Blackstone Secured Lending Fund 2026 Q2 Earnings Call

Good morning. Welcome to Blackstone Secured Lending Fund second quarter results conference call. Joining me today are Brad Marshall, Chief Executive Officer, and Teddy Desloge, Chief Financial Officer, along with other members of the management team available for Q&A, including Carlos Whitaker, President. Earlier today, we issued a press release with a presentation of our results and filed our 10-Q, both of which are available on the shareholder resources section of our website, www.bxsl.com. We will be referring to that presentation throughout today's call. I'd like to remind you that this 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 factor section of our Form 10-Q filed earlier today.

This audiocast's copyright material of Blackstone may not be duplicated without consent. With that, I'd like to turn the call over to Brad Marshall.

Thank you, Stacy. Good morning, everyone. Before we dive into quarterly results, I did want to thank my colleagues, John Bock and Kate Rubenstein, for all their contributions to BXSL over the past several years. John and Kate are both good friends of the firm and many of us here, and John in particular has been a long-time leading expert in the BDC space, as many as you know, and both will be missed by all of us at Blackstone, and we wish them the best of luck in their next endeavors. I thought I'd start by highlighting a few key observations from the quarter. First, we delivered healthy earnings again in the second quarter, supported by our shareholder-aligned fee structure. Second, repayment activity continued to accelerate this quarter, which helped drive realizations, potential additional income, and additional liquidity.

Third, our deployment remains disciplined, with new fundings featuring strong credit profiles, thematic orientation, and attractive spreads. Fourth, we remain highly proactive with underperforming borrowers, leveraging our senior position, strong documentation, and deep restructuring expertise to protect long-term value for investors, as seen at Blackstone Credit & Insurance, or BXCI, for over 20 years. Finally, we continue to be constructive on the outlook for deal activity, with M&A benefiting from strength in the U.S. economy. While the year started slower, activity levels, as measured by new deals through BXCI's global private deal screenings, improved during the quarter, particularly in June. Some of the areas where we are seeing new deal flow in the current market are where Blackstone has deep industry expertise and thematic conviction, including AI and digital infrastructure services, and life sciences.

BXSL funded over $300 million during the quarter, adding five new borrowers to the portfolio, bringing our total to 313 companies. Generally, we are seeing new, recently committed deals across BXCI set up with less leverage, lower loan-to-values, and average spreads higher than in previous quarters. We will continue to use available liquidity selectively, focusing on areas where we believe we have distinct advantages and where we can leverage our scale, as we believe we have done successfully in the past. As an example, BXCI co-led a $1.1 billion financing for Aspen Pharmacare, a scaled pharmaceutical platform in Asia Pacific. In addition, Firmus Technologies, a leading AI infrastructure platform, drew on its $5 billion delay draw term loan as part of a $10 billion financing led by Blackstone.

BXSL's liquidity position remains strong, with over $700 million in additional repayments this quarter, in line with the expectations we discussed on our last call. This represented an annualized repayment rate of 21% of the portfolio at fair value, compared to 13% for the prior quarter and 5% for the same quarter in the prior year. The average low mark across assets fully repaid during the quarter was below 94, and select repayments included call protection, leading to realizations slightly above par on average. We believe this reinforces what we discussed last quarter, that performance of sub-investment-grade companies can evolve over the duration of a directly originated loan. Importantly, seniority in the capital structure dictates repayment in full ahead of subordinated capital absent a restructuring. BXSL's portfolio remains at nearly 97% first lien senior secured. Valuations reflect both company fundamentals and current market conditions.

As first lien secured lenders, our realized outcomes are ultimately driven by repayment at par over time or by enforcing our rights during periods of underperformance to maximize recoveries. This quarter's activity also highlights the importance of portfolio turnover. Repayments can provide additional capacity to reinvest into new investments at attractive spreads. More broadly, we believe repayment activity has continued to be an important indicator of underlying market health and a meaningful signal for future deal activity, as it typically reflects improving capital market conditions, increased M&A and sponsor activity, and greater borrower confidence. In the second quarter, BXSL generated net investment income, or NII, of $0.75 per share, which represents an 11.4% annualized NII yield. NAV per share ended at $25.53, down approximately 2.8% quarter-over-quarter. The total portfolio mark declined to 95.2.

Nearly half of the unrealized private marks reflected continued broader market spread widening throughout the second quarter, while the remaining marks were attributed to some underperforming assets. As a point of reference, the bottom 10% of the portfolio today is currently marked at 70. We remained highly proactive on this subset of the portfolio during the quarter, leveraging the broader Blackstone operating resources over 110 strategic advisors that support our firm across a range of sectors and 120-person BXCI CIO office, including the BXCI value creation team dedicated to operational support. This team helps portfolio companies drive operational efficiencies and cost savings across various categories, from healthcare and insurance services to facilitating introductions across the broader Blackstone portfolio. Further, the team also provides comprehensive management and board enhancements to these portfolio companies through our extensive network of operating executives and industry professionals.

As we have discussed on previous calls, we believe the value creation team is one of the critical advantages BXCI possesses as part of the largest alternative asset manager. Importantly, BXCI has experienced an annualized loss rate of less than 10 basis points across its over 20-year North American direct lending track record. While we are highly focused on this bottom 10% of the portfolio and are actively leveraging these resources available to us to help these companies drive improved outcomes, we continue to see strong performance across the remaining 90% of the portfolio. Across the entire portfolio, LTM EBITDA growth was 7% year-over-year, in line with the growth we've seen in recent quarters. Additionally, interest coverage modestly improved to 2.1 times, and PIK, as a percentage of investment income, was flat from last quarter at approximately 6.6%, which is over 20% below fourth quarter last year.

We ended the period with a non-accrual rate of 1.8% at fair value and 3.6% at cost, down from 3.1% at fair value and 4.7% at cost in Q1, primarily driven by two assets that were removed post-restructuring. We had no new non-accrual assets added in the quarter. Prior to completing its restructuring post quarter end, Medallia represented 1.5% of BXSL's non-accrual rate based on fair value or 79% of fair value of the portfolio on non-accrual as of 6/30. On software specifically, which represented 19% of BXSL's fair market value, fundamentals overall remained healthy across our 70 borrowers. These companies have a weighted average LTM EBITDA of more than $275 million, growing in line with the broader portfolio. They have a weighted average revenue above $780 million, and they have average interest coverage of 2.2 times. In closing, we remained highly aligned with our shareholders.

We continue to generate liquidity through attractive levels of portfolio turnover, we took proactive steps to drive better outcomes on the minority positions that are underperforming expectations. With that, I'll turn it over to Teddy.

Thanks, Brad. First on performance, BXSL's net investment income for the quarter was $174 million or $0.75 per share, compared to our $0.77 per share dividend. These results represent an 11.4% annualized NII yield or 12.1% annualized distribution yield, both among the highest across traded BDC peers with similar levels of first lien senior secured exposure while continuing to benefit from one of the lowest management incentive fee structures in the BDC industry. Payment in kind income was flat quarter-over-quarter and marginally higher year-over-year at 6.6% of total investment income, but down 20% since the fourth quarter of 2025. Interest income excluding payment in kind, fees, and dividends represented over 93% of our total investment income in the quarter. As we communicated last quarter, we continue to maintain our dividend at $0.77 per share.

We intend to use excess earnings in the near term as we transition to a lower dividend level that is aligned with the fund's longer-term earnings profile, reflecting lower base rates and maturities of lower-cost investment-grade bonds. Prior to the second quarter, BXSL's NII per share had met or exceeded our regular dividend per share for 28 consecutive quarters, and excess earnings was retained in net asset value and reinvested in the portfolio over time. As of quarter end, total undistributed earnings represented $1.77 per share, down from $1.80 per share at the end of the first quarter. Turning to the balance sheet, we ended the quarter with $13.4 billion of total portfolio investments at fair value, $7.5 billion of outstanding debt, and $5.9 billion of total net assets.