Fitch Ratings assigned an expected long-term issuer default rating (IDR) of ‘BBB-‘ to Blackstone/GSO Secured Lending Fund (BGSL). The rating outlook is stable. Concurrently, Fitch has assigned an expected rating of ‘BBB-‘ to BGSL’s proposed unsecured debt issuance. Proceeds are expected to be used to repay borrowings on secured credit facilities.
The expected IDR reflects the strength of BGSL’s relationship with GSO Capital Partners, a subsidiary of The Blackstone Group, the first lien focus of the investment portfolio, a relatively strong track record in credit within this vehicle and in vehicles with similar strategies historically, sound risk management, relatively low leverage, a solid liquidity profile given undrawn capital commitments, strong dividend coverage, and the expectation that the firm’s funding flexibility will improve with the proposed issuance of unsecured debt, bringing the proportion of unsecured debt to total debt to above 20% combined with the company’s stated target of managing unsecured debt to total debt in excess of 35% in the near term.
The ratings also reflect Fitch’s view that BGSL’s asset coverage cushion will remain appropriate for its rating, despite the potential for negative portfolio valuation marks in the near term and expectations for an increase in credit issues in the medium term, resulting from the coronavirus impact, given the company’s relatively low leverage at March 31, 2020 and ability to draw uncalled capital commitments.
Rating constraints specific to BGSL include elevated growth over a short-operating history which has translated into outsized portfolio concentrations on an industry- and individual portfolio company-basis, and the potential for the portfolio to experience above-average valuation volatility given exposure to broadly syndicated loans.
Rating constraints for the business development company (BDC) sector more broadly include the market impact on leverage, given the need to fair-value the portfolio each quarter, dependence on access to the capital markets to fund portfolio growth and a limited ability to retain capital due to dividend distribution requirements. Additionally, the competitive underwriting environment over the last several years has yielded deterioration in terms in the middle market, including fewer/looser covenants and higher underlying leverage. Fitch believes a sustained slowdown in the economy, which could result from the coronavirus pandemic, is likely to translate to asset quality issues more quickly, given the limited embedded financial cushion in most portfolio credits and weaker lender flexibility in credit documentation. Recently relaxed regulatory limits on leverage are an evolving sector headwind, which could contribute to increased risk profiles for individual BDCs.
Fitch views BGSL’s affiliation with GSO/Blackstone as a rating strength, as it provides BGSL with access to industry knowledge, relationships with sponsors and banks, investment management resources, deal flow and the firm’s group purchasing program, which has yielded meaningful cost savings for portfolio companies historically. At March 31, 2020, Blackstone had approximately $538 billion in assets under management, including $128.7 billion in credit. Fitch believes that BGSL’s credit performance should benefit from its ability to leverage the broader GSO/Blackstone platform for sourcing, underwriting and monitoring deals. Fitch also believes BGSL benefits from GSO/Blackstone’s previous experience managing several BDCs in partnership with FS Investments from 2009 until 2018.
