5.6 billion and total net assets of $4.4 billion. That asset value per share decreased from $26.27 to $26.13, primarily due to our $0.25 of special dividends, which were paid entirely from accumulated undistributed net investment income from prior quarters. Excluding the impact of special dividends NAV per share was up $0.11 or 0.4% for a quarter ago, and up 3.2% from a year ago. We continue to out earn our regular dividend with net investment income. And the current quarter our NII of $103 million exceeded our regular dividend by $30 million, or dividend coverage ratio of 115% for the quarter. In addition, we had $5 million of net realized and unrealized gains, driven by realization on our equity investment and forfeit. $103 million of NII represents $0.61 per share, which was down from $0.67 per share in the prior quarter, mainly driven by a lower level of prepayment fees, but also still well in excess of our regular dividend level. Focusing on our assets, our total investment portfolio at fair value at the end…

Chandra before we move to Q&A, I just like to clarify that the earnings per share upside from LIBOR that we discuss on a quarterly basis not annual. And with that Chandra, can you please open the call to question.

Certainly And the first question is coming from from Citi. Please go ahead.

With rising concerns about potential recession, what's the Blackstone kind of view of recession? And what are the types of things you're looking for that would make you a little bit more conservative in terms of your portfolio construction?

Sure thanks, Aaron. While I give you the top of the house view from our Chief Strategist Joe Zidle, I think if he was here. He would express a little bit more of an optimistic perspective on the runway for the U.S. economy and expanding over the next 12 months. I think his view is that there's certain tailwind in the household - and corporate sector. And that kind of momentum, those tailwinds should sustain growth, despite higher inflation and rising rates. And I think he would say there's, generally preconditions that would need to be in place before any recession one leading economic indicators have to roll over. They typically lead the business cycle by an average of seven months. And as of the most recent print, they're still rising. Secondly, corporate profit growth on a year-over-year basis needs to turn negative. We've never had a recession in the modern era without profit growth turning negative, and that business cycle contracts before an economic cycle. And then lastly, just the - unemployment rate needs to move higher. And we haven't seen that just yet. What I would - my overlay on top of that Aaron, while I believe all that to be true, I think there is going to be a quality breakdown, like better companies will have pricing power, they'll be able to pass through inflation or growth through it. I think it's really the smaller, more commoditized businesses that will begin to be stressed either because of input costs, supply chain issues, rising rates and what that does to the interest burden. And so I think while we're we generally have a good these tailwinds, we're going to see that some things breakdown. And so that doesn't change kind of our portfolio of construction and in our view on how to mitigate risk, which is focused on bigger companies focus on sectors that we think have more growth in them. So more technology healthcare, less industrial or commoditized type of businesses and continue to be in the most senior part of the capital structure to help mitigate any risk in the event that something does, you know, trip one of these companies up.

Thanks, that's helpful. The other thing I wanted to talk about was, credit spreads, credit spreads and the liquid markets are starting to widen out a bit. And I know it tends to take a while to kind of get into the private credit market. But I'm just curious to see if you're seeing any notable spread widening or if you're kind of repricing some of your new loans that you're putting into the pipeline?

Yes, so you're right. And just to put some numbers to that, since the start of the year, first lien loans in the market are down about 2.5 points. Second lien loans are down 4.7 points and high yield market is down 11 points. So the further down the capital structure you go, the more spread widening you're seeing. In the private markets, we've seen spreads stay about the same, maybe a little bit wider. But as you point out, there's typically a little bit of a lag in terms of the public markets impacting the private markets, because there needs to be a little bit more duration to that spread widening versus, just pockets of technical volatility. But I would expect over time that if the public markets stay wide or that the private markets will follow. And so we're definitely keeping an eye on that.

Thank you.

I mean the only thing I would add Aaron is, it just - if I can just add to that, you know, typically when base rates, widen your spreads compress. So the fact that base rates are up 120 some odd basis points since the start of the year, without really any materials spread compression in the private markets is quite unusual. So effective of the yields have widened quite a bit and well in both the public and private markets.

Thanks.

Next, we have Ken Lee with RBC. Please go ahead.

Hi, good morning. Thanks for taking my question. You highlighted some activity with transactions greater than $1 billion? I'm wondering if you could just further expand upon your comment and talk about what you're seeing in potential rejections pipeline at the upper end of the market to especially given recent market volatility? Thanks.

Yes, so in the larger end of the market, it's actually fairly active, just to put some numbers to it. In 2019, we've talked about this before 2019 I think there was maybe two deals above $1 billion that got down last year, it was 26. And the first kind of four months of this year, we've seen about 15. So the secular shifts from the public markets to the private markets, has continued. I think the volatility in the public markets has accelerated that a little bit for the start of the year. So what I would say can the pipeline is very active. It's one of the most active pipelines we've seen in a long time. Just to give you - put a number to it. We're currently reviewing over 150 different transactions, both large and small. We will gravitate to the bigger deals based on my comments earlier. But the market is definitely becoming much more active.

Okay very helpful there. And one follow-up, if I may on terms of the leverage, you're currently at your top being at the upper end of your leverage range. Wondering, do you see any change over the near term just given current market backdrop? Thanks.

Ken how you doing? I think we're -- we like our target range. And in this environment being, you know, around one of quarter is we feel good about where the company is and with the current portfolio and our pipeline. So, I would not expect our range, our current stock exchange.

Got it. Very helpful. Thanks again.

And next we have Finian O'Shea with Wells Fargo. Please go ahead.

Guys, it's Jordan on for Finian today. We were looking through some of your new origination this quarter, and maybe only see or maybe a handful of new names. Obviously, you're right on the mark for target leverage so there are -- wasn't much need to put some new assets on. But I'm just curious, I described the quarter and whether origination was maybe slower across the platform?

Yes, so you hit the nail on my head. We were -- we're targeting our investments around our target leverage of 1.25 times, just on origination across our direct lending platform, we invested over $5 billion. So, we're actually fairly active in the first quarter. And will be again in the second quarter, and BXSL, if it had $3 billion of capital would -- we would have invested $3 billion of capital. But we do not plan on, you know, taking leverage up much higher. And so we're waiting for more turnover in the portfolio to reinvest those proceeds into our pipeline.

Okay. Great. And so, it looks like a lot of these bigger deals are maybe in, you know, healthcare and software kind of concentrated in those industries? Are you guys thinking about maybe position sizing and how high you can take those industries as a percentage of the portfolio? Any high level thoughts on that?

Yes, listen, we think about risk in a lot of different ways. As you know, we're focused on the top of the capital structure, we want to be diversified, you know, geographically, we want to be in different sectors. Our belief is that healthcare and technology have become such big parts of the U.S. economy, and our growth sectors fit very dramatically with our view of the world, that those will be kind of on the higher end of our universes, other sectors. But we'll maintain a very, very diversified point of view on how we build up the portfolio across individual assets, individual sectors, and across, you know, areas across the U.S.

All right. Thank you. That's all for me.

Melissa Wedel with JPMorgan is next in the queue. Please go ahead.

Good morning. Thanks for taking my questions today. I wanted to follow-up on something you just said assembled that normally, you'd observe that when base rates increase, spreads will compress a bit, but we haven't quite seen that yet. I was hoping you could elaborate on that. What is the normal time horizon that you'd expect to see spreads compressed after base rates rise in here, is there any reason to think this environment might be different?

Sure. So, I missed the first part of that question, but it was just around I think rates and how base rates interchange with spreads. So, one of the things that we benefit from and not just us but others is in order for spreads to compress, there needs to be turnover in the portfolio. We don't voluntarily you know, take our spreads down on our assets. So in an environment and I'll get to your broader question, but I wanted to kind of highlight this one point. In an environment where there is low turnover. There is no spread compression. Environment where there's high turnover, there's higher prepayment fees, there's more income generated from that offset by your spreads coming down a little bit. So in fact, the spreads compress you actually see your portfolio generate more income in that environment. So, we feel like we have a lot of kind of positive kind of uplift in either scenario with rising rates or turnover in the portfolio. In terms of your question around will base rates and spreads play out differently this time around, I think there -- it's hard to say. I definitely think there's a lag in order for spreads to compress you know, part of things that in this was talked about the start of the call, you look at as the public markets and what's happening there. And you're in fact, you're seeing the opposite play out right now, spread are widening in that market. And that should have the same impact in the private markets. So in the near term, you may see actually spread widening as opposed to spread tightening that'll level out over time, as spreads, -- as base rates continue to increase.

Okay. Thank you.

The next question is coming from Ryan Lynch with KBW. Please go ahead.

Good morning. I wanted to follow-up on something you said in your prepared comments. You kind of talked about the two tailwind for being rising rates in your portfolio, which obviously there's a lot of interest rate sensitivity there. And also the potential for increasing prepayments. It seems like those are kind of counterbalances to our each other and probably are not going to occur in the same environment that will think, obviously, rates have been rising like that has already happened in the environment. But it feels like if rates are rising, it seems like in that environment, you're going to have a continual slowdown in prepayment fees as people are not going to want to try to refinance into a higher rate environment. So, I would just love some clarity on that. Obviously, I know you're a prepayments and repayments were extremely low in Q1. So I'm just not sure if maybe you're just saying coming off that extremely low base. You expected to rise or if there was something else, but it just seems like it right environment would also create lower prepayment, so want some clarification on that.

Yes, what I would say thanks, Ryan. What I would say about that, I don't think it turnover and prepayment are not driven by opportunistic refinancing, that is a very low percentage of what causes prepayments. What causes prepayments is an M&A environment that's fairly active. So company's being sold. And we went through a period in the end -- towards the end of last year, started this year with the M-- a lot of M&A proceeds were put on hold and started because Omicron and then the war in Ukraine create a lot of volatility. Volatility creates a very large bid ask between buyers and sellers. We're seeing that start to change and BXSL in particular, as a vintage that result in more companies starting to look for exit opportunities so they can get capital back to their investors. So, I think what you will see, just given our vintage at least, you'll expect to see prepayments pick up towards the end of the year as that M&A environment starts to pick up, which we are definitively seeing right now.

And then maybe just to add to that, Ryan. You know, base rates, right, this is a floating rate product, so differently -- your different than mortgages, where rates rising means you have to refi at a higher rate really far riskier and more spread sensitive and rate sensitive, as it's all floating rate. So, it tends to be the dynamic spreads laying out rather than base rate sensitivity.

And maybe just one other point. And even if we had no prepayment -- like zero prepayment income, we'd still cover our dividend by 105%. So our model doesn't revolve around you needing that kind of that prepayment income to drive origination fees or prepayment fees in order to cover a dividend. We generate sufficient coverage just to our core net income, and that core net income is going to increase because of how levered BXSL is rising rates, given its asset liability matching or mismatching in this.

Yes, totally makes sense. Yes. So the rising rates are definitely the clear beneficiary or clear benefit to you all, new all earnings. And I appreciate the commentary and the clarification on kind of what can drive portfolio activity repayments. The other question I had, you guys have clearly focused on building this BDC with a very high quality portfolio, strong secular businesses? My question is, if we run into a more choppier economic environment or even a recession scenario, you know, I think your businesses are probably a whole lot better than the average BDC. But one of my questions is right now what we're seeing is a big kind of rerating and revaluation of public market businesses, even the strongest businesses are rerate increased significantly. I'm sure that probably hasn't trickled through to the private markets fully? Maybe it started to get in there yet. But my question for you is, you know, what would happen or I guess, do you expect any significant pullback in private market valuations similar to levels, we've seen it in the public markets, which is well over 20%, 30%, 40% in certain businesses, again, strong, stable, secular going businesses in the public markets? And if there would be a valuation pullback, what would that mean to do you think credit quality in your book?

Yes, so you're absolutely right. In the sense that growth, businesses have been rerated. And businesses that maybe we're trading around 35 times cash flow, or maybe trading around 25 times or 20 times cash flow, that definitively will impact valuations in the private markets, as well for these high quality high growth businesses. Because remember, it's a little bit of, they're more exposed to kind of duration risk and - in the risk free rate. So that's driving some of that, as well as capital moving more towards risk off. But if we were at 43%, kind of loan to value on our investments, and there's a pullback, in a rerating, maybe we're now kind of 55% loan to value. So it's why we kind of highlight and talk about where we are on the capital structure on all these calls, not just being first lien, but from an LTV standpoint, kind of where we sit. So they'll definitely as you rerate, that cushion will get impacted a little bit. But we have so much cushion beneath us that we feel fairly well covered. So we do not worry about that in this environment. What I worry about more generally is that you are seeing a, risk off trade in lower quality businesses are feeling more of the impact in their portfolio. They are feeling it from rerating standpoint. They were 13 times, but they should have always been an eight times business. And they were levered five or six times, those businesses are going to really feel the impacts from what you just described, because they're also going to see margin compression, given kind of the inflationary impact on their business models.

Okay, that's helpful. I appreciate the time today and dialogue. Thanks.

Hey Ryan, I just wanted to give you one other stat, which wasn't - isn't directly tied to your question, but I think it's helpful. And no one's asked this yet. But we think about risk - our primary kind of focus versus any other kind of drivers that people often focus on. But as you think about rising rates, it clearly has an impact on the cash flow of our businesses, it's good for investors, they get more yields but that yield doesn't come out of thin air. The portfolio companies have to pay that. And if you look at our portfolio today though 5% of our issuers have interest coverage below one times all of those are recurring revenue loans. We have three recurring revenue loans, Medallia, Relativity, Dreambox. And so our overall interest coverage is closer to three times, but if - interest rates move - the base rate moves to 4%. That 5% number becomes relatively unchanged. Once you get to 5% then base rates - it gives a slight uptick to about 13% of our portfolio companies have interest coverage below one times. So I give - maybe that stat helps a little bit to answer your question, in the sense that because of our loan to value because of where we sit in the capital structure - types of businesses that were focused on how they're more cash flow generative, in a rising rate environment, we don't think even if they get to 5% that our portfolio would be under a lot of distress.

Yes that's helpful. I mean, yes, those are good statistics low loan to values. You know, fairly high interest coverage as long as it sounds like the businesses continue to execute fairly well, because of those starting points are so high. You know, you guys should overall be relatively I think fine. So I appreciate for that - those additional details.

Thanks, Ryan.

Next, we have Robert Dodd with Raymond James. Please go ahead.

Hi guys, one housekeeping one if I can real quick, first on the dividend income, is that sustainable was it one-time, was it to do with Mermaid or Datasite or anything like that or is it just a structural change and we should expect to see that going forward?

Hey Robert, the dividend income was really from one investment, one equity investment we have in Mode. So I wouldn't say it's something that we expect to be regular you know, it was a very high percentage dividend given the size of our equity investment in that company. But I wouldn't say it's something regular or that would predict on a more routine basis.

Got it understood, thank you. On the other one, since I've got - I'm getting incrementally more pessimistic about the economy. Not doom and gloom yet, but on - obviously your balance sheet looks in great shape for the assets on the portfolio, on the books right now, like 60% unsecured. The only - if I step back when we look at COVID, there were a lot of liquidity drawers for a lot of BDCs? You've got 700 in available cash and borrowing capacity, but undrawn commitments of north of $1 billion? Can you give us any color on all that the undrawn commitment? How much is actually drawable a lot of its delayed your terms hence - obviously, so probably not to have bought. And even the revolvers, how much of that - how much all the unfunded commitments are actually drawable like today, at will by a borrowing company?

The vast majority are DDTLs, as you mentioned Robert, and, you know, over our experience with DDTL is, you know, over their life, maybe 30% to 40% of them get drawn ever during the overall life of DDTL so the revolvers representing a small portion of that unfunded commitment. And so our view is between prepayment activity, and really, probably moderate, you know, deployment or drawing on those unfunded commitments that were well covered. But that is a topic we obviously keep in front of mind and look to balance that out in this quarter, as well.

And, Robert the other thing is state to is, just add to that, remember we've 60% of our liabilities in unsecured debt. So we have $10 billion of assets, only what 2.3ish of that is in secured facilities. So our ability to take on additional liquidity, if we need to is, is we're very well positioned for that. But Steve is right our experience, with these DDTL are attached to M&A. We do get a lot of visibility into when that M&A is going to happen. It's really the revolvers you worry more about because revolvers get drawn when bad things are happening versus delay drawers get drawn when good things are happening. So it's a little bit of a I think, from a positioning standpoint, we feel better about.

Understood and partly over to . You have a lot of unpledged assets effectively, you could upsize the revolver I mean has that been considered I guess it's the bottom line?

Yes, so it's actively considered.

Thank you.

And our final question comes from Casey Alexander with Compass Point. Please go ahead.

Yes good morning. I'm just wondering from sort of a functional operating standpoint, now that the share repurchase program has been activated, should we be thinking about as the share repurchase program executes, that the total portfolio balance would actually run down a little bit in order to fund the share repurchase program or should we be thinking about as allowing the share repurchase program to lift the leverage ratio somewhat?

I think it's a little bit of a balance of both Casey. I think it also is a little bit path dependent on how active the repurchase program continues to be. It is formulaic and buys shares. It's allowed to buy shares a percentage of our previous trading days total volume, which isn't an enormous amount. So it's kind of its fairly slow moving and constant when we're trading below NAV. But I would say it could result in a little bit increase in leverage, as you've heard to say we like where we are. So we have some prepayments and the repurchase program is continuing, we would probably try to maintain leverage. At the same time, if we don't have prepayments and repurchase program is operating pretty modestly. We probably stay where we are as well.

Does the repurchase program have a termination date?

Yes, it is November of this year.

Okay. All right thank you. I appreciate you taking my questions.

Now, I would like to turn the call back to Michael Needham for closing remarks.

Great, thank you, Chandra and thank you everyone for joining our call today. Our IR team is available for any follow-up questions. Have a great day.