Q3 2023 Blackstone Secured Lending Fund Earnings Call
Good day and welcome to the Blackstone secured lending third quarter 2023 Investor call. Today's conference is being recorded at this time all participants are in a listen only mode. If you require operator assistance at any time. Please press star zero, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment at this time I'd like to turn the conference over to Stacy Wang head of stakeholder relations. Please go ahead.
Thank you Katie good morning, and welcome to box unsecured lending third quarter call earlier today, we issued a press release with a presentation of our results and filed our 10-Q all of which are available on the shareholders section of our website Www Dot B X S. L Dot com.
We'll 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 and updating these statements for some of the risks that could affect results. Please see the risk factors section of our most recent annual report.
Our Form 10-K this.
Audiocast is copyrighted material of Blackstone and may not be duplicated without come back with that I'd like to turn the call over to <unk> Co Chief Executive Officer, Bob Marshall.
Thank you Stacey and good morning, everyone.
Thank you for joining our call. This morning with me today is our co CEO, Jon Bock, our President Carlos Whitaker, and our CFO Ted <unk>.
Turning to this mornings agenda.
I will start with some high level thoughts before John Carlos and Teddy go into more detail on our portfolio and third quarter results.
Looking at the presentation and turning to slide four I.
I want to highlight that Q4 marks the two year anniversary since our IPO in 2021.
I'm very pleased with the results that we've delivered to our shareholders and I'm very confident in the strength of the portfolio, we have built and highly optimistic about <unk> investment opportunity set.
Focusing on the third quarter <unk>.
<unk> reported another strong quarter of results, including growth in net asset value and net income per share along with higher regular dividend distributions. All built on <unk> strong credit fundamentals with a predominantly first lien portfolio invest in large resilient businesses.
And historically low default sectors.
Looking at the details are 98, 8% floating rate portfolio continues to benefit from sustained higher interest rates net income per share increased 12% to $1.01 per share in the quarter compared to second quarter and is up over 74% compared to last year at this time net.
Net investment income or NII of 95 per share represents a 14, 4% annualized return on equity.
The quality of our earnings remains high with limited payment in kind.
Limited non reoccurring and fee driven income.
Further interest income excluding pik.
These.
And dividends represent a 96% of our total investment income in the third quarter I'll repeat that interest income excluding pik.
Fees and dividends represent 96% of our total investment income in the quarter.
We distributed our previously declared increased dividend of <unk> 70 per share as well. This represents an 11, 6% annualized distribution yield one of the highest among our BDC peers with as much of its portfolio invested in first lien senior secured assets, while covering our third quarter dividend by 120.
3%.
In a higher interest rate environment investors may benefit from an elevated interest income yield.
However, higher interest rates placed pressure on floating rate borrowers as a result, we continue to focus on building our portfolio with the intention of protecting investors' capital.
During the third quarter more than 99% of funds invested were first lien senior secured with an average loan to value of 35, 9%.
As of September 30th <unk> portfolio is over 98% first lien senior secured with 46, 9% average loan to value.
We have a minimal <unk>.
Non accrual rate below 0.1% at both amortized cost.
And fair market value and approximately 1% of debt investments marked at fair value below 90.
We believe our net asset value, which increased to $26 54.
Per share in the third quarter from $26 30.
The previous quarter further highlights portfolio stability.
Turning to page or slide five of the presentation we.
We saw a meaningful increase in new investments ending the quarter with $656 million at par in new investment commitments and $390 million investment funding during the quarter compared to 144 million new commitments at $117 million.
Funded during the last quarter unfunded commitments represent.
Commitments increased.
Two $761 million in Q3 compared to $551 million in Q2.
Proceeds from third quarter sales and repayments were $205 million.
During the quarter, we also issued $210 $7 million of additional common shares before underwriting and offering costs through both an underwritten public follow on offering and our existing ATM program at accretive levels to be xsl.
We have seen an uptick in our investment pipeline since the first quarter. The number of deals in the pipeline doubled as of the end of Q3 versus the end of Q1.
These pipeline deals are predominantly first lien senior secured exposure and companies with historically recession resilient sectors, we know very well.
Important to highlight we're also seeing a resurgence in transactions valued in excess of $1 billion with a number of these larger deals also increasing by two times and our pipeline during the same period.
Looking forward.
We are optimistic about the outlook of new investment opportunities driven by what we believe is a more active M&A environment and additional financing needs from our existing portfolio of over 3150 corporate issuers across Blackstone credit.
I also wanted to highlight the firms recently announced integration of our corporate credit asset based finance and insurance groups into a single new unit, Blackstone credit and insurance or Bx Ci.
We are very excited about the integration as we believe it will further expand the capabilities.
And scale of our platform and create more seamless experience for both our clients and.
<unk> by offering a one stop solution as the demand for private credit continues to expand the <unk> integration should allow us to better capture this opportunity for <unk>, specifically the integration to allow us to lean into our core key areas of differentiation.
They'll experts.
Expertise and value creation.
Taking those in turn as it relates to scale, it's not just about scale of capital.
But it's about the scale of the platform.
Scaled platform like Blackstone, often allows us to have deeper connectivity with M&A advisers with banks with corporates with sponsors all of which we extend globally.
As it relates to expertise I don't think Theres any credit platform that has as extensive reach in certain sectors as Blackstone, we have 950 technologists.
Support our different platforms, we have over 100 advisors, we have 28 Phds Mds doctors all of this.
Really helps us be smarter in certain areas of expertise like Tech software life Science healthcare.
And energy transition.
As it relates to value creation. This remains a core focus of ours, we aim to add value. After we make our investment in the company.
And as we have highlighted in the past over 90% of the companies, we finance to Blackstone credit are that our offer these programs use it.
So when I put all of that together.
We are the sole or lead lender and approximately 84% of the transactions in DSL.
This shows that companies seek Blackstone credit to lead their financing transactions, which allows us to better negotiate the terms the govern these loans instead of being a passive investor in the capital structure.
We believe passionately in these advantages and in developing a highly defensive portfolio. This predominantly senior and investing primarily in scale businesses and historically lower default sectors.
Relative to our peer set.
We believe <unk> leads the market on quality of income as I mentioned earlier quality of the portfolio, which we just discussed.
While all of the of our liabilities, which youll hear about later in the quality of our structure and alignment.
So with that I will turn it over to Jon Bock.
Thank you, Brad and Brad mentioned, a focus on building a healthy and defensive portfolio that we believe allows us to continue to take advantage of our expanded pipeline from a position of strength so jump to slide six.
We ended the quarter with $9 5 billion of investments. We also continued to delever modestly the funds leverage at quarter end was one eight times and quarterly average was $1. One one times and those are well within our target range of one to one five times. We also remain well positioned with $1 5 billion of liquidity.
Apprised of cash and borrowing amounts available across all of our revolving credit facilities to lean in to that expanded pipeline Brad mentioned.
Our weighted average yield on debt investments at fair value continues to increase steadily to 11, 9% this quarter and from 11, 8% last quarter, primarily driven by higher base rates, new investments continue to be accretive to our investment income.
Yield on new debt investment fundings during the quarter averaged 12, 2% while yield on assets repaid or sold down averaged 11, 6% improving our weighted average yield in the portfolio and importantly, the base rates over the third quarter expanded approximately 300 basis points and the 98 eight.
8% floating rate debt portfolio compared to the same quarter in the prior year.
In this environment of higher rates, we continue to focus on constructing a portfolio for resiliency and downside protection so jump to slide seven.
Since <unk> inception, we've been disciplined in building our portfolio to focus on first lien senior secured debt as we believe that its the most defensive place for investors, especially in a higher interest rate and slower growth economy and over 98% of BSL investments are in first lien senior secured.
Loans at over 95% of loans are to companies owned by private equity firms or other financial sponsors who generally have access to additional equity capital and historically has shown a willingness to support their portfolio companies.
These sponsors have significant equity value in these capital structures with an average loan to value of 46, 9% and <unk>.
Only stress the importance of seniority in the portfolio. We've also emphasized what we view as better investment neighborhoods or historically lower default rate sectors companies and sectors that we believe are facing more favorable tailwind consistent growth trends and specifically businesses that we believe have.
Stable growing margins revenue visibility strong management lower Capex and in addition, we focus on the larger scale businesses with significant market share greater ability to pass through price increases and that should be able to withstand a slowdown now looking at scale specifically <unk>.
Sell portfolio companies had a weighted average EBITDA of $185 million as of Q3 compared to $162 million as of Q3 last year.
This focus on higher quality lower default rates sectors in larger scale businesses is a key driver in our credit performance as supported by the fact that <unk> has less than 0.1% of loans on non accrual at cost compared to two 8% at cost for traded BDC peers are non accrual.
Rate declined from the previous quarter, driven by our restructuring in the third quarter.
Now slide eight focuses on our industry exposure, where we believe investing in better companies and better neighborhoods drive strong returns over time. This means focusing on key sectors with among other themes lower default rates lower capex requirements and approximately 90% of <unk> total portfolio is <unk>.
<unk> and historically lower default rate sectors, including software healthcare commercial services, which are some of the highest exposures in the portfolio now slide nine further outlines our portfolio quality. In addition to our focus on investing in higher quality lower default rates sectors <unk> portfolio is focused on investing.
And larger companies based on our belief that larger scale businesses are more resilient in the face of economic headwinds relative to smaller counterparts and that historically has had lower default rates. Our origination effort has been based on supporting companies of scale, because we believe that's where the most compelling risk adjusted return is found.
The slide indicates that the relative risk adjusted return of spread per ton of leverage for smaller deals versus larger deals has a slight disparity, but we noticed more substantial differences in underlying credit health based on data from Lincoln International private markets database larger companies.
Of a $100 million or higher in EBITDA have experienced seven times, greater LTM EBITDA growth and a default rate at an 80% lower rate than the company's measured at $50 million of EBITDA or less what we would refer to as the true middle market direct lending.
This is why we remain steadfast in our belief that larger scaled businesses handle the adversity of economic cycle cycles, better now turn to slide 10, we can see that <unk> portfolio company fundamentals compared to the private credit market as measured by Lincoln.
Paired to the private credit market <unk> average LTM EBITDA on the portfolio is nearly two times larger and has over two times higher growth and generates over 20% greater profitability and that leads me to the importance of interest coverage. We go deep into this discussion on the last call and it's our goal to.
Continue to provide this level of portfolio transparency, so let's dive into it according to Lincoln today, nearly 20% of the private credit market has an interest coverage ratio below one at five 5% forward base rates.
That 20% over 70% are companies with $50 million in EBITDA or less as the pressure of higher rates built we believe we will see dispersed in the market as not all private credit is created equal for <unk> cel. The LTM average interest coverage ratio was one eight.
Times versus the private credit market average of one five times and we when we run interest rates forward at five 5% that brings <unk> average ICR to one six times versus the private credit market at one four and we attribute this stability to our focus on larger more profitable higher growth businesses.
Yes.
And when we assess the tails for <unk> portfolio on an LTM basis, 3% of the portfolio Hasnt ICR below one times and on a forward basis at five 5% range. We can see that we would have 10% of our portfolio with an ICR below one compared to the broader market of 20% mentioned earlier.
About double <unk> exposure and of that 10% with a one times ICR at five 5% base rates about half of that is associated with transactions originally structured as higher growth investments with lower icr's, namely <unk> facilities that exhibit still year over year growth.
<unk> will not tell the story of performance in our view the tails will and we seek to limit our tail risk through our focus on choosing what we believed to be better larger businesses and historically lower default sectors disciplined underwriting and proactive portfolio management, we continue to see favorable results in the portfolio.
Palio.
We're also focused on protections in the agreements governing our loans with over 85% of <unk> loans measured by fair value documented to provide at least one financial Covenant. In addition to leverage and liquidity covenants. We also focus on key protections not commonly seen in.
Gated loans Blackstone credit maintained an in house team focused on legal documentation, who review and aim to ensure the quality of our private loan documentation and as a result, 100% of the deals held in <unk> cel, where Blackstone credit was a lead lender have protections against asset stripping and collateral release and turns.
Two amendments we had 44 amendments in the third quarter approximately 95% of the amendments there were technical audit extensions add ons and another 5% were related to refinancings and repricing and there were no amendments during the quarter related to covenant relief or immediately take relief due to.
Inability to pay interest and principal and so jump to slide 11.
<unk> is now delivering an increased dividend distribution of <unk> 77 per share a 10% increase quarter over quarter and a 45% increase since our IPO two years ago. Our increased dividend is covered at a ratio of 123% by earnings and as you can see we've continued.
To focus on delivering high quality yield to our shareholders building a level of confidence through continuing to raise our base dividend. While also steadily building NAV per share and we believe that speaks to the fund's ability to deliver for our shareholders. Despite macroeconomic headwinds and with that I'll turn it over to Carlos.
John our people are our most important resource with over 500 professionals, we have the scale and bandwidth to inform investment opinions on over 3150 corporate issuers.
We take those valuable insights and plough them back in to be X or sales investment process through portfolio monitoring and origination to drive PX yourselves investment performance.
The performing credit investment Committee has worked together for an average of 16 years and that continuity helps us refine our investment process.
<unk> sells inception, our global private credit investment team has grown meaningfully.
While we've only seen a few departures among senior investment team significantly involved in our North American direct lending strategy.
Blackstone credit has a team of senior investment professionals, who engaged with hundreds of the top financial sponsors. We transact with in addition, we have a dedicated team that cover strategic relationships with M&A and sales side advisers globally sharing pipeline and joint.
Investment opportunities that often drive deal flow.
We also leverage our sector expertise and insights across the credit platform with over 100 Senior advisors 950, technologists and over 50 data sciences across Blackstone, providing us with valuable perspectives on how we invest while also help.
US monitor our portfolio.
Blackstone's deep platform can benefit.
So in other ways.
Stone growth.
Private equity platform.
Real estate.
Life Sciences strategic partners, GP Stakes business and tactical opportunities all offer deep insights and support deal flow from Phoenix, and so widening our funnel.
That's made possible from a platform with the size and scale of Blackstone.
In an increasingly competitive private credit market, we differentiate ourselves.
Mining more than just capital to our portfolio companies.
<unk> borrowers are offered full access to Blackstone credits value creation program through cross sell opportunities cost savings procurement and capabilities, including cyber security and data science all at no additional cost because we understand the end.
Benefit to the investment portfolio.
I Echo Brad's point earlier on the strength of our deal pipeline.
Two our origination franchise that benefits from the scale and platform of Blackstone.
Let me walk through a recent transaction, we led in which the combination of our platform advantages came into play.
Blackstone credit was the sole lender of the recently announced $3 billion merger of health comp and Virgin pulse by New Mountain capital.
Top tier sponsor with deep expertise in the healthcare sector.
We believe a.
A number of factors differentiated us from other private credit lenders.
Our scale and our ability to deliver a one stop solution for the entire capital structure.
Blackstone credit committed to 100% of the financing.
A large commitment across various levels of the capital structure.
This is where scale really matters, especially when confidentiality is critical or in a situation, where our sponsor can only call one or two partners.
We have an excellent relationship with the sponsor New mountain capital and led to a number of existing portfolio companies. In addition, Blackstone has a broader relationship with new mountain across the firm.
That doesn't mean, we lead every deal for them our relationship is strong and presents us with opportunities to work closely with them.
We talk about incumbency, leveraging our existing portfolio.
And this is a great example across our private and liquid credit platform.
Prior to this deal we were the existing lead private lender to health Com and we will also an existing lender to Virgin pulse on our liquid credit side and they're broadly syndicated loans.
We knew both company as well and like their credit merits and individually, which added to our conviction and the merger.
Finally, the Blackstone credit value creation program has multiple levers to pull to assist our combined company.
Particularly on potential cross sell opportunities across the broader Blackstone portfolio.
This has been demonstrated during the last three years when Blackstone credit was a private lender to help calm.
We believe our value added capabilities truly differentiate us as we are no longer just a lender to health comp, but also a value added partner, who aims to help grow equity value.
As another example in black and VX hotels portfolio, our Blackstone credit value creation team worked with our health care services company to prepare for a $15 million firm wide procurement project.
And we already know the first stage of this project yielded approximately 20% in savings for the company.
We believe our engagement on this project and not only improved our financial results, but also helped professionalize the procurement function of the borrower and view. This as another instance of being a value added partner.
Parallel to our borrower experience, we are highly focused on shareholder experience.
<unk> has among the lowest fee structures expense ratios and cost of debt of our peer set as well.
The end of the second quarter.
Which allows us to pass on more returns to our investors.
Additionally, 100% of deal fees.
<unk> are paid to <unk>.
We believe these are important points of distinction.
Does that complement our strong results and strengthen our ability to continue to drive attractive risk adjusted returns for our investors and with that I'll turn it over to Ted.
Thanks, Carlos I will start with our operating results on slide 12.
In the third quarter <unk> net investment income was $161 million or <unk> 95 per share. Our total investment income was up $57 million or 25% year over year, driven by increased interest income primarily due to higher rates payment in kind or pik income remained flat year over year and.
It's less than 4% of total investment income.
GAAP net income in the quarter was $171 million or $1 and <unk> <unk> per share up from 58 per share a year ago, driven in part by 21 million of net unrealized depreciation this quarter.
Our net investment income yield of 95 per share represented a 14, 4% annualized return on equity.
Accordingly, as Brad mentioned, the quality of our earnings remains high with limited payment in kind nonrecurring and fee driven income interest income.
I'm, excluding pick fees and dividends represents 96% of our total investment income in the third quarter.
Turning to our balance sheet on slide 13, we ended the quarter with $9 5 billion of total portfolio investments of which 98, 8% are floating rate loans with a weighted average yield at fair value of 11, 9%.
This compares to less than $5 billion of outstanding debt with a weighted average cost of just over four 9%.
That spread between our floating rate assets and lower cost mostly fixed rate liabilities provides the company with potential for additional earnings growth if rates continue to rise.
As a result of strong earnings in excess of our dividend in the third quarter NAV per share increased to $26 54.
Up from $26 30 last quarter.
Next slide 14 outlines our attractive and diverse liability profile, which includes 56% of drawn debt in unsecured bonds. These unsecured bonds have a weighted average fixed coupon of less than 3%, which we view as a key advantage in this rising rate environment.
We maintained our three investment grade corporate credit ratings and <unk> was the first listed BDC to receive an improved outlook from stable to positive by Moody's.
We ended the quarter with approximately $1 5 billion of liquidity in cash and Undrawn debt available to borrow. We believe this provides us with significant flexibility and cushion average fund leverage was 111 times over the quarter and ending leverage was one eight times.
Based on our pipeline activity, we would expect to remain within our target of one to one and a quarter times through the balance of the year.
Additionally, we have low level of debt maturities over the next few years. The next maturity date for any of our outstanding debt facilities in 2025 with only 6% of debt maturing within the next two years and an overall weighted average maturity of three five years.
We continue to believe <unk> is well positioned to maintain earnings in excess of our dividends as rates on 98, 8% floating rate debt investments have continued to reset higher as Brad and John mentioned, while floating rate debt brings higher yield for investors. It also may result in more pressure for our borrowers.
And to that end, we established a chief investment officer several years ago aimed at leveraging data insights and resources are unique to Blackstone to enhance investment and portfolio management processes to ultimately drive positive outcomes across our portfolios. We believe early intervention and proactive management will be a key driver.
Driver of differentiation across managers through this cycle. Today. This team has nearly 60 individuals which includes resources dedicated to the financial re underwriting legal and restructuring expertise data science and operational asset management, we deploy quantitative screens on a regular basis and have an independent review process for <unk>.
Assets that we deem to be on our watch list ultimately rolling up the senior Blackstone management, we've applied lessons learned from over 17 years history, managing direct lending portfolio through cycles and have established a culture and process that supports and encourages early intervention benefits from unique insights across Blackstone and the <unk>.
Ploys specialized resources to our portfolio of companies.
In conclusion, we remain positive about the company's outlook, given our healthy and defensive portfolio positioning with portfolio company earnings grow growth outpacing the broader direct lending market.
Ample dry powder to deploy into a large opportunity set and continued elevated earnings power along with low cost financing sources, all of which is backed by Blackstone platform advantage, providing for premier sourcing resources and an infrastructure built to protect investors' capital.
With that I'll ask the operator to open it up for questions. Thank you.
Thank you as a reminder, please press star one to ask a question.
Ask you limit yourself to one question and a follow up to allow as many questions as possible. We will go first to finian O'shea with Wells Fargo.
Hi, everyone. Thanks, Good morning, just a housekeeping question.
Fee waiver lapse.
Pursuant to the two year anniversary last week or so.
Yes <unk> this.
This is teddy yes, the fee waiver ended October 28.
2023.
Okay, great. Thank you and a.
Question on leverage Brad you mentioned it's.
Still within your target range, but that's obviously come come down some this year and that has an impact on returns. So we're seeing how you feel about the.
The pipeline.
As you see it today and if we could expect to see this come off the low end or if we need a real market come back to see that.
Thanks fin.
<unk>.
Following my comments.
Pipelines picked up quite a bit.
And you saw that in the third quarter with our commitments being 600.
$50 million or so.
In the fourth quarter, just from the overall Blackstone credit pipeline standpoint.
Probably the busiest we've seen it all year.
And I think Thats, just indicative of a little bit more of an active M&A market.
But also existing portfolio companies looking to do more things, whether it's add on financings whether its recapitalization. So.
I would expect fin.
And you can never perfectly time deals, which is always the tricky thing, which is why we give a range.
As we get towards the end of the year, you could see us get a little bit higher than where we are today.
Awesome. Thank you and if I could sneak in a third I appreciated John's color on on the amendments.
That.
<unk>.
None came from covenant or pick release I was curious if anyone asked for covenant or pick relief.
No.
Good.
Awesome. Thanks, so much.
Yeah.
We'll go next to Robert Dodd with Raymond James.
Hi, and congrats on the quarter.
The pipeline and to your point.
The commitments in Q3.
If we look back over the last multiple quarters the gap between commitments and fundings was.
<unk> was much more substantial than normal can you give us any any color on that was that <unk>.
People are looking.
To start making acquisitions in setting up the financing them first of all can you give us any color on.
What was the reason for the logs.
Should we expect that to be recurring going forward.
Just timing.
So actually.
A handful of those are already funded in the fourth quarter. So we just made the commitments towards the end of the third quarter.
Usually it takes 30 to 60 days for some of these deals to close so that's all that's the gap and the number Robert got it got it. Thank you and then as it really look too.
Two next year.
Obviously, I mean, you've maintained archive firstly do you expect to see.
Some structural changes in climate the deals getting.
With rates being elevated in terms of maybe seeing lower leverage on a first lien.
During the whole stack with somebody coming in.
Find.
We're going to take a bit of.
A bit more risk than you are willing to do because obviously I mean on some of the large unit tranches. If it's at six times with rates where they are.
Eight times or whatever it is.
Versus do you expect to kind of.
The market to shift in terms of how some of the less which is structured as we go through next year, if it's more active with rates being so elevated.
Yes, yes.
Seeing that now.
Because you are right to point out with higher interest expense.
Companies are being set up with less leverage.
In order to service their data appropriately so.
Saw that a little bit in the quarter, our average loan to value was 35, 9% versus our historical LTV, which is in the kind of mid forties.
So you're seeing companies put on less leverage.
And yes in some cases, you're seeing a preferred equity piece get put in behind that.
The senior debt.
In order to kind of how the equity sponsor fund some of these transactions.
But this is.
I'm glad you pointed out because it's what we get excited about in this environment is.
Youre seeing more yield so more return primarily because of base rates.
But youre also seeing better companies come to market.
With less leverage.
And lower loan to value so more return and less risk is kind of how we think about it and it.
We'll drive our portfolio construction going forward, because you don't actually need to take a lot of risk in this market to get a very attractive return relative to most other asset classes.
Got it thank you.
We'll go next to Ken Lee with RBC.
Hi, good morning, Thanks for taking my question.
Just one on the potential implications of the integration of the Bloxom credit.
Sure its platform.
How do you think about potential changes.
And the portfolio mix or originations over time based on the integration. Thanks.
Yeah.
So appreciate the question Ken so.
I don't think it has any.
Implications for our portfolio construction.
What it does for us it gives us a bigger team.
With more exposure to sponsors with more exposure to corporates.
Because at the end of the day, what we're offering these clients is more solutions.
<unk> will continue to be focus on senior secured corporate credit top of the capital structure.
A very kind of simple strategy, but when we're out facing clients for that much more relevant to them because we can do an asset base facility and we can do some.
More junior in the capital structure.
Have more points of connectivity more people more scale more resources and Thats the power of the <unk> integration.
As you look at the private credit asset class expanding.
Those managers that can provide multiple solutions will become more relevant to our clients.
Got you very helpful. There and just one follow up if I may in terms of some of the recent deal activity in terms of some of the newer investments.
Could you just talk a little bit more about.
Trends that youre seeing in terms of.
Deal terms docks protections just wondering.
If theres been any changes there thanks.
Well I would say a couple of things.
Spreads have come in a little bit over the course of the year.
But I attribute that more to what I was saying earlier, which the the the risk has gone down.
As rates are look like they're going to stay higher for longer capital structures are being set up.
With less leverage and therefore as spreads have come in a little bit which is a trade that we will take all.
All day.
So that's maybe one trend.
The public markets were briefly opened now they're they feel a little bit shaky again.
So that gives us a lot more leverage as it relates to negotiating docs, especially for the larger deals one of which Carlos highlighted.
In his prepared remarks, so I would say by and large.
It's very very.
Attractive both from a.
Our return for a level of risk and from a documentation standpoint.
Okay.
Got you very helpful. There. Thanks again.
We'll go next to Paul Johnson with <unk>.
Hey, good morning, guys. Thanks for taking my questions.
Just kind of adding on a little bit to Ken's last question.
How long do you think.
The terms that you guys are seeing today.
As you know I guess be sustained in the market.
I guess.
Listen to them and what is the date.
Probably.
Curtis threaten that a little bit and is it all predicated on the CLO market kind of returning or what how long I guess do you guys think private market Ken.
What's going on today.
If you look at the U S.
U S leverage finance market, it's a little over four trillion.
Private market has grown from $70 million when we started to.
Two a little over a trillion dollars.
We expect that there is a lot more runway.
Under the premise that the private solution.
For some issuers, regardless of whether the public market is open or closed is a much more attractive solution for them and the best evidence of that was the largest growth period for private credit was 2021, when the public markets we're wide open.
And sponsors we're looking for privacy they were looking for certainty they are looking for flexibility.
So we're very bullish on the long term trends of private credit now getting to my earlier comments on spreads.
Spreads will move around a little bit.
But it's not spreads that's driving returns right now in private credit. It's most of most of its coming through.
The increase in base rates and so the returns in private credit will be predicated on your view and our view on how long, we think base rates or interest rates will stay a higher our view is that they will stay higher for longer.
They may move around a little bit, but long term trend is actually quite good so.
The market opportunity is there for those investors, who can create deal flow not just rely on the M&A market.
And returns should stay very robust.
And in this rate environment.
I appreciate that.
One last one just kind of a more general question, but I'm just curious as your portfolio has a decent amount of software related companies.
This is the case.
Pretty much across the sector as well.
But I'm curious as your thoughts in terms of just the evolution.
It would seem.
It could be that big.
A big game changer for some of your companies.
A positive and a negative way.
As that proliferates.
Seems there could be an opportunity to maybe cannibalized I guess parts of the software sector. So I'm just curious I mean do you guys have any kind of broader.
Broader thoughts on how that technology changes I guess, the underwriting story of the software sector.
So that is a five hour conversation.
What I will say is black.
Blackstone has been leading the charge in terms of understanding AI using AI integrating that part of our investment process. So this well it may be new to kind of everyone. On this call over the past three to six months.
Because of chat GPT.
Is not new to Blackstone. So every underwriting that we've done in this space.
Hi.
AI has been at the forefront of our decision making.
Has this app applications, and where it's going to be impactful and where it's not going to be impactful. So.
The shorter answer to the five hour answer is we think about it a lot.
We don't see it having issues on the portfolio that we selected.
In this space.
But youre right it will have implications in parts of the market.
I appreciate that Brad that's all for me.
We'll go next to Melissa Wedel with JP Morgan.
Thanks for taking my question.
I wanted to follow up on one of the comments from the prepared remarks I think it was Brad you were talking about expecting some dispersion in the market.
I think that was related to sort of the higher for longer environment and the pressure that could put on credit.
Just hoping you could elaborate on that and if it doesn't incorporate a view on how you expect the credit cycle to overall could you add that in thank you.
So higher rates are meant to slowdown in the economy.
And so it has two areas of impact on portfolios one.
Rates, obviously consume more cash so.
It puts a little bit of pressure on People's cash flows.
And secondly.
If you are more correlated to the.
The overall health of the economy.
Then you're going to have some potential earnings topline pressure, so that kind of in.
That is the driver behind our remarks that higher rates are meant to cause a little bit of a slowness.
So as I think about kind of where we'll feel that next year.
Because really this most of this year were just because of the lag on rates because of interest rate hedges.
You haven't seen the full impact of higher rates this year.
So as you think about next year.
It's going to be felt in sectors.
That typically don't generate a lot of cash.
So that probably means because they're more capital intensive and industrial manufacturing business.
Could be.
Smaller business.
That just has less diversity of revenue.
May have higher customer concentration.
It has less.
Maybe.
Talent and its and its senior management.
So we think the stress in the system will be driven by which sectors are in and the size of your business.
And then of course layer and the further up the capital structure you are at the kind of the better protected you will be.
Older vintage John talked to the tail end of <unk>.
<unk> will become more of a focus.
<unk> and portfolios. So if the company was already struggling a little bit.
Next year won't make it any easier so.
That kind of was the driver of my comments and when we talk about it internally, we talk about the three assets, which will really.
Drive performance and dispersion and that seniority.
That sectors and Thats scale those for us have been the driving factors when we're building the <unk> portfolio.
Thanks, Brad.
Do you have any broader thoughts about what you expect to see across the space in terms of defaults and non accruals. It seems like what's come up so far has been pretty manageable and we think some restructuring just wonder if you expect that to continue to be sort of a one off in nature or if you're expecting some sort.
Product weakening.
Perhaps along the lines of the things that you just talked about more capital intensive businesses smaller certain factors. Thanks.
Well.
Don't have a crystal ball, what I would say is.
And we look at our how everyone else is doing too I think everyone is.
Probably a little bit surprised this year how well.
Their portfolios have done you haven't seen a big uptick in non accruals.
I think <unk> gave some stats on the year over year growth and earnings of our portfolio companies, which is actually quite strong.
And obviously non accrual is point something in our portfolio is almost nonexistent.
I would say next year you could see.
The market default rates tick up in <unk>.
Some sub sectors of healthcare and industrial manufacturing retail anything touching kind of the housing market and consumer so.
I would say you have to look at People's portfolio.
Composition and that will.
I think maybe better answer your question, yes, Im sure Theyre stats, the jpmorgan and others have out there for <unk>.
Default rates switches.
4% or so.
So that may be another kind of number you could you could use but it really really comes down to and I've heard others say that next year will be more dispersion driven by these these areas that I've I've mentioned.
Thank you.
As a reminder, star one if you would like to ask a question.
We'll go next to Mark Hughes with Trust.
Yes, thanks, good morning.
Just following up on that.
You mentioned that the higher interest rates are meant to slow down the economy do you think that will work.
Okay.
Yes, I do think it will work.
It's it's you start to see kind of a change.
Change in the labor market, so you're starting to see the effects of higher rates.
You see it in portfolio companies and and the impact on how much excess capital they have to spend on growth.
So all of that is slowly starting to have.
Impact whether it has the full desired impacts that the feds, hoping that will a little bit depend on how long they keep rates elevated.
But yes, it will certainly.
You have the desired effect I think whats debatable, how long and how deep.
You mentioned spreads have come in a little bit, but I think attributed to that.
Largely the deal structure.
Theres been more competitive pressure there is a lot of dry powder among private equity has put a lot of it.
Dry powder, presumably among direct lenders.
If you felt that or do you think it's still insulated from that.
And some deals are actually being quite competitive.
And other deals less so.
And but in terms of how deals are ultimately getting price I think there is a fair amount of discipline.
And the market again accompanies taking a turn on turn and a half less leverage.
Rising that spreads for those deals are a little bit lower than what they might have been for.
A more leveraged structure.
I would say kind of the large end of the market.
Which we tend to like.
<unk>.
That the public markets just haven't been opened for those deals.
The deal that Carlos mentioned as a $1 billion six we were the sole lender.
That's a really good dynamic for us because we can customize the solution for the sponsor and and and.
And set it up with the right pieces of the capital structure to allow them to <unk>.
To grow contrast that with.
$200 million lower middle market deal that may be more competitive because theres been a lot of new capital raised by new entrants.
They can all right smaller.
Tickets so.
Will really depend on where the deal was created.
How it comes to market.
And the size of that deal.
I appreciate it thank you.
We will take our final question from Eric <unk> with Citi.
Thanks, maybe you could talk a little bit about.
Conversations with equity sponsors.
Whether or not you see them kind of starting to accept.
The different environment, we're in where equity valuations, where they maybe previously expected are now down to lower levels.
What will necessarily be needed to get folks to that point.
Is it just a matter of time.
And a little less volatility in the market.
Yes evaluation evaluations will come.
Have to come down.
Youre seeing that in new deals get done I think they're probably end by two turns.
In the second half of the year.
So I think it's it's coming through.
Buyers and sellers will always have a different view, but as you point out the structures of their private equity funds.
<unk> them, a little bit to transact.
And that will kind of accelerate.
Yeah the bid ask.
And get.
Get it closer together.
I think we're maybe another.
Three six months away from that.
That acceleration picking up a lot of our deal flow right now Aaron is is just coming from our existing portfolio so coming from our incumbency.
And not necessarily just from M&A.
So whether it's on a public deal that were taken private or whether it's our private companies that are looking for.
To do acquisitions.
Versus new platform investments, that's what's driving activity right now.
But I do think next year, you'll see this youll see the bid ask them closer together.
<unk> start to accelerate.
Thank you.
Thank you that will conclude our question and answer session I would like to turn the call back over to MS. Wang for any additional or closing remarks.
That would wrap up our call for today. Thank you everyone for joining us and thank you for all the great questions and we look forward to speaking to you next quarter. Thanks, everyone.
Goodbye.
Okay.
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