This is an extract from an earlier article at Systematic Income Premium.
In this article, we catch up on Q3 results from the Business Development Company Blackstone Secured Lending Fund (BXSL). BXSL is currently trading at a dividend yield of 10% and a valuation of 93%.
The company outperformed the sector for the third quarter in a row i.e. every full quarter of its life as a public entity. It raised the base dividend in September, however, because its previous special dividends (used to support the stock over lock-up expiries) have fallen away, the total dividend actually fell, resulting in a comically high 133% dividend coverage – well ahead of its target of 100-125%. With additional income increases in the pipeline we expect more dividend hikes over the coming quarters. We continue to hold BXSL in our Core and High Income Portfolios with a Buy rating.
Quarter Update
BXSL delivered a total NAV return of 2.7% over Q3, outperforming the sector once again.
Net investment income jumped 29% to a record high.
Income Dynamics
Nearly 100% of the company’s assets are floating-rate – well above the sector average – while 42% of its debt is floating-rate – a touch below the sector average. This creates a powerful combination to continue to drive net income even higher. This combination also results in a relatively high net income beta to rising rates which is close to 3% above the sector average.
It’s also important to emphasize that there is a lot of catch-up remaining in net income. For instance, the average base rate accrued over Q3 was just 2.5% versus 3.5% at quarter-end and 4.3% at the time of the management call. In other words, even when short-term rates stop rising, there will be a significant net income tailwind over a couple of additional quarters.
Weighted-average asset yield jumped to 9.1% while interest expense rose at a slower pace to 3.67%. BXSL maintains a below-average level of interest expense due to its strong credit profile and timely refinancings. Close to 90% of its fixed-rate debt is in bonds with maturities in 2026 and beyond which gives BXSL a terrific edge in the sector, allowing it to keep interest expense lower for longer.
Portfolio Quality
Non-accruals remained at zero. 98% of the company’s investments are in first-lien secured loans with 95% of these loans are to companies held by sponsors which have access to their own equity capital to support their holdings.
PIK fell slightly and is a touch below the sector average.
Valuation And Return Profile
BXSL does not have a long track record as a public company. For the three full quarters for which there is data, the company has outperformed the broader sector.
Separately, the company has delivered a total NAV return of 10% since inception (in 2019 as it appears from filings) with positive net cumulative realized gains. This would put it above the average return in the sector.
We initiated a position in BXSL in May of this year as its valuation moved slightly below the sector average. We then rotated out in June when its valuation ran up close to a double-digit premium versus the sector and then entered a new position in July when its valuation reached a nearly double-digit discount versus the sector average. As the stock recovered in September and October we downgraded the stock to Hold and we have recently upgraded it to Buy again after it moved to a 4% discount versus the sector average. As of this writing it is trading 3% below the sector average valuation which looks attractive given its history of outperformance.
Takeaways
BXSL remains an attractive core holding in a BDC portfolio given its no-drama profile of higher-quality allocation, shareholder-friendly fee structure, low level of interest expense and a continued lack of non-accruals.
The company’s very high dividend coverage and high income beta to rising short-term rates means it is very likely to keep raising its dividend, whether through the base dividend or additional specials.
It is currently trading at a valuation below the sector average despite putting up above-sector average returns. This is another reason it remains a Buy-rated stock in our Portfolios.
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