Blackstone Secured Lending (BXSL) Q2 FY26 earnings call: the analyst Q&A

Why not restructure underperforming assets into equity to more directly recover lost NAV, given the focus on maximizing recovery?

Management considers various factors in each restructuring to align with the company's earnings power. While some debt may be converted to equity, the primary goal is to set up a sustainable capital structure. Historically, BXCI's restructurings have shown a 0.93 recovery rate (excluding coupons) on exited positions, demonstrating the effectiveness of their approach.

“So every restructuring, we take into a lot of different considerations on restructuring the balance sheet. We want the balance sheet to be done in a way that aligns with the company's kind of earnings power.”

asked by Finian O'Shea · answered by Brad Marshall

Is the current target leverage (1x-1.25x) too high, potentially constraining buyback flexibility, and are managers rethinking this?

The company has prioritized deleveraging, with current leverage below prior quarters, aiming for the 1x-1.25x range. Increasing repayment volume (21% annualized in Q2) is expected to create more balance sheet capacity, allowing for greater flexibility for buybacks or new deployments at wider spreads. They will balance both approaches.

“We had 21% annualized repayments in the quarter, similar level of visibility in the future versus we've had the last few quarters. So as we look forward to the back end of the year, that flexibility should continue to trend towards the mid- to high end of the range. That creates more flexibility to buy back shares.”

asked by Finian O'Shea · answered by Teddy Desloge

How divergent are terms, pricing, and structure across refinance activity, restructurings, and new market investments?

New investments and add-on financings for underpriced loans typically see spreads 25-50 basis points wider than last year. Restructurings vary, with spreads potentially 25-100 basis points wider depending on the capital structure and equity involvement, aiming for flexibility or alignment with new capital.

“Overall spreads relative to last year, we would say, is somewhere between 25 and 50 basis points wider. And that has been reflected in our marks. We had to take the markdowns because of the spread widening.”

asked by Richard Shane · answered by Brad Marshall

How long will the company use spillover income to cover the dividend shortfall, and what scenarios are considered for long-term earnings power regarding base rates and spread outlook?

The use of excess earnings is a temporary bridge, not a long-term solution. The Board continuously evaluates the dividend, aiming for a lower, sustainable level that accounts for potential adjustments in earnings due to lower base rates and maturities of lower-cost investment-grade bonds. This is expected to be a short-term transition.

“What we said was we would use excess earnings as a temporary bridge in the near term to transition. And this quarter is consistent with that approach. We did cover the shortfall by previous earnings that was a NAV, and that's after 28 consecutive quarters of meeting or exceeding our dividend.”

asked by Melissa Wedel · answered by Teddy Desloge

Given the high risk of re-default after restructuring, how does BXSL ensure its restructurings are successful and avoid subsequent failures, especially with large deals like Medallia?

Management agrees that restructurings must establish the right capital structure for business success and growth. They leverage 20 years of BXCI experience, including lessons from past failures, and utilize a 120-person CIO office and restructuring team. This expertise has resulted in a 10 basis point loss rate over two decades, indicating effective restructuring strategies.

“The only reason why you go through these restructurings is to reset the capital structure, give the company cash flow so they can reinvest in the business and reposition them to grow. That is what restructuring is all about.”

asked by Robert Dodd · answered by Brad Marshall

Is the bottom 10% of the portfolio a contained subset, or is there a risk of expansion due to maturity walls from older vintages?

The bottom 10% is considered a contained subset, and the percentage of assets marked below 90% and 85% actually decreased this quarter. Many of these are older vintages that haven't grown into their capital structure, but sponsors are often injecting more equity. The overall portfolio continues to perform well, and there's no indication of the tail expanding.

“I don't see that tail really -- we don't see it in the statistics that we look at as expanding. It's fairly contained, and we're working through it.”

asked by Paul Johnson · answered by Brad Marshall