Persistent inflation and rising interest rates have been on investors’ minds for most of this year.
On September 21, the Federal Reserve raised interest rates again by 75 basis points (0.75%), continuing its fight against inflation. These rapidly rising interest rates have rattled the market, with the S&P 500 more than 24% since the beginning of the year.
At times like this, conservative investors seek safety and protection against inflation. the Blackstone Guaranteed Loan Fund (BXSL -1.39%) it is a dividend stock that could protect you from inflation and the effects of rising interest rates. The company has a high dividend yield and benefits from higher rates. That is how.
Blackstone Secured Lending Fund seeks to fill a void created by banks
Blackstone Secured Lending Fund invests in private company debt to generate income for investors. The company operates as a business development corporation (BDC). CDBs finance businesses through loans and equity investments, following tax rules similar to those of real estate investment trusts (REITs). One of those rules requires BDCs to pay out 90% of their taxable income in dividends, making them attractive high-yield stocks to income investors.
The Blackstone Secured Lending Fund sees an opportunity to meet the growing demand for credit from private companies and leverages the Blackstone platform to identify attractive investment opportunities in private companies.
Regulation hit banks hard after the Great Recession of 2007-2009, and as a result, they stopped making as many loans to businesses. According to S&P Capital IQ LCD, US banks’ share of senior secured loans dropped from 33% in 1995 to just 8% in 2022. The number of banks has also consolidated, leading to a shortage of loan supply to seniors. private businesses.
This is what the business does
Under normal market conditions, the fund intends to invest 80% of its total assets in collateralized debt investments. The fund invests in 163 portfolio companies that have an average return of 7.8%. The fund invests primarily in senior secured loans, which represent almost 98% of its total portfolio.
Debt investments have liens or a security interest that a company pledges to secure financing. These liens determine who gets paid first if a business is unable to repay its loan. First lien secured loans have first claim on collateral, so if a business goes bankrupt, these debt holders are paid before anyone else. This can make the investments safer than second lien loans or equity investments, which have lower priority in the event of a company’s liquidation.
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Why Blackstone Secured Lending Fund Could Be a Good Inflation Hedge
The fund’s potential to hedge against inflation and rising interest rates makes it attractive. Over the past year, inflation has remained stubbornly high due to huge fiscal stimulus amid the pandemic, supply chain issues, and rising housing and food costs.
To combat inflation, the Federal Reserve is raising interest rates at a rate we haven’t seen in decades. Since March, the fed funds rate, or the rate that banks can lend each other money overnight, has gone from 0.25% to 3.25%.
Rising interest rates increase the return on Blackstone Secured Lending Fund’s debt investments, which are almost 100% floating rate instruments. These higher rates can lead to higher interest costs that benefit the fund and its investors. During the first half of this year, the fund’s net investment income (NII) increased 41% from last year to $208 million.
In its June 30 regulatory filing, the fund noted that a 100 basis point increase would see the NII increase by $73 million, while a 200 basis point increase would see it rise by $147 million. Since that date, the Federal Reserve has raised the federal funds rate by 150 basis points.
The risks of investing in the BDC
While rising interest rates increase the fund’s investment income, rates that rise too quickly could put pressure on those companies’ ability to repay their debts. In addition, the value of the fund’s debt investments could fall due to higher interest rates.
One way the fund hedges this risk is by investing in those first-lien loans, giving them priority in the event of bankruptcy. It also spreads risk across companies and industries, so it’s not too concentrated. Its largest industries are healthcare and software providers and services, which account for 14% of its portfolio. The fund has $890 million in liquidity and undrawn debt, and 55% of this debt is fixed with an average rate of 2.97%.
investor takeaway
The risk of investing in the fund is that companies start to default in waves, resulting in liquidations rather than a steady stream of income. The fund could also be squeezed if interest rates return to the lower levels we have become accustomed to over the last decade.
Brad Marshall, CEO of Blackstone Secured Lending Fund, is optimistic, saying “despite possible economic headwinds, we believe the outlook for shareholders is bright, given a portfolio that is well positioned for this environment and significant earnings growth potential. higher rates”.
With a dividend yield of 10.4%, the company looks like a solid dividend stock that could provide investors with a good hedge if inflation remains stubbornly high.
