IOANA BARZA:
Welcome to the Lending Lowdown. I’m Ioana Barza, Head of Market Analysis, here with CJ Doherty, Director of Analysis
CJ DOHERTY:
We're excited to be joined by Carlos Whitaker, Senior Managing Director with Blackstone Credit, who's focused on the direct lending business, and serves as president of the Blackstone Private Credit Fund and the Blackstone Secured Lending Fund. Carlos, welcome.
IOANA:
Welcome, Carlos – thank you for joining us. We hosted our 28th Annual Loan Conference last week in New York, and the room was packed with people trying to make sense of this really tough market we're in. And there's a big theme throughout the day, and I want to pose that to you and kind of start with that now. Is private credit a port in the storm? What's your view or the Blackstone Credit view for the private credit market right now?
CARLOS WHITAKER:
Yes. Thanks for having me, Ioana and CJ, great to see you all. Yes. In terms of private credit, we continue to be very bullish about the long-term trend of alternatives, particularly private credit. This year has been a challenging environment due to inflation, rising interest rates, and uncertainty around growth. But we are very confident in our ability to navigate and deliver for investors. Private credit is a long-term megatrend. It has demonstrated its value for both investors and borrowers. From an investor's perspective, private credit – that is short duration floating rate – typically outperforms traditional long duration fixed income during periods of rising interest rates, like what we have today. And then, from a borrower's perspective, private credit enables greater certainty to close and faster execution for their transactions. So right now, it's a very favorable environment for deployment for us. Base rates have increased significantly, spreads have widened, all while traditional sources of public debt financing have really pulled back. The high-yield bond and leveraged loan markets have experienced a lot of volatility this year, which is really depressing new issuance and making them difficult markets for borrowers to access. For example, high yield new issuance is down 70-80%, and leveraged loan new issuance is down around 40-50%. So borrowers, which for us are PE sponsor companies, really must consider private credit markets to get their deals financed and ultimately closed. So this dynamic is driving more deal flow to us, and then our team continues to focus on lending to large performing companies in attractive sectors with strong cashflow, and at the top of the capital structure. So our loans tend to be senior secured and more protected during periods of volatility.
IOANA:
You alluded to this; this is what's haunting all of us – just how stalled these public markets are. And you talked about the fact that, that does create opportunities; when these markets are closed, there's a lot more opportunity for the direct lending side, which you're saying has really remained robust. And can you talk a bit more about the … you've talked about opportunities in terms of the higher-quality companies. Is it across the spectrum? What kind of opportunities is that creating?
CARLOS:
Yes. The opportunity for scaled direct lenders like us is very attractive. As the public debt syndication market remains challenged. As larger, higher-quality companies turn to private credit, we believe direct lenders’ ability to commit to large-scale transactions is more valuable than ever. Remember, there is ample private equity dry powder to deploy, and private equity sponsors are still active in M&A, and in particular in “take-private” transactions in the current environment. Despite overall M&A activity trending lower this year – remember last year was a record – take-private transaction volumes are actually up this year. So the bottom line is, we believe Blackstone Credit is in a favorable environment for deployment as traditional public sources of financing have pulled back, which is forcing more incremental deal flow into private credit markets. And as we see more flow, we can be more selective, negotiate more favorable terms like wider spreads, call protection and covenants. And then, looking into the future, as private equity sponsors continue to adopt and use private credit solutions, it's going to help drive even more this secular shift of private credit, taking more share of the public credit markets. And this, I think, will be good for us over the long term.
CJ:
Okay, Carlos, I'd like to pivot now to talk about portfolio performance. Given we're in a rising-rate environment, how is your portfolio and your portfolio companies positioned, and how are they doing in this environment?
CARLOS:
Yes, that's a great question. And I would give a little bit of a backdrop. Blackstone – we really saw inflation unfolding 18-plus months ago. We were early in our call on inflation and that it was understated, and it was going to be more persistent than market expectations. So we really constructed our portfolios for a high-inflation and rising interest rate environment. Across Blackstone credit, we are positioned very defensively. Most of our portfolios are in senior secured loans with low loan-to-values, and our loans are also typically 100% floating rate. And given our size and scale, we have leading market share of large-scale billion-dollar-plus private credit deals. Large deals are typically for larger companies that have greater levels of EBITDA or cash-flow. Larger companies also tend to perform better than smaller companies during periods of inflationary pressures and slower growth. They also tend to have better management teams and also more diversified and durable businesses. Not only do we think about risk in relation to the size factor of our companies, but we also look at it through the lens of a sector factor as well. Most of our loans are two companies and sectors that have strong cashflow, generative profiles, good secular growth tailwinds. So we tend to favor sectors like enterprise software, health care services, and also professional services. So from a size and sector factor perspective, we are positioned very defensively, and we are really focused on being well-protected by investing in senior secured floating rate loans that are benefiting from higher base rates, and generating attractive income investors.
CJ:
Okay. And you mentioned scale there, and I know there's been a lot of talk about the advantage of scale this year for the larger private credit firms, particularly given the continued consolidation in the market. So I know you've touched on it there, but what are the benefits of scale for players like Blackstone credit?
CARLOS:
Yes. I'm glad you asked this. Scale is a significant competitive advantage for us, as we are one of the largest global platforms in the industry. And I'll quickly highlight three examples of how scale helps us. First, scale enables us to be a well-informed investor. We leverage our knowledge and unique insights gained from our investments across thousands of different corporate issuers. We also leverage our partners in private equity and our partners in real estate to tap into their collective knowledge and insights on sectors and business models. Given the experience and scale of these combined platforms, we can make better investment decisions and, more importantly, limit mistakes, which is very key for lender like ourselves. The second point, I would say is, scale enables us to capitalize on this secular shift. We are seeing and private credit, which is larger borrowers shifting away from the public markets and looking to transact increasingly in the private markets. Blackstone Credit has leading market share of larger deals. And in these larger deals we generally face less competition, and in turn, the companies tend to be better credits. And then a third factor, or example I would say on a scale is scale really allows us to leverage operating expenses and to finance ourselves in a more optimized and efficient way. The goal here is to enable us to pass on more return to investors because of our efficiency. So I would say to conclude, scale is quite frankly, one of the attributes that gives us great confidence in our ability to navigate cycles, particularly this one that we are currently in.
CJ:
Okay, So last question for you then, Carlos. You know, we're approaching the end of the year. 2023 is right around the corner. What's the one thing you're focused on as we turn it into the new year?
CARLOS:
Yeah, I would say we're focused on this continuing large-scale movement that you're seeing from investors towards the private credit asset class. Institutional investors, retail investors, and also insurance. We believe we're really built for environments like this. And then at Blackstone Credit, we have significant dry powder due to our broad platform. And it's an exciting moment for the asset class. We want to be a leading partner for private equity sponsors and companies as they seek capital. And we believe the activity levels are likely going to increase in 2023.
IOANA:
Well, that is a great view, Carlos, on private credit really being a port in the storm, given that we started the podcast talking about just how stalled the public markets are and how many challenges issuers face. So thank you for that and thank you for your outlook for what might lie ahead. Thank you for joining us today and sharing your insights with us.
CARLOS:
And thank you, Ioana, for having me and thanks to you as well, CJ. It was great to speak to you all today.
CJ:
And thanks for joining us.
IOANA:
And thank you all for tuning in. I invite you to check out our BDC and Private Credit Analysis at
loanconnector.com. Follow us on Twitter at LPC loans. I'm Ioana Barza, here with CJ Doherty. Subscribe to the Lending Lowdown on your favorite podcast platform.
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