I am Derek Hewett from Bank of America Securities. I cover the specialty finance sector, including business development companies. With us today is Teddy Desloge, CFO and Portfolio Manager of Blackstone Secured Lending, that's ticker BXSL, and then also Blackstone's Private BDC, which is BCRED, so thanks for joining us today, Teddy. Excellent. Thanks, Derek. So Teddy, could you start off by providing a brief history of BXSL and discuss maybe some of both the investment strategy and also some of the competitive advantages of the platform? Yeah, absolutely. Thanks, Derek, and thanks everyone for being here today to listen in. You know, at Blackstone, we've been investing in direct lending for over 18 years, really through cycles. We've launched BXSL in 2018 as really what was our flagship direct lending product for institutional and retail investors, and we took that public in 2021. We launched with a few very simple goals. The first was really be the leader in shareholder alignment. That took the form of lower fees, shareholder-friendly terms that we introduced, as well as making sure 100% of economics of what we're investing in flows through to the ultimate shareholder, so i.e., no scraping of fees. Number two, to create really what's a defensive, first-lien, income-oriented portfolio for shareholders, so that's really a first-lien focus in what we see as the best neighborhoods across the economy, and three, utilize Blackstone scale, right? Our resources, our data advantage. We're invested in over 4,000 companies, sub-investment grade, and use those insights to manage risk and make better portfolio decisions. The output of all of that is, as of Q3, we have about a $12 billion portfolio, $5.7 billion of NAV, 99% first-lien in primarily Blackstone credit-controlled capital structures and focused on areas of the market where we see positive trends. We're investment-grade rated by three agencies. That includes a recent upgrade by Moody's to Baa2, and we've delivered 11.4% inception-to-date returns since inception with low defaults or non-accrual rate as of Q3, which was just 20 basis points of cost. I think in competitive advantages, there's a few that come to mind. Number one, being part of Blackstone platform is an advantage in itself. Blackstone having over $1 trillion of assets, that comes in a lot of different forms. Certainly, the data advantage that I spoke to and unique insights that we have across various sectors and various parts of the economy. From an origination perspective, we have scale, right? We have specialized teams in key sectors where we're seeing unique opportunities, and then the value that we can also bring, which we should touch on a little bit more, but being the largest owner and operator of assets globally, we can bring a different level of value to our companies than just providing capital, so those are some of the things that jump out from a competitive advantage perspective. Okay, and then a question I get a lot from kind of a certain cohort of investors is, what is the relationship and the portfolio overlap between BXSL and then other kind of Blackstone-affiliated BDCs? Yeah, so we have a public BDC, BXSL. We also manage a perpetual private BDC. Both strategies are very similar, largely a first-lien focus, defensive portfolios. If you actually look at the underlying assets between what's invested in BXSL versus our other, it's about 90% overlap. I think the main difference is just the launch date. BXSL was 2018 versus our perpetual BDC was 2021. And then there are some capital structure differences as well in terms of having more fixed-rate bonds in BXSL and therefore benefiting from a higher interest rate environment with 100% floating-rate assets. Okay. And then maybe kind of more of a kind of a macro question is just in terms of M&A, it was kind of depressed last year, kind of likely impacting origination volumes. But given kind of the rise of just business optimism in general, the prospect of additional deregulation, kind of what's your view on M&A heading into or in 2025? Yeah, we're pretty optimistic. You know, we're coming out of what clearly is a cyclical low in M&A volumes, up 22% last year, but still close to 40% below 2021 volumes. I think we see an inflection point in 2025, and there's a couple of very clear things driving that. Number one is this continued capital imbalance between private equity firms and private equity capital and the debt markets. There's about a trillion of dry powder that we see that's sitting on the sidelines that needs to get deployed. Number two is this prospect for lower cost of capital. Rates coming down, spreads, as we know, have come in across all of fixed income. We view that as an appropriate amount of spread tightening. It's good for the overall economy and market activity. And then lastly, we are seeing increasing activity where we have incumbency, particularly in the last 24 months. As new M&A is low and multiples have been compressed in certain parts, in certain sectors, it's a great opportunity for businesses to drive M&A. So seeing increased opportunity there. Last year across Blackstone Credit was our most active year ever in terms of originations. We committed to or deployed over $40 billion. We see that continuing this year as well, which we would expect to benefit BXSL. Okay. And then kind of maybe circling back to some of your competitive advantages, could you discuss kind of the portfolio operations team and kind of how that kind of differentiates Blackstone relative to peers? Yeah, you know, if you think about Blackstone, at our core, the lifeblood of our business is owning and operating assets, right? Being the largest alternative investment manager globally. So that's true on the private equity side, the real estate side. We have a centralized portfolio operations group that we, on the credit side, have access to. So if we're lending money to a company, we can bring more to the table than just capital. That can come in the form of cross-selling underlying products or cost savings as well, where we're aggregating spend across all of Blackstone portfolios in certain categories to drive down costs, operating costs for our companies. That's great on the way in when you're building a relationship with a management team and a sponsor, but it's also great in terms of managing risk, having a next layer of connectivity with the management team apart from just being a lender. It's certainly an advantage that we've seen companies value over a long period of time. Okay. And then maybe moving over to credit. Credit trends for the sector have been kind of really positive in this higher-for-longer environment, but it also is kind of somewhat dependent on the investment strategy since there are some outliers. So what's your outlook for defaults for the industry overall? And then I think it would be interesting to hear kind of what your thoughts are on kind of a typical recovery if an investment defaults, especially since LTVs tend to be kind of in the mid-40s. Yeah. So on defaults, I mean, consensus is right around 3%-4% defaults for 2025. I think B of A recently came out and said 3.5%-4.5%. That's down from what's 4.5% today. So I think the general view is with rates coming down, you should see a little bit of a little bit of abatement just in terms of defaults. That said, we do see growing dispersion. So we think there are some parts of the economy, some sectors that will see continued stress before it gets better. We characterize that as just more fragile areas of the economy. Cyclical businesses, capital-intensive, smaller companies is where we see growing stress. You know, we recently did an analysis where we looked at Q3 nonaccruals across all of BDCs, and top three sectors account for about 50% of those nonaccruals. That's healthcare in particular, behavioral or rehab facilities or government-facing MSOs. That's food products, and that's industrials applications or metals and mining. So we think it's fairly concentrated in those areas, and the data supports that. In our core sectors and core themes where you see more of our exposure, software, enterprise, commercial services, and then certain parts of healthcare, we're actually seeing EBITDA growth, margin improvement, and continued deleveraging despite what's been a higher-for-longer rate environment. In terms of recoveries, I would expect this is where you're going to start to see more dispersion between the private market and the public market, right? We see stronger documentation trends in the private market, particularly around terms like collateral coverage and collateral protection, which leads to what we think are better recoveries in the private market. I think you can expect something close to or better than the historical average of 55%-60% recovery upon default. Okay. And then it was interesting that you had mentioned that software is one of your largest sectors within the BXSL portfolio. We saw credit stress from these annual recurring revenue loans to these non-profitable software companies. And we saw that that was a significant headwind for certain peers last year. So what's BXSL's annual recurring revenue exposure? And then kind of how do you, in terms of the underwriting, how do you get comfortable with not only the fact that these companies tend to be non-profitable, but also how do you handle risk of disruption from new technologies? And then also, I guess that would include kind of AI as well. Yeah. No, it's something we've spent a lot of time focusing on. We've seen a lot of ARR opportunities over the last three years in direct lending. It's something that really came to market in a scalable way in 2021. We've done very few of them. So we have about 5% of fair market value in BXSL today that's ARR loans. When we think about where we've been comfortable with the underwriting, it's a few key themes. Number one, quality in terms of product comes first. We want to be financing companies that have the highest quality products in their sector. Generally, these are larger companies, think north of $3 billion of enterprise value, lower LTV as well, sub 40%, well below 40%, and higher growth profiles where sponsors and management teams are intentionally investing in discretionary spending to drive growth. The thesis there is that in a slowdown, what we've seen over the last 24 months, you can then pull back and focus on margins and free cash flow. That's effectively what we've seen in our ARR portfolio overall, seeing healthy EBITDA growth and deleveraging trends in that cohort as our companies have adjusted to what's been a higher rate environment. Okay. Thank you, and then just one additional question on credit. Kind of average credit stats, whether you're looking at interest coverage or revenue or EBITDA growth, have been positive for the sector and kind of been remarkable just given the increase in base rates over the last few years. But it doesn't really tell the full story. So if we look at the tail risk, what percentage of the portfolio is kind of performing, underperforming relative to the original underwrite in addition to the obvious non-accruals? Yeah, it's a good question. So overall, I would characterize as the fundamental environment as decelerating EBITDA growth, but still positive. And to put numbers to that, our companies grew in LTM for Q3 of last year about 7% year-over-year. That was down from the peak of, call it low teens, still very comfortable from a credit perspective. Average interest coverage is right around 1.7 x in the portfolio. We think that's close to a trough given where rates have gone over the last six months. And then if you look at the tails, we think about it a couple of ways. Number one is, well, what percentage of your exposure is below one times coverage, excluding your ARR exposure? And in our portfolio, it's about 4%. That compares versus the overall market as defined by Lincoln of about 18%. About 18% of direct lending exposure, excluding ARR, below 1x coverage in the current rate environment as defined by Lincoln. What we also look at is, you know, what is the convergence of leverage over a term since close, interest coverage below a term, and then where liquidity is starting to get constrained, and generally, that Venn diagram or the convergence of those three sort of dictates your exposure in a portfolio marked below 80, so I think that's a good stat to look at rather than just nonaccruals. In our portfolio as of Q3, we had about 40 basis points of exposure marked below 80 versus the average of the traded BDC peer set of 4%, so as you think about the tail risk, it's important to look at marks below 80 + nonaccruals. Again, we're at 20 basis points of nonaccruals at cost versus the traded peer set at 2.6%. Okay. Great. And then the last question on credit is really growth in non-cash PIK remains at least a concern that investors are paying attention to. And then although BXSL's PIK is below kind of the peer average, I think it's roughly about 8% as of the third quarter. So could you, one, talk about the circumstances where kind of that PIK puzzle makes sense from Blackstone's perspective? And then what percentage of the PIK was actually incorporated into the original underwrite versus kind of the quote-unquote bad PIK that was due to amendments? Yeah. So we reported in Q3 about 6% of our total income was from PIK, you know, well below, I think, what we're seeing the average across the BDC peer set. Nearly 85% of our PIK exposure were loans actually put in place with PIK optionality at underwrite. And as we think about where we provide that flexibility, usually it's your highest quality part of your pipeline where LTV is lower, larger companies, higher growth, and we do put guardrails around it. So on average, where we're giving PIK toggle flexibility, it's limited to 20%-25% of the coupon, and it's limited to the first two years post-close. So the actual principal impact post two years is relatively muted. You know, we also look at just where those are marked. These are, for the most part, performing companies where we've underwritten the exposure to give a little bit of PIK flexibility, particularly in this market where the syndicated market has come back, as we know, spreads have come in in the public market. It's an area where you can provide a little bit more flexibility and differentiate with a private solution versus what's offered in the syndicated market. Okay. Great. And then kind of given BXSL's upper middle market strategy and kind of the reemergence of the broadly syndicated market, how has that impacted BXSL's investment strategy? Meaning, are you expanding the funnel to maybe kind of go kind of downstream a little bit to either the core or the lower part of the middle market? And then kind of can you talk a little bit about spreads in terms of where you're seeing them in the upper middle market? Yeah. So I think, you know, spreads have definitely compressed as we look at the market. You saw the majority amount of spread tightening happened in the first half of last year. And that was in the private market a lag to what we've seen in the public markets, right? And then if you think about where all fixed income markets have gone since the peak in 2023, you know, IG 50 basis points tighter, high yield and leveraged loans about 100 basis points tighter, and the private market has not been immune to that. We view it as an appropriate amount of spread tightening, right? Private market spreads today in the 500 context are right around, right on top of where they were in 2021, but there's less leverage being put on capital structures because where rates are. As we think about how that has impacted our investment strategy, it really hasn't, right? We're set up to focus on larger borrowers in higher quality parts of the market, but we do see the full market. As part of Blackstone, we have 280 investment professionals. We have companies that are as low as $30 million of EBITDA in the portfolio to as high as $1 billion. So I think we have the ability to sort of move in the market where we see the best relative value. We're active in both the middle market and the large cap space, but it has not led to a change in investment criteria or a change in underwriting, i.e., moving down in the capital structure. Okay. And then private credit has been evolving to other sectors of the economy. And some estimates we've heard think that the total addressable market is now in the kind of the multi-trillion. So are there investment strategies beyond kind of your typical kind of first-lien, senior sponsor-backed corporates that are interesting to BXSL, whether it be, I don't know, asset-based finance, which is a large industry infrastructure, more exposure to equity investments? What are your thoughts there? I think for us, you know, really no change to BXSL. You know, we've been fairly set and disciplined and defined with our strategy, which is, you know, first-lien, senior secured, you know, 40% LTV, you know, sub 50% LTV in the highest quality sectors. I don't think that's changing. As a firm, we do see significant opportunity in asset-based finance. We recently combined our credit business with our insurance business. We're unlocking opportunities there. We think we're in very early innings of the growth of that market. Overall, the other dynamic we're seeing is a little bit more demand from corporates, business, either public companies or non-sponsored companies that haven't historically accessed the private market are now picking up the phone and wanting to learn more about it. So if there's an area of growth we see within direct lending, that's probably it. But in terms of BXSL's strategy, we've been fairly disciplined and set and wouldn't expect drift from that materially. Okay. And then interesting that you had mentioned non-sponsor. What percentage of the portfolio is non-sponsor? Today, it's relatively muted. It's single digits. But, you know, for instance, we did announce a deal in Q4 of last year for Dropbox. Dropbox is a $10 billion enterprise value business with no net debt. We provided a private financing solution to help them that was structured in nature to help them solve a problem. So that got quite a bit of press. And on the back of that, we are having similar conversations. Okay. Great. And then new entrants, both private and public BDCs have entered the direct lending space. It seems like private BDC fundraising has really started to accelerate now. And so just given the kind of the capital entering the sector, how do you frame the overall competitive landscape right now? Yeah. You know, there's headlines every day about new private credit managers raising capital and entering the space. I think as we look at it, the vast majority of new entrants that have raised capital in the last 24 months or 36 months has really been in the middle market, in the lower middle market. There are very few platforms we see that are operating at our scale, right? We can, as a firm, you know, we look at the sort of $5 billion and below part of the sub-investment grade market as our target universe. You know, we can write and hold up to $4 billion checks. So on the private market, there are few players at that level. The air is a little bit thinner, but we do see the dynamic with the public markets at that level. Our view is that the private alternative is here to stay. There are some large-scale transactions that we closed last year that helped support that. And overall, you know, it may over time lead to sort of spreads stable to declining slightly, just given the presence of where we operate in the public markets. But, you know, most of the new entrants are really the middle market and the lower middle market space. Okay. And then could you talk a little bit about underwriting, just given the increase in competition, whether it be covenants, EBITDA add-backs, like how are those trending right now? Yeah. You know, first, given where rates are, there's been a little bit of self-selection in terms of what deals are getting done in the private market, right? Deals are generally being set up with lower leverage, lower LTVs, higher quality credit profiles as rates are, you know, we're underwriting to 4% + SOFR. You know, average LTV over the last 18 months was low 40s. Average leverage over the last 18 months was about a turn to a turn and a half inside of where we saw it in 2021. I think there are some areas where you see private lenders being able to differentiate versus the public market, particularly the larger end. So where we've seen a little bit of loosening is DDTL terms in terms of just size of DDTL that we're committing to, a little bit more PIK flexibility or portability are examples where lenders can differentiate. I think for the most part, what we care about is collateral protection. And this is where you're starting to see some discrepancy and dispersion between the public markets and the private markets. Recovery rates in first-lien loans, public syndicated loans are well below historical averages. We've been able to hold the line in terms of document protections around, particularly around collateral coverage, which ultimately leads to better outcomes. Maybe kind of excluding credit risk or maybe just defaults in general, what are some of the other risks that investors need to kind of pay attention to in 2025? Yeah, I think it's a good question. Number one is, I mean, as you mentioned, there have been significant new entrants in this space that have significant, you know, capital that's been deployed in first- or second-time funds. I think the question then becomes, well, what is the infrastructure built to mitigate losses, right? At Blackstone, we have about 200 investment professionals across our public and private business. We have another 90 investment professionals in our CIO office that's managing risk post-close. So you could see more dispersion over time in portfolios. And importantly, particularly in this market, it's important to be able to set up to be proactive and drive positive outcomes. The second is portfolio positioning, right? We said it last year, expecting more dispersion, continuing to expect more dispersion across the BDC landscape, default rates higher in certain areas of the market. I think you're starting to see that, right? Higher non-accrual rates in certain portfolios, whereas lower in others. So those would be the two things that we think it's important for investors to pay attention to: infrastructure, ability to drive positive outcomes in your watch list when things go wrong, and then also portfolio positioning. Okay. And then, given the overall growth in the private credit market, are there concerns that maybe the banks want to have a greater presence in the private credit market, just given the expectation that there could be a lighter regulatory touch? Yeah, you know, we've, so if you look at the share between the private and public market over the last three years, you have seen quite a trend, right? Look at pre-COVID and then during COVID, about 60% of loans or new deals were financed privately, 40% publicly. In the last 24 months, that's shifted, right? That's been close to 85% of new deals financed privately, 15% publicly. So we think as the market comes back and spreads have normalized, you could see a little bit of normalization in that. But, you know, we think and what we see is that the private alternative is here to stay in terms of our differentiation around certainty of execution, price certainty, ability to move quickly, ability to provide large-scale financings to private companies is new in the private market. And we're seeing that opportunity consistently versus the public market. Okay. And then as spreads have come down a little bit and rates have trended down, has there been kind of a commoditization within the direct lending space, just given additional players, more capital kind of chasing the same deals? You know, it's interesting. So if you look at the direct lending solution and just private credit today versus the liquid markets, the premium that we see when you bake in the multiple layers of fees that banks are earning is about 75 basis points. That's been fairly consistent over the last three to four years. So we don't see really commoditization happening. And in fact, we see more consolidation happening within the private market, which leads to more differentiation. You know, I think your ability to deliver more to your sponsors over time through good times and in bad in terms of providing value above and beyond just capital is what we think really differentiates. Okay. And then maybe just thinking about M&A within the BDC sector, there's a lot of like subscale BDCs that are out there. Do you expect any sort of material M&A activity combinations or just are there too many technical challenges? I think there are significant technical challenges in the BDC landscape and in your ability to buy other platforms. You've seen some of that with recent headlines. But overall, I think there's going to be a little bit of natural consolidation over time, right? As portfolios have different returns and different investor experiences, you'll see some natural consolidation happen. Okay. And then kind of on the consolidation question, we've seen kind of a lot of affiliated kind of private to public types of consolidation kind of within the Blackstone platform. You have BXSL, and then you also have other private funds. Is that kind of a strategy that you would be potentially interested in down the road, or do you want to kind of just keep those two strategies separate? It's something we're always talking about and looking at. Do we, you know, do we strategically increase new products to the market? To date, we've had quite a bit of success with the retail product, which is private, and then the public fund. And so we've been focused on that success. Okay. And then last question, then we can open it up to the investors. Just could you talk a little bit about your dividend strategy? You kind of purposefully decided not to have kind of a supplemental dividend. And so could you just kind of talk about your thoughts on dividend strategy? And does that kind of put you in a situation where you might have to have a kind of an annual kind of cleanup? Yeah, you know, when we increased the dividend as rates were rising in 2022, we took sort of a through cycle approach, right? The view internally that rates were rising, but rates were going to be more cyclical in nature and not necessarily secular. So because of that, in Q3 of last year, we reported 13.4% ROE, paid out 11.3% dividend. There's clearly a little bit of pressure on earnings as rates come down. So very comfortable where we're set today in the out earnings that we've seen over the last 12 months to 24 months. Okay. All right. What questions do we have from the audience? Thanks. ARR loans, not too familiar with them. I know they're not a huge part of your business, but I know they are broadly in the BDC space. There's some really big funds out there with it. And you mentioned that there's been some, forget how you put it, but there's been some, you know, maybe structural changes or things you've done to help these companies get through. Can you give us some examples of what you can do to remediate a situation? Are they cutting costs? Are you extending waiving covenants? Something, you know, anything along those lines? Yeah. So ARR loans, it's really a product that came about in the current scale sort of post-COVID, right? And generally speaking, you're setting up a capital structure as a multiple of ARR versus EBITDA. We've seen a lot of them get dumb in the market, and we've been very selective in what we're focused on, which is larger borrowers, higher quality products, and, you know, generally lower LTV with significant cash equity invested behind us. What we've seen in that portfolio, which is, again, 5% of fair market value, is relatively positive trends. As rates increased, which was one of the cases that we're running in when we're underwriting ARR loan, there's been a change in mentality from these companies. They're cutting costs. They're cutting discretionary spending, whether that's on the OpEx line or capitalized R&D. And that's led to EBITDA growth, margin enhancement, and deleveraging overall. So that's been the overall trend. And what we've seen, the situations that have gone wrong have been more product quality issues in the market where retention trends, customer retention trends have been under pressure, or cyclical type products that have seen a bit of a pullback in terms of demand. Those categories are where we've seen most of the stress within ARR, and we'd probably expect a little bit more of that before it gets better. Other questions?