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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2023-04-26 compared with 2022-10-26 · 22 added, 40 removed, 57 unchanged (52% of the section changed)

3 unchanged sentences

Generally, our business model is such that rising interest rates will increase our net income, while declining interest rates will decrease net income.

As of September 30, 2022, substantially all of our investments by total loan exposure earned a floating rate of interest and were financed with liabilities that pay interest at floating rates, which resulted in an amount of net equity that is positively correlated to rising interest rates, subject to the impact of interest rate floors on certain of our floating rate loans.

LIBOR and certain other floating rate benchmark indices to which our floating rate loans and other loan agreements are tied, including, without limitation, the Euro Interbank Offered Rate, or EURIBOR, the Stockholm Interbank Offered Rate, or STIBOR, the Australian Bank Bill Swap Reference Rate, or BBSY, the Canadian Dollar Offered Rate, or CDOR, the Swiss Average Rate Overnight, or SARON, and the Copenhagen Interbank Offering Rate, or CIBOR, or collectively, IBORs, are the subject of recent national, international and regulatory guidance and proposals for reform.

As of December 31, 2021, the ICE Benchmark Association, or IBA, ceased publication of all non-USD LIBOR and the one-week and two-month USD LIBOR and, as and previously announced, intends to cease publication of remaining U.S.

dollar LIBOR settings immediately after June 30, 2023.

Further, on March 15, 2022, the Consolidated Appropriations Act of 2022, which includes the Adjustable Interest Rate (LIBOR) Act, was signed into law in the U.S.

This legislation establishes a uniform benchmark replacement process for financial contracts maturing after June 30, 2023 that do not contain clearly defined or practicable fallback provisions.

The legislation also creates a safe harbor that shields lenders from litigation if they choose to utilize a replacement rate recommended by the Board of Governors of the Federal Reserve.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee composed of large U.S.

financial institutions, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated using short-term repurchase agreements backed by U.S.

Treasury securities, as its preferred alternative rate for USD LIBOR.

As of September 30, 2022, one-month SOFR is utilized as the floating benchmark rate on 49 of our loans, the financing provided on the 2020 FL3 and 2020 FL2 CLOs, one of our asset-specific financings, certain borrowings under nine of our credit facilities, and our B-4 Term Loan.

As of September 30, 2022, the one-month SOFR was 3.04% and one-month USD LIBOR was 3.14%.

Additionally, market participants have transitioned from GBP LIBOR to the Sterling Overnight Index Average, or SONIA, in line with guidance from the U.K.

As of September 30, 2022, daily compounded SONIA is utilized as the floating benchmark rate for all of our floating rate British Pound Sterling loans and related financings.

At this time, it is not possible to predict how markets will respond to SOFR, SONIA, or other alternative reference rates as the transition away from USD LIBOR and GBP LIBOR proceeds.

Despite the LIBOR transition in other markets, benchmark rate methodologies in Europe, Australia, Canada, Switzerland, and Denmark have been reformed and rates such as EURIBOR, STIBOR, BBSY, CDOR, SARON, and CIBOR may persist as International Organization of Securities Commissions, or IOSCO, compliant reference rates moving forward.

However, multi-rate environments may persist in these markets as regulators and working groups have suggested market participants adopt alternative reference rates.

Refer to “Part I.

Risk Factors—Risks Related to Our Lending and Investment Activities—The expected discontinuation of currently used financial reference rates and use of alternative replacement reference rates may adversely affect net interest income related to our loans and investments or otherwise adversely affect our results of operations, cash flows and the market value of our investments.” of our Annual Report on Form 10-K filed on February 9, 2022.

The following table projects the earnings impact on our interest income and expense, net of incentive fees, for the twelve-month period following September 30, 2022, of an increase in the various floating-rate indices referenced by our portfolio, assuming no change in credit spreads, portfolio composition, or asset performance, relative to the average indices during the three months ended September 30, 2022 ($ in thousands):

As of March 31, 2023, substantially all of our investments by total loan exposure earned a floating rate of interest and were financed with liabilities that pay interest at floating rates, which resulted in an amount of net equity that is positively correlated to rising interest rates, subject to the impact of interest rate floors on certain of our floating rate loans.

For information on financial reference rate reforms, refer to “Part I.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reference Rate Reform” of this report and “Part I.

Risk Factors—Risks Related to Our Lending and Investment Activities—The recent and expected discontinuation of currently used financial reference rates and use of alternative replacement reference rates may adversely affect net interest income related to our loans and investments or otherwise adversely affect our results of operations, cash flows and the market value of our investments” of our Annual Report on Form 10-K filed with the SEC on February 8, 2023.

The following table projects the earnings impact on our interest income and expense, net of incentive fees, for the twelve-month period following March 31, 2023 , of an increase in the various floating-rate indices referenced by our portfolio, assuming no change in credit spreads, portfolio composition, or asset performance, relative to the average indices during the year ended March 31, 2023 ($ in thousands):

Assets (Liabilities) Sensitive to Changes in Interest Rates (1)

Interest Rate Sensitivity as of September 30, 2022 (2)

Interest Rate Sensitivity as of March 31, 2023 (2)

Increase in Rates Decrease in Rates

1 unchanged sentence

100 Basis Points

150 Basis Points

200 Basis Points

50 Basis Points

50 Basis Points 100 Basis Points

Floating rate assets $ 26,703,081 $ 102,978 $ 205,957 $ (102,863) $ (205,441)

7 unchanged sentences

Investment Portfolio Value

As of September 30, 2022, substantially all of our portfolio earned a floating rate of interest, and so the value of our investments is generally not impacted by changes in market interest rates.

As of March 31, 2023, substantially all of our portfolio earned a floating rate of interest, and so the value of our investments is generally not impacted by changes in market interest rates.

Additionally, we generally hold all of our loans to maturity and so do not expect to realize gains or losses resulting from any mark to market valuation adjustments on our loan portfolio.

3 unchanged sentences

This risk is partially mitigated by our consideration of rising rate stress-testing during our underwriting process, which generally includes a requirement for our borrower to purchase an interest rate cap contract with an unaffiliated third-party, provide an interest reserve deposit, and/or provide other structural guarantees.

Our loans are also subject to credit risk.

Our loans are also subject to credit risk, including the risk of default.

The performance and value of our loans depend upon the sponsors’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us.

To monitor this risk, our asset management team reviews our loan portfolios and, in certain instances, is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

To monitor this risk, our asset management team reviews our loan portfolios and, in certain

instances, is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

In addition, we are exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control.

1 unchanged sentence

We maintain a robust asset management relationship with our borrowers and utilize these relationships to maximize the performance of our portfolio, including during periods of volatility.

We believe that we will benefit from these relationships and from our long-standing core business model of originating senior loans collateralized by large assets in major markets with experienced, well-capitalized institutional sponsors.

Our loan portfolio’s low origination weighted-average LTV of 63.8% as of September 30, 2022 reflects significant equity value that our sponsors are motivated to protect through periods of cyclical disruption.

We believe that we benefit from these relationships and from our long-standing core business model of originating senior loans collateralized by large assets in major markets with experienced, well-capitalized institutional sponsors.

Our loan portfolio’s low origination weighted-average LTV of 63.8% as of March 31, 2023 reflects significant equity value that we expect our sponsors will be motivated to protect through periods of cyclical disruption.

While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain loans.

2 unchanged sentences

The market-leading real estate expertise derived from the strength of the Blackstone platform deeply informs our credit and underwriting process, and we believe gives us the tools to expertly asset manage our portfolio and work with our borrowers throughout periods of economic stress and uncertainty.

This year has been characterized by steep declines and significant volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth and geopolitical uncertainty.

Inflation across many key economies reached generational highs, prompting central banks to take monetary policy tightening actions that are likely to create headwinds to economic growth.

The ongoing war between Russia and Ukraine is also contributing to mounting inflationary pressure.

Inflation continues to rise and has caused the Federal Reserve to continue raising interest rates, which has created further uncertainty for the economy and for our borrowers.

Although our business model is such that rising interest rates will, all else being equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers.

The three months ended March 31, 2023 have been characterized by continued volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth, and geopolitical uncertainty.

Recent bank failures and consolidations, and other events affecting financial institutions, have also contributed to volatility in global markets and resulted in diminished liquidity and credit availability in the market broadly.

The ongoing and potential future impacts of the war between Russia and Ukraine is also contributing to economic and geopolitical uncertainty.

Continued inflation has prompted central banks to take monetary policy tightening actions, including raising interest rates, which has created further uncertainty for the economy and for our borrowers.

Although our business model is such that rising interest rates will, all else equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers and lead to nonperformance.

Additionally, rising rates and increasing costs may dampen consumer spending and slow corporate profit growth, which may negatively impact the collateral underlying certain of our loans.

While there is debate among economists as to whether such factors, coupled with economic contraction in the U.S.

in 2022, indicate that the U.S.

has entered, or in the near term will enter, a recession, it remains difficult to predict the full impact of recent changes and any future changes in interest rates or inflation.

It remains difficult to predict the full impact of recent events and any future changes in interest rates or inflation.

Capital Market Risks

14 unchanged sentences

As a result, we substantially reduce our exposure to changes in portfolio value related to changes in foreign currency rates.

In addition, substantially all of our net asset exposure to foreign currencies has been hedged with foreign currency forward contracts as of September 30, 2022.

In addition, substantially all of our net asset exposure to foreign currencies has been hedged with foreign currency forward contracts as of March 31, 2023.

The following table outlines our assets and liabilities that are denominated in a foreign currency (amounts in thousands):

September 30, 2022

March 31, 2023

EUR GBP All Other (2)

6 unchanged sentences

(1) Represents the U.S.

Dollar equivalent as of September 30, 2022.

Dollar equivalent as of March 31, 2023.

(2) Includes Swedish Krona, Australian Dollar, Canadian Dollar, Swiss Franc, and Danish Krone currencies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk