Blackstone Secured Lending Fund Stock

Good day, and welcome to the Blackstone Secured Lending Second Quarter 2026 Investor Call. Today's call is being recorded. [Operator Instructions].

At this time, I'd like to turn the call over to Stacy Wang, Head of Stakeholder Relations. Please go ahead.

Thank you. Good morning, and welcome to Blackstone Secured Lending Fund Second Quarter Results Conference Call. Joining me today are Brad Marshall, Chief Executive Officer; and Teddy Desloge, Chief Financial Officer, along with other members of the management team available for Q&A, including Carlos Whitaker, President.

Earlier today, we issued a press release with a 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. Audiocast copyright material of Blackstone may not be duplicated without consent.

With that, I'd like to turn the call over to Brad Marshall.

Thank you, Stacy, and good morning, everyone. Before we dive into quarterly results, I did want to thank my colleagues, Jon Bock and Kate Rubenstein for all their contributions to BXSL over the past several years. Jon and Kate are both good friends of the firm and many of us here. And Jon, in particular, has been a long-time leading expert in the BDC space, as many of you know, and both will be missed by all of us at Blackstone, and we wish them the best of luck in their next endeavors.

I thought I'd start by highlighting a few key observations from the quarter. First, we delivered healthy earnings again in the second quarter, supported by our shareholder-aligned fee structure. Second, repayment activity continued to accelerate this quarter, which helped drive realizations, potential additional income and additional liquidity. Third, our deployment remains disciplined with new fundings featuring strong credit profiles, thematic orientation and attractive spreads. Fourth, we remain highly proactive with underperforming borrowers, leveraging our senior position, strong documentation and deep restructuring expertise to protect long-term value for investors as seen at Blackstone Credit Insurance or BXCI for over 20 years. And finally, we continue to be constructive on the outlook for deal activity with M&A benefiting from strength in the U.S. economy.

While the year started slower, activity levels as measured by new deals through BXCI's global private deal screenings improved during the quarter, particularly in June. Some of the areas where we are seeing new deal flow in the current quarter -- in the current market are where Blackstone has deep industry expertise and thematic conviction, including AI and digital infrastructure, infrastructure services and life sciences. BXSL funded over $300 million during the quarter, adding 5 new borrowers to the portfolio, bringing our total to 313 companies.

Generally, we are seeing new recently committed deals across BXCI set up with less leverage, lower loan to values and average spreads higher than in previous quarters. We will continue to use available liquidity selectively, focusing on areas where we believe we have distinct advantages and where we can leverage our scale as we believe we have done successfully in the past. As an example, BXCI co-led a $1.1 billion financing for Aspen Pharmacare, a scaled pharmaceutical platform in Asia Pacific. In addition, FAMA Technologies, a leading AI infrastructure platform drew on its $5 billion delayed draw term loan as part of a $10 billion financing led by Blackstone.

BXCL's liquidity position remains strong with over $700 million in additional repayments this quarter, in line with the expectations we discussed on our last call. This represented an annualized repayment rate of 21% of the portfolio at fair value compared to 13% for the prior quarter and 5% for the same quarter in the prior year. The average low mark across assets fully repaid during the quarter was below 94% and select repayments included call protection leading to realizations slightly above par on average. We believe this reinforces what we discussed last quarter, the performance of sub-investment-grade companies can evolve over the duration of a directly originated loan. Importantly, seniority in the capital structure dictates repayment in full ahead of subordinated capital absent a restructuring. And BXSL's portfolio remains at nearly 97% first lien senior secured.

Valuations reflect both company fundamentals and current market conditions. But as first lien secured lenders, our realized outcomes are ultimately driven by repayment at par over time or by enforcing our rights during periods of underperformance to maximize recoveries. This quarter's activity also highlights the importance of portfolio turnover. Repayments can provide additional capacity to reinvest into new investments at attractive spreads. More broadly, we believe repayment activity has continued to be an important indicator of underlying market health and a meaningful signal for future deal activity as it typically reflects improving capital market conditions, increased M&A and sponsor activity and greater borrower confidence.

In the second quarter, BXSL generated net investment income, or NII, of $0.75 per share, which represents an 11.4% annualized NII yield. NAV per share ended at $25.53, down approximately 2.8% quarter-over-quarter. The total portfolio mark declined to 95.2%. Nearly half of the unrealized private marks reflected continued broader market spread widening throughout the second quarter, while the remaining marks were attributed to some underperforming assets. As a point of reference, the bottom 10% of the portfolio today is currently marked at 70%.

We remain highly proactive on this subset of the portfolio during the quarter, leveraging the broader Blackstone operating resources, over 110 strategic advisers that support our firm across a range of sectors and 120-person BXCI CIO office, including the BXCI value creation team dedicated to operational support. This team helps portfolio companies drive operational efficiencies and cost savings across various categories from health care and insurance services to facilitating introductions across the broader Blackstone portfolio. Further, the team also provides comprehensive management and board enhancements to these portfolio companies through our extensive network of operating executives and industry professionals.

As we have discussed on previous calls, we believe the value creation team is one of the critical advantages BXCI possesses as part of the largest alternative asset manager. Importantly, BXCI has experienced an annualized loss rate of less than 10 basis points across its over 20-year North American direct lending track record. While we are highly focused on this bottom 10% of the portfolio and are actively leveraging these resources available to us to help these companies drive improved outcomes, we continue to see strong performance across the remaining 90% of the portfolio. And across the entire portfolio, LTM EBITDA growth was 7% year-over-year, in line with the growth we've seen in recent quarters.

Additionally, interest coverage modestly improved to 2.1x and PIK as a percentage of investment income was flat from last quarter at approximately 6.6%, which is over 20% below fourth quarter last year. We ended the period with a nonaccrual rate of 1.8% at fair value and 3.6% at cost, down from 3.1% at fair value and 4.7% at cost in Q1, primarily driven by 2 assets that were removed post restructuring. We had no new nonaccrual assets added in the quarter. Prior to completing its restructuring post quarter end, Medallia represented 1.5% of BXSL's nonaccrual rate based on fair value or 79% of fair value of the portfolio on nonaccrual as of 6/30. On software specifically, which represented 19% of BXSL's fair market value, fundamentals overall remained healthy across our 70 borrowers. These companies have a weighted average LTM EBITDA of more than $275 million, growing in line with the broader portfolio. They have a weighted average revenue above $780 million, and they have average interest coverage of 2.2x.

In closing, we remain highly aligned with our shareholders. We continue to generate liquidity through attractive levels of portfolio turnover, and we took proactive steps to drive better outcomes on the minority positions that are underperforming expectations.

With that, I'll turn it over to Teddy.

Thanks, Brad. First, on performance, BXSL's net investment income for the quarter was $174 million or $0.75 per share compared to our $0.77 per share dividend. These results represent an 11.4% annualized NII yield or 12.1% annualized distribution yield, both among the highest across traded BDC peers with similar levels of first lien senior secured exposure while continuing to benefit from one of the lowest management and incentive fee structures in the BDC industry. Payment in-kind income was flat quarter-over-quarter and marginally higher year-over-year at 6.6% of total investment income, but down 20% since the fourth quarter of 2025.

Interest income, excluding payment in kind fees and dividends, represented over 93% of our total investment income in the quarter. As we communicated last quarter, we continue to maintain our dividend at $0.77 per share. We intend to use excess earnings in the near term as we transition to a lower dividend level that is aligned with the fund's longer-term earnings profile, reflecting lower base rates and maturities of lower-cost investment-grade bonds. Prior to the second quarter, BXSL's NII per share had met or exceeded our regular dividend per share for 28 consecutive quarters and excess earnings was retained in net asset value and reinvested in the portfolio over time. As of quarter end, total undistributed earnings represented $1.77 per share, down from $1.80 per share at the end of the first quarter.

Turning to the balance sheet. We ended the quarter with $13.4 billion of total portfolio investments at fair value, $7.5 billion of outstanding debt and $5.9 billion of total net assets. Net asset value per share at quarter end was $25.53, down from $26.26 in the first quarter or 2.8%, which was impacted primarily by $0.59 of unrealized net losses. We also had $0.12 of realized net losses in the portfolio tied to 2 restructurings that closed in the quarter, as Brad previously mentioned. Further, the portfolio is marked at 95.2% at quarter end, down from 96.2% last quarter, reflecting a combination of broader spread widening and company-specific fundamentals.

Importantly, from a wider lens, we have delivered net cumulative realized gains overall on investments since inception through the second quarter. We are constantly working constructively with our companies on amendments to support our businesses for growth and M&A, often including new sponsor capital and to improve terms and mitigate risk where possible. To that end, we completed amendments for 38 of our 313 issuers in the quarter and over 97% of amendments as measured by fair value were associated with what we believe are benign or positive events, add-ons, M&A, DDTL extensions or immaterial technical matters.

Moving to our liabilities. Our liability profile remains diverse across multiple financing markets, including $10.4 billion of committed debt capacity and $7.6 billion of funded debt as of the end of the second quarter. We have relationships across diverse lending counterparties and a balanced mix of unsecured and secured funding with approximately 68% of funded debt unsecured and 32% secured. This diversity of funding sources, combined with our scale and long-standing lender relationships support financial flexibility and low cost of capital relative to our traded BDC peers. We have $679 million drawn on our asset-based facilities with multiple banks, of which we had a weighted average drawn spread of SOFR plus186.

In addition, BXSL benefits from one of the most competitively priced revolvers across our traded BDC peers at SOFR plus 153 basis points on drawn amounts, over $450 million of CLO debt outstanding at a weighted average coupon of SOFR plus 154 and $5.2 billion of unsecured bonds outstanding as of June 30, $2 billion of which were not swapped and has an average coupon of 2.58%. That includes a $650 million 5-year bond we issued in May, which priced at 205 basis points above the benchmark treasury rate or a 5.9% coupon. And taking this all together, our all-in cost of debt for the second quarter was 5.05%.

Total liquidity comprised of unrestricted cash and undrawn debt available to borrow was $2.8 billion at quarter end, while ending leverage as of June 30 was 1.25x on a net of cash basis and 1.28 turns on a gross basis, which is below where we ended each of the last 2 quarters. As a reminder, BXSL's Board of Trustees approved a discretionary share repurchase plan earlier this year, under which BXSL may repurchase up to $250 million in the aggregate of its outstanding common shares in the open market at prices below its net asset value per share. While we have not exercised the program, we continue to expect repayment activity to create additional balance sheet capacity through year-end and will weigh repurchases against deployments at wider spreads while managing to our stated long-term leverage range of 1 to 1.25 turns.

To close, the second quarter was important for BXSL and highlighted several strengths of our model. Earnings supported by a fee structure highly aligned with shareholders, continued healthy portfolio turnover, creating balance sheet flexibility, disciplined deployment with new commitments at wider spreads in industries where we see tailwinds and active asset management, leveraging our operating resources to proactively drive positive outcomes.

And with that, I'll ask the operator to open it up for questions. Thank you.

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

I guess to start, Brad, hitting on some of the remarks around restructurings and maximizing recovery. I know a couple came off this quarter, ACI, DCA, which is good, of course. But in the spirit of like longer-term recovery earnings power for the BDC, why not restructure those all into equity where -- which would more directly allow recovery of lost NAV?

Thanks, Fin. 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. So that's kind of first and foremost, that's what you've seen in Medallia, that's what you saw in ACI, DCA. If I take a kind of bigger step back and look at the 10 restructurings we've done so far over the past 8 years in BXCI, we've exited 2 and actually, if you add SelectQuote because we just have a stub position, we've exited 3 positions. And in each of those cases, we had a little bit of debt. We converted some to equity or we just did debt alone. Our recovery rate, excluding the coupons was 0.93 in those 3 positions. So I think the formula has worked out quite well. So BXSL is kind of -- that's been experienced in those restructurings. But each situation is going to be different. And I think we'll continue to evaluate it on that basis.

I appreciate that. And a follow-up for Teddy on the ending remarks on buybacks and leverage. It sounds like being at target leverage is sort of a constraint for flexibility there. Do you think target leverage is too high? It seems like some managers are rethinking this and kind of taking a step back and seeing if you had -- if you have any thoughts on that?

Yes. Thanks, Fin. I'd say a couple of things. I think, first off, just in short, we have been prioritizing deleveraging in the last couple of quarters, right? Leverage is below where -- as of the end of the quarter, where it's been the last 2 quarters. We've been highly focusing on manage to that 1x to 1.25x range. We also do have clear visibility to increasing repayment volume, and that's a big piece of the calculus for us. 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. That creates flexibility to deploy capital into a market, as Brad said, at wider spreads. So both of those, we will be quite balanced in the approach. But certainly, at current trading levels, if they persist, we would expect some potential activity weighed against new deployments.

We will take our next question from Rick Shane with JPMorgan.

Look, there are -- we're in a world right now where there's sort of 3 types of transactions that exist. There are -- there's potential refinance activity related to healthy companies as equity values improve. There are restructurings of challenged investments and then there is sort of new to the market investments. When you look at the dispersion across those 3 types of activity, can you help us understand how divergent terms and pricing and structure is?

Sure. So -- and I would say there's a fourth, which is just companies that are drawing on their delayed draws or doing some sort of kind of add-on financings. Those are typically done at the current terms of their existing loan. And in some cases, if they're asking for new capital and their old loan was kind of underpriced relative to the market, then we price that a little bit wider. 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. I would say that's new investments, that's add-ons that -- for deals to loans that are underpriced relative to the market.

In terms of restructurings, that is a little bit dependent on kind of how we set up the capital structure. So if we really underlever it, then it's going to be paying maybe a market rate that's a little bit below a new deal -- and we do that to give it a little bit more flexibility or we may kind of restructure it in line with equity capital that comes in and that is priced at or maybe a bit wide to the market. So I would say that range is somewhere between 25 and 100 basis points depending on the situation, if that's helpful, Ric.

Very much. And then looks, there's an interesting comment embedded in what you just said, which is that a lot of the marks that you are referring to are market-driven, and there should be pull to par associated with that as those loans approach maturity. Have you -- can you guys give some sort of -- I have a lost of words. It's been a long day already, I apologize. Can you give us some sort of sense of how much accretion you could expect from pull to par over time when we look at the discount to the cost basis?

Yes. So good question. I understand. And I think maybe the best way to think about it, Rick, is you just take a look at the assets that repaid this quarter, $700 million, the average low of those marks were 94. The portfolio today is marked at 95 and change. So I would expect the vast majority of the assets that are currently marked below par to migrate and be repaid at par. That takes a little bit of time, but that would be my expectation. And then, of course, you're going to have assets that go through restructurings and those may take on a little bit of a different journey.

But to answer your question, I would expect the vast majority of the assets to repay at par over the next several years, which is why we're very, very focused. We keep bringing this up on calls about this turnover, this repayment activity because that does kind of drive pull to par on assets that may be marked at 95, 96 that are perfectly fine assets, but spreads widened with maybe a missed kind of quarter and leverage ticked up a half turn. Unfortunately, you have to mark those assets down a little bit, but they're very good assets and will have a high probability of repaying at par.

We will take our next question from Melissa Wedel with UBS.

I wanted to revisit your comments about the dividend. I realize that what you're saying now is that there's a slight shortfall this quarter in NII versus that stable dividend level. And in the short term, the Board and management, you guys are willing to sort of use that spillover income to supplement the shortfall. I guess the question that is really how do you think about your willingness to do that or your time line and how you define short term in that context? And then as you think about the longer-term earnings of the power of the portfolio, what kind of scenarios are you thinking about in terms of base rates and then embedded spread outlook?

Yes. Thanks, Melissa. This is Teddy. I'm happy to take that. So I think you kind of nailed it, you hit it head on. So on our last call, we did set that expectation, right? 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. I think what I would say is we are being front-footed about this, right? We will continuously and are continuously evaluating the dividend with the Board. That long-term dividend level takes into account the potential adjustment on earnings, taking into account both base rates and some lower cost of maturities in our capital structure. So as those flow through, we would expect this to be very much a short-term temporary bridge, not a long-term solution.

Okay. And then just following up on sort of that topic of earnings power longer term. I know that historically, you guys have not really expressed much interest in the sort of JV structures that a few other BDCs or many other BDCs have pursued to enhance earnings power. I'm curious if that is also on the table or sort of in discussion or any interest to management.

Thanks, Melissa. It's Brad. I think we are constantly looking at all available ways to drive shareholder value. And we've also wanted to do it in a way that was very -- with a very clear message of what we're trying to accomplish, which is focusing on senior secured risk for investors. So trying to deliver attractive dividend, which I think we have one of the highest dividends but in a way that has the least amount of risk. When you do the JVs, it's certainly an interesting structure. We look at it. It does add more leverage. So we just want to weigh that against what we set out to do for our investors longer term.

So everything is on the table, buybacks, investing into the market, different leverage structures. But what we don't want to do is really layer in a lot of risk. So it's the reason why PIK preferreds, which have been very topical recently, we have almost 0% of PIK preferreds in the portfolio. And because we think when those go sideways, the recovery is close to 0. So we'll weigh all of those things, but with the overarching goal of minimizing risk and maximizing returns for investors.

We will take our next question from Robert Dodd with Raymond James.

Sorry to kind of pile on Fin's question about restructuring, et cetera. I mean, historically, right, for BDCs, about the worst kind of outcome for recovery is a restructuring that doesn't stick, right? If it gets nonaccrual, restructured and then ends up back on nonaccrual, those tend to produce extremely low recovery. So I'm not saying you've had any of them yet, but that's the issue, right? So when it comes to a restructuring, obviously, a BDC has an income mandate, so you don't want to eliminate all the debt necessarily. But you also, worst case, do not want it to have another failure. We've seen over the last 2 years, maybe not over the last -- a much greater incidence of restructurings failing. I can give you a list of names, if you want. Not generally yours, obviously, right, but across the industry.

So when you look at like some of these just ACI, but the Medallia, like obviously, a very big deal. There was also a big software deal a couple of years ago that underwent a restructuring and has defaulted again, right? So why 3 is not really a meaningful sample size in terms of historics. So why should we investors believe like that you've done it right. And I realize that's really hard to quantify, but the risk of a redefault really is really outsized in terms of NAV risk. So how do you evaluate that? And how are you sure that you're not going to have that kind of incident occur?

Yes. Thanks, Robert. This is Brad. Well, we agree with you. We start there that when you restructure a business, you need to set it up with the right capital structure. I've referenced the 10 we've done in BXSL. But clearly, in BXCI, we've been doing this for 20 years. And we've had our fair share of restructurings that went exceptionally well, and we've had our fair share of some that didn't go well. It's really the ones that didn't go well that you learn your lessons, your best lessons from. And that informs us on these new restructurings that we do and how to set up the capital structure that positions the business for success.

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. And over that time period, over 20 years, our loss rate has been 10 basis points. So not all of them have worked out perfectly. Some of them have worked out exceptionally well. But it comes from a lot of experience, but it starts from us agreeing with what you just said, which is you need to set these up with appropriate amount of debt. You're right, we're an income payer. So we need to think about that. But to do so in a way that positions the company for success and you're not back at the table. So we have 120 people in our kind of our CIO office, our restructuring team. This is all they do. That's all they think about and because we're very much in line with how you and Fin are thinking about it.

Got it. And one more, if I can, not technically a follow-up. A lot of talk about the second half of the year in terms of deal flow, to your point, like the repayment activity is pretty good. Your choice of words today, I think, was constructive on the outlook for activity. A lot of other managers have said things like optimistic or things like that. You sound -- constructive sounds less optimistic than optimistic to me. So could you give us any color? Obviously, everybody has been wrong multiple times over the last couple of years. So a little caution is justified. But can you give us any kind of like what's your comfort level that activity really is actually going to pick up in the second half or maybe in '27? Or are you still constructively cautious, inflections?

So I'm one person, this is Brad. And I would say I'm very constructive. How about that? But as I also said 2 years ago, we were going to start a super cycle. So -- but listen, I think all the fundamentals are there, which is why we're optimistic. The deal activity in the past couple of months has picked up a fair bit just in terms of screenings. The U.S. economy is fairly healthy. We've got to get through this war, which feels like it's trending the right way. So there are a lot of reasons to support us being very constructive.

[Operator Instructions] We'll go next to Arren Cyganovich with Truist Securities.

You highlighted amendment activity during the quarter, and it sounded as though you were being somewhat proactive on this front. I was -- but you also mentioned that it was kind of mostly benign or positive events. Are you getting a decent amount of amendment requests from any of your borrowers? Or -- and are you actually kind of looking to be proactive in terms of some of the ones that maybe you want to give a little bit more flexibility to?

Yes. Thanks, Aaron. I'm happy to take that. This is Teddy. I'd say a couple of things. Overall, no real significant change over the last few quarters. I will say we did see amendment activity pick up marginally versus the previous quarter. As we dig through that activity, over 97% is driven by M&A, EDTL extensions, things we can do proactively to support our companies over a long period of time in addition to what are just ongoing sort of more benign technical matters that are a little bit less relevant.

We are being highly proactive with our companies, more on being supportive in an environment to Brad's point, where M&A is picking up across the space, our companies can take advantage of that, particularly in some sectors where multiples are lower, that builds to the equity thesis and also helps diversify from a credit perspective. So we've had good case studies over a long period of time where we've financed our businesses over the life cycle, and we'll continue to do that through amendment activity.

And where are we seeing, I guess, the impacts of that? And maybe it's just kind of behind the scenes because it doesn't look like there's much in terms of amendment fees that are going through. How are you structuring these typically?

Less so fees, but if you do look at sort of what we deployed in the quarter, you do see some add-ons. You see some DDTLs that increased. So it's less going to be driven by fees. I think there was marginal structuring/amendment fees on the income statement that you can see, but more so in deployment.

Yes. And most of the amendments, because they're positive, Aaron, you don't -- meaning it's good for the credit. You don't typically charge fees on those sort of activities, and that's the bulk of kind of what we've seen in the past couple of quarters.

We will take our next question from Ken Lee with RBC Capital Markets.

Just one on the portfolio. Wondering if you could just talk about how much of the investments are or would be considered to be on some sort of watch list and maybe how that's been trending more recently?

Yes, I'm happy to take that. So we've given the stat that we started this a couple of quarters ago where the bottom 10% of the portfolio that was marked at 70% this last quarter. I think that's the best way to frame it. What we have seen is some positions that have taken marks continue to take some marks. It's a relatively concentrated set in the portfolio. But in terms of that bottom 10% mark, that's probably the best stat to look at. Again, that was marked at 70% in the last quarter.

Got you. Very helpful there. And then one follow-up, if I may. I wonder if you could talk about any additional efforts or options that you have to further optimize your funding mix over the near term?

Yes. I'm happy to take that as well. So highly focused on funding mix. We've seen increased diversity over the last year. We've actually seen spreads come down overall over the last year on our fundings and liabilities. I think what we also see is a financing market that's wide open. I mean we have access to all capital markets seeing strong demand post the Q1 volatility. IG bond spreads have largely retraced the widening we saw earlier this year. We did take advantage of that. We issued a $650 million 5-year bond that priced just over basis points over treasuries. That book was near 5x oversubscribed and is actually now trading tight to where we issued. So we'll continue to access the markets. We're sitting at right around 32% secured, 68% unsecured. We like being in that position because that adds operating flexibility to the portfolio. We also do see the bank and CLO markets continue to be functioning in a healthy way. So I would expect that we're continuing to access the capital markets.

We will take our final question from Paul Johnson with KBW Research Analyst.

Just a little bit more on Ken's question in terms of like the internal watch list and the bottom 10% of the portfolio. I mean, at this point in the cycle, a lot kind of developed here this year in terms of credit risk and spreads, et cetera. But do you see, I guess -- did you feel, I guess, that bottom 10% is kind of, as you mentioned, I guess, kind of a contained subset of the portfolio where you feel like you've got a pretty good handle on this is what you've identified as maybe the tail risk within the portfolio or maybe it's still just relatively early in addressing some of the maturity walls from the earlier COVID vintages that are set to be addressed here over the next few years?

Yes. Maybe I'll start, Paul. So I would say the reason why we focus on this bottom 10% is just to highlight that from a mark standpoint, we feel like we're being very proactive in marking the assets to the right level. If you look at kind of half of those assets, actually, the sponsors are putting in more kind of equity into those businesses. So that would suggest that longer term, they're fairly supportive of those assets. I think your question is, one, do you see a migration to that -- to the bottom tail kind of expanding. And I would point out just a couple of statistics that we've highlighted. One, we don't have a lot of kind of pick assets and will first lien. So I think all our companies continue to generally service their debt with cash, and that is a really important statistic for everyone to focus on.

The other thing this quarter, you saw the percentage of assets below 90% and below 85% actually decreased this quarter. So it's trending in the right way. The overall portfolio continues to perform very well, except for the bottom few assets that we have that tend to be older vintages. They tend to be -- your tail tends to be assets that are a little bit older and they haven't grown out of their capital structure. Some of these businesses, so, Paul, are actually quite good. but they didn't grow into their capital structure given how they were set up maybe 5, 6 years ago. So those are the ones that we can reset and try and reposition them for growth and get a good recovery. But 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.

That's very helpful. And last question, maybe a little bit more of a technical one, but just trying to understand in the presentation in terms of your LTV statistics sort of year-over-year, the 51.9% LTV in the portfolio today versus 46.9% a year ago. Is the change there? Is that just kind of like a weighted average change of mix within the portfolio? Or is that driven more from -- or I guess, is there some sort of valuation impact where is the valuation coming from your own proprietary valuation versus the most recent mark that would be making that adjustment? Or is it just kind of further drawdown of debt within these companies?

Yes. Good question. It's a relatively simple answer. It is a weighted average. We are refreshing our view for LTVs, taking into account both underlying fundamentals and valuations, both public and private. Remember, we are predominantly first lien. Average LTV at close is low 40s. But certainly in a market where multiples have compressed over the last year, you would see that reflected in your LTV. The pickup in the last quarter alone was actually most related to just 2 companies. So a bit of a weighted average that you're seeing somewhat tied to multiples that we've seen over the last year in the public market.

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

Thank you, everyone, for joining us for our call this morning. We really appreciate all the thoughtful questions, and our team will be available for any follow-ups. With that, that wraps our call this morning, and we look forward to speaking with you again next quarter.

Good day, and welcome to the Blackstone Secured Lending First Quarter 2026 Investor Call. Today's call is being recorded. [Operator Instructions] 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 First Quarter Results Conference Call. Joining me today are Brad Marshall, Co-Chief Executive Officer; and Teddy Desloge, Chief Financial Officer, along with other members of the management team available for Q&A, including Jonathan Bock, Co-Chief Executive Officer; and Carlos Whitaker, President.

Earlier today, we issued a press release with a 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 copyrighted material of Blackstone and may not be duplicated without consent.

With that, I'll turn the call over to Brad Marshall.

Thank you, and good morning. Before turning to the quarter's results, I want to take a step back and address the broader market environment. The first quarter unfolded against an uncertain backdrop across asset classes, with the S&P 500 investment grade, high yield and broadly syndicated loan markets, all posting negative returns amidst geopolitical developments, concerns around AI's impact on software businesses and overall wider spreads.

Simply looking at the leveraged loan index, spreads widened roughly 50 basis points and returns were down 55 basis points during the quarter. Investor sentiment was clearly negative during the quarter. And despite private credit generally outperforming the broadly syndicated loan and public equity markets, capital flows into several non-traded BDCs declined and public BDCs traded down meaningfully.

Amidst the volatility and broader market pressure, the private credit markets continue to be well capitalized and in high demand by private and public companies. Through Q1, over 80% of borrowers chose private lenders for LBO financings. The direct-to-borrower model is often a better solution to our corporate partners, all while seeking to provide investors with risk mitigation through senior positioning, covenant protections and contractual income generated returns. We believe these attributes have contributed positive returns in direct lending for Blackstone Credit and Insurance, or BXCI, since starting nearly 20 years ago. In fact, over the past 20 years, over $160 billion has been invested in BXCI's North American direct lending strategy with less than 10 basis points of realized annual losses as described in materials.

More broadly, while we expect continued normalization of default activity across public and private sub-investment-grade markets from historically low levels, the private credit model is built for that environment. In our view, performance in our portfolio will continue to be underpinned by high embedded current income, disciplined asset marks and highly negotiated structural protections, and we expect that long-term outperformance to continue relative to liquid markets.

For BXSL specifically, first and foremost, we have nearly 98% first lien exposure with substantial cushion of nearly 50% junior capital or equity below our capital structures on average. Second, our credit agreements are heavily reviewed with key provisions we negotiate during periods of underperformance and include strong collateral protections. Third, nearly 80% of BXCI's historical exposure is with either a sole or lead lender role, typically providing a position of influence.

We are positioned in capital structures to enforce our rights, and we believe we have unmatched resources, experience and infrastructure as part of Blackstone to help drive positive outcomes. Furthermore, in BXSL, as we enter our eighth year, we have had a total of eight restructurings that incurred realized losses, two of which have now been fully realized. In those two deals, inclusive of interest received, we achieved a realized multiple on invested capital of 0.98x, reflecting nearly a full recovery of our loan basis.

Turning to performance this quarter. We generated net investment income, or NII, of $0.77 per share, fully covering our dividend and our total net return was over 70 basis points for the quarter despite a volatile market backdrop. We deployed $325 million of new capital, and we saw nearly $450 million of repayments, consistent with our messaging that repayment volumes remain healthy. As we sit here today, we see visibility to over $600 million of repayments in the next 3 months to 4 months, which we expect to use for a combination of new investments and share buybacks.

NAV per share as of Q1 was $26.26, down approximately 2.5% quarter-over-quarter, reflecting changes to both public and private loan market spreads and company fundamentals. While these marks reduced NAV in the quarter, we believe they are an important part of the private credit model that reflect current information and market conditions and every line item is publicly reported versus investment costs and par value. Nonaccruals for the quarter were 3.1% at fair value and 4.7% at cost.

We added three new positions to nonaccrual, including Medallia, now marked at 60.3, Affordable Care now marked at 69.8 and Paramount Global Services now marked at 65. Of the 316 portfolio companies in BXSL, these three names make up over 88% of our nonaccrual based on fair market value. Before detailing these portfolio developments, it is worth highlighting that we believe the overall portfolio remains resilient if you look at averages across our book, stable high single-digit EBITDA growth over the last 12 months, consistent portfolio company EBITDA margins of 28%, interest coverage at 2x, which is a 17% increase over the last 2 years and an average mark of 96.2%, which is generally in line with the broadly syndicated loan market.

Moreover, the bottom 10% of the portfolio is marked at 73, with valuations reflecting underperformance on a handful of names. Certain borrowers may continue to see challenges and require sponsor capital or capital structure improvements. We believe we are very well positioned to drive this process as senior secured lenders. On the names we added to nonaccrual this quarter, the largest is Medallia, which represents a 1.7% of BXSL's fair market value. While the company paid its full quarterly interest in cash in March, we have begun working towards a restructuring.

As part of this restructuring, we, together with the other lenders, plan to invest new capital into the business and meaningfully delever the balance sheet. This will allow the company to, one, better serve its customers; and two, invest in new products and AI features. As we mentioned previously, Medallia is highly profitable today, and we expect it will be greatly benefit from a delevered capital structure, which we expect to finalize over the next few months.

Affordable Care, representing 0.73% of BXSL's fair market value, operates in the dental service space where demand trends have weakened and the business carries a relatively elevated cost structure. Importantly, we are first lien lenders in a capital structure with multiple layers of junior capital below our exposure and strong lender documentation. We plan to enforce our rights to senior lenders, and we are actively engaged with sponsor management team, junior capital providers and lender base to improve the capital structure.

Finally, Paramount Global Services, which represents 0.26% of fair market value and remains current on its coupon payments was also added to nonaccrual -- the business is a building products distributor within the trading companies and distribution industry and has seen softening demand consistent with the broader industry, which has impacted performance. In our view, the sponsor has been supportive to date and believes the challenges to be more cyclical in nature. The consistent theme across these three names is that we sit at the top of the capital structure where we have both strong documentation and lender protections. We use these to help improve the outcomes for investors and the companies.

On the new deal front, our largest new commitment was to Firmus Technologies during the quarter, an emerging GPU cloud service provider. Blackstone led a $10 billion GPU-backed debt financing to support the company's cloud build-out, serving large investment-grade counterparties, including major hyperscalers and enterprise cloud customers. The loan is senior secured denominated in U.S. dollars with lenders having a first lien on GPUs. To date, Blackstone has led or anchored nearly $25 billion of GPU financings and is the largest owner of data centers globally.

We leverage the insights gained from our experience investing across the digital infrastructure ecosystem to identify investments that benefit from the continued tailwinds we see from the build-out and demand for AI infrastructure. In this case, proprietary origination and structuring complexity helped create attractive relative value for our investors.

At BXCI, we continue to see attractive opportunities within the digital infrastructure, life science and infrastructure services area of the market, three higher conviction themes with secular tailwinds where we can leverage Blackstone's specialized expertise. We said last quarter that repayments would create additional balance sheet capacity if they materialize. We emphasize this because repayments give us room to be patient, stay disciplined and make capital allocation decisions between paying down debt, investing in new deals as spreads may widen and potentially buying back shares.

Natural turnover can pull assets back to par upon realization. In other words, when a credit is marked below par due to market volatility or temporary performance pressure, but the underlying business retains meaningful equity value, repayments at par converts that discount into a positive realization for shareholders. A few recent instances. SelectQuote was previously marked as low as 88.4 and Colony Hardware at 91.75. Both were repaid at par during Q1.

Alliance Ground's loan was marked at 96.75 previously and was taken out at par, while our equity position returned 2x invested capital. And lastly, and probably most notably, AEVEX Aerospace, which went public in April last month, -- the business underperformed early in our BXSL investment. We held the position at a low mark of 82.5 and yet we were taken out at par in Q2 following a very successful IPO. These four examples represent over $300 million of total repayments at par since Q4 despite a previous combined average mark in the 80s. These are also examples of what we have stated in past quarters. We believe realized performance is what ultimately matters and a more active deal market leading to more repayments can be helpful longer-term return driver. This is also why we view interim marks and embedded income together.

Current income can provide a significant return cushion, while repayment activity can convert below par marks into par realizations. Finally, on software and AI, we continue to see public market bifurcation between business models that are more resilient and more insulated versus those at greater risk of potential disruption. For public loans in the leveraged loan index, companies growing earnings greater than 10% in more protected end markets have seen modest spread widening and are trading on average north of 95%.

In public equities, companies with a similar profile trade at a median of nearly 14x EBITDA. BXSL's software portfolio has continued to perform well with low double-digit percent LTM EBITDA growth and a large portion of our exposure in historically resilient subverticals such as data management, ERP and security. Across approximately 70 software companies in the portfolio, weighted average LTM EBITDA is over $280 million and weighted average revenue exceeds $750 million.

On average, these companies also maintain interest coverage of 2x. As the sole or lead lender for the majority of transactions, BXCI can be more proactive and influence change versus acting as a passive investor. In many cases, BXCI's AI team has been working directly with some of these companies. We believe Blackstone has a differentiated perspective on AI. Across the firm, we have deep technology verticals that support and inform investment activity, including hundreds of technologists helping Blackstone's expansive portfolio on software procurement, technology implementations and AI adoption.

We also benefit from senior AI experts and technology leaders across the platform. Additionally, Rodney Zemmel, former global leader of McKinsey Digital is helping us advance AI-enabled underwriting, risk analytics and portfolio activities to support BXCI's investment process. At large, the firm is in constant dialogue with AI market leaders across the digital infrastructure ecosystem. You may have seen the announcement this week that Blackstone is helping create a new AI service firm with Anthropic to bridge the gap between the technology and actual business applications.

Once built, we expect that BXSL portfolio companies could engage the new firm and benefit from these services. So stepping back, our message this quarter is that while defaults may continue to normalize off historically low levels in the sub-investment-grade market, this activity is not new and is built into the long-term return model across diversified portfolios of senior secured assets.

The important point is that performance is underpinned by high embedded interest income, disciplined marks that create cushion for future outcomes and the structural protections we negotiate as first lien lenders. Said differently, this is a model designed to produce a range of positive performance over time, even as individual credit experience is volatility. We believe the market is functioning. Our portfolio remains broadly healthy. Our underwriting and senior positioning matter, and our active asset management is designed to drive positive performance where companies see turbulence.

At Blackstone is the world's largest alternative asset manager, we have the scale, operating resources and experience through cycles to lean into situations that require operational support. That matters because even when defaults occur, we believe there is no better platform than Blackstone to manage them. BXSL has delivered a nearly 11% inception-to-date return, which represents 550 basis points of excess return to the broadly syndicated loans.

We have done this through a simple formula that remains in place today, and that has continued to support outperformance. Senior positioning in BXCI originated assets in defensive areas of the market, high current income, low expense ratios, strong structural protections, disciplined marks and an active asset management. Taken together, these elements give us confidence in BXSL's ability to outperform for shareholders across cycles. With that, I'll turn it over to Teddy.

Thanks, Brad. First, on performance. BXSL's net investment income for the quarter was $179 million or $0.77 per share, representing 100% coverage to our dividend on a per share basis. Payment in-kind income represents less than 7% of total income, which is down 21% on a quarter-over-quarter basis from over 8% of total investment income. Interest income, excluding payment in-kind fees and dividends, represented over 92% of total investment income in the quarter.

Looking back, BXSL has outearned its dividend every quarter since inception. More recently, since the beginning of 2023, BXSL BXSL's annualized earnings exceeded its distribution yield by approximately 160 basis points on a weighted average basis. Over this period, undistributed earnings were retained in net asset value, which represents approximately $1.80 per share as of the first quarter or over $410 million. This capital has been reinvested into new deals, which has been accretive to NII by approximately $0.07 per share after accounting for annual excise tax on undistributed amounts.

We outlined last quarter that should BXSL stock trade at a discount to net asset value, we would consider returning a portion of undistributed earnings to investors. We are doing so by reaffirming BXSL's quarterly dividend of $0.77 per share, which we anticipate will be covered by a combination of both current and previous undistributed earnings. This provides a temporary bridge as we realigned our dividend with the longer-term earnings profile as rates have reset on our predominantly floating rate portfolio. As always, we will continue to evaluate the dividend with our Board every quarter. It is worth noting we manage BXSL with a long-term orientation. That means remaining patient through periods of market volatility, continuing to focus on income generation and positive realizations and making capital allocation decisions between -- based on long-term shareholder value rather than short-term sentiment.

Moving to the balance sheet. We ended the quarter with $13.9 billion of total portfolio investments at fair value, $8.1 billion of outstanding debt and $6.1 billion of total net assets. Net asset value per share at quarter end was $26.26, down from $26.92 in the fourth quarter or 2.5%, which was impacted primarily by $0.67 of unrealized losses in the portfolio, partially offset by $0.01 of net realized gains. The portfolio was marked at 96.2 as of the first quarter, down from 97.3 last quarter, reflecting a combination of broader spread widening across the public and private credit markets and company-specific fundamentals.

Importantly, we have delivered net cumulative realized gains overall on investments since inception. As Brad highlighted, we saw healthy fundamentals on average across our portfolio companies demonstrated by consistent high single-digit percent EBITDA growth and increasing interest coverage ratios of two turns, which are up 5% from a year ago and 17% in the last 2 years. Earlier, Brad mentioned some of the advantages of senior private lending and documentation is an important part of that defensive positioning. When we lead a transaction, we are able to negotiate directly with our borrowers and sponsors, and we place significant emphasis on lender protections from the outset.

We conducted a bottoms-up review of Blackstone credit agreements across key covenant protections relative to broadly syndicated loans. In BXCI-led transactions, nearly 100% included enhanced protections against asset stripping and collateral release as well as caps on EBITDA add-backs.

Only 40% of broadly syndicated loan documents contain similar protective provisions. We believe that discipline is critical and will support recoveries in the private market through cycles. And this reinforces the value of directly negotiated documents, which can lead to benefits for senior secured private credit portfolios. Further, we did not see an increase in material amendments or performance-driven PIK amendments in the first quarter. In fact, both PIK income and amendment activity dropped this quarter. We had 30 amendments in the quarter across our portfolio, down 25% over Q4 with over 95% related to amendments associated with add-ons, PDTL extensions and immaterial technical matters.

Turning to activity. As Brad mentioned, BXSL funded over $325 million at a weighted average spread of nearly 530 basis points above the reference rate. Net funded investment activity was negative $126 million after nearly $450 million of repayments. This represented an annualized repayment rate of 13% of the portfolio at fair value compared to 15% for the prior quarter and 28% for the same quarter in the prior year.

As a reminder, BXSL's Board of Directors approved a discretionary share repurchase plan last quarter under which BXSL may repurchase up to $250 million in the aggregate of its outstanding common shares in the open market at prices below its net asset value per share. As we see repayment activity creating additional capacity through year-end, we expect to evaluate share repurchases so long as trading levels persist at similar discounts to NAV as seen in the first and second quarter thus far. That said, capital allocation for share repurchases will be weighed against both new deployment opportunities and repayment volume as we manage to our stated long-term leverage range of 1 to 1.25 turns.

Our liability profile remains diverse across multiple financing markets, including $10.2 billion of committed debt capacity and $8.1 billion of funded debt as of the end of the first quarter. We have relationships across diverse lending counterparties and a balanced mix of unsecured and secured funding with approximately 56% of funded debt unsecured and 44% secured. This diversity of funding sources, combined with our scale and long-standing lender relationships supports financial flexibility and the cost of capital that remains attractive relative to our traded BDC peers.

We remained active in the quarter on liabilities while reducing our cost of capital. We have $1.7 billion of drawn on our asset-based facilities with multiple banks, of which had a weighted average drawn spread of SOFR plus 1.84, down 8 basis points since Q1 2025. We successfully closed an upside for the BXSL revolver, increasing the facility by $100 million to a total size of $2.5 billion. BXSL to date continues to have the most competitively priced revolvers across our traded BDC peers.

In addition, we have over $450 million of CLO debt outstanding at a weighted average coupon of SOFR plus 154 and $4.5 billion of unsecured bonds outstanding as of March 31, $2 billion of which is not swapped and has a weighted average coupon of 2.58% -- this includes a $400 million 3.5-year bond we issued in February priced 200 basis points above the benchmark treasury rate or 5.25% coupon. Taking all of this together, our all-in cost of debt for the first quarter was 4.9%, down from 5.09% in the first quarter of 2025. Total liquidity at the end of the first quarter was $2.3 billion, including unrestricted cash and undrawn debt available to borrow, while ending leverage as of March 31 was 1.27 on a net of cash basis and 1.32 turns on a gross basis. We expect repayment volumes to continue. And with that, we can manage to the high end of our range of 1 to 1.25 turns.

With that, I'll ask the operator to open it up for questions.

[Operator Instructions] We will take our first question from Rick Shane with JPMorgan.

Look, the framework that we've been asking most of the BDCs this quarter is really trying to understand where you think we are in the continuum, both in terms of return profile and also where we are in terms of deal structure. I am curious, particularly on the ROE side, sort of if you can frame what you think the opportunity is now and put it in the context of what you think we've seen historically, realizing, of course, you guys are asset sensitive. So if you want to think about it as an ROE is a SOFR plus, that's a great way to do it.

Sure. Rick, this is Brad. So we mentioned some of this on the call, but we have seen spreads move a little bit wider, and we've seen the cost of our leverage decline. So that's a net positive. The other positive is that as we see continued turnover, then you should expect some of those assets, 4 of which we talked about on the call that were marked below par start to gravitate to their repayment price of par or better. So those are the two kind of positive kind of drivers of return. And that's offset by mark-to-market volatility in our assets driven by what we're seeing in the market backdrop and if there is interim underperforming performance on assets.

What we tried to do on our calls is identify on that last bucket, the bottom 10% of our portfolio, which we've marked it at $0.73 on the dollar. And as they perform in future quarters, we'll either take those marks up or down or the sponsors may contribute more capital. But that's where you'll see kind of most of the volatility from a mark-to-market standpoint.

The good news there is, historically, recovery rates have been higher than that. And even if they're lower than that and all of those assets default, the downside from a realized NAV standpoint is actually pretty limited. If you assume 50% recovery rate on those bottom 10% of your assets, that means we have 2.3% asset movement from here. So I think to frame your answer without perfectly answering it, you have very high income across our vehicle and other BDCs that helps offset any potential losses in an asset class that historically has had moderate default rates and very strong recovery rates.

BXSL is uniquely positioned because we're 98% senior secured. So when we do see nonaccruals, three of which we talked about on this call, we're in control. We can reset the capital structure, work to improve the business and capture the upside to the extent we're successful.

And we talked about the long history we've had doing that where we actually only lost less than 10 basis points annually in realized losses because of that seniority, because of the high income that we generate on these investments. So from here, Rick, I would say you have a couple of positive potential drivers of return. We'll see what happens with rates. And then you have a couple of interim points of volatility that are based on market conditions and based on certain assets interim performance.

I appreciate it. I think somewhere along the line we've written, we shouldn't assume that everything going forward will be unprecedented. But I'm hoping at some point soon, we'll be right on that.

We will take our next question from Cory Johnson with UBS.

I was wondering if you could maybe size how much of the losses that you saw this quarter were sort of a result of credit issues versus the AI concern versus spread widening that we've seen in the market?

Sure. Why don't I take a stab at that, Cory. Your line was a little bit muffled, but I think I heard it. So if you look at this quarter, about half the markdowns that we saw were related to the two positions -- two of the positions we put on nonaccrual that made up about 48% of the markdowns.

And then the remaining 52% was spread very broadly across the portfolio. More specifically, our software names, we took down 270 basis points during the quarter based on AI kind of concerns for the most part.

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

Just on the prepayment activity there, the visibility that you're seeing there. What's driving some of the healthiness that you've seen in terms of prepayment activity even despite a potentially wider spread kind of environment there?

Yes. I'm happy to take that. This is Teddy. So we're tracking a number of repayments. And I think as you look at the list, right, it's really a mix of a few things, sales to strategics. We did have one company go public in the quarter, as Brad mentioned, sponsor-sponsor M&A continues, although it's been a little bit softer and also refinancing. So it is a bit of a mix. We did highlight last quarter we have visibility to over $550 million of repayments near term. We saw that conversion in the first quarter. We saw $450 million as we sit here at the end of the first quarter, visibility to another $600 million in Q2. So that turnover continues at a healthy place. As it relates to the full portfolio and what the potential return impact on that is we do have about two points of call protection and unamortized OID across the portfolio. So as those repayments continue, there is potential for potential monetization of that call Pro and unamortized OID and income.

And Ken, I would expect that repayment activity picks up towards the end of the year. So we've had a healthy start. We've got good visibility. And I think that continues to pick up towards the end of the year as we see more deal activity flow through the system.

Got you. Very helpful there. And then one follow-up, if I may, just in terms of the common dividend there. It sounds like there's some supplementing from the undistributed distributable earnings there. Wondering how many additional quarters could you see that? And then how would you frame out some of the potential return there?

Yes. Just to summarize, as we take a big step back, we've covered our dividend every quarter since inception, most recently out earning by over 150 basis points, right? We're paying out 11.7% distribution among the highest across the peers. And as a result of that, we're sitting with about $1.80 of undistributed NII and that capital has been reinvested in the portfolio.

We also did mention previously that we consider distributions from undistributed NII if trading below NAV, which we have been over the last couple of quarters. So to facilitate that, reaffirming our dividend for the second quarter, we expect that to be covered by a combination of previous undistributed and current earnings. This would be viewed as a temporary bridge. As we've said previously, recognize that rates have come down. We continuously evaluate the longer-term dividend to align with the earnings generation of the portfolio, and we'll continue to evaluate that with our Board each quarter.

We'll take our next question from Finian O'Shea with Wells Fargo Securities.

Brad, sort of a crystal ball question admittedly, just on credit, where I think the industry is rolling through just a bit of a tough vintage right now. And I know there's spread widening on top of that, but just sticking to credit, like new nonaccruals, what inning do you think we're in, in dealing with underperforming assets? How long should we expect new nonaccruals to continue to roll in?

Well, I would expect that in levered credit, there is always going to be some level of nonaccruals flowing through everyone's portfolios. We generate a double-digit dividend for our investors. And along the way, we take some risk in doing so. And so I think default rates will normalize off what has been very low levels. And you're seeing that flow through, I think, most people's earnings over the course of the year. But I don't think it's elevated. I don't think it will be much more elevated from here. As we look at our portfolio, most of the issues that we're seeing, one, we think are already marked into the portfolio.

Two are fairly identifiable meaning we know what the issues are. They're not broad-based. They're maybe a bad acquisition, maybe some operating issues, maybe a customer loss. And so I think it's actually quite manageable. It doesn't mean there won't be more defaults in our portfolio and others. But I think what really matters as you think about kind of the outcome of any future defaults or assets that go on nonaccrual is are you first lien in the capital structure? Can you control the outcomes of those nonaccruals?

And are you in a position to enforce your rights as first lien lenders? And if you are, then if you look back over a long history, certainly of Blackstone, 20-plus years, the outcomes are actually pretty good. loss rates are fairly low. You're able to reset the capital structure, give the company more flexibility to grow their business, to invest into their business versus cutting costs to service their debt. So I think it's -- you have to put all of it in perspective when you're looking at coming off of low default rate environment and where you sit in the capital structure.

I appreciate that. I guess sort of a small -- sort of a follow-up to that thread. If today's -- if the nonaccrual rate in the industry again, if it's more of a normalization than a flare up, do you think like the $400 million to $500 million spread frame is just way too low and the industry needs to sort of reprice risk in a more attractive way?

Well, I think the spread environment will be dictated by the quality of deals you do and how the broader market, including the public loan market is pricing risk. And what we've seen over the past number of years is the public markets continue to price risk tighter and tighter, reflecting that the default environment. What I think will happen, Fin, over the course of this year, if deal activity accelerates, then you could see a widening of spreads in order to get those deals done in the private markets. But for us, our kind of true north is to deliver premium over those public markets. You know this better than anyone, but last year, we generated a 360 basis point premium to the public markets despite some markdowns on certain assets. First quarter, that premium was over 100 basis points. So I think the asset class in BXSL and others continues to deliver what it set out to do, which is deliver that premium to the public markets and drive an attractive return for investors.

[Operator Instructions] We'll take our next question from Arren Cyganovich with Truist Securities.

I was hoping we could discuss some of the AI infrastructure investments that you were referencing, the GPU-backed debt financing. How are they structured? What kind of rate do you get on these loans? And are they backed by the borrower? Or are they nonrecourse? Just trying to understand the kind of risks rewards of the giant investment that's going on in the industry?

Yes, Arren, I think I caught most of that. The -- in terms of kind of where we're investing across AI, maybe just start with a point of perspective. I think today, Blackstone has become the largest investor in AI-related infrastructure in the world. So we have this pretty unique vantage in this ecosystem that continues to grow -- and we've developed these in-house capabilities, which I mentioned. And I know your question was around investing, but it's also worth highlighting that these capabilities, these viewpoints helps us manage our AI exposure, helps us implement AI strategy in our portfolio companies.

We're currently working with Medallion more specifically. And so it's a very unique asset to have within Blackstone because it's a 24/7 resource. We announced the partnership with Anthropic as well as in addition to that. So this entire build-out of the AI infrastructure is something that we will continue to stay very active in and BXSL will benefit from that. Our investments in the space will continue to be first lien senior secured backed by collateral backed by contracts. That is what you saw in our announcement with Firmus. That deal was a commitment last quarter that will start to fund this quarter, and we'll disclose the terms of that loan next quarter.

Okay. That's helpful. And understanding that you have a strong history with credit and recoveries, but the near-term impact of these new nonaccruals is going to weigh on your earnings power. How can you, I guess, get some of that earnings power back? And what is the investment appetite right now given the environment? Are you continuing to see good opportunities? And when would you expect to start to see some of that investment activity to occur?

Yes. So on the nonaccruals, they are clearly not accruing any income. As we work through the restructuring, we will reset the debt lower. So the debt that we reinstate lower will be accruing income. So there's earnings upside from those nonaccrual names going forward. In terms of the opportunity set, we will really be defined by how much repayment activity that we see that allow us to reinvest into the market backdrop.

Again, repayment activity does two things. It helps drive a little bit of extra returns because of the fee acceleration that we get, and it does help with NAV. And then lastly, those repayments, we will use either to buy back shares or to reinvest into a market backdrop that in this moment feels a little bit wider, albeit there's not a ton of activity that we've seen more recently.

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

You mentioned kind of balancing the allocation of repayment activity between share buybacks and new investments, I guess, based on kind of relative attractiveness there. Given some of the commentary we've heard about improving economics and terms on new deals, kind of curious how you see those two kind of competing uses of capital stacking up currently? Like is there kind of a clearly more favorable use in the current kind of environment?

Yes. This is Teddy. I'm happy to take that. I think it's a few things. Number one, we do see clear repayment volume continuing, right? We're mentioning $600 million in the near term. As that happens, there are some competing allocations of capital. Number one, we do want to manage our leverage ratio to the 1 to 1.25x longer-term target. We are at 1.25x net, so we're not too far off of that.

Number two, what we have said in the last quarter and continue to see is that buying back stock, buying back shares is accretive at similar discounts that we've seen in the first and second quarter. So if those continue, we will certainly evaluate that as a real option in the back half of the year. And then number three, as Brad mentioned, as repayments hit, we see a little bit of a return benefit from potential return benefit from unamortized OID and then we can redeploy that potentially at wider spreads. We saw spreads marginally wider in the first quarter. As we look at what's getting done in the market today, it's continuing to move a little bit wider. So we will have potentially some capital to take advantage of that tied to repayments.

Okay. That's helpful. And then one other on Medallia. So I guess you kind of talked about like the confidence you have in the underlying business going forward, right? I'm wondering how much of the challenges over there would you categorize as like capital structure related versus maybe more fundamental pressure related to competition from AI, say?

Great. Ethan, it's Brad. I'll take that. I think most of their challenges have been around their capital structure, and it's prevented them from fully investing into the company for growth because their debt levels were higher than what their cash flow supported. And so as we go forward, our job is to reset the capital structure in a way that will position them to reinvest in the business and grow. And I think after we do finish the restructuring, they'll be less levered than their competitor and therefore, potentially better capitalized to continue to expand. They will most definitively need to invest into AI to continue to improve their product offering for their clients. But the company has already started this journey. We're supporting them with more capital and our AI resources. And as I mentioned on the call, the company today is highly profitable. And with the new capital structure, we're very optimistic.

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

Thank you again for your time and continued interest in BXSL and for all your questions today. We look forward to updating you next quarter. Have a great day.

Good day, and welcome to the Blackstone Secured Lending Fourth Quarter and Full Year 2025 Investor Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the call over to Stacy Wang, Head of Stakeholder Relations. Please go ahead.

Thank you, Katie. Good morning, and welcome to Blackstone Secure Lending Fund's Fourth Quarter and Full Year Results Conference Call. Joining me today are Brad Marshall, Co-Chief Executive Officer; and Teddy Desloge, Chief Financial Officer, along with other members of the management team available for Q&A, including Jon Bock, Co-Chief Executive Officer; and Carlos Whittaker, President.

Earlier today, we issued a press release with a presentation of our results and filed our 10-K, 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 certain than 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-K filed earlier today. This audio cast is copyright material of Blackstone and may not be duplicated without consent.

With that, I'll turn the call over to Brad Marshall.

Thank you, and good morning, everyone. Before highlighting the results from the quarter and some key observations, I would like to take a moment to share our macroeconomic views heading into 2026. Stepping back to the broader macro environment, despite periods of volatility over the past year, including tariff uncertainty, geopolitical instability and elevated headline risk, we continue to see a fundamentally healthy economic backdrop.

Overall, corporate earnings growth has remained resilient, the consumer continues to demonstrate strength and fiscal and monetary conditions remain supportive. Together, these factors are contributing to sustained economic momentum. Key driver of that momentum is the ongoing technology and AI-driven investment cycle, which I will provide more details on shortly.

We believe we are in the early stages the significant capital expenditure build-out focused on AI, digital infrastructure and related technologies, providing a durable support to growth across multiple sectors, particularly when you couple that with encouraging signs on inflation. We believe this macro and investment backdrop has translated into robust capital inflows into Blackstone's private credit strategies over 2025 and particularly strong demand from the institutional channel most recently.

We are coming off one of our most active quarters of investing for BXCI and have over $40 billion of dry powder to invest in direct lending into a market that, in our view, remains highly receptive to direct private credit solutions.

Looking ahead, we believe this combination of a constructive macro environment, improving credit fundamentals and a defensive first lien orientation positions the BXSL portfolio well from a performance and investing standpoint.

On earnings, BXSL reported another strong quarter with our net investment income or NII of $0.80 per share, representing an 11.8% annualized return on equity, made up overwhelmingly of interest income rather than income from PIK or dividends. Our distribution of $0.77 per share was 104% covered by our net investment income per share and represents an 11.4% annualized distribution yield on NAV. BXSL delivered a 9.6% net return for the year, outperforming the leveraged loan market by 360 basis points, with an 11.2% annualized return since inception 7 years ago. BXSL at the outset was designed to have a lower cost structure so that it could focus on what we believe is a higher quality portfolio and you are seeing that durability reflected in quarterly performance.

A few core topics I'll discuss from the quarter include a busy quarter of deployment, recent headlines around private credit and related concerns around software companies and the impact that AI may have on them. On deployment, the fourth quarter was our second most active quarter of funding since 2021. We increased our overall portfolio to 316 companies, including 40 industries funding 13 new credits, which had an average LTV at underwrite of 41% at an average spread near 500 basis points, and completed 15 add-ons to incumbent name. Some of the larger fundings during the quarter were to AmTrust, an insurance managing general agent focused on specialty programs; Mankind, a public biopharma business; IEM, an electrical equipment manufacturer supplying data centers; and Saber Power, an engineering firm that is a provider of electrical infrastructure services. BXCI led all 4 of these senior secured transactions and was the sole lender in 3 of them.

Additionally, another large investment during the quarter was BXCI-co-led was for a digital aviation solutions business called Jefferson, sold by Boeing for $10.5 billion. We believe this company has a dominant market position, is performing exceptionally well post close and is categorized by BXCI as being well positioned from AI risk given its deep entrenchment in the aerospace industry and high cost of failure. These deals highlight how we are investing around some of our 4 themes at Blackstone, including life science and AI infrastructure.

Despite positive trends in deal activity, as outlined during last quarter's call as well, external narratives around bubbles in the credit market continue to percolate in the news. What we are seeing on the ground and across the over 300 credits we are invested in, in BXSL, is broadly inconsistent with this. In fact, if you look at the top 90% of our names in the portfolio, these companies are growing EBITDA at 9% over the past 12 months and have interest coverage over 2x and have an average mark of 99%. This is consistent with my comments earlier about a healthy economic backdrop and the benefits of lower interest expenses for our portfolio companies.

Meanwhile, there has been significant external focus on AI's impact on the overall economy and on software companies specifically. It's helpful as a starting point to highlight the Blackstone has been at the forefront of AI and its impact for many years with its deep technology vertical supporting and informing investment activity across the broader platform. This is one of the big advantages of being part of the world's largest alternative asset manager and has helped drive our focus on deeply embedded high-retention businesses. Blackstone sees the AI revolution creating generational opportunities, and we want to stay ahead of this as leaders in the space. We receive real-time insights through our firm-wide resources and use that to make us better investors.

Additionally, Blackstone is one of the largest investors in the entire AI ecosystem, including the infrastructure around it as the largest owner of data centers globally, leaders across the firm focused on AI are active dialogue with the AI market leaders such as OpenAI, Anthropic, Google, Meta and others. These relationships help inform our perspective on where the industry is headed, and we believe that BXCI with the help of the broader Blackstone platform has incredibly well informed view on AI.

It's also important to understand that you cannot paint software with a broad brush. There are sub verticals of software with proprietary systems, huge data lakes and incumbent long-term customer relationships that may be more protected or see tailwinds from AI adoption, while other areas will be more at risk of displacement. BXCI has typically avoided the less differentiated business model, sub verticals that we believe are likely to be protected are vertical software, ERP, data infrastructure, data management and security. These account for the majority of BXSL's software exposure where we have seen 40% EBITDA growth since underwriting. And today, these businesses generate over 2x interest coverage.

Importantly, the public market is differentiating in a similar way. While software valuations have compressed from 18x NTM EBITDA last September to 14x today. These sub verticals, that I mentioned earlier, continue to trade in the 15x to 20x EBITDA range, implying well over 2x enterprise value coverage of BXSL's first lien exposure.

We also put significant value on partnering with larger companies with sophisticated ownership and forward-leaning management teams to drive adoption of AI technology. As a reminder, 99% of our portfolio companies are private equity owned or large public companies with market caps exceeding $5 billion. On Medallia, a name that we have discussed in previous quarters, we continue to mark the asset now at [ 77.75 ], which applies over a 70% reduction to its set up enterprise value due to a slower-than-expected turnaround. For background, BXCI led a first lien term loan through a 26% LTV at underwrite, supporting the $6.4 billion take-private acquisition of Medallia by the current sponsor, Thoma Bravo, who together with its co-investors, have funded over $5 billion in cash equity for this deal today. The company has been underperforming, not because of anything related to AI, but due to what we believe to be execution-driven issues, particularly in its go-to-market function. Early last year, Thoma Bravo installed a new leadership team, and they are working through a turnaround plan. We also expect there to be discussions around the capital structure.

If I zoom in on the rest of the bottom 10% of performers in the portfolio, a common threat is operational challenges rather than any secular concerns. As such, these companies have been marked lower to an average mark of 82. On average, these companies have been modestly down from an EBITDA growth perspective since underwrite and were set up with -- at underwrite with an average 42% LTV. The good news with these names is that over half of them have seen further equity and junior capital commitments by the sponsor, or are experiencing improving performance overall. In fact, we saw the watch list decline this quarter compared to last quarter as a result of some of these trends. However, to provide some illustrative framing, if you take this bottom 10% and just punitively assume the company is all defaulted, which, again, we do not, I underscore, do not expect to see this happen, and BXSL recovers 65% over the next 4 years, in line with long-term recovery of first lien public loans, and based on where they are marked today, this would only impact the equity by approximately 100 basis points per year. I state these numbers just to reinforce what I mentioned earlier. BXSL's model was designed to be defensive by focusing on first lien larger private equity-owned businesses across a portfolio with diversified industries.

In reality, underperforming companies can recover. Just this quarter, for example, SelectQuote, Colony and Alliance Ground were 3 underperformers and at their lows had a weighted average mark of 93%. All have been paid or are expected to repay this quarter at par, generating nearly $100 million of liquidity. So putting it all together, we're encouraged by deal activity from the quarter as has improved portfolio turnover and funding efficiency, which in turn should support ongoing earnings, and we remain very comfortable with the overall portfolio mix and positioning. We've seen similar market dislocations before, including during COVID and even following the post tariff news this time last year. And in periods like this, our focus is on providing as much transparency and clear facts as possible to help investors look through the headlines and assess the facts on the ground.

For context, this is my 21st year of Blackstone's credit business across multiple cycles and periods of volatility. BXCI has invested over $155 billion in our North American direct lending strategy with an annualized loss rate of less than 10 basis points. This is a result of focusing on investing defensively, as I just mentioned. But equally important is leveraging the advantage of Blackstone's scale and expertise, all of which we believe will continue to support excellent long-term results for our investors.

With that, I'll turn it over to Teddy.

Thanks, Brad. I will cover BXSL's performance, portfolio fundamentals and liability profile for the fourth quarter. First, on performance. BXSL's net investment income for the quarter was $186 million or $0.80 per share, representing 104% coverage to our dividend on a per share basis. Year-over-year, fourth quarter total investment income was up over $5 million or 1.5% and interest income, excluding payment in kind, fees and dividends, represented over 91% of our total investment income in the quarter.

BXSL continued to outearn its dividend in the fourth quarter with a predominantly first lien portfolio and among the lowest operating and financing costs across our traded BDC peers compared to Q3 data. We will continue to assess our dividend with our Board as we do every quarter as lower base rates flow through our portfolio.

As previewed on last quarter's call, we experienced increased repayment activity in the fourth quarter and with accelerating M&A and deal activity, as Brad outlined earlier, we are expecting similar levels of turnover in the upcoming quarters.

Moving to the balance sheet. We ended the quarter with over $14.2 billion of total portfolio investments at fair value, $8.1 billion of outstanding debt and $6.2 billion of total net assets. Net asset value per share at quarter end was $26.92 down from $27.15 in the third quarter, which was primarily impacted by $0.27 of net unrealized losses in the portfolio, partially offset by $0.01 of net unrealized gains and $0.03 of excess net investment income generated to our dividend.

As Brad highlighted, we saw healthy fundamentals on average across our portfolio companies demonstrated by high single-digit percentage EBITDA growth and stabilizing interest coverage ratios at 2 turns as rate resets are improving cash flow profiles of our borrowers. Non-accruals in the fourth quarter were just 0.6% at cost and 0.5% at fair market value, up from 0.3% at cost and 0.2% at fair market value in the fourth quarter of last year as 2 smaller positions were added this quarter.

Further, our Q4 amendment activity by issuer was down over 25% compared to the third quarter, with over 85% of amendments associated with add-ons, M&A, DDTL extensions or immaterial technical matters. Only 4 issuers experienced material amendments accounting for 0.8% of the portfolio by fair market value.

Turning to activity. BXSL funded $1 billion for the second consecutive quarter and committed over $900 million. Net funded investment activity was $400 million after $629 million of repayments and sales, up nearly 45% quarter-over-quarter. This represented an annualized repayment rate of 15% of the portfolio at fair value, up from 13% for the prior quarter and 6% for the same quarter in the prior year.

As we sit here today, we are tracking over $550 million of potential repayments for the first 6 months of the year, which could create additional balance sheet capacity if they materialize. Importantly, BXSL's Board of Directors approved a discretionary share repurchase plan, under which BXSL may repurchase up to $250 million in the aggregate of outstanding common shares in the open market at below its net asset value per share. As we see repayment activity create additional capacity, we will continuously evaluate capital allocation decisions between new opportunities and buying back shares.

Our liability profile remains diverse across multiple financing markets, including $10.5 billion and $8.1 billion of committed and funded debt, respectively, as of the fourth quarter. This includes $2.4 billion committed to our corporate revolving credit facility priced at SOFR+1.53% at its tightest levels, which we believe is the lowest priced revolver across the traded peer set. We also have $2.7 billion of committed to our asset-based facilities with multiple banks of which had a weighted average drawn spread of SOFR+1.87%, down 23 basis points since Q4 2024 in addition to over $450 million of CLO debt outstanding priced at SOFR+1.54%.

Lastly, we have nearly $5 billion of unsecured bonds outstanding as of the fourth quarter, $2.8 billion of which are not swapped and have an average coupon of 2.88%. This includes a $500 million 5-year bond we issued in October, priced at 155 basis points above the benchmark treasury rate or 5.125% coupon, which was subsequently swapped at SOFR+1.66%.

In 2025, BXSL had the tightest public bond spread issuance amongst its traded BDC peers, and taking this all together, our all-in cost of debt for the fourth quarter was 4.93%, down from 5.24% in the fourth quarter of 2024. Total liquidity at the end of the fourth quarter was $2.5 billion, including unrestricted cash and undrawn debt available to borrow, while ending leverage as of December 31st was 1.3 turns on a gross basis and 1.25 turns on a net basis net of cash.

Our balance sheet strength, portfolio composition and long-term operating history all helped support BXSL in achieving ratings among the top 3 when compared to our traded BDC peers, with a Baa2 in stable outlook by Moody's, BBB- and positive outlook by S&P and BBB flat and stable outlook by Fitch.

With that, I'll ask the operator to open it up for questions.

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

First question, big picture, we're looking at the potential scenario where the non-traded channel slows. I know you have your share of institutional capital, but that's perhaps less so than some of the other great houses of direct lending. So how do you -- how do we think about the impact where, for example, you've often talked about the importance of check size, larger companies and so forth? Should we think about -- should we see it as a risk that you might have to go back down market on new origination in the event there are non-traded headwinds?

Thanks, Fin. Thanks for the question. Maybe just as a starting point, just to frame the market. So the U.S. leverage finance market is about a $5 trillion market. You look at high yield, it's about $1.5 trillion. If you look at leveraged loans, about $1.4 trillion, private credit in the institutional non-BDC channel is actually about $1.5 trillion. The non-traded BDC is about $275 billion and the traded BDC is about $235 billion. So it remains very much, as you point out, an institutional driven market. And why? Because institutions see the asset class I think similar to how you view it, which is very defensive. We're driving a premium to what you can get in the public markets, and that's really important. If you look at kind of our business more broadly to answer your question, our credit business is $520 billion. We are in every crevice of the credit markets we're invested. And I think you've heard us mention this before, 5,000 companies around the world, which gives us incredible insights into going on with what's going on in the world and helps back up some of our investment themes. So our business is broad and deep in every channel. If I look at kind of corporate lending, specifically non-investment grade, we have about $40 billion of dry powder. So I expect us to remain fairly active in the remainder of 2026, similar to kind of how active we were in the fourth quarter of 2025, which was our busiest investment quarter since 2021. So our business will remain active. We have lots of pools of capital to draw from, and it really comes back down to performance. And I think that will continue to attract capital in the space to the managers that are performing well.

Great. I appreciate that. And follow-up on another sort of hypothetical, but also front and center question. You're a little below book, still better than most, but we might be here for a little while. In that case, does it make sense to sit on spillover or should we expect you to revisit that in a potential special?

Great. Thanks, Fin. And I appreciate you actually pointing that out. We do have spillover income as a result of us outearning our dividend over time, and we've taken that -- those over earnings and invested back into new loans to drive income for our investors. I think as maybe answer the question a little bit differently, as we get new cash proceeds into BXSL, either because of income or repayments. We mentioned we have a series of repayments coming over the next 2 quarters. We have options. We can reinvest in new loans. We can buy back, as you pointed out, discounted shares. We can delever. Those would be the core kind of options. And you're right, we could pay a supplemental dividend but as you know, our dividend at 11.4% being the very high end of the market. So our focus has been on these other kind of options at this point. But of course, appreciate you highlighting the fact that we are in this enviable position of having outearn the dividend. And I also appreciate the point that we're in unusual time where we're trading below book. So we need to consider all these options, but at the end of the day, it's a discussion on how do we want to use -- best use our cash on hand to deliver attractive options for our investors and all options are on the table.

We will take our next question from Robert Dodd with Raymond James.

On kind of related somewhat to Fin's question, when we look at the grand scheme of things, flows in the BDC perpetuals in my view or the private market, aren't that significant to affecting pricing and spreads? So to your point, it's a $5 trillion market and all the BDCs together at $0.5 trillion. What do you think the potential is if flows do deteriorate across the whole market for retail fundraising? What do you think the potential is that's actually going to have a discernible impact on spreads in the market? I mean, CLO formation still looks pretty healthy. A lot of the other areas of the markets still look pretty healthy. The retail flows seem to be quite a small part of that. Is that -- any reason why that would actually influence pricing out in the marketplace?

I think it's a little early to tell. Robert, it's a good question, and I appreciate you highlighting the liquid markets because they remain actually quite strong. I think 66% of the liquid market is trading 99% or above. Spreads remain fairly tight in the liquid markets. And so the credit markets generally, again, despite what we read in the headlines are actually pretty healthy. There's capital available. And as I mentioned, we just look at our platform with $40 billion of dry powder, we will remain active in this market and the overall credit quality of the deals that we're seeing, the credit quality of the deals that we're in are not suggesting that spreads should widen at this point. So we'll continue to watch the market evolve. But right now, things feel pretty stable.

Got it, got it. If I can kind of flip that like software, and I appreciate all the detail you gave and the framework to think about it. On -- I mean, do you expect -- I was going to say 3 years from now, do you think the software mix in your portfolio would be higher or lower than it currently is or stable? I mean, do you -- is it -- there is more potentially uncertainty. I mean, obviously, they're different business models, et cetera, but would -- are you looking to maybe not participate in the next time something gets refinanced, or would you prefer to shrink that exposure or keep it where it is or grow it?

Well, the 3-year crystal ball, I don't have, Robert. What I would say is we are seeing very good investment opportunities in the infrastructure around AI. And you saw that in the fourth quarter, we made investment in IEM. We made an investment in Saber Power. And so that is definitely on theme for us. The picks and shovels kind of around this AI build-out, which I mentioned in our prepared comments, you could see us continue to lean into those themes and those opportunities because we think they have very good tailwinds.

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

Maybe you could just talk a little bit about what the sponsor conversations have been like over the last few weeks. Clearly, the public markets are very trigger happy. What are the sponsors thinking given that this was supposed to be a big capital markets year in kind of reviving IPOs, et cetera? Maybe just your thoughts on those conversations.

Yes. It's a little bit like last year when the tariff noise came out, and there was a lot of volatility and uncertainty. Sponsors are kind of watching the markets and trying to see where they settle out before they bring assets to market. So I think, like us, they're not terribly disrupted, but they are holding back right now and bringing some of these assets to market. And -- but I do expect for all the reasons we mentioned earlier, it will remain a fairly active year this year because you do see growth in the economy. You do have lower cost of capital, which is positive for M&A activity. So all those tailwinds still exist, and we just need to work through a period of heightened uncertainty and volatility, largely around the software space.

Got it. That's helpful. And then as a follow-up on -- we've seen a couple of BDCs make some asset sales recently. One of them had already said they were going to do this last quarter, so it wasn't necessarily a surprise. Do you have a view on that? You're trading below book, but not dramatically below book. Is there any benefit to selling assets at fair value and putting that back into the stock?

So what I would say to that is we are definitively long-term holders of assets and we also have $2.5 billion of liquidity. I think we mentioned on the call, we have $550 million of near-term repayments. I suspect there's another $1 billion or $2 billion that will occur over the balance of the year. So the fund itself naturally generates liquidity because of the term nature of the investments that we make. And with those proceeds, we will look at all the options, as I mentioned on -- in answering Fin's question, which is we will look at buybacks. We have approval to do that. We will look at new loans that come through our system. We may look to delever. So all those options will be on the table. And it's probably worth just hitting on this turnover and repayment dynamic, which actually can be quite positive for BDCs and BXSL in particular. I mentioned 3 assets that will be repaid this quarter. Those assets have been marked down to 93 at their low, and now they're getting refinanced at par. So that sort of activity as we get those repayments will be positive to -- on those underperforming assets to pull NAV up and will be positive to generate liquidity, which we can use to do one of many things, as I just highlighted. So lots of different options on the table for us.

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

I think previously you talked about operating leverage perhaps closer to the higher end of the target range there. Just given the potential opportunities to deploy into as well as the share repurchase, maybe just give us some thoughts about where leverage -- where could trend over the near term or where you looking to operate near?

Yes. Thanks, Ken. This is Teddy. I'm happy to take that. So just starting with the facts, as highlighted, 1.3 gross, ending leverage, 1.27 average, 1.25x on a net basis. As Brad mentioned, we did have a very active end of the year. It was our second most active quarter on gross originations. Since 2021, we did have some deals -- deal processes accelerated towards the end of the year. So we ended at slightly above the 1.25x range. We also do have $2.5 billion of immediate liquidity, $550 million of repayments near term. So really taking that all together, Ken, no change. Long-term target remains 1.25x, we would expect to be able to manage near to high end of that range in the near term.

Got you. Very helpful there. And just one follow-up, if I may, and this is just on the software book here, and really appreciate the additional details and color around there. How do you think about specifically recovery rates for software companies just given lack of tangible assets? How do you get confidence around the valuations and all sorts around that?

Yes, I can take that. I think when we look at our software businesses, we look at kind of how they're performing as a starting point. And they're performing -- actually, they're the best performing part of our business. No doubt the public market has re-rated software companies. As I said in our remarks, even in that instance, you take the 25% kind of markdown or re-rating of public company software businesses, and we're still 2x covered. So we feel very good about our coverage on our software business. We do have a small subset, less than 5% of the portfolio of assets that we think are more impacted by AI and some operational challenges. Those are a little bit harder to pinpoint from a value standpoint, but they're set up with a lot of equity in the business, and we suspect the sponsors will continue to support them.

[Operator Instructions] We'll take our next question from Doug Harter with UBS.

You mentioned weighing the share repurchase, obviously, with the new authorization. Can you just walk through the thought process? How you'll evaluate that and kind of how we should think about actually using that versus kind of having it there for kind of in case further declines?

Yes, Doug, this is Teddy. I'm happy to take that. I think the short answer is we're going to watch it and be very opportunistic. We do have $250 million approved by the Board. We also have turnover increasing the portfolio as Brad mentioned. Historically, below a 10% discount to NAV can be quite accretive for buybacks. We've done this previously. Post IPO, we announced $250 million repurchase that got done in 2022, and then we announced another plan in 2023. So we'll be opportunistic with it. We'll watch it. It will be a capital allocation decision between, as Brad said, paying down debt, new deals and share repurchases.

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

Quick question on some of the unrealized depreciation during the quarter. Maybe you might have touched on it a bit in the prepared remarks, but I guess kind of specific to this quarter, it looks like the depreciation was largely driven by maybe a handful of positions, call it, 5 to 10 positions with maybe single-digit percentage point markdowns. I guess my first question is, is this kind of consistent with your read? Or do you see it as more of a broad kind of -- driven by broad market movement? And then second question, assuming it is, in fact, driven by a few names here. Can you walk through any potential like common denominators? I know you mentioned operational challenges, but do you see these as kind of idiosyncratic? Any, I guess, additional specificity here would be appreciated.

Yes, absolutely. Thanks, Ethan. I'll start with just the fact. So you're right, NAV per share was $26.92, that's versus $27.15 prior quarter, so down $0.23 or less than 1%, about 85 basis points. When you dig into the $0.23, we had $0.26 of unrealized losses, about $0.01 of gains and $0.03 of excess earnings. And within the unrealized losses, you're right the marks were concentrated to a small handful of positions, 2 accounted for about 50% of net unrealized gains and losses in the top 5 accounted for over 60%. So taking a step back, what we see on the ground is stability. Earnings growth, consistently high single digits, increasing interest coverage ratios and cash flow profiles while you certainly can see some movement in marks tied to both performance and spreads over time. What we're seeing is around 85% of the portfolio seeing stable or improving trends based on fundamentals.

Yes. And maybe just to add to that, because I mentioned this in the remarks, the number of deals on our watch list actually declined during the quarter. If I look back over the past 7 years since we started BXSL, we've actually had 0 net realized losses for investors. So it does kind of get back to -- we do mark the portfolio quite actively. But it is really, really designed to be defensive. That's why we're first lien in the capital structure, why we're large businesses, why they're largely sponsor-backed, why we've picked some low default sectors. So I just want to highlight that and the journeys that sometime assets take like the 3 I mentioned that just got repaid at par, we're all in the kind of low 90s at one point. So companies don't always go up to the right. We work through them. And I also mentioned this on the call, I've been doing this 21 years in our direct lending business. Our realized loss rate is 10 basis points a year over that 21 years. And that's obviously through a lot of different economic cycles. So this is just ordinary kind of marking of assets, and we feel very, very good about the overall portfolio.

Okay. Great color. And then one quick unrelated question. You mentioned -- I just want to get these numbers right. You mentioned $550 million of repayments over the first 6 months kind of in the insight. And then, Jon, I think you also mentioned an additional $1 billion throughout the year. Can you just kind of flesh that out line, correct?

Yes, Ethan, this is Brad. So we have clear line of sight to $550 million of repayments. These are committed deals that are -- have or will be refinanced. If you look at a typical repayment cycle, it's somewhere between 15% to 20% a year. So if you just use 20%, that's $2.8 billion of repayments this year, and that's where we give the range of an expectation that we'll have another $1 billion or $2 billion behind that just given the later vintages of our portfolio.

We'll take our final question from Rick Shane with JPMorgan.

Most have been asked and answered. The outlook on leverage is very helpful. Look, you guys have announced a repurchase. We just discussed the possibility of $2 billion of repayments this year. Leverage sounds like it's going to be flat. So you're going to be making some choices in terms of how to deploy capital. With where we sit today is your best incremental investment deploying capital into new assets or is it buying back stock? And it helps us sort of understand how you guys are thinking about that repurchase program.

Thanks, Rick. It's Brad. And it's great to have you on the call. I think we're in a little bit of new territory for us. We've been trading at a premium for so long that trading at a discount is more of a -- more recent issue. I think Teddy framed it well. We have bought back shares in the past quite a bit actually. So we're not afraid to do so. We do have a lot of things that we need to manage, leverage levels, and making sure that we can support our existing portfolio companies. But I will say that given where the stock is trading, buying back shares is -- it's a very interesting price to do so. But there are a lot of different factors that it's not as simple as that. So we've done in the past, we think it's attractive, and there's lots of factors we'll evaluate.

I appreciate that. And it's helpful. And again, realizing it is a complex decision. Look, the other thing is, and it's interesting revisiting the space after all these years. Look, you guys are trading at a discount to NAV, but you're trading at a relative premium to most of your peers. Historically, we have seen in those environments, particularly where peers are trading at substantial discounts, some opportunities for strategic decisions that are actually accretive despite trading at a discounted NAV. Are there pools of assets out there right now that you find attractive? Or do you feel like those opportunities are just taking on other people's problems?

Yes, if you're referencing buying secondary loans that our other investors are looking to sell. We've looked at portfolios. We do think that investing in new loans is the best use of capital for BXSL. The secondary credit sales remains to be a fairly kind of active market and we look at that across our broader platform. But for BXSL specifically, I think we want to continue making kind of new primary loans where we've had the ability to do very deep underwritings. As you know, these take months and months of detailed work when you're buying a secondary portfolio, it's a little bit more of a tabletop analysis. So BXSL will focus on new loans.

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

Thank you for joining us this morning. We appreciate your engagement and ongoing support of BXSL. Don't hesitate to reach out with any follow-up questions, and we look forward to continuing our dialogue next quarter.

[Audio Gap] I cover the specialty finance sector, including business development companies. With us today is Jon Bock, Co-CEO of Blackstone Secured Lending, that's ticker BXSL and also Co-CEO of Blackstone Private Credit Fund, the non-traded BDC or BCRED.

So thanks, Jon, for joining us.

It's a pleasure to be here, guys. Thank you so much. It's near the end of what was a very, very long day. And so our hope here is not only we could be able to answer your questions, but then also congratulate you on what was a very successful event. So thank you, Derek. It means a lot. It means a lot to be here.

Okay. Thank you. So Jon, you had outlined some -- a growing origination opportunity earlier this year. So could you -- so how do you see the macro backdrop evolving this year?

Well, look, if you just look at things high level by taking a step back, the broader economy itself is looking pretty good. I mean it's not only fairly resilient as you start to see through corporate earnings, that remains strong, consumer spending resilient, rates also coming down. So there's a bit of a tailwind there. But then also just Q3 GDP growth, right, continued to accelerate.

And then also, if you look across and for some of us that are more private credit or credit-centric, default rates actually declined in '25, down roughly 30%. So you're looking across the board at a fairly healthy backdrop. And now what you see in Q4 data, which has come out, particularly is that volumes right, are starting to pick up. Direct lending activity was really up over 50% quarter-over-quarter. And then we've mentioned that the deal environment, and this comes from our leadership at Blackstone overall, but the deal environment is achieving escape velocity, right, after a fairly tough period. So there's certainly more to do, and you're going to expect that in this year and, of course, the quarters to come.

And then looking at leverage, last quarter, it was in like the 1.1, 1.2 range. So kind of towards the upper end of the target leverage. But how do you fund new investment opportunities if the capital markets kind of remain challenging and the shares trade below NAV?

So it's a good point. I'd also say we've got a very strong, just history, right, of growth. We've got over 9 consecutive quarters of $500 million or more just commitments that's continuing to drive. And so then the question really is, where does the money come from? When if you start to look, right, you mentioned our leverage profile, on average, we're about roughly 1.15x average fund leverage, ending leverage about 1.2x with roughly $2.5 billion of liquidity. And so if you start to think of some of the measures of liquidity that we can pull, well, there's certainly a little bit more leverage.

Two, as the deal environment accelerates, so too does repayments. So you don't ever, one, consider a level of dilutive equity capital raise. That's certainly not in the card for any strong manager. But looking for the other pockets of liquidity, whether it's going to be what's coming back at us additional leverage or I've seen across the board industry folks consider joint venture solutions or others across the board that can, over time, provide diversification in new areas of investment. We look at all of them. But really, it's going to be what's steady and what's remarkably boring. And in that case, it will be additional leverage growth and level of repayment activity that we know is coming our way.

Okay. Great. And then before we get into the more exciting software discussion, just in general, like earnings are kind of close to the dividend. We have the looming rate and spread headwinds. Again, it's early days for BDC reporting season, but we have seen one peer recently reset the dividend about 15% or so. So how should investors think about dividend resets during 2026?

Well, I think an approach to the dividend and the underlying cost of capital can highlight a manager's focus on long-term NAV preservation. Because if a manager is heavily exceeding -- the dividend is heavily exceeding the earnings power to produce it, either you're having NAV diminution from the fact that your earnings profile is not covering your dividend, so it's coming out of NAV or worse, one is being forced to stretch to take risk in order to cover that cost of capital, which may, in turn, lead to a dividend reduction.

And so look, we're mindful of all the factors across the board, but we certainly believe that it's important to always ensure that your cost of capital is heavily aligned with your ability to generate attractive investments that preserve NAV and generate an attractive return. But look, as rates continue to fall, we're seeing -- look, on the dividend, there's a couple of items that are now coming back into account. We talked about the benefit of higher leverage, right? So we talked about that growth. We talked also certainly of normalized repayments as those increased.

And so if you're looking at the future, right, and we look across the space, it's always going to be part of the consideration. I think you folks have seen continued earnings stability, and that's important for us. And look, over time, to the extent that we feel the earnings power needs to -- the dividend needs to reflect the decline in earnings power, we'll always be mindful about a reduction. But right now, the goal is always to ensure that, that cost of capital relative to what we're generating today is currently aligned.

Okay. Great. Wonderful. And then just like over the past year, software has been about 20% of direct lending volume, and it represents maybe about 20 or so percent of BDC portfolios, although it's somewhat hard to kind of fine-tune that number because there's no uniform software like reporting structure. So in light of the kind of the recent news with -- and public commentary about AI disruption risk in software portfolios, what's your view on the sector? And also, is it a -- does it remain an active place for investment at this point in time?

I'd say that big picture, right, our consistent focus in the platform, right, is large, well-entrenched businesses, significant sponsor equity. But let's take maybe a step deeper into just software overall. Right now, if you look at inside the software exposure, it's approximately $4.5 billion of enterprise value. That's in 30s -- we also have a 37% loan-to-value at set up. So that's a $3 billion subordinate capital position, right, that's beneath that of our debt. And so you could see approximately 60 points of enterprise value cushion beneath us, which means the business could decline materially. And certainly, if you were thinking of the software stocks in terms of their decline that's occurred in the public markets today, if that were applied to those positions, you'd still find us close to a 50% loan to value. So there's significant underlying subordination of capital beneath our investment that provides a significant buffer.

But then let's also go beyond that because not all software is the same, and there's quite a bit of underlying diversification that exists inside that segment. And so with over 12 underlying subsegments, over 100 individual positions across the board, if you think about us more broadly, we aim to be very focused in on the potential disruption risks. But importantly, we invest in understanding what those disruption risks are. So we're very focused as it relates to AI in terms of our underwriting discussions. You also can see that in terms of how we lean into other areas of the firm that also are applying or purchasing or working with other software services providers largely understanding what we believe is truly mission-critical and what is not.

And then, of course, if you start to see that there's a significant investment in understanding, well, there's significant investment that it's also implementing. And so we see this across the board where we have AI integration efforts led by our colleague, Rodney Zemmel, came from McKinsey. You have the ability when you're at a large firm to take this -- the data insights that we have across our nearly $1.2 trillion across assets, across asset classes and alternatives and can put those insights directly to work in both our underwriting and our operating capability.

And so I tend to think lots of folks ask, is it overdone? Is it not? I tend to think that irrationality is done in herds. Rationality is done one person or one investment at a time. And if we look at the individual investments in specific, you can see that not only are they well structured, but many of them and the vast majority of them have the potential to benefit, particularly with Blackstone's scale as that invisible hand behind them.

Okay. And just a follow-up on software. Software and AI disruption risk have been kind of in the news for the past 2, 3 years. How should investors think about just like earlier vintages of software exposure, just in general for the market? I assume you would always be looking at obsolescence risk kind of prior to AI becoming a thing, but just wanted to get your thoughts on that.

It's hard and difficult to paint it all with one brush because you have effectively 3 categories, right? You have those businesses where large language models have the potential to lower industry profitability or have the ability to perhaps conduct an underlying process quicker, more efficiently, which could pressure industry margins, right? And you're familiar with what those are. But then the second is you have an underlying category where if you're investing in agentic opportunities that can then be sold and prepackaged to an existing customer base, there could be a lot of opportunity.

Then, of course, the third bucket really is underlying data moat, protection, the ability to -- whether it's regulatory or HIPAA-related, protect your underlying data and also protect what we would believe to be effectively software that's designed to serve direct purposes that's very hard to take out and it's deeply embedded.

Many of those traits on that third moat, those were existing in 2021. Oftentimes, they were very part of our centralized theme. Two, even if you have some folks that maybe are in the middle category where an investment is required today, what we're also seeing is that they're taking those incumbent relationships and they're doing great things with them. And so I really would say it's hard to say that anything that was done pre a deeper understanding of where we're headed is going to be headed for an underlying level of difficulty. And really, it's going to be more of a matter of how much has really been invested to understand this problem and more importantly, position yourself and not only mitigate risk, but benefit from opportunity. And this is where Blackstone in specific really starts to shine.

So just in our credit business alone, there's over 125 individuals in our office of the CIO. That broader Blackstone operating team, right, led by Rodney Zemmel, specifically talking about AI at McKinsey and also John Stecher, our CTO, substantial level of resource. And so again, I'd say it's early. Folks are understanding that disruption can occur, but an investment today and clearly, some firms are more than willing to make that investment can mitigate risk in the future.

Okay. Great. And then maybe circling back to valuation, BDCs have traded off really since the back half of last year into this year, although at least it looks like the last couple of days, we're starting to see a little bit of rationality kind of seep back into the market. But with rates, rates are on decline, capital deployment may or may not be around kind of depending on portfolio turnover. Is there a road to recovery and positive returns for BDCs in 2026 in your view?

Yes. What I would say is having been through so many cycles in the BDC space over a career, you can really understand that it is at a point when the price to book values remain depressed. And right now, the median price to book value at roughly 0.8. And Derek, you know this means that in the future, you have an extremely high probability of an attractive positive return.

Now what does that really look like is as you start to get past kind of the headlines, folks recognize that some of the implied losses that might need to be achieved may be excessive to what they've seen historically. But the question really is now is one of catalyst, what causes the catalyst for the stocks to effectively trade back? And that one is a function of time and deployment. But then two, you also would expect to see a level of rate dynamic change or the market reaction to what some of the cost of capital resets that are coming to change as well.

And so if you're looking at a deeply discounted space overall with an attractive double-digit yield profile, do I believe there's a certain road to recovery? Absolutely. Because you don't see those types of returns relative to history hang around for very long.

Okay. Great. And then just given recent headlines about elevated redemptions on the private BDC level, specifically with one of Blackstone's competitors, like how should investors kind of view redemptions in the non-traded space? And is it -- do you think it's going to be an indicator for public BDC selling, either selling pressure or just negative sentiment in general?

If we were thinking about non-traded versus traded, I would say that they're not only different planets, they're different galaxies. What I've always noticed is that the public BDC space, they tend to trade the asset class incorrectly, meaning that there's -- they often overshoot that there is the potential for loss or overshoot when there's a premium. They might tend to -- they get the asset class incorrect, but they often can get manager differentiation right. So what does that mean? Well, you can start to see across the board, there's a cross-section of BDCs that are trading at slightly higher price to books relative to peers. That's an important data signal.

Now to your question on non-traded, I think that if you look at kind of the flow information that was out there, taking the step back and looking at the fourth quarter, there is net growth. There was net growth. And across the space, while redemptions effectively went from approximately $3.5 billion to $8 billion or so, that was still relative to industry inflows at over [ $12 billion ]. I'm talking about $3 billion BDCs or larger. So that inflow is extremely important because it does show there is still a very, very high degree of interest in earning excess return relative to one's public benchmarking credit, which is what the non-traded model was designed to do.

Now really, what we're going to focus in on as an industry, it is very important to keep a high degree of liquidity. And across the board, relative to that $8 billion in redemptions, there's approximately $70-or-so billion of available -- we call it available liquidity across both cash revolving credit lines and broadly syndicated loans. So I tend to think that it's not only well positioned, but if you're looking across the space overall, flows themselves, they continue. They might continue at a slightly slower clip largely due to headlines. But then at the same time, redemptions and more importantly, liquidity are both intact and in our view, going to be well managed by the industry as a whole.

Okay. And then, Jon, the BDC market has definitely changed over the last decade plus as more institutional quality managers have entered the sector. And you're probably in a very unique position to answer this question since you're kind of a former sell-side analyst that's now running one of the largest BDC platforms. So are there too many managers chasing too few deals, effectively eroding margins in the space? And then just what's next overall for BDCs?

Well, what's wonderful about Blackstone is that scale, not only is it representative in some of the topics we talk about AI or software, but when you think of the team that operates the BDC, so our partners, whether it's our global CIO, Michael Zawatsky, of course, everybody here knows our colleague and leader of the direct lending franchise, Brad Marshall, there's a substantial level of insight across all areas, whether it's origination, investment and BDC structure.

You asked kind of a market structure question, Derek. So would it surprise you, so everyone understands that there's going to be newer managers that are effectively entering the space. And the question is, are there now too many chasing too few opportunity. But the vast majority of the capital, right, certainly that gets raised in this category is done by a relatively small group of firms. And you would understand that their level of institutional presence, their level of institutional platform investment is significant. And so as we look across at some of the closer competitors, I would say that not only is there plenty of deal opportunity for that subset of firms, I would say that the opportunities are right because there's so few underlying individuals and underlying managers that can go after the types of transactions that the market is going to present us that it creates a significant opportunity.

So I try not to let the count full folks. It's more about the AUM and where it sits and whether those folks can deem to be considered rational actors. And if you look across the base of a small handful, they are.

Okay. Great. And then moving on to a different topic. Spreads have materially tightened the last 24-plus months. And combined with like lower rates, we're going to see like top and bottom line growth pressure on the sector in general. Like what is your outlook for spreads to potentially increase in 2026?

More supply helps. I'd say spreads still remain tight, although when you see an element of fear, either a fear tied to economic slowdown or sector-specific fear where you could imagine if folks are going back and reconsidering to the extent that enterprise value multiples are compressing on software companies that, that can also then be reflected in new spread, you could see some potential pockets of widening.

I'd say across the board, they're going to be generally stable until one sees a high degree of fear into the market. Private credit spreads typically range between a 500 and a 600 product at the 1L level. We're at the tighter end of that. But interestingly, it has been able, in our view, to maintain what was nearly a 150 and 200 basis point premium to broadly syndicated loans. And so where credit risk is measured overall, I still believe we might be closer to the tighter end. It can expand a bit, but right now, not seeing widespread or wholesale widening across the board, which is why keeping a focus on managers that not only maintain a high degree of discipline and credit selectivity, but then also the underlying cost, the fee structure, the ability to keep your debt costs low, the ability to run very low levels of G&A, every basis point matters today. And that's why we're very focused on not just on the left side of the balance sheet, but the right one -- right side as well.

Okay. Great. And then index inclusion is an opportunity just to expand the general liquidity for BDCs. Any kind of high-level thoughts on the AFFE issue?

That's -- I will say that, that is a bill that is working its way through Congress. And I'll just let folks that are smarter than I outline what they believe the prospects are. I would say this, having additional institutional investment in the space is a good thing because the transparency that's offered by the model is significant, right?

If you look at BCRED's financials overall, BCRED or even BXSL, I pick on BCRED because it's certainly a large entity, there's nearly 30,000 individual data points that exist. That level of detail and more importantly, the higher degree of both capital in public or private capital because public BDCs produce the same financials, that can create even greater amounts of transparency in market policing, which I believe is important. And so for us, do I believe that the long-term prospects for something like that are bright? I do. I can't give you an exact time, but I would say this, BDC legislation and underlying items that they're measured in decades. And I think the last time that you and I were familiar with the change in legislation was nearly 10 years ago.

Okay. Excellent. Good point on the decades. So excluding credit risk, what are some of the other risk investors need to pay more attention to at this point in the cycle?

Excluding credit risks. Well, we outlined liquidity. And then I would also -- I'd say this, there is a high degree of correlation between book value degradation and time spent in this case, in years below book value. So for us, growth and how one grows and introjects new capital into the underlying public entity or even private entity is very important. So keeping in that mind, not only a focus in on both new capital for growth, but then also the costs. Because credit risk is always paramount. It will determine whether or not one is going to be generating an attractive return. But even good credit can be overrun by high expense. And so to the extent that one is operating with higher-than-average underlying debt costs or greater-than-average underlying G&A or high underlying fee structures that may or may not be aligned with experience, that's an important item investors take notice of. And interestingly, the market at times, will choose publicly to price that in based on one's premium or discount to the market.

Okay. And interestingly, you had mentioned kind of the market pays very close attention to fees. We've seen some BDCs over the past couple of years reduce their fee structure. A lot of it had to do with performance related, some was just due to -- it was -- the portfolio at scaled and it was the right thing to do for investors. Do you think we're going to see more of that over the next year? Or do you think that's kind of largely played out.

I think this is the benefit of the transparency of the model. The market is a very efficient mechanism. And again, if folks don't choose to adjust, the market can, again, on a market price basis or on a capital basis, adjust it for them. I tend to think this that strong managers that can generate very sustainable premium over time and deliver what is effectively a boring is beautiful level of return experience. Those managers and more importantly, over time, can tend to not only generate attractive returns, but have a win-win situation for all parties involved.

Okay. Absolutely. So that's all of my prepared questions. What questions do we have from the audience? No questions?

That is perfect. We understand, and we thank you so much because we know it's near the end of the day. It means a lot to spend time with us here, and we look forward to talking to you again.

Okay. Thank you, Jon.

Thank you.

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 at 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 fund this M&A with private capital, this has helped our ongoing growth. Further, there was about 5x more dry powder in North America private equity vehicles than private credit origination dry powder, representing a healthy potential backlog of demand for private credit solutions.

As it relates to defaults and in particular, First Brands in Tricolor, I think it is reasonably well established now that these were, in fact, not private credit transactions. They were bank originated, bank underwritten and bank distributed deals. However, it's worth noting two things: one, the fall or, in fact, declining in the leveraged loan and high-yield markets, down 37% year-to-date this year from 2023 and 24% in 2024, demonstrating that despite well-publicized, the default trends in the indices have improved.

Second, defaults do occur from time to time across both the public and private markets. Knowing this is why we have continued to feel very confident in our approach to investing by focusing on first lien senior secured loans with large sponsor-backed companies across sectors we believe have good long-term tailwinds. In our view, these companies are better able to navigate market changes, inclusive of the fast pace of change driven by AI.

These companies are generally more strategic because of their scale. These companies tend to attract and maintain high-quality management teams and ownership forms. Our experience is supportive of this thesis. In direct lending, BXCI has experienced annualized realized losses of only $0.01 or 0.1%, including through the global financial crisis. Being part of Blackstone allows us to navigate and leverage the full bandwidth of the firm to maximize value in the event of default, which is something we are quite proud of.

So as we put all of that together and what we view going forward, we expect to see deal activity staying active, asset turnover picking up, spreads remaining attractive when compared to traditional fixed income and credit quality remaining fairly steady across the portfolio.

Turning to Slide 4 to highlight this. BXSL reported another strong quarter with our net investment income, or NII, of $0.82 per share, representing a 12% annualized return on equity, made up overwhelmingly of interest income rather than income from tick or dividends or fees. We believe the quality of BXSL's income has historically created a robust income stream for our investors.

NAV per share decreased by $0.18 quarter-over-quarter to $27.15 due to markdowns that Teddy will discuss shortly. Our distribution of $0.77 per share was 106% covered by our net investment income per share and represents an 11.3% annualized distribution yield, one of the highest among those of our traded BDC peers with similar levels of first lien senior secured assets.

Finally, as mentioned earlier, we believe credit quality remains strong, 0.1% of investments on nonaccrual at both cost and fair market value. We had no new names added to the nonaccrual list this quarter.

Moving to Slide 5. We've continued to prepare ourselves for what we believe may be a period of heightened deal activity, focusing both on our existing portfolio companies and new assets. And despite lower base rates, private credit premium relative to leveraged loans in the liquid market has endured. We collaborate with teams across the firm to identify new opportunities and key investment trends. And right now, we believe we are in a reindustrialization with AI that will require significant ongoing insights and capital solutions. You will hear from Carlos on this later, but we integrate AI considerations into our disciplined investment process, searching for larger businesses, mission-critical products, high recurring revenue and senior secured positions.

We believe we are well resourced to understand and underwrite the fast paced change that AI is driving and the impact this will have on companies and investments. We saw a 20% increase in new BXCI global private deal screenings this past quarter versus the third quarter of last year. And while not every BXCI deal that comes through BXCI screening is suitable for investments by BXSL. This is consistent with our general view from last year that deal activity would pick up meaningfully throughout 2021.

Deployment for the quarter surpassed $1 billion and was up 90% compared to the second quarter. We believe the drivers of this growth are both more macro clarity for the U.S. economy and lower base rates. We seek to continue our disciplined approach and use our cost advantage to focus on quality borrowers, not reach for risk and deliver returns for our shareholders.

With that, I will pass it over to my colleague, Jon.

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 is at 7% of fair value, which compares favorably to the Lincoln data based for the broader private credit market at 10%.

Now turn to Slide 8, which focuses on our industry exposure. Recall, we focused on domestic businesses in less capital-intensive sectors with our highest exposures in the software, healthcare providers and services and professional services industries. This quarter, 99% of the private debt investments into new portfolio companies were first lien senior secured physicians with average LTVs below 45%, meaning there's significant amount of capital beneath our loans. And our relentless focus on first lien senior secured debt and historically low default rate industries, is what we view as a defensive position for investors to be in. But how does that translate into returns?

Over the last 12 months, we generated a 12% net investment income return. This was well above our 11.3% dividend yield on NAV during the same time period and above the weighted average NII return of 10.7% for traded BDC peers for the 12 months ended June 30, 2025. And importantly, we've continued over earning our distribution even in a more competitive tighter spread environment. Further, we believe dispersion among managers continues to be evident. And you can see this by looking at various portfolio metrics compared to the weighted average of our traded BDC peers in 2Q.

Our nonaccrual rates 0.1% at cost compares favorably to 2.9% for peers. Our PIC as a percentage of total investment income at 8.2% compares favorably to 11.3% for peers and our stressed debt investments marked below 80 at cost is approximately 0.9% compared to 4.1% for the peer average.

Now to conclude this with some points on our documents and recent amendment activity. And as a reminder, when we negotiate our credit agreements, especially as a leading lender, we place a significant focus on control and important document protections and we've remained consistent in this approach. And if you take a look at our recent amendments, Q3 was largely similar to Q2 activity, with the majority of amendments associated with add-ons, M&A, DDTL extensions and immaterial technical matters or slight changes to terms.

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

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 equity cushion. These companies are growing EBITDA annually at what we believe are healthy levels with weighted average interest coverage ratios near 2 turns. These numbers do not come by accident. Blackstone aims to identify trends and related downstream investments early before they become mainstream. While we work to expand the portfolio through new borrowers, we have remained active with existing companies that we believe are quality assets.

We saw deal activity pick up across the private credit landscape. And to Brad's point, we were active on the deployment front. Q3 marked our most active quarter in 2025 from a funding perspective with net deployment up 65% and gross deployment up 90% quarter-over-quarter. We believe much of this was driven by BXSL's access to incumbent borrowers across our 5,100 BXCI issuers globally. Just this quarter, nearly 2/3 of BXSL's fundings were to repeat borrowers of BXCI. In fact, we have sole or lead roles in nearly 3/4 of our debt investment fundings for the quarter, and the majority of those were sourced from our liquids business, advisor networks and our long-standing relationships.

Certain sponsors prefer to work with BXCI when their portfolio companies need capital due to what we believe is a largely differentiated credit franchise in a market. BXSL's largest third quarter investment into a new portfolio company was a large debt financing for a global specialty consulting firm. We were the sole lender in the financing and provided the company committed capital to execute on future growth plans. We believe that owners like to partner with BXCI not just because of the scale solutions we can provide, but also because of the services we can offer after the investment.

Our value creation team was extremely active during the third quarter and had some impactful wins with improving earnings for our portfolio companies. Just looking at the data available through the second quarter, the BXCI value creation program offered at no charge to participants or expense to BXSL, has created $5 billion in illustrative value and reduced cost by over $440 million for BXCI portfolio companies since its inception.

We can differentiate ourselves as not just a lender but as a value-added partner, helping credits grow equity value through our BXCI value creation program. We believe we have developed a reputation for being a valued partner with the ability to provide speed, creativity, flexibility and certainty of execution.

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

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 to 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 reflective of that. Further, we have over 120 individuals in our CIO office comprises of operational expertise, financial and legal restructuring expertise, data science expertise, capital formation and more, all dedicated to driving positive outcomes through our investment process and mitigating losses in the portfolio.

We are relentless in finding ways to add value to our companies and deploying unique resources that Blackstone can bring to bear.

Moving to Slide 12. BXSL funded over $1 billion in the quarter and committed nearly $1.3 billion. Net funded investment activity was up for the quarter at over $500 million with $433 million of repayments up nearly 150% quarter-over-quarter. This represented an annualized repayment rate of 13% of the portfolio at fair value, up from nearly 5% for the prior quarter.

Next, Slide 13 outlines our attractive and diverse liability profile, which includes 37% of drawn debt in unsecured bonds that are not swapped. These unsecured bonds have a weighted average fixed coupon of less than 3%, which contributed to an overall weighted average all-in cost of debt of 5.0%, down from 5.1% last quarter. This also compares to a weighted average yield at fair value on our performing debt investments of 10%, down from Q2 at 10.2%. The overall weighted average maturity on our funding facilities is 3.3 years.

Further, we have continued to optimize our cost of capital. In August, we closed an amend and extend of our BXSL revolving credit facility, which eliminated the 10 basis point credit spread adjustment for extending loans and gave us the tightest price revolver among traded BDC peers based on our market research. Further, BXSL's overall cost of debt of 5.04% is one of the lowest compared to our traded BDC peers last quarter.

We continue to be prudent in taking advantage of historically tight spreads for BDC bonds. In mid-October, we closed a $500 million bond priced at 155 basis points over the benchmark treasury rate or at a 5.125% coupon with a 5.3-year tenor. This represented the tightest spread issue among our traded BDC peers since February. Our balance sheet strength and portfolio performance have supported us in achieving among the highest ratings for BDCs with a Baa2 and stable outlook by Moody's, BBB- and positive outlook by S&P and BBB flat and stable by Fitch. In fact, Moody's completed its annual review of BXSL at the end of the quarter, maintaining the Baa2 stable rating citing BXSL's first lien senior secured focus, strong asset quality since inception and sound underwriting.

Total liquidity was $2.5 billion of unrestricted cash and undrawn debt available to borrow, while ending leverage as of September 30 was 1.22 turns on the higher end of our target range of 1 to 1.25 turns. Moving forward, we expect to operate near the higher end of our range given what we believe is a period of heightened deal activity.

With that, I'll ask the operator to open it up for questions. Thank you.

[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 525 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 for in the mid-50s.

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 225 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?

SP-13 So I'd say a couple of things, Ben. 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 that 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% 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 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 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 a 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 1 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 that 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 2 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 Kay 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, we're 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 attention. Brad, in your prepared remarks, you're talking to Ken, you said valuations in the market are improving, and that's 1 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 low 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 PIC 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.