Good day, and welcome to the Blackstone Secured Lending's Third Quarter 2025 Investor Call. Today's call is being recorded. [Operator Instructions] 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 Blackstone Secured Lending Fund's Third Quarter Conference Call. Joining me today are Brad Marshall, Co-Chief Executive Officer; Jonathan Bock, Co-Chief Executive Officer, Carlos Whitaker, President; Teddy Desloge, Chief Financial Officer; and other members of the management team. Earlier today, we issued a press release with the 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 Factors section of our Form 10-Q filed earlier today. This audio cast is copyright material backfill and may not be duplicated without consent. With that, I'll turn the call over to Brad Marshall.

Great. Thank you, Stacy, and thanks for joining our third quarter earnings call. I will begin with some thoughts on the current environment and our views heading into year-end. Last quarter, we addressed the positive trends reemerging with markets opening back up, equities hitting all-time highs and inflation staying muted. Now we believe we can keep capitalizing on a few key themes that may continue to yield returns for our investors. Firstly, deal activity has continued to accelerate, which is consistent with what we have seen in past periods when cost of capital starts to come down and valuations improve. In part as a result of increased deal activity, leverage in BXSL ended at 1.22x after averaging close to 1.15x for the quarter. Secondly, despite falling base rates during the quarter, we saw new deals at an average spread of 544 basis points over the base rate, inclusive of amortization of OID to maturity. And total fundings during the quarter averaging 556 basis points above the base rate, the majority of each of which were first lien. Lastly, overall, we saw stable underlying fundamentals and growth in our portfolio, with the majority of the assets flat or marked higher in the quarter. Non-accruals dropped to 0.1% of costs remaining the lowest among our traded BDC peers. Despite all these positive trends, there have been external narratives around bubbles and rising default across the credit markets. What we are seeing on the ground and across over 300 credits we are invested in is in direct contrast. Firstly, as mentioned earlier, M&A activity is picking up. In fact, as of the third quarter, it is up 63% year-over-year, consistent with what we discussed with all of you regarding our expectations at the start of the year. And with more companies choosing to…

Thank you, Brad. Let's turn to Slide 6. We ended the quarter with $13.8 billion of investments at fair value, over a 15% increase year-over-year from $12 billion. In 3Q alone, BXSL also added 22 new borrowers to our portfolio by exiting 6 positions, netting a total of 311 companies. Ending leverage and average leverage kicked up compared to prior quarter at 1.22x and 1.15x, respectively, remaining in our target range between 1 to 1.25x. Our weighted average yield on performing debt investments at fair value was 10% this quarter, down from 10.2% last quarter. The yields on new debt investment fundings and assets sold and repaid during the quarter averaged 9.3% and 9.9%, respectively. Now turn to Slide 7. Nearly 98% of BXSL investments are in first lien senior secured loans and nearly 99% of those are the companies owned by financial sponsors that generally have significant equity value in these capital structures, demonstrated by an average loan-to-value of 49.7%. Our portfolio also has LTM EBITDA base averaging nearly $221 million, with year-over-year EBITDA growth of nearly 9%. This growth percentage is well above that of companies in the Lincoln International Private Markets database for last quarter. Although we've evaluated opportunities across the size spectrum as evidenced by our investment this year, we've seen continued strength of performance from larger companies relative to their smaller EBITDA counterparts in terms of higher growth and lower defaults, and we believe this trend may continue, given the Fed's latest rate cut announcement. We can see how investing in larger companies affects interest coverage. BXSL's portfolio companies average interest coverage based on LTM EBITDA was 2x in 3Q. And looking at the share of private portfolio assets below 1x interest coverage when you exclude recurring revenue loans, BXSL was at 7% of fair…

Thanks, Jon. Turning to Slide 9. BXSL maintained its dividend distribution of $0.77 per share as we remain focused on delivering high-quality yield to shareholders. We continue to believe BXSL's portfolio strength is owed to the scale and platform of Blackstone and BXCI, and we have used this to our advantage as we have expanded our book. Take, for instance, our view on AI. Blackstone made an early call on the importance of AI, and we believe BXCI has been at the forefront of adapting this into our portfolio. We consider AI as we evaluate investments and use Blackstone resources, including BX technology investments, the BX operating team and BX data science to help evaluate AI-related opportunities and support portfolio companies in adapting to change. And while BXSL has a larger concentration in software than other industries, our AI lens expands to our investments in healthcare technology, healthcare services, professional services, business services and insurance. In the current landscape, there are AI verticals that we believe have definitive headwinds that investors should be mindful of. We believe that in most instances, larger companies may be better positioned to defend and leverage AI. We also believe that there are tailwinds that may impact secondary beneficiaries of AI technology expansion, such as cybersecurity and data infrastructure and management. But it is worth noting, we aim to avoid verticals that we believe may be at higher risk of disruption, such as low-skill outsourced services or businesses centered around content creation, such as ad tech or Ed tech, of which BXSL has mid-single-digit percentage exposure in its portfolio. In addition, we try to avoid industries that are more cyclical in nature. If we just look at BXSL's software portfolio, our investments averaged over $4 billion in enterprise value and are well capitalized with significant…

Thank you, Carlos. I'll start with our operating results on Slide 10. In the third quarter, BXSL's net investment income was $189 million or $0.82 per share, representing a 106% coverage to our dividend on a per share basis. Total investment income for the quarter was up $14 million or 4.7% year-over-year, driven by increased interest income. We experienced increased repayment activity in the third quarter compared to the second quarter and with accelerating M&A and deal activity, Brad outlined earlier, we expect continued turnover activity in our portfolio throughout the upcoming quarters. Interest income, excluding PIC, fees and dividends, represented 91% of our total investment income in the quarter. Moving to our balance sheet. On Slide 11, we ended the quarter with over $13.8 billion total portfolio investments at fair value, nearly $7.7 billion of outstanding debt and nearly $6.3 billion of total net assets. NAV per share at quarter end was $27.15, down from $27.33 at the second quarter. NAV per share was supported by $0.02 from share issuance from our ATM program at a premium to NAV, offset by $0.09 of realized losses and $0.16 of unrealized losses in the portfolio, primarily concentrated to a small number of larger positions. As we look at the portfolio overall, the majority of the portfolio was flat or marked higher during the third quarter with nearly an equal number of markups versus markdowns. NAV per share was down $0.18 predominantly related to names previously highlighted. Taking a step back, as Brad and Jon highlighted, we saw healthy fundamentals across our portfolio with 9% EBITDA growth and increasing interest coverage ratios back to 2x as rate resets are improving cash flow profiles of our borrowers. Our nonaccruals of just 0.1% coupled with less than 1% of exposure valued below 80 are…

[Operator Instructions] We will take our first question from Finian O'Shea with Wells Fargo Securities.

First question on Square space. I guess, can you hit on why hang on to that? There was a pretty small junior allocation, it looks like in the main tranches plus 225 pretty -- is that indicative of how low you'll go? And otherwise should maybe more junior follow and a delayed draw or something like that?

Yes, Finn, thanks for the question. I'm happy to take that. I won't speak to specific situations, but from time to time for a high-quality company that has delevered, we do have multiple options to retain exposure versus losing it to what could otherwise be a significantly tighter price syndicated option. That can include potentially using a first out in some cases, where we view it's appropriate. From a spread perspective, overall, which I think is where you're going with the question, we actually saw spreads on new deals marginally increase quarter-over-quarter. I think we would characterize the environment over the last 3 to 4 quarters as relatively stable. As Brad mentioned, spreads on new deals overall, we're in the 5.25 contact with 3-year OID amortized. So relatively stable. We do have multiple tools in our toolbox.

And maybe said differently, Then, we look at spreads on a portfolio basis, and there may be specific reasons why individual assets may be structured a certain way. But as Teddy highlighted, spreads for the quarter, if you include the add-ons and delayed draw fundings were in the mid-500s.

Well, I guess a follow-up is what is -- does it really matter if new spreads are in the mid-500s if they're going to be repriced to 2.25 because that -- it's pretty tough math, that's inside of a lot of BXSL. So are we going to -- is this -- is the answer indicative of a lot more of this to come?

The answer is no.

Okay.

I also think from time to time, you might see a first out in a portfolio that thing gets sold over time. So I think to Brad's point, you can't really take one situation to draw broad portfolio conclusions. Overall, spreads have been pretty flat over the last 3 to 4 quarters.

Okay. Got it. And I guess the follow-up, just market-wide, I think you hit on some of this in the remarks, there's a lot of headlines out there that are hard hitting on private credit. Are you seeing any impact on the nontraded space, given your major, if not dominant, presence there on the nontraded BDC? Any impact do you think to the trajectory of flows on that part of the market?

So I'd say a couple of things, Finn. As you know, performance across the BDC market generally and more specifically Blackstone's BDCs has actually been exceptionally good. What you ultimately see in the BDC market is returns that are delivering a premium to what investors can get in the public markets. That's the real driving kind of value of the asset class and what's interesting is that when rates fall, the return premium that private credit delivers is actually more impactful. And think about 2021, we saw this when rates were near 0, you saw inflows from both institutional and individual investors actually grow despite the base rate environment we are living through. So the answer is there continues to be strong demand across all different types of investor bases for private credit.

We'll take our next question from Casey Alexander, Compass Point Research and Trading.

My first question is, obviously, there was a modest quarter-over-quarter markdown on Medallia. And just simply because of the size of the investment, I think investors would like to hear where that company stands. And we also noticed that their principal competitor is doing a large acquisition. So we wonder if in your view, that is changing any of the competitive dynamic between the two companies?

Thanks, Casey. Yes, there's no real update from last quarter on Medallia, and we believe it's marked appropriately. I think as the acquisition by Valtrex will take some time to integrate, but does not change the market backdrop. And so no real change there.

Well, I also noticed in your deck that your company revenues year-over-year up, your company EBITDA year-over-year is up, but also the loan-to-value has skipped up a little bit higher. And normally, I would think that if revenues and EBITDA were up that might be actually coming down a little bit. Can you speak to that dynamic? Does it have something to do with loan-to-value on newly originated loans? Or what's the principal reason for that?

Yes, sure. So loan to values on new deals for the quarter averaged about 45%, as we noted, is probably one of our busiest quarters in a long time. Across the portfolio, you're right, loan-to-value went from 47% to just under 50%. It's a fairly marginal move. And I think that's largely a product of enterprise values getting adjusted marginally lower on existing names which we think is largely an equity consideration. It's like saying the average enterprise of our companies was something like $3.2 billion, and now it's $3 billion. But most importantly, there's still $1.5 billion of equity subordinate to us. And so as we think about it from a credit standpoint, you're focused on the right things. The companies are growing, interest coverage is getting better, 98% of the portfolio is at the top of the capital structure. So nothing to read into anything there, just marginal changes.

We'll take our next question from Doug Harter with UBS.

Can you talk about the -- how you're viewing the outlook for the dividend as base rates come down and you have to refinance some more of your fixed rate debt?

Sure, Doug. So maybe we'll just start with the quarter, right, paid $0.77 dividend and earn approximately $0.82. So the payouts covered with room to spare, but the portfolio is in great shape, as Brad outlined, you've got low nonaccruals and levered equity base, which Teddy referenced, and importantly, an income, right, investment income that's high quality and most of all, predictable, approximately 90% come from cash interest. So it's not PIC or not fee related. Now right now, about 99% of the portfolio is floating rate, which has been a big win with rates being high, but when rates start to come down and the Fed is expected to take so far around 3% over the next year, we'll see some impact on earnings. Now some peers have already adjusted their dividends. And for us, the plan is to keep looking at the base dividend in light of where rates and earnings are headed and still make sure it stays competitive and sustainable. Now the good news is we have a cost and expense advantage over peers, and our latest bond deal swapped at around 155 over outlined that. And with more M&A activity expected, we see some opportunities, as Brad outlined, to put some capital to work. So it's -- we're in a good spot to be thoughtful about any changes to the base dividend rather than just rush into them. That's how we're looking at it this quarter and the quarters going forward.

Appreciate that. And just as you mentioned, if there is increased M&A and turnover in the portfolio, how do you think about that impact on the realized yields you have if portfolio turnover picks up?

Yes, I'm happy to take that. I think we've been messaging for some time that, number one, we expect activity to pick up. You clearly saw that. Number two, in line with that, you would expect repayment activity to pick up as well. You saw that to this quarter. So if those trends persist, we'd expect a continued trend that does represent a potential upside driver to returns versus what you saw in certainly the second quarter and previous quarters and lower repayment activity.

Yes, it probably has more of an immediate impact on earnings just given the acceleration of OID, the fees that we get from those refinancings. And then if the rate environment or the yield environment is a little bit lower, longer-term yields will be a tad lower on those new deals.

We'll take our next question from Kenneth Lee with RBC Capital Markets.

First one is just about the AI opportunities, and you highlighted a couple of different things here. Over the near term, what sorts of opportunities do you see potentially over the next coming quarters? Could this include, for example, debt financing and some of the infrastructure, what's appropriate for the vehicle here?

Yes. So obviously, AI is both a risk and an opportunity. We're spending a lot of time on the risk side, understanding what sectors could be impacted. We have -- I think we've talked about this before, 1,000 technologists across Blackstone. So our insights into areas of concern and risk are probably better positioned than most anyone in the industry. Your question was more on the opportunity side, and we think everything in and around the AI ecosystem is looking attractive, not from an application or technology standpoint. There's some -- we need to be cautious as a debt investor on where we want to invest, but more in the infrastructure and that includes equipment providers into data centers. So we just did a big deal for BXSL during the quarter called Layer Zero which Advent purchased. We just announced a deal last week, Sabre Power, which powers another attractive infrastructure play on the AI -- in the AI ecosystem. So you'll continue to see us play in the picks and shovels around AI and drive more secured type investments in that space.

Great. Very helpful there. And then one follow-up, if I may more broadly. How are you seeing in terms of the quality of deals that you're seeing? You've certainly seen a pickup in activity, but wondering how would you assess the quality of the deals that you're seeing so far?

Yes. I would say it's actually fairly good. We're seeing -- what's driving a little bit of the pickup in M&A activity, as I said in my opening remarks, you have a little bit more macro clarity. You have a lower cost of capital and those two things are driving improved valuations. And so buyers and sellers are coming a little bit closer together. And typically, when an M&A machine starts to pick up, it leads with the higher-quality assets. And those are the types of deals that we're seeing. As I just mentioned on the previous question, average loan-to-value of about 45%, so still sub-50%. When we started 15, 20 years ago, average loan-to-values were around 65%. So very good backdrop from a capital structure standpoint if you're investing at the top of the capital structure, which we continue to do. And then I would say there are certain sectors that we think will be better performers going forward, and those are the ones that we've invested in the past year and will continue on a go-forward basis for our investors.

We'll take our next question from Ethan Kaye with Lucid Capital Markets.

So you guys had strong commitment in net funding activity this quarter, which is great to see. I guess first question is how much of this was kind of incumbent versus new borrowers? And are you kind of seeing a shift in these proportions in the last quarter, recent months here?

Yes. Good question. Thanks, Ethan. So as we look at total activity in the quarter, which includes existing portfolio companies that are accessing DDTLs or doing add-ons in addition to new deals, over 80% of activity was to incumbent borrowers and over 70% or actually close to 75%, as Carlos mentioned, were sole leads. So I don't -- I wouldn't say that's in a different quarter than previous. That's kind of been consistent for a while. It goes back to our broad coverage across the sub-investment grade universe, cover or invested as a platform over 5,000 companies, that's somewhat of a fertile hunting ground for us for new deals. You saw that in the quarter.

And I would say just as a market backdrop, we're seeing about a 25% uptick in new LBOs. So going forward, I think you'll see a decent percentage of new deals come through the portfolio and into next year.

Got it. That's helpful. And then, I guess, somewhat of a follow-up. So given that leverage ticked up a bit, at the high end of your range, as you mentioned. And given that kind of share issuance ability is a little bit more constrained these days, should we anticipate kind of the level of deployment to be largely driven by portfolio turnover? Do you think there's capacity to kind of maintain these elevated net funding levels?

Yes, good question. Thank you. So well, first off, going into a period of heightened activity, very well capitalized, right, over $2.5 billion of liquidity, among lowest cost of financing, debt markets wide open, we issued a $500 million bond at 155 basis points spread over treasury. And to put that in context, that's about 50 basis points inside of where spreads were on bonds in 2021. So to your point, also seeing a pickup in repayment activity as the M&A market does pick up, we expect to continue to see that. And we'll watch the equity markets closely, an only issue if we see that it's accretive to both NAV and earnings based on the opportunity set in front of us. So in the meantime, we feel we're in a very good position and do have some visibility to increasing repayments as previously mentioned.

The pickup in M&A activity and turnover are directly linked, not surprisingly. So you'll see both those happen at the same time.

[Operator Instructions] We'll go next to Robert Dodd with Raymond James.

If I can go back to the LTV question quickly. I mean almost 50%, I think that's probably an all-time high in this portfolio, and it's up almost 300 basis points since last quarter. And there's also -- there seems to be a bit of tension. Brad, in your prepared remarks, you're talking to Ken, you said valuations in the market are improving, and that's one of the factors driving activity. But then explanation for LTVs going down as you're marking down the enterprise value for some of your portfolio companies. So can you give us a little bit more granularity on that? Is it trimming multiples modestly broadly across the portfolio for your enterprise value assessments or more concentrated in some larger assets where there are bigger negative adjustments?

Yes. I don't want to get into too technical of an answer on this point. But I'll give you an example, and hopefully that is helpful. If a company does an add-on financing where they had previously an equity position, let's just say that was $1.5 billion, that company may have improved in value and we may have financed it with the acquisition with debt. So it may look like the LTV has gone up, but it, in fact, is reflecting the original purchase price of the sponsor. So there's a lot of puts and takes on the LTV, Robert. I would tell you it's not -- it's -- as we look at it, it's not a story. It's not an event that concerns us just given the subordination that remains below our debt positions.

Got it. Got it. Sort of a follow-up, a little early. On spreads, I mean, in your opening remarks, Brad, you did say spreads are still attractive relative to other fixed income markets. We agree with that, right? I mean spreads are down everywhere. And private credit has persistently maintained the premium over the syndicated low market, call it, 150 plus basis points. Do you think there's risk to that 150 as we go forward given the amount of capital and the amount of competition?

I definitely do not think there's risk to that premium. If you take a step back and think about what private credit is delivering for companies, in the bank model, you approach a bank, bank underwrites a loan, goes to rating agencies, goes through a long distribution process and eventually prices that debt in the public markets. They charge a fee for that. Usually, that fee is somewhere between 2.5 basis -- 250 basis points to 300 basis points, depending on the -- all the other ancillary expenses. And you compare that to private credit, where I'm going to the same company and saying, work with Blackstone directly. We can give you $1 billion loan, you don't need to go through that distribution process. By the way, we can give you a little bit more of a tailored solution for you. And that is the value of what private credit brings to the market. It's the disintermediation of the bank distributed model and there's value for that. There's value for the company and there's value for investors. And so I strongly believe that, that premium will be maintained and at some point, will actually even be wider.

Got it. I hate to ask one more. Can you give us the estimated spillover currently to support the dividend?

Yes, $1.89.

We'll take our next question from Melissa Wedel with JPMorgan.

Definitely noticed the resilience in interest income this quarter, especially given the pickup quarter-over-quarter, and I was wondering if there was anything onetime or outsized showing up and impacting the 3Q revenue number?

Yes. Thanks, Melissa, I think as you look at our interest income profile overall, what you see is quite a bit of recurring nature, right? We have, as I mentioned, 91% excluding -- 91% of interest income excludes PIK and onetime fees. We did have a little bit of repayment activity. The impact of that was maybe $0.03 a -- so I think overall, as you go back to our policy from an accounting perspective, right, all OID and upfront fees are amortized over the life. And so that leads to more stability or we believe leads to more stability over a long period of time.

Okay. That helps. And it sounds like with the pickup in M&A activity and deal volumes, you're seeing some attractive opportunities. I'm curious how the opportunity set here in the U.S. now that it is sort of reaccelerating, how does that compare to what you're seeing outside of the U.S., which I know has a small exposure in the portfolio?

Yes. I would say Europe as being the primary market that's most developed outside of the U.S., probably sees terms that are a little bit wider to what you're seeing in the U.S. The market is just not as developed. The capital markets aren't as deep. There's not as many competitors and so as that market starts to reaccelerate as well, there's a slightly better backdrop in Europe than the U.S. Both are attractive clearly, but you see about a 25, 50 basis point spread premium in Europe. And in Asia, it's a little bit of a market that's still developing for the most part and probably not a great comp.

We'll take our last question from Arren Cyganovich with Truist Securities.

I just wanted to talk a little bit about the commentary of investment activity picking up because the cost of capital coming down and macro getting better. The macro still seems kind of squishy and part of the reason that rates may be coming down is that there is a little bit of macro uncertainty along with the slowing inflation. What -- I guess what are your -- what's your experience in the past in areas like this where you have the cost of capital coming down, but macro still has some uncertainty in it?

Yes. Let me just comment broadly on the economy because you are correct, we did highlight that it feels like the economy, the backdrop is good. Corporate balance sheets are good. Earnings, as we see them reported publicly, are strong. We're seeing that in our portfolio as well. I think we mentioned 9% earnings growth. There are pockets of weakness most certainly. And you see that in the cyclicals. You see that in smaller companies. You see that in companies that are exposed to the lower end of the consumer. Tricolor is a good example of that. And then you see some businesses that are more impacted by AI. So it's not without challenges, but -- so it really depends on where you're invested. But importantly, as you think about rates, rates are primarily looking at inflation. And inflation is coming down. The labor markets are cooling, shelter, costs are lower, and that's really what the Fed is focused on when they're setting their interest rate policy.

With no additional questions in queue, I'd like to turn the call back over to Stacy Wang for any additional or closing remarks.

Thank you, and thanks, everyone, for your participation in our call this morning. We look forward to speaking to you next quarter. Thanks again.