One of our holdings is going through an M&A process – of which I sold 75% of our position to reallocate. I put a good chunk in BXSL, as continuing to increase our allocation to credit related investments makes sense for our personal desired outcomes.
Blackstone runs a premier credit platform. It is the most prolific CLO originator, has the one of, if not the biggest private debt platforms, and culturally prioritizes losing money over stretching (read Schwartzmann’s book, What it Takes).
A quick overview of BXSL – it is a publicly traded BDC that one can consider a sister fund to Blackstone’s private BDC, BCRED. It invests exclusively in first-lien loans, with the vast majority privately originated, in the non-investment grade space. Average issuer EBITDA is large, north of $150M /year.
But there are many choices for 100% first lien BDCs, why BXSL?
Here are my simple reasons:
- Rates. It is highly sensitive to rising rates versus similar BDCs, by virtue of 50%+ of its liabilities being fixed rate debt. So as rates have gone up, its earnings benefit more than similar products that have a higher share of floating rate liabilities. While we purchased at a ~9% yield on cost (excluding special dividends, which push it to 11%), the base dividend has already increased to land it at a 10% yield on cost, and management is guiding towards a roughly 30% increase to earnings from 2Q-22 based on where rates are projected to go by the end of September.
- Scale. Blackstone’s massive size allows it to bear costs that others can’t. They can have teams of people plug in to reduce costs, intro to new customers, etc – a cost that others can’t justify. There’s a 5 person team doing nothing but calling its debtors to help them on top and bottom line initiatives. It’s not something typical of a credit provider, more an equity provider. For me, that ideally means fewer defaults or better recoveries when defaults occur.
- Culture. I care that the sponsors we invest in are more focused on downside vs upside. The management team explicitly uses incremental cost savings to get better credit risk at the same spread versus capturing greater spread for the same credit risk.
- Discount. Shares were at $23.5/share when we purchased, almost a 10% discount to NAV. Whereas BCRED trades at NAV – a 10% discount is a nice way to mitigate the likely defaults coming down the pipeline in 2023. Especially when similar BDCs include 2nd lien debt, equity, etc. My guess is this is because the BDC recently went public and the last share unlock happened in July.
There is plenty more information out there on the credit portfolio – both in absolute metrics and sensitivities, but keeping this one short and sweet.
Disclosure: We own BXSL, this is not investment advice. Do your own work.