BGX - BGX: 11% Yield On Rising Rates 11% Discount

2023-09-22 09:15:00 ET

Summary

• Blackstone Long-Short Credit Income Fund is a closed-end fund that offers exposure to higher rates through senior loan investments.
• BGX has a diversified portfolio with a focus on secured loans and floating rate loans.
• The fund has an 11% yield and has been increasing its monthly distributions over the past year.
• It's selling at an 11% discount.

With rates now expected to stay high for longer, you may be looking for income investment vehicles that leverage higher rates. Certain Senior Loan funds can offer that exposure.

Blackstone Long-Short Credit Income Fund ( BGX ) is a closed?end fund, a CEF, that trades on the New York Stock Exchange. 85% of its investments are at floating rates, with 82% of them being secured loans.

Fund Profile:

BGX’s primary investment objective is to provide current income, with a secondary objective of capital appreciation. BGX will take long positions in investments which we believe offer the potential for attractive returns under various economic and interest rate environments.

BGX may also take short positions in investments which we believe will under?perform due to a greater sensitivity to earnings growth of the issuer, default risk, or the general level and direction of interest rates. BGX must hold no less than 70% of its Managed Assets in first? and second?lien secured floating rate loans but may also invest in unsecured loans and high-yield bonds. (BGX site)

BGX's management uses leverage, ~38%, which adds 1.46% in interest expense to its expense ratio, for a total of 3.67%. Its distributions are variable but have been rising over the past ~9 months, with an average coupon of 8.57%. It had no short positions as of 6/30/23.

Holdings:

The top 5 industry exposures are rather diverse, being within 5 different sectors, with ~8% in Software the highest of the ~32% total.

BGX's top 10 positions are each below 1%, and are all 1st Liens:

BGX's loans are rated mostly non-investment grade, with over 70% at B1 or lower - highly speculative by Moody's.

As of 7/31/23, BGX had ~16% in 1-3 year maturities, 47% in 3-5 year maturities, and 32% in 5-7 year maturities.

Dividends:

BGX pays monthly and pre-declares each quarter's monthly distributions. Management raised the Sept-Oct-Nov. payouts 5.76%, from $.104 to $.112. It just went ex-dividend this week - the next ex-dividend date will be 10/23/23, with a 10/31/23 pay date. At its 9/20/23 $11.80 closing price, BGX yielded 11.39%.

Management has raised the monthly distribution by 32% over the past year, with 4 payout hikes, rising from $.085 to $.1120. Payouts were previously as high as $0.122 in late 2019, and declined to $.073 in Q1 '22, before starting to rise again in June '22 to $.079.

BGX had positive distribution coverage in 2020 and 2021, but 2022 was sub-par, with -$1.79/share total income from investment operations. As a result, NAV/share declined from $15.22 to $12.55 in 2022.

However, in Q1-2 2023, NII was $.63, and total income from investment operations was $.95/share, covering the $.59/share in distributions by a healthy 1.61X factor. NAV/share has risen from $12.55 to $12.91 in Q1-2 '23.

Performance:

BGX has kept pace with the S&P 500 and has outperformed the Debt CEF industry by a wide margin over the past year on a total return basis. It has also outperformed the S&P and the Debt CEF industry over the past month and quarter, in addition to outperforming the Debt CEF industry so far in 2023.

Longer term, BGX outperformed the Morningstar US CEF Senior Loans category on an NAV basis in 2016 - 2021. It outperformed on a price basis in 2016 - 2019.

Valuations:

CEFs' daily valuations are calculated at the end of each trading day. Buying CEFs at deeper than historic discounts to NAV can be a useful strategy, due to mean reversion.

As of the 9/19/23 close, BGX was trading at an 11% discount to NAV/Share, cheaper than its 3- and 5-year average discounts of 9.53%, 8.09%, but not as cheap as its 1-year 13% average discount. At $11.80, BGX is at its 52-week high, and 11.5% above its 52-week low of $10.58.

Parting Thoughts:

We advise adding BGX to your watchlist - while it may be at its 52-week high presently, a market pullback could provide a buying opportunity at a lower entry point.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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