Welcome everyone to the Blackstone Secured Lending Fourth Quarter and Full-Year 2022 Investor Call, hosted by Michael Needham, Head of Investor Relations. During the, your lines will remain on listen-only. [Operator Instructions] And now, I would like to hand over to Michael. Please go ahead.

Thank you, Colby. Good morning and welcome to Blackstone Secured Lending's fourth quarter call. Earlier today, we issued a press release for the presentation of our results and filed our 10-Q, both of which are available on our Shareholders section of our Web site, bxsl.com. We will be referring to that presentation throughout today's call. 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 most recent annual report on Form 10-K. This audio cast is copyrighted material of Blackstone and may not be duplicated without consent. With that I'll turn the call over to BXSL's Co-Chief Executive Officer, Brad Marshall.

Thank you, Mike, and good morning, everyone. Joining me today are Interim CFO, Kevin Kresge and our newly appointed Co-CEO, Jon Bock. I, as well as many others on this call are quite familiar with Jon's impact on the BDC industry. As both a top-ranked equity research analyst and BDC executive, Jon is an exceptional thought leader in the BDC space as well as a long-time friend. I'm thrilled to have his partnership as we continue to expand our business. Turning to this morning's agenda, I'd like to start with some high-level perspectives before Jon and Kevin go into detail of our portfolio and fourth quarter results. Turn to slide four. BXSL reported another excellent quarter with significant growth in investment income, higher net asset value, and strong credit performance. Net investment income, or NII, increased 13% quarter-over-quarter to a record $0.90 per share, which represents a 14% annualized return on equity. This powerful performance reflects the quality and strength of our well-sourced portfolio. At year-end, 98% senior secured 47.5% loan-to-value, with zero investments on non-accrual, and only 1% of our assets marked below 90. Our net asset value, which increased to $25.93 from $25.76 the previous quarter, also reflects the portfolio's strength. As a result, I'm thrilled to report that BXSL has raised its regular quarterly dividend by 17% to $0.70 per share beginning in Q1, 2023. That represents a 10.8% annualized yield for shareholders based on the higher fourth quarter NAV of $25.93 per share. This marks the third time in the last year-and-a-half that we've raised our regular dividend, which we believe represents the highest dividend yield for any listed BDC with a predominantly first lien senior secured portfolio. Since we [IPOed] (ph) in late 2021, we've increased our regular dividend by 40%. Later in the call,…

Thank you, Brad, and good morning, everyone. I can't tell you how much I've looked forward to walking through the strength and stability of the BXSL portfolio with you. And the best place to start is to tell you very briefly why I chose to join Brad and the team at Blackstone Credit. And I'm sure you all see us drive the immense scale and broad capabilities that Blackstone brings to private credit markets. Yet what surprised me. And it may also surprise you is how Blackstone pairs the power of its unique scale, with world class shareholder alignment to drive attractive performance and investor returns. And Brad alluded to this. This isn't something I take for granted; BXSL fee structure is materially lower than the average publicly listed BDC. BXSL also has a performance fee look back mechanism, and the management team has regularly demonstrated in industry leading ability and willingness to align with shareholders. I spent my entire professional career in BDCs and private credit early on as a sell side analyst before I became an operator and Chief Executive. When BXSL was formed in 2018, Brad Marshall stated that Blackstone would lead the BDC market with best practices. And in my professional opinion, they've done exactly that. I'm thrilled to join the team to be here today and join my colleagues. And that's actually a perfect segue to the portfolio. Remember, Blackstone's decision to focus on shareholder alignment upfront, allowed BXSL to build a more defensive portfolio that better protects shareholder capital in more challenging market conditions. So, let's outline what a defensive portfolio looks like. Jump to slide eight, let's start with seniority, 98% of BXSL investments are in first-lien senior secured loans, and over 95% of those loans are to companies owned by private equity…

Thanks, Jon. I'll start with our operating results on slide 12. In the fourth quarter, net investment income was a record $144 million or $0.90 per share, which was up 34% year-over-year. Our revenues were up $59 million or 31% year-over-year, with combined fee and dividend income, flat quarter-over-quarter payment-in-kind or PIK income declined to $10 million from $11 million last quarter and represented less than 4% of total investment income. Meanwhile, net expenses were up just $25 million compared to last year's fourth quarter, driven largely by interest expense. GAAP net income in the quarter was $122 million or $0.76 per share, up from $0.73 per share a year-ago. This is despite $22 million of unrealized losses this quarter. These unrealized markdowns resulted in a $3 million capital gains incentive fee reversal or $0.02 per share benefits NII this quarter. Next turning to the balance sheet on slide 13, we ended the fourth quarter with $9.6 billion of total portfolio investments, of which approximately 98% are floating rate at a weighted average yield of 10.7%. This compares to [$5.5 million] (ph) of outstanding debt, weighted average cost of just 4.3%. Spread between our floating rate assets and low costs mostly fixed rate liabilities, provides the company with the potential for additional earnings growth if rates continue to rise. As a result of strong earnings in excess of the dividends in the fourth quarter, NAV per share increased to $25.93, up from $25.76 last quarter. Next, slide 14 outlines our attractive and diverse liability profile, which includes 58% of drawn debt, and unsecured fixed rate bonds with a weighted average interest rate at less than 3% which we view as a key advantage in this rising rate environment. Additionally, BXSL ended the year with $1.1 billion of liquidity in cash…

Thank you. [Operator Instructions] And the first question is coming from the line of Finian O'Shea, Wells Fargo. Please go ahead.

Hi, everyone. Good morning. Appreciate the color there on the interest coverage and the portfolio. What are the interest coverage ratios you're seeing today in the market for new deals?

Thanks, Finn. Interest coverage is in line with where the existing portfolio is. Or said differently, the capital structures are being set up with a little bit less leverage today given where rates and spreads are in this environment. So, a lot of deals that we're looking at are around two times coverage, stepping down a little bit to the extent that base rates get into the low-to-mid fives.

Okay, that's helpful. Thanks so much.

And the next question is coming from the line of Casey Alexander, Compass Point. Please proceed.

Hi, good morning. First of all, welcome to Mr. Bock to the Blackstone management team. We're happy to see him there. I have two questions. First of all, I appreciate your thoughts around the dividend and around the base dividend. Based upon where your earnings power is, currently the base dividend doesn't even come close to satisfying the RIC requirements for required distributions. So, how do you plan to -- do you have a formalized process that you're thinking about for distributing the additional income that you expect to earn over and above the base dividend? Some BDCs have offered a formula that they would use. How do you guys think about managing that RIC requirement and handling the extra income over and above your current base distribution?

Thanks, Casey. This is Bock. So, I'll start with really our focus on what we believe truly drives long-term value. And so our view is, as those BDCs that institute steady and stable growing base dividends and have a level of NAV growth associated, those are generally the types of BDCs that generate the best valuations. So, you could expect to see clearly, while we have a raised dividend, there is going to be a level of earnings excess. That level of earnings excess enters dividend spillover and grows NAV, and to the extent that we start to approach a level of special that's going to be required as a result, we'll deal with that as we come to it. But we find that there is more value as it relates to NAV and the compounding inside given the small cost of excise tax of 4%. And over time, as you start to see the market opportunity grow and BXSL grow along with it, you can easily manage a number of those payouts to drive long-term return.

All right. My second is, and appreciate the information that you gave on slide 10, the types of companies that fit the fundamentals that you are lending to also have deal sizes that are well in excess of the average size in the marketplace. So, given co-investment privileges, does Blackstone have deep enough pockets that have co-investment privileges to be able to absorb those entire deals or would you think more in terms of partners on some of those deals? How do you contour managing the deal size that comes with those types of characteristics?

Yes, Casey, it's Brad. I'll take that. So, if you look at our private portfolio, about 80% of the deals that we do, we're the sole or lead lender. I think once a deal gets above $2 billion it requires us to bring in partners. So, as you exceed a certain size, we are going to be co-investing alongside others, which is partly why our fee structure is so attractive, right? If other managers are coming in alongside of us in those deals, the best ROE for investors for those types of deals, those large deals, is to invest to BXSL just because of the fee structure that Jon went through.

All right, great. Thank you for taking my questions, that's my two. I'll hop back in the queue, and if I have more I'll jump back in later.

Thanks, Casey.

And the following question is coming from the line of Robert Dodd, Raymond James. Please go ahead.

Hi, guys, and welcome, Jon. On going to that slide -- the data on slide 10, I mean, Jon, you talked about at the December spot rates you'd have 8% of the portfolio under one times interest coverage. December is your peak though. Have you looked at what, say, intra the proportion or indeed your proportion versus the length of the portion would be under 1 at peak rates, which are maybe 100 basis points higher even than December?

Yes. So, if you start to look forward, let's say 5%, you'll notice that that ratio still stays very, very close. For Blackstone, you'll see a level of stability in our portfolio given where we focused. And then for the market, if you move forward, you start to see that tail increase over 20%. Our goal is to give you a view of what we see as of 12-31, and then continue to adjust to what's factually there, because who knows where rates will be arbitrarily. But that's really where it will trend. And we believe that's an important item to focus on because, truly, it is what sits in the tails and how you manage it, Robert.

Rob, maybe just to add to that, because we clearly run all the different interest rate environments through our portfolio. I think I mentioned this before, but we have one of the largest portfolio management teams in the industry. And this is a big part of what we do; we run it through our models. Because what that does is it creates the conversation with the sponsor to figure out a game plan to the extent they're going to be close. If you look forward into peak rates, what you'll find is that -- and remember, we look at coverage on an LTM basis, and if look at the companies that would step into the less than one times, they're actually outperforming the rest of the portfolio. So, we feel good about the quality of those companies that would approach or be less than one times in higher rate environment because of the momentum they have on a forward-looking basis to performance.

I appreciate that, but that's exactly related to the follow-up question. Which is to your point, like just under one times interest coverage doesn't really -- that doesn't [indiscernible], right? It has to be a combination of factors, i.e., lender 1 and the EBITDA is shrinking or that the business is broken or something like that. So, if I look at slide 10, in the middle, LTM EBITDA growth, you're at 17%, credit market at 9%, so roughly 2X again. So for the tail, what percent of the portfolio, for example, has negative EBITDA growth or -- because that's where the problems are going to come from more than the interest expense, right, it's that the EBITDA is having a problem or any other way you can breakout the tail of the portfolio for us in some of those other metrics?

So -- or maybe asked differently, interest rates alone don't cause companies to default. Good companies will manage through a higher interest rate environment quite well, especially given the vintage of BXSL's portfolio companies. But to answer your question, Robert, about 20% of the companies that are closed on interest coverage have been performing in line or below expectations.

Got it, I appreciate that. Thank you.

[Operator Instructions] And the next question is coming from the line of Ryan Lynch, KBW. Please go ahead.

Good morning, and welcome, Jon, to Blackstone. The first question I had, kind of following up on the whole interest coverage discussion. Really appreciate the details you guys gave in your prepared remarks as well as some of the details in the slides. I just think it would be helpful, when you think about the portfolio, 8% falling below 1% interest coverage, which just sounds like that's pretty significantly better than most of your peers. But I would just love to hear, if that does occur, what are some of the remedies that you all can do to ease the stress of those companies? I would assume that the easiest one is trying to get the private equity sponsor to inject more capital into that business. But assuming that does not occur, what are some of the remedies that you can do and proactively make to allow those companies to transition through this kind of period of high interest rates?

Yes, thanks, Ryan. So, a couple of things, one, half those companies, of the 8%, are companies that have negative EBITDA by design. So, these kind of reoccurring revenue loans, so it's a small portion of our portfolio, but their capital structures were set up with that in mind. With the rest of the portfolio companies, there's a couple things. One, when we have these conversations with the sponsors, what they say when we run our models and we show them what we think interest coverage is, their reply is typically, one, they can cut costs in order to improve cash flow and service their debt. Two, they can inject equity, as you suggested. And as I said, interest rates won't cause a good company to default, so they will support their companies. Third, you can pick some of your interest rate, which I'm sure you'll see more of across the industry as this year evolves. And then you have maybe the fourth mechanism is most companies have revolvers they can use as long as it satisfies their covenants to fund any kind of slight misses in cash flow. So, those would be the four primary areas. Again, we've had all these conversations with all these companies within our portfolio companies that even get close. And so far, the sponsors seem incredibly supportive given what I said earlier, which is if you're a good company transitory issues like rates, like inflation does not cause a company to default.

Yes, got it, that makes sense. And then just the other question I had was, and I may be wrong in this, but I thought you guys' targeted leverage range was around 125. So, you guys have been running, not materially above that, but closer to 130 -- in the 130s the last several quarters. Did you guys change where you guys expect a run or is there ever a point where you guys want to reduce that down to 125-ish?

So, Ryan, remember in the quarter, we bought back another $47 million of stock, and we invested actually about $175 million. So, those two things alone, which entirely in our control, took leverage above 1.25 times target. And if we remember last call, I said we had about $800 million of pay-downs coming, $200 million, roughly, we saw in the fourth quarter. So, we have another line of sight over the next couple of quarters to additional paydowns. So, that's informing, kind of our buyback, our investment pace, and we take [technical difficulty] --

Okay. Just wanted to -- I mean that makes sense, you know, kind of moving it around a little bit when there's good opportunities, and line of sight and share repurchases, I just want to make sure that the long-term can change. That's all from me. I appreciate your time.

And now I would like to hand the call over to Michael for closing remarks.

Great. Thanks everyone for joining. Our team is available for any follow-up should you have them. Otherwise we will speak to you again next quarter.