BXSL - Better 10%+ Yield: Blue Owl Capital Corp Or Blackstone Secured Lending?

2023-11-22 18:55:18 ET

Summary

• Blue Owl Capital Corporation and Blackstone Secured Lending Fund are both blue-chip investment grade Business Development Companies.
• Both offer high yields that are well-covered by income.
• We compare them side-by-side and offer our take on which is the better buy right now.

Given that it appears that an economic slowdown is increasingly likely in the near future, it is prudent for investors to increasingly weight their portfolios towards more defensive positions. When it comes to business development companies, or BDCs ( BIZD ), that means favoring the ones that have investment grade credit ratings, strong sponsors with skilled underwriting and recovery teams, and portfolios with large allocations to senior secured loans. Moreover, it makes insisting on a margin of safety in the price at which you are allocating your hard-earned money all the more important to help shield your principal against potential NAV erosion in the event of some defaults in the BDC's loan portfolio.

In this article, we compare two high-yielding and defensively positioned BDCs - Blue Owl Capital Corporation ( OBDC ) and Blackstone Secured Lending Fund. ( BXSL ) - and offer our take on which is the better buy at the moment.

BXSL Stock Vs. OBDC Stock: Investment Portfolios

BXSL's investment portfolio is among the defensively positioned in the BDC sector today, with an impressive 98.4% of its assets allocated to 1st lien senior secured loans, underscoring BXSL's focus on risk mitigation and preserving shareholder capital as these loans provide greater security in case of borrower defaults. Moreover, 98.8% of its loans are floating rate, while 56% of its debt is fixed rate, putting it in a position to benefit from rising interest rates. This explains much of its strong outperformance in recent years as interest rates soared. Moreover, BXSL's underwriting skill - boosted by its industry and macroeconomic insights through its relationship with trillion-dollar global alternative asset manager Blackstone ( BX ) - is evidenced by its non-accrual rate of less than 0.1% on a fair value basis.

OBDC's investment portfolio is also relatively defensively oriented, with 83% of its assets allocated to 1st and 2nd lien senior secured loans, including a significant 69% in 1st lien loans. This positions OBDC as one of the lower-risk BDCs. Moreover, like BXSL, it benefits from rising interest rates, as 98% of the loans in its investment portfolio are floating rate, whereas its floating rate debt exposure is much lower than that figure. OBDC's underwriting skill is reflected in its low non-accrual rate, representing approximately 1.1% and 0.9% of the total debt portfolio at cost and fair value, respectively.

Both BXSL's and OBDC's risk profiles are further enhanced by the significant diversification in their portfolios.

As of September 30, 2023, none of the top ten companies within BXSL's portfolio individually exceeded 4% of its total portfolio and overall compose just 29% of its total portfolio. The remaining 71% of the portfolio is distributed among 178 additional companies. Further diversifying its risk, BXSL has spread its industry exposure across several sectors, with software receiving the most substantial allocation at 16%, followed by healthcare providers & services and commercial services & supplies, which command 12% and 9% of the portfolio, respectively. The portfolio also includes healthy allocations to professional services, insurance, aerospace & defense, and other sectors, each encompassing a range of 4% to 7% of the total portfolio.

OBDC's top ten positions similarly account for 24% of the portfolio at fair value, with the largest single borrower making up 3.7% of the portfolio. This indicates a measured concentration that balances risk while still potentially capitalizing on the performance of these investments. In terms of industry diversification, the highest allocation is in Internet software and services at 12.7%, followed by insurance at 9.6%, and food and beverage at 6.4%. Other notable allocations include asset-based lending and fund finance, manufacturing, healthcare technology, financial services, healthcare providers and services, healthcare equipment and services, and buildings and real estate, each ranging from 3.9% to 6.3%. The presence of 19 other industries constituting 37.4% of the portfolio further underscores the breadth of OBDC's industry exposure.

BXSL Stock Vs. OBDC Stock: Balance Sheets

Both BXSL and OBDC also enjoy investment-grade credit ratings, reasonable leverage levels, and substantial liquidity. BXSL's leverage ratio was quite low at just 1.08x as of the end of the most recent quarter, suggesting sufficient financial cushion to navigate potentially adverse economic conditions while still achieving strong returns on equity. Moreover, with its fixed-rate debt not maturing for an average of 3.5 years, BXSL's cost of capital should remain fairly low for the foreseeable future, even if interest rates remain higher for longer. BXSL also has $1.5 billion of liquidity.

OBDC's leverage ratio is quite similar to BXSL's at 1.13x, also giving it an attractive combination of financial flexibility and attractive returns on equity. Moreover, the vast majority of its debt matures in 2026 and beyond (a weighted average term to maturity on its debt of 5.1 years), giving it a fairly stable cost of capital for the foreseeable future. Moreover, it has $1.9 billion in total liquidity.

BXSL Stock Vs. OBDC Stock: Dividend Profile

BXSL and OBDC both have strong dividend coverage ratios which, when combined with their defensively positioned investment portfolios and solid balance sheets, provide a stable dividend payout profile. BXSL boasts a dividend coverage ratio of 123%, thanks in large part to a very impressive 74% year-over-year increase in net income per share and a 12% increase from the previous quarter that has supported its aggressive dividend growth. Looking forward, further dividend growth will largely depend on where interest rates and the economy head, as rising non-accruals and/or falling interest rates will likely eat into BXSL's current dividend cushion, thereby making it more difficult for management to continue growing its dividend.

OBDC also has very strong dividend coverage. Net Investment Income per share of $0.49 covers its regular quarterly dividend payout by 148%. Even when including its substantial $0.08 supplemental dividend per share, the coverage ratio remained quite conservative at 120%. Even better, its net asset value per share has grown in each quarter over the past year, reflecting that its dividend payments are very sustainable. Moving forward, OBDC has plenty of room to continue growing its regular quarterly dividend should it choose to, though it may elect to continue its more flexible option of paying out supplemental dividends as long as macroeconomic conditions support it doing so.

BXSL Stock Vs. OBDC Stock: Valuation

When it comes to valuation, OBDC is significantly cheaper than BXSL, trading at a 5% discount to NAV at the moment compared to BXSL's 6.63% premium to NAV. That said, OBDC has a much higher regular dividend yield of 10.88% compared to OBDC's dividend yield of 9.57%. That being said, when taking into account expected supplemental dividends over the next twelve months, OBDC's yield is actually slightly higher at 11.3% compared to BXSL's 11.1% yield.

Based on expected forward earnings, BXSL has a P/E of 7.69x and OBDC a P/E of 7.68x, making them virtually identical in price from an earnings power perspective.

Investor Takeaway

We like both of these BDCs and think that they are both well-positioned to deliver attractive risk-adjusted income in all but a severe and prolonged recession.

Blackstone Secured Lending Fund is a bit more defensively positioned than Blue Owl Capital given its larger parent, slightly lower leverage ratio, and a greater allocation to first-lien senior secured loans.

That being said, Blue Owl Capital Corporation still has a strong asset portfolio and balance sheet and has stronger dividend coverage than Blackstone Secured Lending as well as a cheaper valuation. As a result, we give OBDC the overall edge here and rate it a modest Buy, while giving BXSL a Hold rating.

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