Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR), secured debt rating and unsecured debt rating of Blackstone Secured Lending Fund (BXSL) at 'BBB-'.

The Rating Outlook remains Positive.

The 'A+' rating and Stable Outlook assigned to Blackstone Inc. (Blackstone), the parent company of BXSL's external manager, Blackstone Credit BDC Advisors LLC, are unaffected by these actions.

Today's rating actions have been taken as part of a broader review business development companies (BDCs) which included 18 publicly rated firms. For more information on the peer review, please refer to 'Fitch Completes 2023 BDC Peer Review' available at www.fitchratings.com.

Key Rating Drivers

The maintenance of the Positive Outlook reflects the firm's strong portfolio credit performance, the focus on senior secured investments, which represented 98.4% of the portfolio at Dec. 31, 2022, the more moderate growth rate in 2022, and the maintenance of unsecured debt above 40% of total debt. However, leverage (debt/equity) has been maintained above the firm's targeted range of 0.9x-1.25x for the last four quarters. Failure to return leverage to within the targeted range near-term would result in the Outlook being revised to Stable.

The ratings affirmation reflects BXSL's relatively strong track record in credit within this vehicle and in vehicles with similar strategies historically, the strong risk profile of the portfolio, the strength of BXSL's relationship with Blackstone which provides access to investment resources and deal flow, appropriate leverage for the current rating level, strong funding flexibility, a sound liquidity profile, and solid dividend coverage.

Rating constraints specific to BXSL include elevated growth over a short-operating history, which exposes the firm to meaningful vintage concentrations. The significant size of Blackstone's BDC platform, which includes Blackstone Private Credit Fund, also poses some potential constraints on its operational flexibility. For example, at certain points in the cycle, BXSL may be more challenged to identify sufficient investment opportunities to invest the proceeds from repayments and maturities, which could pressure dividend coverage. BXSL's size may also limit capital markets' capacity to provide it with sufficient unsecured financing, particularly if investors consider exposure to the entire Blackstone BDC platform.

Rating constraints for the BDC sector more broadly include the market impact on leverage, given the need to fair-value the portfolio each quarter, dependence on access to the capital markets to fund portfolio growth and a limited ability to retain capital due to dividend distribution requirements. Additionally, Fitch believes BDCs will experience weaker asset quality metrics in 2023 amid macroeconomic headwinds and higher debt service burdens and slower growth prospects at portfolio companies.

Asset quality metrics have been strong since inception, with no investments on non-accrual status at Dec. 31, 2022. The firm has generated modest cumulative net realized gains on the portfolio since inception and its credit metrics compare favorably to the peer group.

Rising interest rates have benefited the total portfolio yield, which increased 340 bps in 2022, but higher interest rates have also pressured underlying interest coverage metrics, which declined to 2.3x at YE 2022 from 2.7x in 3Q22. While additional interest rate rises are expected to lead to more amendment activity in the portfolio, BXSL remains focused on sponsor-backed activity and continues to move up-market as larger companies become more comfortable with private debt solutions. The weighted average EBITDA of the underlying portfolio companies was $167 million at YE 2022, up 44% from YE 2021, which Fitch believes should result in better credit outcomes.

BXSL's net investment income (NII) rose 27.8% in 2022, adjusting for the GAAP accrual of capital gains incentive fees, driven largely by higher rates. The NII yield on the average portfolio at cost was 4.9% in 2022, which is below the rated peer group, and would have been 4.5% adjusting for the management and incentive fee waivers. While Fitch expects earnings to benefit from additional interest rate rises in 2023, the expiration of the fee waivers in October 2023 will be an earnings headwind heading into 2024.

Leverage (par debt-to-equity) was 1.34x at Dec. 31, 2022, which was above BXSL's target of 1.00x-1.25x. The firm operated with elevated leverage throughout 2022 as it executed on its post-IPO share repurchase program, generated unrealized portfolio depreciation, and in anticipation of meaningful portfolio repayments near-term. Leverage at YE 2022 implied an asset coverage cushion of 14.4%, which was within Fitch's 'bbb' category benchmark range of 11%-33% for BDCs. While the cushion was below the peer average, Fitch believes it is acceptable given the firm's focus on first lien investments. Still, failure to reduce leverage to the targeted range near-term would result in the Outlook being revised to Stable.

BXSL had an unsecured funding mix of 57.5% at Dec. 31, 2022, which was above Fitch's 'bbb' category benchmark range of 35%-50%. Fitch expects the company will remain opportunistic with regard to unsecured issuance.

Fitch views BXSL's liquidity position as sound. At Dec. 31, 2022, the firm had $131.3 million of balance sheet cash and $987 million of undrawn capacity on secured credit facilities. Unfunded commitments were $690.3 billion at YE 2022, but the majority were delayed draw term loans, which have pre-conditions to fund. The next term debt maturity is in July 2023 when $400 million of unsecured debt is due, which Fitch believes could be refinanced with secured borrowing capacity without compromising funding flexibility.

NII coverage of the regular dividend has been solid since inception, despite a number of increases, amounting to 126.5% in 2022, or 106.8% on a cash earnings basis. Paid-in-kind (PIK) income increased in 2022, to 4.7% of investment income but remains below the peer average. While PIK could grow near-term with increased amendment activity, Fitch expects dividend coverage to remain sound.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Factors that could, individually or collectively, lead to negative rating action/downgrade, including a revision of the Outlook back to Stable, include failure to reduce leverage to within the targeted range near-term; deterioration of the portfolio risk profile, such that first lien positions decline materially as a proportion of the overall portfolio; a spike in non-accrual levels; meaningful realized or unrealized losses; weaker cash-based NII coverage of the dividend; a sustained decline in the unsecured funding mix below 40%; or an impairment of the firm's liquidity profile.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Factors that could, individually or collectively, lead to positive rating action/upgrade over time include a sustained reduction in leverage to within the targeted range; a continuation of more modest portfolio growth; maintenance of the above-average focus on first lien loans; strong credit performance of recent underwriting vintages; the maintenance of solid liquidity and dividend coverage; consistent core operating performance; and unsecured debt being sustained at-or-above 40% of total debt.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The secured and unsecured debt ratings are equalized with the Long-Term IDR and reflect solid collateral coverage for all classes of debt given that BXSL is subject to a 150% asset coverage limitation.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The secured and unsecured debt ratings are primarily linked to the Long-Term IDR and are expected to move in tandem. However, a material reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3' - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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