PriceSmart Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the Blackstone Secured Lending 4th Quarter and Full Year 2023 Investor Call. Today's conference is being recorded. At this time, all participants are in a listen only mode. At this time, I'd like to turn the conference over to Stacy Wang, Head of Stakeholder Relations. Please go ahead.

Speaker 1

Thank you, Katie. Good morning, and welcome to Blackstone Secure Lending Fund's 4th quarter and full year call. Earlier today, we issued a press release with a presentation of our results and filed our 10 ks, both of which are available on the Shareholders 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.

Speaker 1

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 ks filed earlier today. This audiocast is copyright material of Blackstone and may not be duplicated without consent. With that, I'll turn the call over to BXSL's Co Chief Executive Officer, Brad Marshall.

Speaker 2

Thank you, Stacey, and good morning, everyone. Thanks for joining our call this morning. Also with me today are Co Chief Executive Officer, John Bach and our President, Carlos Whitaker and our Chief Financial Officer, Teddy Delos. Turning to this morning's agenda, I will start with some high level thoughts before turning it over to John, Carlos and Teddy to go into more details on our portfolio and the 4th quarter results. So just turning to the slide deck that we posted and if we start on Slide 4, VXSL reported another strong quarter of results including growth in net investment income, increased net asset value and continued solid credit performance.

Speaker 2

Several other key highlights in the quarter include the highest weighted average asset yield on the portfolio since inception at 12%, our 2nd best quarter of net investment income per share and the busiest deployment period in 2 years. Net investment income or NII per share increased 1% quarter over quarter to $0.96 per share, which represented a 14.5% annualized return on equity. It is important to note along with strong earnings, the quality of our earnings remains high with limited PIK payment, non recurring and fee driven income. In fact, interest income excluding PIK fees and dividends represented 95% of our total investment income in the 4th quarter. BXSL maintained its dividend of $0.77 per share representing an 11.6 annualized distribution yield, one of the highest among our traded BDC peers with as much of their portfolio in 1st lien senior secured assets, while covering our 4th quarter dividend by 125%.

Speaker 2

We continue to focus on our mandate of protecting investors' capital by constructing a portfolio of 1st lien senior secured loans. As of December 31, BXSL's portfolio is 98.5 percent 1st lien senior secured debt with a 48.2 percent average loan to value. We had strong credit performance supported by a minimal non accrual rate below 0.1% at both amortized cost and fair market value, lowest among our traded BDC peers. And approximately 1.5% of our debt investments as a percentage of total cost are marked below 90. Turning now to Page 5 of the presentation deck.

Speaker 2

In the 4th quarter, BXSL saw a meaningful increase in investment activity ending the period with over $1,000,000,000 at par in new investment commitments and $874,000,000 in new investment fundings. New investments funded in the quarter were over 98 percent 1st lien with a weighted average EBITDA of approximately $130,000,000 and an average loan to value of 41.5 percent reflecting our continued focus on what we believe are high quality investments. In addition, the weighted average spread was approximately 580 basis points with an average OID of 1.7% and nearly 2 years on average of call protection. From a market activities perspective, we see strength building as 4th quarter M and A volume increased almost $400,000,000,000 a 40% boost year over year. We expect M and A activity to continue to build and accelerate in 2024.

Speaker 2

This view is supported by our ongoing dialogues with the top financial sponsors that we cover as well as the sell side advisors with whom we partner with. M and A activity is expected to be largely driven by the buildup in record levels of private equity dry powder, large amounts of unsold assets that sponsors are sitting on in older previous vintage funds and the impact of lower M and A activity in 2023, 54% lower than the most recent peak in 2021. This expected market activity can be sustained by the prospect of lower interest rates and continued narrowing of bid ask spreads between buyers and sellers. In addition, the number of deals in the Blackstone credit and insurance pipeline doubled as of the end of Q4 versus the end of Q1. These pipeline deals are predominantly 1st lien senior secured exposure in companies and historically recession resilient sectors we know very well.

Speaker 2

While we know every opportunity in BXSL's pipeline will not convert into investments and our underwriting bar remains high, the volume gives us a sense for the scale and presence that we believe we have as an institution to drive deal flow. BXSL's origination pace benefits from the scale and platform of Blackstone or BXSI, which is one of the world's largest alternative credit managers with $319,000,000,000 in assets under management and over 500 investment professionals in 18 offices globally. Our incumbency in over 4,500 corporate issuers allows us to see more deal flow, leverage our incumbency and select into what we believe are the most attractive risk adjusted assets. Further, BXSI has been the sole or lead lender in approximately 84% of BXSL's direct lending transactions since inception. This quarter alone 12 of 17 BXSL's funded transactions were for deals Blackstone led, which allows us to be in a position to drive the negotiation of terms and documentation.

Speaker 2

During the quarter, we issued nearly 330,000,000 of common shares through our ATM offering with additional equity and increased capacity for our debt, which has a weighted average cost of just over 5%, we remain very well positioned to take advantage of an improving M and A environment where we believe we can deploy capital and drive earnings for shareholders. 2023 was also our best year of performance since inception with a 14.7% return on NAV basis. And while a lot of that return was supported by higher rates, we believe there are multiple drivers of returns that could work in our favor in 2024. These drivers include sustained elevated interest rates despite potential cuts later this year, tightening credit spreads which could result in asset appreciation and refinancings in our 1st lien senior secured portfolio. And lastly, as I just mentioned, additional potential income driven by increased M and A activity, which we are starting to see as evidenced by our Q4 activity.

Speaker 2

So with that, I will turn it over to John Box. Thank you, Brad, and let's turn to Slide 6. We ended the quarter with $9,900,000,000 of investments, an increase of 9 point an increase from $9,500,000,000 in the 3rd quarter. We also modestly delevered ending the quarter at 1 times debt to equity and averaging 1.05x in the quarter. Now we enhanced our liquidity position this quarter to $1,800,000,000 that's comprised of cash and available borrowing capacity across our revolving credit facilities including ABLs and that's to lean into an expanded pipeline.

Speaker 2

Now our weighted average yield on debt investments at fair value was 12% this quarter compared to 11.9% last quarter. New investments continue to be accretive investment income. The yields on both new debt investment fundings and assets repaid during the quarter averaged around 11.7%. And importantly, the weighted average base rate over the 4th quarter expanded approximately 120 basis points on our 98.9% floating rate debt portfolio compared to the same quarter in the prior year as rates remain elevated. Now let's look at the portfolio and on Slide 7.

Speaker 2

BXSL continued to focus on its defensive positioning in the current market environment and this is reflected in our non accrual rate of less than 0.1 percent at cost and fair market value with no new non accruals in the quarter. As we look into 2024, we expect to see dispersion in performance across the market with defaults increasing in certain areas, particularly in smaller companies and businesses with cyclical and capital intensive profiles, neither of which are within DXSL's investment focus. In addition, we expect that underperforming businesses with upcoming maturities where sponsors have taken value out could also face more challenges. And while we expect market defaults and non accruals to pick up modestly, fewer than 10% of BXSL's loans have maturities in the next 24 months and liquidity profiles overall remain healthy. Now further, 9% of BXSL's exposure to revolver credit facilities is drawn.

Speaker 2

And while we're pleased with our non accrual rate, we continue to monitor our portfolio companies very closely, leveraging our team of 84 professionals and Blackstone Credit Insurance's Chief Investment Office. Now over 98% of BXSL's investments are in 1st lien senior secured loans and 99% of those loans are the companies owned by private equity firms or other financial sponsors who generally have access to additional equity capital and equity owners of this type have historically shown a willingness to support borrowers. These sponsors have significant equity value in these capital structures with an average loan to value of 48.2 percent in BXSL. And to complement healthy credit fundamentals in what could be a lower interest rate environment later this year, our portfolio also starts from a very strong EBITDA base. Taking a look at Slide 8, you can see why we view larger companies as higher performing borrowers.

Speaker 2

Our portfolio companies generated an average of $192,000,000 in LTM EBITDA, up from approximately $167,000,000 at the end of the Q4 of 2022 and more than 2 times larger than the private credit market average. As we can see from the Lincoln International Private Market Database, a market resource on private credit markets overall, larger companies of $100,000,000 or higher in EBITDA have experienced nearly 4 times greater EBITDA growth and default nearly 5 times less than when compared to true middle market transactions. And this is often said, these companies are not simply good because they are big. We believe they are big because they are good. And with our extensive sourcing capabilities and origination engine, we have the ability to identify and choose a broad array of investments that are in our view attracted risk adjusted opportunities in the market environment where we're anticipating increased activity as Brad outlined earlier.

Speaker 2

Now Slide 9 focuses on our industry exposure. Another important part of our defensive positioning where we like to focus on better investment neighborhoods. And this means focusing on key sectors with among other themes, lower default rates and lower CapEx requirements. This quarter, 30% of BXSL's deals were closed in the software industry as we continued to focus on more historically lower default rate industries. We increased the number of portfolio companies while maintaining nearly 90% invested in historically lower default rate industries including software, healthcare providers and services, professional services and commercial services and supplies, which are some of the highest exposures and highest conviction themes across the portfolio.

Speaker 2

On Slide 10, we can see BXSL's portfolio company fundamentals compared to the private credit market as measured by Lincoln. And then looking relative to the private credit market, BXSL has approximately 2 times our portfolio companies have approximately 2 times higher growth rate and generate nearly 15% higher profitability. Now we continue to stress the importance of interest coverage. Average LTM EBITDA coverage of interest for BXSL portfolio companies over the last 12 months was 1.8 times in Q4, which again compares favorably to the Lincoln database for the private credit market at 1.4 times coverage in Q4. As we always say, the tails here are key And 6% of BSSL's portfolio reflected interest coverage below 1x compared to the market at 15% on an LTM basis.

Speaker 2

It is even more important to understand what's driving these tails and which companies comprise them. If you're looking at the markets, looking at that tail below 1 times EBITDA coverage, more than 70% of the companies below 1 times interest coverage are small with less than $50,000,000 in EBITDA. Now for BXSL, the majority of these companies are associated with recurring revenue loans, which were underwritten as higher growth names with lower initial coverage ratios. And if you exclude recurring revenue loans from the analysis, DXSL's share of the portfolio below 1x interest coverage becomes less than 1% versus the market at 13. Especially relative to the broader private credit market, we've seen our portfolio companies continue to deliver strong fundamental performance.

Speaker 2

Now looking ahead, the market's expecting rates to begin to fall this year. Current pricing implying an average SOFR rate in 20 25 of 4.1%. Now as many of you know, lower interest rates effectively lower the interest burden that's currently placed on our portfolio companies and that in turn allows more free cash flow to equity holding all else equal. Rather than spend the free cash flow and interest payments, borrowers can reinvest excess cash into growth or prepare for sale or refinancing. And to illustrate this point, running at a 4.1 percent average base rate through BXSL's portfolio as of Q4 2023, that imply a hypothetical increase in the portfolio's interest coverage ratio from 1.8x to 1.9x holding other data constant.

Speaker 2

Now I'll conclude with some points on our documents and recent amendment activity. As Brad indicated, when we negotiate our credit agreements, especially when we're the leading lender, we place significant focus on ensuring important protections are put in place. Nearly 100% of the Blackstone led deals held in BXSL include certain protections against asset stripping and collateral lease and have caps on add backs EBITDA. This is in stark contrast to the syndicated market where the majority of loans lack these kind of lender protections and which we believe have been a significant driver of depressed recoveries in liquid loans over the past year. Finally, amendment activity continues to be relatively benign.

Speaker 2

In the Q4, in BXSL, there were 40 amendments, the vast majority of which were associated with add ons, DDTL extensions and other immaterial technical matter. And there were 2 other amendments associated with providing additional PIK flexibility and one amendment associated with an underperforming investment. Among the 2 PIK amendments, one was associated with significant equity infusion by the PE sponsor and the other was effectively extension on a PIK option provided at initial underwrite. Now when we extend call, we also extended call protection on one of the deals by 2 years. And for the underperforming investment, we proactively engaged the PE sponsor who also contributed new equity and the amendment here was associated with recognizing additional equity in our covenant tests.

Speaker 2

And with that, I'll turn it over to Carlos.

Speaker 3

Thanks, John. Turning to Slide 11. BXSL maintained its dividend distribution of $0.77 per share, a 28% increase from Q4 of last year and a 45% increase since our IPO 2 years ago. As you can see, we have continued to focus on delivering high quality yield to shareholders, building a level of confidence through steady regular dividends while also building NAV per share. We expect this approach to continue.

Speaker 3

As the economic environment shifts, it's important to look at the market as a whole. We expect private credit spreads to tighten as M and A increases, a trend we began noticing in late 2023. To expand on Brad's point regarding deal activity, we are optimistic about M and A volumes and the deployment picture for 2024. Valuation expectations have improved. Record private equity dry powder of $1,500,000,000,000 is on the sidelines.

Speaker 3

Economic sentiment is improving. Fundamentals remain healthy. And there is a new prospect to lower cost of capital if rates fall, all drivers for pent up market activity. Given our broad origination platform and expansive credit footprint, we believe BXSL is well positioned to take advantage of this environment. Another benefit we offer is our scaled investment franchise, which allows us to drive investor returns, a main Blackstone focus.

Speaker 3

Recall, our value creation program, which all BXSL portfolio companies have access to, seeks to assist our companies by lowering their expenses and creating cross sell opportunities across the broader Blackstone portfolio. We have created and implied $3,500,000,000 plus of enterprise value for our BX CI companies in addition to being their lender. For example, we made over 20 introductions across the broader Blackstone to a digital service provider and generated approximately $7,000,000 in sales for this borrower. This included projects for enterprise architecture and enterprise resource planning selection, cloud optimization consulting and material requirements and planning, all directly with other Blackstone investments. We also worked with a management service provider for health care to put together a request for proposals for medical consumables.

Speaker 3

The request contained over 1,000 SKUs and through this process saved the borrowers almost $2,000,000 And again, we are just a lender here. So to be able to provide such assistance is quite remarkable. It's a point worth emphasizing. As we provide BXCI value creation services that aim to add value to our companies, we offer our borrowers access to over 50 data scientists, over 90 senior advisors and a team of cybersecurity experts, all of which we believe ultimately makes us an attractive manager to partner with. But all of this ties to our focus on shareholder experience and alignment.

Speaker 3

We built BXSL to help drive attractive risk adjusted returns to shareholders with what we consider to be industry leading best practices. Even after the expiration of our fee waiver, BXSL has among the lowest fee structures, expense ratios and cost of debt relative to our peer set as a percentage of NAV and as of the end of Q4. This helps us to build a defensive portfolio and deliver returns to our investors. We have a 3 year look back or total return hurdle related to incentive fees on income. And importantly, we amortize OID over the life of the loan and do not scrape upfront fees to the manager by passing on all of BXSL's portion of investment related fees fully to the fund.

Speaker 3

Another example of shareholder alignment and another way we aim to differentiate ourselves. And with that, I'll turn it over to Eddie.

Speaker 4

Thank you, Carlos. I'll start with our operating results on Slide 12. In the 4th quarter, BXSL's net investment income was $172,000,000 or $0.96 per share, representing the 2nd highest NII quarterly performance since our IPO. GAAP net income in the quarter was $157 or $0.88 per share, up 16% from a year ago. Our total investment income for the quarter was up $53,000,000 or 21% year over year, driven by increased interest income primarily due to higher rates.

Speaker 4

Payment in kind or PIK income represented approximately 5% of total investment income during the quarter. We would also like to acknowledge that the fee waivers in place since our IPO expired near the end of October 2023, While this quarter included partial waivers for approximately 1 third of the period, future quarters will fully incorporate BXSL's full management fee of 1% and its incentive fee of 17.5%. The partial waivers added approximately $0.02 of NII per share to the quarter. Turning to the balance sheet on Slide 13, we ended the quarter with $9,900,000,000 of total portfolio investments at fair value, less than $5,000,000,000 of outstanding debt and nearly $5,000,000,000 of total net assets. With our strong earnings in excess of the dividend in the quarter, NAV per share increased to $26.66 up from $26.54 last quarter.

Speaker 4

Next, Slide 14 outlines our attractive and diverse liability profile, which includes 57% of drawn debt in unsecured bonds. These bonds have a weighted average fixed coupon of less than 3%, which we view as a key advantage in this elevated rate environment and contribute to an overall weighted average interest rate on our borrowings of just over 5%. Again, this compares to weighted average yield at fair value on our debt investments of 12%. Additionally, we have no maturities on our liabilities until 2026 and our funding facilities have an overall weighted average maturity of 3.4 years. As mentioned in our prior earnings call, BXSL was the 1st traded BDC to receive an improved outlook from stable to positive by Moody's and we continue to maintain our 3 investment grade corporate credit ratings.

Speaker 4

We ended the quarter with approximately $1,800,000,000 of liquidity in cash and undrawn debt available to borrow, providing us with significant capacity for continued portfolio growth. The Q4 of 2023 was our most active quarter since 2021 with BXSL committing to over $1,000,000,000 in investments in the quarter that have closed to date plus an additional $221,000,000 committed to BXSL as of December 31 that have not yet closed. As you heard from Brad, John and Carlos, we believe deal activity will increase in 2024 and create new deployment opportunities we are seeing that play through our pipeline. We also have seen spreads tighten and activity rise in the syndicated loan market, generally a leading indicator for what we expect to see on the private side. As such, we are actively leveraging incumbency to retain exposure where capital structures were set up in a wider spread environment, while company performance has remained strong, exceeding expectations.

Speaker 4

For example, in the Q4, we agreed to 5 repricings in the portfolio in exchange for an average of nearly 2 years of additional call protection. We are also finding success offering private solutions that are differentiating versus what the syndicated market can offer, such as refresh DDTL capacity or modest pick flexibility. In conclusion, we remain positive about the year ahead, our competitive advantages in the market and robust performance in various metrics against our peer set. We believe the positive factors that have supported returns for investors remain in place, including portfolio positioning for modestly lower, but still elevated rate environment, ample liquidity to deploy into what we believe will be a more robust deal environment and continued elevated earnings powered by low cost financing sources, all of which is backed by Blackstone's platform advantages in scale and sourcing and our focus on protecting investors' capital. With that, I'll ask the operator to open up for questions.

Speaker 4

Thank you.

Operator

Thank you. We'll go first to Finian O'Shea with Wells Fargo Securities.

Speaker 5

Hey, everyone. Good morning. Thanks for having me on. Interesting comment at the end by Teddy there on the repricings. I guess first, how many like if you can offer us color happened post quarter with the major BSL come back.

Speaker 5

And then just higher level is I'm not sure repricing has been a concept in direct lending. If you could touch on, if this is a market evolution that's kind of happening in real time? Thank you.

Speaker 4

Yes. Thanks, Fin. So on your first question, repricing activity has continued not to overly sort of material extent. I think if you look at the capital structures where we have agreed to repricing, some of these were set up at a clearly higher rate environment or higher spread environment. The average spread on the deals that we repriced in Q4 were just over right around so for 6.15 inside of or outside of where the market is today.

Speaker 4

All of those were met with new call protection. So we make that trade to extend duration in the portfolio.

Speaker 2

Ben, it's Brad. I would say it is a bit of a new phenomenon. But you always have the option to take your capital back at your call protection. And that's why it's important to have call protection in deals. But on the higher quality assets, if they delevered, we're usually okay with extending duration on those types of assets.

Speaker 5

Okay. That's helpful. Thank you. And then I guess for my follow-up, can you talk about the strategy with capital raising? You've kind of leverage has gone from 130 to 1 over the course of the year, mostly on account of the ATM.

Speaker 5

Is this I know you gave some constructive comment on a deployment the deployment outlook, but it's not that meaningful yet. So are you still pedal to the metal post quarter? And how are you looking at that today? Thank you.

Speaker 2

Fin, it's Bak. I would I'd outline that not a pedal to metal focus, you size the equity capital based on the opportunity set as your forward pipeline develops. And you've seen and you've heard Brad's comments on the development of the forward pipeline. I think what it's outlining is that we have access to very high quality investors through the ATM program, some of them are very large in nature. And our goal will be to ensure that we're sizing the equity growth to ensure that we're generating attractive return and so monitoring that on a or quarterly basis.

Speaker 2

So you're starting to see a build in pipe. You can expect to see a level of build in capital, but you don't let that overwhelm the forward return. And then I'll just add to that. So I think we see things maybe a little bit before the market in terms of pipeline, building and assets and deployment. You certainly saw some of that get reflected.

Speaker 2

As we said, the Q4 was our busiest quarter since 2021. So we are seeing a material uptick in activity. Some of that's being driven just by incumbency, not in the existing portfolio, but across our BXI portfolio where we can kind of originate deals on a proprietary basis. Just to give you some stats, I think we said this, but pipelines are 2 times larger than it was maybe 6 months ago. And even in the past couple of weeks, the deal flow coming in from sell side advisors has more than doubled.

Speaker 2

So we're always going to be thinking about our capital structure to make sure we can take advantage of what's in front of us. Recognize kind of your points leverage has come down, but again it's on the back of very, very active investment activity in the Q4 and we'll see how the Q1 travels.

Speaker 1

Thank you.

Operator

We'll go next to Ken Lee with RBC Capital Markets.

Speaker 6

Hey, good morning. Thanks for taking my question. In terms of the normalization of the broadly syndicated loan markets, Wondering if you could just share your thoughts on how you think this could impact either the pace or the mix of new originations that you could be seeing this year? Thanks.

Speaker 2

So, yes, the broadly syndicated markets have been quite, I wouldn't say active because most of the activity has been on repricing. There hasn't been much of a new calendar come to the market, but it has tightened quite a bit, probably by at least 50 basis points in the 1st couple of months of the year. And I would say the private markets are somewhat keyed off of the public market. So, one could expect asset spreads coming in across the private market. We do have a pretty broad deal funnel globally, so we can pick our spots with BXSL.

Speaker 2

Again, the 4th quarter activity, the spreads were in line with the assets that we deployed, were in line with the assets that came out. So we're kind of keeping pace. Spreads are both a positive and a negative. And so maybe just to hit on that, as spreads tighten, all else being equal, asset prices should increase. So it does have, and I said this in my comments, a little bit of an upward driver on the price of your existing assets.

Speaker 2

So that's positive. Lower spreads, lower rates does increase deal activity, market activity, or at least it should, and that creates more turnover and more fee acceleration. So that's another positive. And then of course, it is a little bit of a headwind potentially on new assets. But even if 20% of your portfolio was being invested in this market has what 10 basis points of impact on the yield of the portfolio and the fees that you're getting on an accelerated basis more than offsets that.

Speaker 2

So there are some pros and cons, and you will continue to see us pick our spots in this market, which is the benefit of having a really wide and deep deal funnel.

Speaker 6

Very helpful there. And just one follow-up, if I may. In terms of the activity that you're seeing in the pipeline, sounds pretty robust. Is there any particular drivers that you're seeing commonalities across the activity there? Any particular sectors?

Speaker 6

Just want to get a little bit more color on what you're seeing there. Thanks.

Speaker 4

Yes. On the pipeline, I think the couple of things I would highlight is first similar sector exposures as Bak mentioned, what we deployed in the Q4 is consistent to what we're seeing in the pipeline. 2 is larger capital structure. So as Brad mentioned, double the volume, more than double the volume of larger than $1,000,000,000 transactions the pipeline. I think generally speaking, we are optimistic about the M and A environment this year.

Speaker 4

We see that early in our pipeline. I think one thing we do need to see is continued sort of narrowing between valuation, between buyers and sellers. That's starting to happen certainly helps with the prospect of lower cost of capital on the horizon with, as Brad mentioned, spreads tightening modestly and then the prospect for lower rates coming down towards the back half

Speaker 2

of this year. And what I'd just add to that, Ken, is I would say at least half for our deal flow right now. We're going into the market and creating. So take HealthComp, which we did in the Q4. We were the only capital provider that was around that.

Speaker 2

We were the incumbent. We had a strategic angle across our value add group. We could do the whole capital structure. So these are the types of transactions that we're leaning into in this market. We're going to we committed to another deal this week that's fairly large over $1,000,000,000 in size and no one else kind of saw that deal.

Speaker 2

And these are some of the things I was trying to get across with my message on even in a market with a broadly syndicated activity is robust from a spread standpoint, we will continue to drive deal flow that's accretive to BXSL in our opinion. So lots of different ways that we can kind of go about this, but that's where we're seeing deal flow, mostly from things that we're creating.

Speaker 6

Great. Very helpful there. Thanks again.

Speaker 2

Thank

Operator

Ken. We'll go next to Melissa Wedel with JPMorgan.

Speaker 7

Good morning. Thanks for taking my questions today. I wanted to also follow-up on the comments about the pipeline and how rich that seems to be right now. I think that we've heard from a few different management teams that while there is a pickup sort of early this year, a lot of folks are expecting particularly increased volume in the back half of this year. Is that are you seeing anything differently than that?

Speaker 7

And then also, what does that imply for sort of repayments or exits to counter that? Are we seeing refi activity? Or is this sort of a net originations environment? Thank you.

Speaker 2

I can do the repayment point because it ties to what Teddy mentioned as it relates to repricings and then as it relates to the pipeline bill and then Teddy can build out those comments. So listen, as we're proactive both in sourcing deals and also proactive in defending them, you've seen both year to date or near term repayment remain muted. And so that's a function of our view that an asset on our books still at an attractive illiquidity and credit spread relative to our cost base is a decision we're choosing to make. And so I think from a repayments perspective, we're trending better than expected. And then as it relates to deployment, I'll turn to my colleague.

Speaker 4

Yes. I think consistent with Brad's comments, it's we're generally seeing deals earlier stage. A lot of what we're working on today are sell side commitments prior to deal launching. So I think a lot of that does come to fruition in the back half of this year. In the meantime, there were a couple of situations, particularly last quarter, where sell side processes, M and A processes fell apart because of valuations.

Speaker 4

We were then able to show up with a sole financing source for a recap ahead of another process. So those are situations that we're very in front of. A lot of those we have incumbency today whether they're positions we have on the liquid side or private positions.

Speaker 2

Well, it's the activity picking up in the second half of this year,

Speaker 4

it's I would agree with that comment. But I

Speaker 2

think most of the comments are, we hope that activity picks up in the second half is what you're hearing from others. Hope is not a strategy. So we're out trying to kind of develop our own deal flow in the absence of a more active M and A market. A logic holds true that activity should pick up, but we're certainly not going to sit back and wait for that to happen. And PE activity being light for the past 2 years, lots of dry powder, all that is very true.

Speaker 2

But I would look more towards our current comments, which are sell side M and A inbounds to us, have increased 2 fold. The pipeline, which Teddy has highlighted is twice as large as it was not too long ago. So those are the kind of the near term things that we're seeing. And then yes, we also hope that the broader market picks up, but we'll go out and find deals in the absence of that.

Speaker 7

Understood. If I could follow-up also on Fin's question, the repricing that you did, I think that's what you're referring to when you talk about finding the deals yourself and sort of being proactive. Are those deals that can see or companies that could have conceivably refinanced in the broadly syndicated market? Thank you.

Speaker 4

Yes. Thanks, Melissa. Those deals were actually separate. So those deals were capital structures set up in a clearly wider spread environment. So average so far on those were 600 to closer to 625, where performance has exceeded our expectations from a credit perspective.

Speaker 4

Those did have some access to the public markets. We were able to reset call protection, extend duration on those. The deals that Brad was referring to were more public capital structures that actually see value in going private. And that was one of the deals that he was referring to that's closing shortly. There are ways that private lenders can differentiate from the syndicated market.

Speaker 4

We've been seeing that in our pipeline certainly around delayed draw capacity, providing capacity for M and A and certainty of execution. Those are some areas where we're seeing differentiation and where we can utilize those strengths to really drive our own deal flow.

Speaker 2

Most help put some numbers to that. We have 100 deals that we identified at the end of the 4th quarter that we want to reverse into the company to try and create deal flow. They may have a maturity. They may need growth capital. They may prefer a more private capital structure.

Speaker 2

So even when the public markets are active, we can go in and create something that's a little bit more customized for them. And you can only do that if you have scale. So in a couple of deals, we'll likely close shortly. They are well over $1,000,000,000 will be the sole or the large majority anyways of those capital structures will bring in some others. And you can only do that if you have incumbency across your platform.

Speaker 2

You can only do that if you have scale. And you can only do that obviously if you have a more proactive mindset.

Speaker 7

That's great detail. Thank you.

Operator

We'll go next to Casey Alexander with Compass Point.

Speaker 8

Hi, good morning and thanks for taking my questions. You talked about spreads appear to be tightening and interest rates were actually down broadly in the Q4, which should have been supportive for the general marks of the portfolio. So can you contour that against the $23,000,000 of unrealized depreciation in the quarter and give us a feel for what caused that relative to what should have been a pretty good pricing environment?

Speaker 4

Yes, I'm happy to take that. So the $23,000,000 of unrealized depreciation, some of that was a reversal of unrealized appreciation that we saw as it relates to repayments, right? We had over $500,000,000 of repayments in the quarter that was an annualized repayment number of just over 20%. So when that happens, you do have a reversal of unrealized gains. That was about a third of the move.

Speaker 4

The other 2 thirds were offset by some markups in the portfolio as well. I think spreads from a valuation perspective in the quarter were actually relatively flat. I think most of the spread tightening that we've seen that we're committed to in the quarter are deals that likely won't close until the Q1 or Q2 of this year. So I think there's still some room to go on spreads tightening and haven't fully seen that reflected in

Speaker 2

the markets today. Yes, rates shouldn't impact marks, Casey. So, it's more just the spreads and spreads have come in more in the Q1. I'd give you a couple of other stats. Only 1.1% of the portfolio is marked below 90.

Speaker 2

That would be the asset list of assets that were most focused on. 8.8% is below 95%. So portfolio is still in really good shape, but we mark our assets to market. And so you're seeing that in some movements up and some movements

Speaker 8

down. Okay. Thank you for that. And then secondly, maybe a minor point, but there was a reasonable rise in pick income versus the Q3. It's about 5% of total investment income now.

Speaker 8

Can you give us a feel for how that fits into the rest of your comments earlier today?

Speaker 4

Yes, maybe take that. So, PIK income was up modestly. It was up about a percentage point, 4% to 5% in the quarter. I don't know if there's anything specific to point out there. We have one position that did roll off in the quarter, that was that had PIK's flexibility, that paid full cash.

Speaker 4

Offsetting that, we did have a couple smaller pick amendments where we agreed to it. It is an area I think over time where you can see for higher performing situations, low LTV in good sectors with good fundamentals, it's an area where you can see a little bit of differentiation from the syndicated market. So I think there's a difference between pick because of underperformance versus pick due to new deals or differentiating versus public markets.

Speaker 2

And again, I'll just add some numbers to that. So for we had a couple of smaller ones get added, couple and then 4 dropped. The ones that got added, the average mark

Speaker 4

of that of those assets is 97 approximately. So just give you

Speaker 2

a sense that they're kind of performing assets, they're marked in and around cost, but they've elected part of their pick option. I still think 5%, Casey is probably at the low end of the industry. So still so no trend that you're seeing other than as rates stay high, companies have the option, they're going to use it.

Speaker 8

All right. Thank you for taking my questions.

Operator

Thank you. We'll go next to Mark Hughes with Trist.

Speaker 9

Yes, thanks. Good morning. You talked about the new deals this quarter, I think $130,000,000 in average EBITDA, your overall norm is $190,000,000 plus. Was anything to that? Notwithstanding you talked about some bigger deals that are out there.

Speaker 9

Did you find a little more attractive pricing at maybe the lower middle end of the market?

Speaker 4

Yes. I don't think there's anything specific to point out there. We have seen growth in the existing portfolio, organic and M and A growth, which is driving growth of our existing deals. There were a handful of deals that we closed that were sort of sub $120,000,000 that were still very high quality. So really no change in strategy to point out there.

Speaker 9

And then anything in your healthcare exposure you want to highlight or not highlight given some of the events in the industry, some other credit issues?

Speaker 4

Yes. I think that healthcare exposure is one area where we spend a lot of our time. We do have a team that specialize in healthcare that sits in our investment team. We see everything. I think the areas overall where we see stress are what we've mentioned before, business models with high components of labor inflation, business models that are more tied to regulatory pressure or business models that are more commoditized.

Speaker 4

Where we focused our capital is really on more specialized models that aren't seeing much of that pressure. There are a couple of situations we are focused on that are roll ups that have a little bit more cash flow constraint as rates are higher, but overall, seeing relatively good performance in that part of the portfolio.

Speaker 2

And Mark, to add to that, if you think about it, while we're insulated from a lot of the trends you might have seen in other PPMs or physicians practice, we're not completely immune. And to the extent that you see an area where we're named, where there an indicative level of stress that's also found and reflected in the mark. So we're very focused on those situations. Clearly, they're very small, but at the same time, we always want to ensure that, that level of stress is reflected in the marks, which you can see in the SOI.

Speaker 9

Appreciate that. Thank you.

Operator

We'll take our final question from Paul Johnson with KBW.

Speaker 10

Yes, good morning. Thanks for taking my questions. Just Brad sort of answered my question here in terms of the opportunity that you see in the portfolio in terms of repricing. But I guess you identified 100 deals. I mean would you describe that as pretty meaningful in the portfolio in terms of driving the pipeline?

Speaker 10

Or is that more or less kind of just low hanging fruit that you expect to be picked relatively quick? And then also on that one more question is just how much work I guess is it to execute a repricing transaction? Is it just kind of a matter of calling on the sponsor and discussing the repricing? Or do you basically effectively re underwrite transaction?

Speaker 2

Yes. And Paul, just I'll reiterate what Teddy mentioned. There is a distinct difference between repricings and reverse deal flow. Repricings is the only asset. The sponsor reaches out and says, hey, we know we have call protection, but we want you to reprice and we either say, yay or nay.

Speaker 2

We usually ask for something in exchange, usually reset the call protection if we say yay. Reverses are entirely different. These are things that we don't own, that we're going into the market. We're trying to create new deals. And in those situations, if I said if there was 100 of those deals, we've actually gone through 33 of them through our kind of review process and reached out to the sponsors.

Speaker 2

80% of those they've said no, not yet or pricing is too high, and so they go back on the shelf. And the other ones we're working through. So that's it's very different. So when if you think about our platform, we are invested in BXCI in over 3,000 companies. So we can mine our portfolios.

Speaker 2

We can create ideas. We can play the role of banker with a balance sheet. It's a highly differentiated platform than almost anyone in the market And that's what we're focused on from a reverse standpoint. Very different than the repricing exercise that will invariably kind of have to go through as the market strengthens.

Speaker 10

Thanks for that Brad. Very helpful description there. And then last one I have to ask because it happens every 4 years. I mean, how do you expect, I guess, the election to kind of play into the pipeline this year? Do you think that will prompt any more transactions ahead of the election?

Speaker 10

I mean, just what do you kind of expect from sponsor behavior, if anything?

Speaker 2

Yes, I don't think we know. In election year, you should see deal flow get pulled forward because people are worried about change and volatility. So if you look at kind of past history, that is what happens. And I guess we're seeing a pickup in the pipeline that would suggest that that will hold true. But unclear kind of if that's an accelerator or more of the fact that private equity sponsors have been sitting on the sidelines for a couple of years.

Speaker 2

So we'll wait and see.

Speaker 1

Thank you, Paul.

Operator

Thank you. That will conclude our question and answer session. At this time, I'd like to turn the call back over to Ms. Wang for any additional or closing remarks.

Speaker 1

Thank you. This concludes our Q4 call. Thank you so much for dialing in. We look forward to speaking to you next quarter.

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Earnings Conference Call
PriceSmart Q4 2023
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