Blackstone Secured Lending Fund. (BXSL) CEO Brad Marshall on Q1 2022 Results – Earnings Call Transcript

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Blackstone Secured Lending Fund. (NYSE:BXSL) Q1 2022 Earnings Conference Call May 12, 2022 9:00 AM ET

Company Participants

Michael Needham – Head of IR

Brad Marshall – CEO

Stephan Kuppenheimer – CFO

Conference Call Participants

Kenneth Lee – RBC

Melissa Wedel – JPMorgan

Ryan Lynch – KBW

Robert Dodd – Raymond James

Casey Alexander – Compass Point


Welcome to the Blackstone Secured Lending First Quarter 2022 Investor Call. At this time all participant lines are in listen only mode. [Operator Instructions] 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

Michael Needham

Thanks [Chandra]. 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.

Brad Marshall

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 dividends in the quarter totaling $0.25 and we have declared two more special dividends to be paid later this year for an additional $0.40 per share.

Excluding the impact of special dividends, NAV would have increased 0.4% during the quarter. While BXSL’s performance was steady during a volatile first quarter, we’re most excited about what lies ahead. Even though there may be macroeconomic headwinds on the horizon, we believe that BXSL’s defensive portfolio composition and attractive liability structure make us well positioned for an environment of rising inflation and rising interest rates.

So today, I’d like to cover a few key themes before turning it over to Steve to review our financial results. First, I’ll discuss a, robust investment platform enhancements we’re making on that front, second, the defensiveness of our portfolio in the current environment, third, potential income upside over time, from higher interest rates and from normalization of prepayment income over time.

And fourth, our operating team Blackstone Advantage is an important tool in most environments – and especially in today’s environment to help companies mitigate inflationary pressures. Starting with our BDC franchise, we have vast pools of capital as the largest BDC manager in the industry. The BXSL benefits from that because it can finance large transactions for high quality companies when it has available capital.

Year-to-date Blackstone credit committed to 10 mega unit tranche transactions with deal values exceeding $1 billion. In the past 12 months, Blackstone Credit led was the largest lender of $17 billion plus transaction. Blackstone has further cemented itself as the market leader for the largest private financings. In fact, our BDC platform was recognized by private debt investors earlier this year, as BDC Manager of the Year along with winning Global Fund Manager of the Year and Deal of the Year in America’s for one of our large transactions.

Across Blackstone Credit, there are over 400 employees 15 regional offices around the world deep sector teams and over 2,300 corporate debt investments. That gives us tremendous insight, origination and overall connectivity in the credit markets. Across the larger Blackstone platform, with over 4,000 employees and nearly $1 trillion in assets under management, that connectivity is multiplied many times over.

For example, BXSL’s investment team has access to over 100 Blackstone senior advisors across various areas of expertise. And it’s not just the scale of Blackstone, but how we leverage it to advantage our investors. As Blackstone’s Credit capital base has expanded, it has invested in more capabilities that benefit BXSL across origination, sector expertise and other support areas.

Blackstone Credit is also meaningfully expanding its headcount by targeting over 100 new hires by year end, which will bolster our origination and sector expertise including enhancements to our technology and healthcare verticals, where we see attractive long-term opportunities. Those verticals also happen to be BXSL’s largest sector exposure today. Second, BXSL’s portfolio was designed to protect investors’ capital in challenging market environments.

As of quarter end, none of our portfolio companies are on non-accrual and in aggregate our companies are experiencing healthy revenue and EBITDA growth as well as expanding margins. However, the overall business environment has undoubtedly become more challenging. Inflation is at a 40 year high in the U.S. Supply chains are disrupted in certain areas. And interest rates are rising along with financing costs.

We expect those challenges to be felt unevenly across the economy. With some areas more protected, especially where revenue growth can offset inflation pressure. We believe other areas, such as certain industrial businesses will bear more of the brunt given capital expenditure requirements and rising input costs. We believe these risks generally are amplified as you move into smaller companies.

And as you move further down the capital structure into second lien unsecured debt and equity. The advantage, we gained from being part of the Blackstone platform is that we get an early read on economic trends and inflection points from many thousands of investments managed across the firm. In this case, we saw inflationary pressures developing and build our portfolio around that theme.

We’ve largely avoided secular disruptive businesses, which protect us as debt holders. Most of our portfolios comprise of non-cyclical sectors, and are privately originated loans have an average loan to value of 44% with significant equity and subordinated debt below us. We built a largely senior secured portfolio and focus on lending to larger companies that have more pricing power, more experienced management teams, and are backed by sophisticated sponsors with financial and operational support.

Looking ahead, we feel very good about the quality and the resiliency of our portfolio. Third, we see income growth potential over time from rates and prepayment fees. Our asset liability profile enables BXSL to benefit from rising interest rates. Nearly 100% of our debt investments are floating rate, and nearly 60% of our liabilities are fixed rate at an average interest rate of 2.97%.

We decided not to swap those liabilities back to floating, giving us powerful upside earnings potential, while still protecting us to the downside with interest rate floors on our assets. Since our earnings call last quarter, short-term interest rates have increased significantly, with three month LIBOR increasing from 21 basis points to 96 basis points as of quarter end and 140 basis points today.

Short term interest rates are now above BXSL’s interest rate floors which have average 84 basis points on all our investments. Given the significant quarter to date move in LIBOR and the timing of rate resets, we expect most of the benefit from recent moves to begin in the third quarter of this year given the timing of 3-month LIBOR contract rolling over.

Based on quarter end LIBOR, we estimate that 100 basis point increase in LIBOR would result in incremental earnings per share of $0.09 per year, $0.18 from a 200 basis point increase and 28 basis points from 300 basis point increase. Since quarter end, rates have already increased by 44 basis points.

While spreads may compress in a higher rate environment, which could partially offset the benefit from rising from higher rates for BXSL, this will come as the portfolio turns over which will drive incremental income from prepayment fees.

In the quarter end investment activity was fairly light driven primarily by our desire to maintain leverage at 1.25 times. On the positive side, we were able to optimize the BXSLs investment activity around its capital availability, which was limited due to lower prepayment activity. The flip side to that is that prepayment income was at a historically low level for BXSL due to this lower portfolio turnover. Prepayment fees accounted for only one penny of our $0.61 of net investment income.

Even if those fees were zero, we would have meaningfully covered our dividends. Our prepayment fees could remain subdued over the near term, we expected that coverage will grow over time with rising rates.

Fourth, and lastly, our Blackstone advantage program is helping our companies combat inflation.

Last quarter, we talked about how we believe in delivering a superior value proposition to our boards. One of those services is expense reduction through procurement, which has been in high demand given rising cost and supply chain bottlenecks.

We believe we can help mitigate those pressures on our borrowers by taking an active role. For example, one of our portfolio companies was experiencing challenging challenges obtaining raw materials, and controlling its overall cost inflation. We’ve been working closely with that company to leverage our group purchasing offering, as well as building out RFPs and supplier auctions on their behalf.

So far, we’ve helped them identify more than $3 million of cost savings. We’re also helping — we’re also working to map their carbon emissions footprint, procure energy resources, and identify renewable energy projects, all of which should lead to reduce costs and lower emissions.

Across the Blackstone credit platform, we’ve identified total annual savings of nearly $200 million for companies through this program, which has created billions of dollars of enterprise value for our sponsors.

I’ll close by saying that I’m extremely excited about what lies ahead for BXSL. We built a high quality portfolio that is designed to withstand challenging environments and deliver an attractive, durable yield.

Our platform is unmatched in scale sourcing and providing operational support to our companies. And Blackstone is investing even more into that platform. We think that the BXSL represents the best version of a public business development company with stable, high quality, defensive portfolio is well positioned for this environment.

Pairing that with a low cost structure and attractive upside from higher interest rates creates a powerful economic engine that we believe will drive strong results for our investors going forward.

So with that, I will turn it over to Steve.

Stephan Kuppenheimer

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 of the quarter was $10 billion, and we had total assets of $10.3 billion. As of March 31, 2022, the weighted average yield on our debt investments and other income producing securities at amortized cost was 7.3%.

The excess sales gross investment activity during the quarter was slower given this was our first quarter of being fully drawn and invested. During the quarter the company made $278 million of funded investments offset by only $33 million of sales and $100 million of repayments for net investment activity of $145 million.

Although our quarter-over-quarter portfolio statistics are relatively similar, I would like to summaries the evolution of the portfolio on a year-over-year basis, as it helps to frame the picture around how well the BXSL situated for current and expected market conditions.

Compared to the first quarter of 2021, the number of portfolio companies is up 71% from 89 to 152. The average EBITDA of our borrowers is up 91% from $67 million to $128 million, while the average LTV of our borrowers has remained constant at 44%. In addition, the first 9% of the portfolio and floating rate exposure, and both first quarter of 2022 and the first quarter of 2021 was 98 and 99.9% respectively.

Altogether, this means we have added material diversity and quality to the portfolio through more individual credits and larger borrowers while not compromising risk based on loan to value or first in concentration.

We continue to be diversified across industries as we ended the quarter invested across 35 different industries which is consistent quarter-over-quarter. As of quarter end our largest exposures are in healthcare, software and professional services. Each of these are industries where we continue to see strong tailwinds, economic growth and well positioned companies backed by strong sponsors aligned to.

Now moving on to our capitalization liquidity our balance sheet is comprised of efficient diversified sources of capital, including a significant amount of fixed rate unsecured debt, as of quarter end, 56% of our debt outstanding was in the form of unsecured bonds, which provides the company with significant flexibility and cushion as well for potential for additional earnings upside as rates continue to rise as Brad mentioned.

Of our $6.3 billion of committed debt $5.7 billion of principal was drawn of that $5.7 billion, $3.2 billion represented unsecured bonds, which again, as Brad mentioned, have an average coupon of just under 3%. And maybe just as importantly, have a remaining weighted average life above 4.4 years. And we — as Brad mentioned, we did not swap these bonds. This means that we have a very low unsecured cost structure for the next several years of forecasts.

At the end of the quarter are average debt to equity ratio was 1.28 times and — I’m sorry, we ended at 1.28 times, average was 1.25 times, which is consistent with our near term goal to operate with leverage at the high end of the range of one-to-one on a quarter times. This active balance sheet management allowed us to continue to keep our costs of leverage down with an average cost of debt over the quarter of 2.9%.

Additionally, we have a low level of debt maturities over the next few years with our nearest maturity in 2023, and the weighted average maturity of our liabilities at four years as of quarter end. We ended the quarter with $569 million of undrawn debt capacity. As part of the IPO, a share repurchase program equal to $262 million, or the size of the IPO was put into place. The program is formulaic, and is triggered to BXSL shares trade below net asset value.

The program was put in place because we believe that if our common shares trade below NAV is in the best interest of our shareholders to reinvest in the portfolio. Though there were no repurchases in the first quarter of 2022, since the stock price never traded below NAV the repurchase program has been activated on a few trading days subsequent to quarter end, but the vast majority of the $262 million program remained available to the company.

The first quarter of 2022 saw continued strong investment and financial performance for the company. And we believe BXSL is well positioned in the current rising rate environment with floating rate assets and largely fixed low cost liabilities that should allow for enhanced earnings power going forward.

And with that, I’ll ask the operator to open the call for questions.

Michael Needham

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.

Question-and-Answer Session


Certainly [Operator Instructions] And the first question is coming from [indiscernible] from Citi. Please go ahead.

Unidentified Analyst

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?

Brad Marshall

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.

Unidentified Analyst

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?

Brad Marshall

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.

Unidentified Analyst

Thank you.

Brad Marshall

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.

Unidentified Analyst



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

Kenneth Lee

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.

Brad Marshall

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.

Kenneth Lee

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.

Stephan Kuppenheimer

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.

Kenneth Lee

Got it. Very helpful. Thanks again.


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

Unidentified Analyst

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?

Brad Marshall

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.

Unidentified Analyst

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?

Brad Marshall

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.

Unidentified Analyst

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


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

Melissa Wedel

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?

Brad Marshall

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.

Melissa Wedel

Okay. Thank you.


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

Ryan Lynch

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.

Brad Marshall

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.

Stephan Kuppenheimer

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.

Brad Marshall

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.

Ryan Lynch

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?

Brad Marshall

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.

Ryan Lynch

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

Brad Marshall

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.

Ryan Lynch

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.

Brad Marshall

Thanks, Ryan.


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

Robert Dodd

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?

Stephan Kuppenheimer

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.

Robert Dodd

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?

Stephan Kuppenheimer

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.

Brad Marshall

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.

Robert Dodd

Understood and partly over to [indiscernible]. 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?

Brad Marshall

Yes, so it’s actively considered.

Robert Dodd

Thank you.


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

Casey Alexander

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?

Brad Marshall

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.

Casey Alexander

Does the repurchase program have a termination date?

Brad Marshall

Yes, it is November of this year.

Casey Alexander

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.

Michael Needham

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.