Blackstone Secured Lending Fund

NYSE:BXSL

Earnings Call Analysis

Robust Financials and Positive Outlook

BXSL sustained solid performance with net investment income at $0.96 per share and maintained its dividend of $0.77 per share, an 11.6% annualized distribution yield, covering the dividend by 125%. The company saw over $1 billion in new investment commitments, with 98% being first lien, indicating high-quality investments. The investment focus targets historically lower default rate industries and the portfolio outperforms the private credit market in growth and profitability. Expectations of falling interest rates could boost companies' free cash flow and investment prospects. Additionally, a lower interest rate environment anticipated for 2024, with a forecasted average SOFR rate of 4.1%, might lead to increased M&A with significant dry powder in the market.

Blackstone Secured Lending Delivers Strong Performance Amid Favorable Market Conditions

The fourth quarter and full-year 2023 earnings call for Blackstone Secured Lending (BXSL) revealed a strong set of results, with notable growth in net investment income (NII), increased net asset value (NAV), and robust credit performance. The company maintained one of the highest annualized distribution yields among peers, reflective of their operational strength.

Significant Investment Activity and Focus on High-Quality Assets

In Q4, BXSL saw a surge in investment activity, surpassing $1 billion in new investment commitments, signifying a strategic drive towards high-quality investments. The focus on first lien loans, favorable average EBITDA, and conservative loan-to-value ratios underlined a disciplined investment approach, while the observed market trends pointed towards a strong M&A landscape and anticipated increase in deal flow for 2024.

Defensive Portfolio Positioning and Liquidity Enhancement

The quarter ended with a $9.9 billion investment portfolio and a cautiously managed leverage ratio. BXSL's strategic portfolio composition showcased nonaccrual rates of less than 0.1%, indicating robust credit quality. Looking ahead, the company emphasized a defensive positioning in anticipation of market defaults, which seems unlikely to significantly impact the portfolio due to BXSL's cautious credit selection and healthy liquidity profiles.

Company Fundamentals and Protection Measures

BXSL's portfolio companies exhibit strong fundamentals, with superior EBITDA growth and profitability relative to the market. Protective measures in loan agreements guard against borrower's asset stripping, and the amendment activity in Q4 was chiefly associated with minor technicalities, thus showcasing the resilience of the company's investment practices and documentation standards.

Dividend Growth and Anticipated Market Opportunities

The company has steadily increased dividends, highlighting their commitment to shareholder returns and confidence in the firm's strategy. Macro factors such as tightening private credit spreads, improving valuation expectations, and an abundance of private equity dry powder indicate an impending surge in M&A activity, which could create favorable opportunities for BXSL's investment portfolio. Additionally, BXSL benefits from Blackstone's expansive network and resources to support portfolio companies beyond financial backing.

Strong Balance Sheet and Positive Outlook

With a fortified balance sheet demonstrating $9.9 billion in quality investments and no debt maturities until 2026, BXSL's financial health appears commendable. The company's diverse liability profile and prudent management of borrowing costs lend confidence in its ability to maintain returns in the face of fluctuating interest rates. Concluding the call on an optimistic note, BXSL affirmed their positive outlook for the upcoming year, emphasizing their strategic advantages, robust performance, and commitment to investor capital protection.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the Blackstone Secured Lending Fourth Quarter and Full Year 2023 Investor Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. [Operator Instructions]. At this time, I'd like to turn the conference over to Stacey Wang, Head of Stakeholder Relations. Please go ahead.

[Stacy Wang, executive]

Thank you, Katie. Good morning, and welcome to Blackstone Secured Lending Funds Fourth Quarter and Full Year Call. Earlier today, we issued a press release with a presentation of our results and filed our 10-K, both of which are available on the Shareholders section of our website, www.bxsl.com. We will be referring to that presentation throughout today's call. I'd like to remind you that this call may include forward-looking statements, which are uncertain and outside of the firm's control and may differ materially from actual results. We do not undertake any duty to update these statements for some of the risks that could affect results, please see the Risk Factors section of our Form 10-K filed earlier today. This audio cast is copyright material of Blackstone and may not be duplicated without consent. With that, I'll turn the call over to BXSL's Co-Chief Executive Officer, Brad Marshall.

[Brad Marshall, executive]

Thank you, Stacy, and good morning, everyone. Thanks for joining our call this morning. Also with me today are Co-Chief Executive Officer, Jon Bock; and our President, Carlos Whitaker; and our Chief Financial Officer, Teddy Desloge. Turning to this morning's agenda. I will start with some high-level thoughts before turning it over to Jon, Carlos and Teddy to go into more details on our portfolio and the fourth quarter results. So just turning to the slide deck that we posted. And if we start on Slide 4, BXSI reported another strong quarter of results, including growth in net investment income, increased net asset value and continued solid credit performance. Several other key highlights in the quarter include the highest weighted average asset yield on the portfolio since inception at 12%, our second best quarter of net investment income per share and the busiest deployment period in 2 years. Net investment income or NII per share increased 1% quarter-over-quarter to $0.96 per share, which represented a 14.5% annualized return on equity. It is important to note, along with strong earnings, the quality of our earnings remains high, with limited tick payment, nonrecurring and fee-driven income.In fact, interest income, excluding PIC, fees and dividends, represented 95% of our total investment income in the fourth quarter. BXSL maintained its dividend of $0.77 per share, representing an 11.6% annualized distribution yield, one of the highest among our traded BDC peers with as much of their portfolio in first lien senior secured assets, while covering our fourth quarter dividend by 125%. We continue to focus on our mandate of protecting investors' capital by constructing a portfolio of first lien senior secured loans. As of December 31, BXSL's portfolio is 98.5%, first lien senior secured debt with a 48.2% average loan to value. We had strong credit performance supported by a minimal nonaccrual rate below 0.1% at both amortized cost and fair market value, lowest among our traded BDC peers. And approximately 1.5% of our debt investments as a percentage of total cost are marked below 90%. Turning now to Page 5 of the presentation deck. In the fourth quarter, BXSL saw a meaningful increase in investment activity, ending the period with over $1 billion at par and new investment commitments and $874 million in new investment fundings. New investments funded in the quarter were over 98% first lien with a weighted average EBITDA of approximately $130 million and an average loan-to-value of 41.5%, reflecting our continued focus on what we believe are high-quality investments. In addition, the weighted average spread was approximately 580 basis points with an average OID of 1.7% and nearly 2 years on average of call protection. From a market activities perspective, we see strength building as fourth quarter M&A volume increased almost $400 billion, a 40% boost year-over-year. We expect M&A activity to continue to build and accelerate in 2024. This view is supported by our ongoing dialogues with the top financial sponsors that we cover as well as the sell-side advisers with whom we partner with. M&A activity is expected to be largely driven by the buildup in record levels of private equity dry powder, large amounts of unsold assets that sponsors sitting on an older previous vintage funds and the impact of lower M&A activity in 2023, 54% lower than the most recent peak in 2021. This expected market activity can be sustained by the prospect of lower interest rates and continued narrowing of bid-ask spreads between buyers and sellers. In addition, the number of deals in the Blackstone credit and insurance pipeline doubled as of the end of the fourth quarter versus the end of the first quarter. These pipeline deals are predominantly first lien senior secured exposure in companies. And historically, recession-resilient sectors we know very well. While we know every opportunity in BXSL's pipeline will not convert into investments, and our underwriting borrow remains high, the volume gives us a sense for the scale and presence that we believe we have as an institution to drive deal flow. BXSL's origination pace benefits from the scale and platform Blackstone or BXSL which is one of the world's largest alternative credit managers with $319 billion in assets under management and over 500 investment professionals in 18 offices globally. Our incumbency in over 4,500 corporate issuers allows us to see more deal flow, leverage our incumbency and select into what we believe are the most attractive risk-adjusted assets. Further, BXSI has been the sole or lead lender in approximately 84% of BXSL's direct lending transactions since inception. This quarter alone, 12 of 17 BXSL's, funded transactions or for deals Blackstone lead, which allows us to be in a position to drive the negotiation of terms and documentation. During the quarter, we issued nearly $330 million of common shares through our ATM offering with additional equity and increased capacity for our debt, which has a weighted average cost of just over 5%. We remain very well positioned to take advantage of an improving M&A environment where we believe we can deploy capital and drive earnings for shareholders. 2023 was also our best year of performance since inception with a 14.7% return on NAV basis. And a lot of that return was supported by higher rates, we believe there are multiple drivers of returns that could work in our favor in 2024. These drivers include sustained elevated interest rates despite potential cuts later this year, tightening credit spreads, which could result in asset appreciation and refinancings in our first lien senior secured portfolio. And lastly, as I just mentioned, additional potential income driven by increased M&A activity, which we are starting to see as evidenced by our fourth quarter activity. So with that, I will turn it over to Jon Bock.

[Jonathan Bock, executive]

Thank you, Brad. And let's turn to Slide 6. We ended the quarter with $9.9 billion of investments, an increase from $9.5 billion in the third quarter. We also modestly delevered and end the quarter at 1x debt to equity and averaging 1.05x in the quarter. Now we enhanced our liquidity position this quarter to $1.8 billion. That's comprised of cash and available borrowing capacity across our revolving credit facilities, including ABLs, and that's the lean into an expanded pipeline. Our weighted average yield on debt investments at fair value was 12% this quarter compared to 11.9% last quarter. New investments continue to be accretive to investment income. The yields on both new debt investment fundings and assets we paid during the quarter averaged around 11.7%. And importantly, the weighted average base rate over the fourth quarter expanded approximately 120 basis points on our 98.9% floating rate debt portfolio compared to the same quarter in the prior year as rates remain elevated. Now let's look at the portfolio and on Slide 7. BXSL continued to focus on its defensive positioning in the current market environment, and this is reflected in our nonaccrual rate of less than 0.1% at cost and fair market value with no new nonaccruals in the quarter. As we look into 2024, we expect to see dispersion in performance across the market with defaults increasing in certain areas, particularly in smaller companies and businesses with cyclical and capital-intensive profiles, neither of which are within BXSL's investment focus. In addition, we expect that underperforming businesses with upcoming maturities where sponsors have taken value out could also face more challenges. And while we expect market defaults and nonaccruals to pick up modestly, fewer than 10% of BXSL loans have maturities in the next 24 months and liquidity profiles overall remain healthy. And further, 9% of BXSL's exposure to revolver credit facilities is drawn. And while we're pleased with our nonaccrual rate, we continue to monitor our portfolio of companies very closely, leveraging our team of 84 professionals in Blackstone Credit Insurance's Chief Investment Office. Now over 98% of BXSL's investments are in first lien senior secured loans and 99% of those loans are to companies owned by private equity firms or other financial sponsors who generally have access to additional equity capital and equity owners of this type have historically shown a willingness to support borrowers. These sponsors have significant equity value in these capital structures with an average loan to value of 48.2% in BXSL. And to complement healthy credit fundamentals in what could be a lower interest rate environment later this year, our portfolio also starts from a very strong EBITDA base. Taking a look at Slide 8. You can see why we view larger companies as higher performance borrowers. Our portfolio companies generated an average of $192 million in LTM EBITDA, up from approximately $167 million at the end of the fourth quarter of 2022 and more than 2x larger than the private credit market average. As we can see from the Lincoln International private market database, a market resource on private credit markets overall, larger companies of $100 million or higher in EBITDA have experienced nearly 4x greater EBITDA growth and default nearly 5x less than when compared to true middle market transactions. And this has often said, these companies are not simply good because they are big. We believe they are big because they are good. And with our extensive sourcing capabilities and origination engine, we have the ability to identify and choose a broad array of investments that are, in our view, attracted risk-adjusted opportunities in a market environment where we're anticipating increased activity, as Brad outlined earlier. Now Slide 9 focuses on our industry exposure. Another important part of our defensive positioning where we like to focus on better investment neighborhoods. And this means focusing on key sectors with, among other themes, lower default rates and lower CapEx requirements. This quarter, 30% of BXSL's deals were closed in the software industry as we continue to focus on more historically lower default rate industries. We increased the number of portfolio companies while maintaining nearly 90% invested in historically lower default rate industries, including software, health care providers and services, professional services and commercial services and supplies, which are some of the highest exposures and highest conviction themes across the portfolio.On Slide 10, we can see BXSL portfolio company fundamentals compared to the private credit market as measured by Lincoln. And looking relative to the private credit market, BXSL has approximately 2x our portfolio companies have approximately 2x higher growth rate and generate nearly 15% higher profitability. Now we continue to stress the importance of interest coverage. Average LTM EBITDA coverage of interest for BXSL portfolio companies over the last 12 months, was 1.8x in Q4, which again compares favorably to the Lincoln database for the private credit market at 1.4x coverage in Q4. As we always say, the tails here are key and 6% of BXSL's portfolio reflected interest coverage below 1x compared to the market at 15% on an LTM basis. It is even more important to understand what's driving these sales and which companies comprise them. If you're looking at the markets, looking at their tail below 1x EBITDA coverage, more than 70% of the companies below 1x interest coverage are small, with less than $50 million in EBITDA. And for BXSL, the majority of these companies are associated with recurring revenue loans, which were underwritten as higher growth names with lower initial coverage ratios. And if you exclude recurring revenue loans from the analysis, BXSL's share of the portfolio below 1x interest coverage becomes less than 1% versus the market at 13%, especially relative to the broader private credit market, we've seen our portfolio companies continue to deliver strong fundamental performance. Now looking ahead, the market is expecting rates to begin to fall this year, current pricing implying an average SOFR rate in 2025 of 4.1%. Now as many of you know, lower interest rates effectively lower the interest burden that's currently placed on our portfolio companies. And that, in turn, allows more free cash flow to equity holding all else equal. Rather than spend the free cash flow and interest payments, borrowers can reinvest excess cash into growth or prepare for a sale or refinancing. And to illustrate this point, running at a 4.1% average base rate through BXSL's portfolio as of Q4 2023 that imply a hypothetical increase in the portfolio's interest coverage ratio from 1.8x to 1.9x holding other data constant. Now I'll conclude with some points on our documents and recent amendment activity. As Brad indicated, when we negotiate our credit agreements, especially when we're the leading lender, we placed significant focus on ensuring important protections are put in place. Nearly 100% of the Blackstone lead deals held in BXSL include certain protections against asset stripping and collateral lease and have caps on add-backs EBITDA. This is in stark contrast to the syndicated market where the majority of loans lack these kind of lender protections and which we believe have been a significant driver of depressed recoveries in liquid loans over the past year. Finally, amendment activity continues to be relatively benign. In the fourth quarter, in BXSL, there were 40 amendments. The vast majority of which were associated with add-ons, PDTL extensions and other immaterial technical matter. And there were 2 other amendments associated with providing additional PIK flexibility and one amendment associated with an underperforming investment. Among the 2 PIK amendments, one was associated with a significant equity infusion by the PE sponsor and the other was effectively extension on a PIK option provided an initial underwriting. Now we also extended call protection on one of the deals by 2 years. And for the underperforming investment, we proactively engaged the PE sponsor who also contributed new equity, and the amendment here was associated with recognizing additional equity in our covenant tests. And with that, I'll turn it over to Carlos.

[Carlos Whitaker, executive]

Thanks, Jon. Turning to Slide 11. BXSL maintained its dividend distribution of $0.77 per share. a 28% increase from Q4 of last year and a 45% increase since our IPO 2 years ago. As you can see, we have continued to focus on delivering high-quality yield to shareholders, building a level of confidence through steady regular dividends while also building NAV per share. We expect this approach to continue. As the economic environment shifts, it's important to look at the market as a whole. We expect private credit spreads to tighten as M&A increases, a trend we began noticing in late 2023. To expand on Brad's point regarding deal activity, we are optimistic about M&A volumes and the deployment picture for 2024. Valuation expectations have improved. Record private equity dry powder of $1.5 trillion is on the sidelines. Economic sentiment is improving. Fundamentals remain healthy, and there is a new prospect for lower cost of capital if rates fall, all drivers for pent-up market activity. Given our broad origination platform and expansive credit footprint, we believe BXSL is well positioned to take advantage of this environment. Another benefit we offer is our scaled investment franchise, which allows us to drive investor returns, a main Blackstone focus. Recall, our value creation program, which all BXSL portfolio companies have access to seeks to assist our companies by lowering their expenses and creating cross-sell opportunities across the broader Blackstone portfolio. We have created and implied $3.5 billion plus of enterprise value for our BXCI companies, in addition to being their lender. For example, we made over 20 introductions across the broader Blackstone ecosystem to a digital service provider and generated approximately $7 million in sales for this borrower. This included projects for enterprise architecture and enterprise resource planning selection, cloud optimization consulting and material requirements and planning, all directly with other Blackstone investments. We also worked with a management service provider for health care to put together a request for proposals for medical consumables. The request contained over 1,000 SKUs. And through this process, save the borrowers almost $2 million. And again, we are just the lender here. So to be able to provide such assistance is quite remarkable. It's a point worth emphasizing as we provide BXCI value creation services that aim to add value to our companies, we offer our borrowers access to over 50 data scientists, over 90 senior advisers and a team of cybersecurity experts, all of which we believe ultimately makes us an attractive manager to partner with. But all of this ties to our focus on shareholder experience and alignment. We built BXSL to help drive attractive risk-adjusted returns to shareholders with what we consider to be industry-leading best practices. Even after the expiration of our fee waiver, BXSL has among the lowest fee structures, expense ratios and cost of debt relative to our peer set as a percentage of NAV and as of the end of Q4. This helps us to build a defensive portfolio and deliver returns to our investors. We have a 3-year look back, our total return hurdle related to incentive fees on income. And importantly, we amortize OID over the life of the loan and do not scrape upfront fees to the manager by passing on all of BXSL's portion of investment-related fees fully to the fund. Another example of shareholder alignment and another way we aim to differentiate ourselves. And with that, I'll turn it over to Teddy.

[Teddy Desloge, executive]

Thank you, Carlos. I'll start with our operating results on Slide 12. In the fourth quarter, BXSL sales net investment income was $172 million or $0.96 per share, representing the second highest NII quarterly performance since our IPO. GAAP net income in the quarter was $157 million or $0.88 per share, up 16% from a year ago. Our total investment income for the quarter was up $53 million or 21% year-over-year, driven by increased interest income primarily due to higher rates. Payment in kind or PIK income represented approximately 5% of total investment income during the quarter. We would also like to acknowledge that the fee waivers in place since our IPO expired near the end of October 2023. While this quarter included partial waivers for approximately 1/3 of the period, future quarters will fully incorporate BXSL full management fee of 1% and its incentive fee of 17.5%. The partial waivers added approximately $0.02 of NII per share to the quarter. Turning to the balance sheet on Slide 13. We ended the quarter with $9.9 billion of total portfolio investments at fair value, less than $5 billion of outstanding debt and nearly $5 billion of total net assets. With our strong earnings in excess of the dividend in the quarter, NAV per share increased to $26.56, up from $26.54 last quarter. Next, Slide 14 outlines our attractive and diverse liability profile, which includes 57% of drawn debt in unsecured bonds. These bonds have a weighted average fixed coupon of less than 3%, which we view as a key advantage in this elevated rate environment and contribute to an overall weighted average interest rate on our borrowings of just over 5%. Again, this compares to weighted average yield at fair value on our debt investments of 12%. Additionally, we have no maturities on our liabilities until 2026, and our funding facilities have an overall weighted average maturity of 3.4 years. As mentioned in our prior earnings call, BXSL was the first traded BDC to receive an improved outlook from stable to positive by Moody's, and we continue to maintain our 3 investment-grade corporate credit ratings. We ended the quarter with approximately $1.8 billion of liquidity in cash and undrawn debt available to borrow, providing us with significant capacity for continued portfolio growth. The fourth quarter of 2023 was our most active quarter since 2021, with BXSL committing to over $1 billion in investments in the quarter that have closed to date plus an additional $221 million committed to BXSL as of December 31 that have yet not yet closed. As you heard from Brad, Jon and Carlos, we believe deal activity will increase in 2024 and create new deployment opportunities we are seeing that play through our pipeline. We also have seen spreads tighten and activity rise in the syndicated loan market, generally a leading indicator for what we expect to see in the private side. As such, we are actively leveraging incumbency to retain exposure where capital structures were set up in a wire spread environment, while company performance has remained strong, exceeding expectations. For example, in the fourth quarter, we agreed to 5 repricings in the portfolio, in exchange for an average of nearly 2 years of additional call protection. We are also finding success offering private solutions that are differentiating versus what the syndicated market can offer, such as refresh DDTL capacity or modest peg flexibility. In conclusion, we remain positive about the year ahead, our competitive advantages in the market and robust performance in various metrics against our peer set. We believe the positive factors that have supported returns for investors remain in place, including portfolio positioning for a modestly lower but still elevated rate environment, ample liquidity to deploy into what we believe will be a more robust deal environment and continued elevated earnings powered by low-cost financing sources, all of which is backed by Blackstone's platform advantages in scale and sourcing and our focus on protecting investors' capital. With that, I'll ask the operator to open up for questions. Thank you.

[Operator]

Thank you. [Operator Instructions]. We'll go first to Finian O'Shea with Wells Fargo Securities.

[Finian O'Shea, analyst]

Interesting comment at the end by Teddy there on the repricing. I guess first, how many, if you can offer us color happened post quarter with the major BXSL come back? And then just higher level is, I'm not sure repricing has been a concept in direct lending. If you could touch on if this is a market evolution that's happening in real time.

[Jonathan Bock, executive]

Yes. Thanks, Fin. So on your first question, repricing activity has continued, not to overly sort of material extent. I think if you look at the capital structures where we have agreed to repricing, some of these were set up at a clearly higher rate environment or higher spread environment. The average spread on the deals that we repriced in Q4 were just right around SOFR 615 inside or outside of where the market is today. All of those were met with new call protection. So we make that trade to extend duration in the portfolio.

[Brad Marshall, executive]

Fin, it's Brad. I would say it is a bit of a new phenomenon, but you always have the option to take your capital back at your call protection. And that's why it's important to have call protection and deals. But on the higher-quality assets, if they've delevered, we're usually okay with extending duration on those types of assets.

[Finian O'Shea, analyst]

Okay. That's helpful. And then I guess for my follow-up, can you talk about the strategy with capital raising. You've leverage has gone from 130 to 1 over the course of the year, mostly on account of the ATM. I know you gave some constructive comment on the deployment outlook, but it's not that meaningful yet. So are you still pedal to the metal post quarter? And how are you looking at that today?

[Jonathan Bock, executive]

It's Bock. I would outline that not pedal metal focus, you size the equity capital based on the opportunity set as your forward pipeline develops. And you've seen, and you've heard Brad's comments on the development of the forward pipeline. I think what's outlining is that we have access to very high-quality investors through the ATM program, some of them are very large in nature. And our goal will be to ensure that we're sizing the equity growth, ensure that we're generating attractive return. And so monitoring that on a daily or quarterly basis. So you're starting to see a build in pipe, you could expect to see a level of build in capital, but you don't let that overwhelm the forward return.

[Brad Marshall, executive]

Then, I'll just add to that. So I think we see things maybe a little bit before the market in terms of pipeline building and assets and deployment. You certainly saw some of that get reflected as we said, the fourth quarter was our busiest quarter since 2021. So we are seeing a material tick in activity. Some of that's being driven just by incumbency, not in the existing portfolio, but across our XI portfolio where we can originate deals on a proprietary basis. Just to give you some stats, I think we said this, but the pipeline is about 2x larger than it was maybe 6 months ago. And even in the past couple of weeks, the deal flow coming in from sell-side advisers has more than doubled. So we're always going to be thinking about our capital structure to make sure we can take advantage of what's in front of us. Recognize your point, leverage has come down. But again, it's on the back of very, very active investment activity in the fourth quarter, and we'll see how the first quarter evolves.

[Operator]

We'll go next to Ken Lee with RBC Capital Markets.

[Kenneth Lee, analyst]

In terms of the normalization of the broadly syndicated loan markets, I wonder if you could just share your thoughts on how you think this could impact either the pace or the mix of new originations that you could be seeing this year?

[Jonathan Bock, executive]

So yes, the broadly syndicated markets have been quite -- I wouldn't say active because most of the activity has been on repricing. There hasn't been much of a new calendar come to the market. But it has tightened quite a bit, probably by at least 50 basis points in the first couple of months of the year. And I would say the private markets are somewhat keyed off of the public market. So one could expect asset spreads coming in across the private market. We do have a pretty broad deal funnel globally, so we can't pick our spots with BXSL. Again, the fourth quarter activity, the spreads were in line with the assets that we deployed were in line with the assets that came out. So we're keeping pace Spreads are both a positive and a negative. And so maybe just to hit on that, with spreads tighten, all else being equal, asset prices should increase. So it does have -- and I said this in my comments, a little bit of an upward driver on the price of your existing assets. So that's positive. Lower spreads, lower rates does increase deal activity, market activity or at least it should. And that creates more turnover and more fee acceleration. So that's another positive and then, of course, it is a little bit of a headwind potentially on new assets. But even if 20% of your portfolio was being invested in this market has, what, 10 basis points of impact on the yield of the portfolio and the fees that you're getting on an accelerated basis more than offsets that. So there are some pros and cons. And you will continue to see us pick our spots in this market with the benefit of having a really wide and deep deal funnel.

[Kenneth Lee, analyst]

Very helpful there. And just one follow-up, if I may. In terms of the activity that you're seeing in the pipeline sounds pretty robust. Is there any particular drivers that you're seeing commonalities across the activity there? Any particular sectors? Just want to get a little bit more color on what you're seeing there.

[Carlos Whitaker, executive]

Yes. On the pipeline, I think the couple of things I would highlight is, first, similar sector exposures, as Bock mentioned, what we deployed in the fourth quarter is consistent to what we're seeing in the pipeline. Two is larger capital structures. So as Brad mentioned, double the volume, more than double the volume of larger than $1 billion transactions in the pipeline. I think, generally speaking, we are optimistic about the M&A environment this year. We see that early in our pipeline. I think one thing we do need to see is continued narrowing between valuation between buyers and sellers. That's starting to happen certainly helps with the prospect of lower cost of capital on the horizon with, as Brad mentioned, spreads tightening modestly and then the prospect for lower rates coming down towards the back half of this year.

[Jonathan Bock, executive]

And what I'd just add to that, Ken, is, I would say, at least half of our deal flow right now, we're going into the market and creating. So take health comp, which we did in the fourth quarter. We were the only capital provider that was around that. We were the incumbent. We had a strategic angle across our value-add group. We could do the whole capital structure. So these are the types of transactions that we're leaning into in this market. We're going to we committed to another deal this week that's fairly large, over $1 billion in size, and no one else saw that deal. And these are some of the things I was trying to get across with my message on even in a market with a broadly syndicated activity is robust from a spread standpoint, we will continue to drive deal flow that's accretive to BXCL in our opinion. So lots of different ways that we can go about this, but that's where we're seeing deal flow, mostly from things that we're creating.

[Operator]

[Operator Instructions]. We'll go next to Melissa Wedel with JP Morgan.

[Melissa Wedel, analyst]

I wanted to also follow up on the comments about the pipeline and how rich that seems to be right now. I think that we've heard from a few different management teams that while there's a pickup early this year, a lot of folks are expecting particularly increased volume in the back half of this year. Are you seeing anything differently than that? And then also, what does that imply for repayments or exits to counter that? Are we seeing refi activity? Or is this a net origination environment?

[Brad Marshall, executive]

I can do the repayment point because it ties to what Teddy mentioned as it relates to pricing and then as it relates to the pipeline building on Teddy can then build out those comments. So Melissa, Intel, as we're proactive both in sourcing deals and also proactive in defending them, you've seen both year-to-date or near-term repayment remain muted. And so that's a function of our view that an asset on our books still at an attractive liquidity and credit spread relative to our cost base is a decision we're choosing to make. And so I'd say from a repayments perspective, we're trending better than expected. And then as it relates to deployment, I'll turn to my colleague.

[Teddy Desloge, executive]

Yes, I think consistent with Brad's comments, we're generally seeing deals earlier stage. A lot of what we're working on today are sell-side commitments prior to deal launching. So I think a lot of that does come to friction the back half of this year. In the meantime, there were a couple of situations, particularly last quarter, where sell-side processes, M&A processes fell apart because of valuations, we were then able to show up with a sole financing source for a recap, ahead of another process. So those are situations that we're very in front of. A lot of those we have in commentated out today, what are the positions we have on the liquid side or private positions.

[Brad Marshall, executive]

Well, it's the activity picking up in the second half of this year, I would agree with that comment. But I think most of the comments are, we hope that activity picks up in the second half as what you're hearing from others. I hope is not a strategy. So we're out trying to develop our own deal flow in the absence of a more active M&A market. A logic pulls through that activity should pick up. But we're certainly not going to sit back and wait for that to happen and PE activity being light for the past 2 years, lots of dry powder, all that is very true. But I would look more towards our current comments, which are sell-side M&A inbounds to us have increased twofold. The pipeline, which Teddy's highlighted is twice as large as it was not too long ago. So those are the kind of the near-term things that we're seeing. And then, yes, we also hope that the broader market picks up, but we'll go out and find deals in the absence of that.

[Melissa Wedel, analyst]

Understood. If I could follow up also on Fin's question. The repricing that you did, I think that's what you're referring to when you talk about finding the deals yourselves and being proactive, are those deals that or companies that could have conceivably refinanced in the broadly syndicated market?

[Brad Marshall, executive]

Those deals were actually separate. So those deals were capital structure is set up at a clearly wider spread environment. So average SOFR on those were 600 to closer to 625 where performance has exceeded our expectations from a credit perspective. Those did have some access to the public markets. We were able to reset call protection, extend duration on those. The deals that Brad was referring to were more public capital structure that actually see value in going private. And that was one of the deals that he was referring to that's closing shortly. There are ways that private lenders can differentiate from the syndicated market. We've been seeing that in our pipeline, certainly around delayed draw capacity, providing capacity for M&A and certainty of execution. Those are some areas where we're seeing differentiation and where we can utilize those strengths to really drive our own deal fun. Most help put the numbers that. We have 100 deals that we identified at the end of the fourth quarter that we want to reverse into the company to try and create deal flow. They may have a maturity. They may need growth capital. They may prefer a more private capital structure. So even when the public markets are active, we can go in and create something that's a little bit more customized for them. And you can only do that if you have scale. So in a couple of deals will likely close shortly, they are well over $1 billion will be the sole or the large majority anyways of those capital structures will bring in some others. And you can only do that if you have incumbency across your platform, you can only do that if you have scale and you can only do that, obviously, if you have a more proactive mindset.

[Operator]

We'll go next to Casey Alexander with Compass Point.

[Casey Alexander, analyst]

You talked about spreads appear to be tightening and interest rates were actually down broadly in the fourth quarter, which should have been supportive for the general marks of the portfolio. So can you contour that against the $23 million of unrealized depreciation in the quarter and give us a feel for what caused that relative to what should have been a pretty good pricing environment?

[Jonathan Bock, executive]

Yes, I'm happy to take that. So the $23 million of unrealized depreciation, some of that was a reversal of unrealized appreciation that we saw as it relates to repayments. We had over $500 million of repayments in the quarter. That was an annualized repayment number of just over 20%. So when that happens, you do have a reversal of unrealized gains. That was about 1/3 of the move. The other 2/3 were offset by some markups in the portfolio as well. I think spreads from a valuation perspective in the quarter were actually relatively flat. I think most of the spread tightening that we've seen that we're committed to in the quarter are deals that likely won't close until the first quarter or the second quarter of this year. So I think there's still some room to go on spreads tightening and haven't fully seen that reflect in the market today.

[Brad Marshall, executive]

Yes. Rates shouldn't impact marks, Casey. So it's more just the spreads and the spreads have come in more in the first quarter. I'd give you a couple of other stats. Only 1.1% of the portfolio is marked below 90. That would be the list of assets that we're most focused on, 8.8% is below 9.5%. So portfolio is still in really good shape, but we mark our assets to market. And so you're seeing that in some movements up and some movements down.

[Casey Alexander, analyst]

Okay. And then secondly, maybe a minor point, but there was a reasonable rise in PIK income versus the third quarter. That's about 5% of total investment income now. Can you give us a feel for how that fits into the rest of your comments earlier today.

[Teddy Desloge, executive]

Yes, maybe take that. So PIK income was up modestly. It was up about 1 percentage point from 4% to 5% in the quarter. I don't know if there's anything specific to point out there. We had one position that did roll off in the quarter that had picked flexibility that paid full cash. Offsetting that, we did have a couple of smaller PIK amendments where we agreed to it. It is an area, I think, over time, where you can see for higher-performing situations, low LTV in good sectors with good fundamentals. It's an area where you can see a little bit of differentiation from the syndicated market. So I think there's a difference between PIK because of underperformance versus PIK due to new deals or differentiation versus public markets.

[Brad Marshall, executive]

And again, I'll just add some numbers there. So we had a couple of smaller ones get added, a couple and then 4 dropped. The ones that got added, the average mark of those assets is 97% approximately. So just to give you a sense that they're performing assets, they're marked in and around cost, but they've elected part of their PIK option. I still think 5%, Casey, is probably at the low end of the industry. So no trend that you're seeing other than as rates stay high, companies have the option, they're going to use it.

[Operator]

We'll go next to Mark Hughes with Truist.

[Mark Hughes, analyst]

You talked about the new deals this quarter, I think, $130 million in average EBITDA. Your overall norm is $190 million plus. Was anything to that, notwithstanding, you talked about some bigger deals that are out there. Did you find a little more attractive pricing at maybe the lower middle end of the market?

[Brad Marshall, executive]

Yes, I don't think there's anything specific to point out there. We have seen growth in the existing portfolio, organic and M&A growth, which is driving growth of our existing deals. There were a handful of deals that we closed that were sub $120 million that were still very high quality. So really no change in strategy to point out there.

[Mark Hughes, analyst]

And then anything in your health care exposure you want to highlight or not highlight given some of the events in the industry and some other credit issues?

[Brad Marshall, executive]

Yes. I think the health care exposure is one area where we spend a lot of our time. We do have a team that specializes in health care, that sets our investment team. We see everything. I think the areas overall where we see stress are what we've mentioned before, business models with high components of labor inflation, business models that are more tied to regulatory pressure or business models that are more commoditized where we focused our capital is really on more specialized models that aren't seeing much of that pressure. There are a couple of situations we are focused on that are roll-ups that that have a little bit more cash flow constrained as rates are higher. But overall, seen relatively good performance in that part of the portfolio.

[Jonathan Bock, executive]

And Mark, to add to that, if you think about it, while we're insulated from a lot of the trends you might have seen in other PPMs or physicians practice, we're not completely immune. And to the extent that you see an area where or a name, whether it would be an indicative level of stress that's also found and reflected in the mark. So we're very focused on those situations. Clearly, they're very small. But at the same time, we always ensure that, that level of stress is reflected in the marks which you can see in the SOI.

[Operator]

We'll take our final question from Paul Johnson with KBW.

[Paul Johnson, analyst]

Brad answered my question here in terms of the opportunity that you see in the portfolio in terms of repricing. But I guess you identified 100 deals. I mean, would you describe that as pretty meaningful in the portfolio in terms of driving the pipeline? Or is that more or less just low-hanging fruit that you expect to be PIK relatively quick? And then also on that, one more question. It's just how much work, I guess, is it to execute a repricing transaction? Is it just matter of calling on the sponsor and discussing the repricing? Or do you basically effectively reunderwrite transaction?

[Brad Marshall, executive]

Yes. And Paul, just to reiterate what Teddy mentioned. There is a distinct difference between repricings and reverse deal flow. Repricing is you own the asset, the sponsor reaches out and says, "Hey, we know we have call protection, but you want you to reprice." And we either say, yay or nay, we usually ask for something in exchange usually reset of the call protection if we say yay. Reverses are entirely different. These are things that we don't own, that we're going into the market. We're trying to create new deals. And in those situations, if I said if it was 100 of those deals, we've actually gone through 33 of them through our review process. and reach out to the sponsors, 80% of those, they've said no, not yet or pricing is too high, and so they go back on the shelf and the other ones we're working through. It's very different. So if you think about our platform, we are invested in BXCI in over 3,000 companies so we can mine our portfolios, we can create ideas. We can play the role of banker with a balance sheet. It's a highly differentiated platform than almost anyone in the market, and that's what we're focused on from a reverse standpoint. It's very different than the repricing exercise that will invariably have to go through as the market strengthens.

[Paul Johnson, analyst]

It's very helpful description there. And then last one, I have to ask just because it happens every 4 years. I mean how do you expect, I guess, the election to play into the pipeline this year? Do you think that will prompt any more transactions ahead of the election. I mean just what do you expect from sponsor behavior, if anything?

[Jonathan Bock, executive]

Yes. I don't think we know. The election in election year, you should see deal flow get pulled forward because people are worried about change and volatility. So if you look at past history, that is what happens. And I guess we're seeing a pickup in the pipeline that would suggest that, that will hold true. But unclear if that's an accelerator or more of the fact that private equity sponsors have been sitting on the sidelines for a couple of years. So we'll wait and see.

[Operator]

Thank you. That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Ms. Wang for any additional or closing remarks.

[Stacy Wang, executive]

Thank you. This concludes our fourth quarter call. Thank you so much for dialing in. We look forward to speaking to you next quarter.