Blackstone BGX: Why a Fund Name Needs Further Research (NYSE: BGX)
(This article was co-produced with Hoya Capital Real Estate)
A reader mentioned the Blackstone/GSO Long-Short Credit Income Fund (BGX) as a closed-end fund that deserves a closer look since I was doing a series of articles on different fixed income strategies to consider as the Federal Reserve hikes interest rates to fight inflation.
The name and underlying strategy of BGX was worth digging into. I was surprised that none of the recent Seeking Alpha papers or other reviews I looked at showed them holding short positions, despite the word “Short” in the fund’s name. Without any short positions, now or in the recent past, BGX appears to be a typical CEF secured loan. Investors looking for a traditional CEF secured loan wishing to capitalize on a declining discount might want to take a look.
Understanding the Blackstone/GSO Long-Short Credit Income Fund
The Fund’s Prospectus Supplement lists the following as BGX’s investment strategies:
The Fund seeks to achieve its investment objectives by employing an aggressive long-short strategy in a diversified portfolio of loans and fixed income instruments from primarily US corporate issuers, including secured loans and high-grade corporate bonds. yield of various maturities. The Fund’s long positions are generally rated below investment grade.
Source: blackstone.com prospectus.pdf
Seeking Alpha describes this CEF as follows:
Blackstone/GSO Long-Short Credit Income Fund is a closed-end, fixed-income mutual fund launched by The Blackstone Group LP. The fund is managed by GSO / Blackstone Debt Funds Management LLC. It takes both long and short positions to invest in the US bond markets. The fund seeks to invest in shares of companies operating in diversified sectors. BGX started in 2010.
Blackstone’s prospectus for BGX explains its investment strategy as follows:
In pursuit of the Fund’s investment objective with respect to the bond portion of the Fund’s portfolio, the Adviser intends to use a proprietary model (the “Model”) as it deems appropriate. The model incorporates fundamental balance sheet information, real-time information embedded in equity and options markets, and a historical default database. The Adviser uses a variety of risk management tools to produce risk metrics for investments which are monitored in “real time”, providing potential early warning capabilities and a broad investment universe from which the Adviser may shape the Fund’s bond portfolio. The model seeks to identify the most liquid and least valued credit issues while minimizing exposure to systematic credit risks. The Adviser seeks to actively diversify exposure in order to mitigate the idiosyncratic risk of the Fund’s bond portfolio. folio. If you use long and short exposures, the model selects potentially undervalued and overvalued credits to be long and short respectively.
Source: blackstone.com BGX Prospectus
Added strategy points include the following:
- The fund compares the performance of its portfolio to a composite index composed of 70% S&P/LSTA Leveraged Loan Index and 30% Barclays US High Yield Index.
- The investment aims to provide current income, with a secondary objective of capital appreciation.
- He uses fundamental analysis using a research-driven credit approach to create his portfolio.
- It invests primarily in loans and fixed income instruments from private issuers, including senior and junior secured loans and high yield corporate debt securities of various maturities.
- The fund seeks to invest in securities rated below investment grade.
BGX Holdings Reviews
Some of the most recent data is from late February, which is not unusual for CEFs. The first chart shows their asset allocation.
Secured loans are by far the largest allocation. I suspected most of them would be bank loans, but the asset list shows otherwise. Asset allocation helps explain that BGX has a duration of less than 1 year, which means that a 100 basis point increase in interest rates should only lower BGX’s net asset value by 1%. Since the end of 2021, BGX has reduced its secured lending allocation by 10% and increased its HY allocation by 5.5%, with a slight increase in CLOs and cash/other.
I chose to use this older data against a chart from 12/31/21 because it links the BGX allocation to one of the benchmarks it tracks, while the other does not. Allocations have not changed much between these dates.
Only Baa3 is considered investment grade debt and it is Moddy’s lowest IG rating. Default risk jumps for debt rated below B3, or about 15% of the portfolio.
Other portfolio statistics include:
- Leverage: 38.10%
- Average asset price: $98.32
- Duration: 0.99 years
- Average maturity: 5.5 years
- Average overall rate: 5.12%
- Average position size: 0.24%
Top BGX Holdings
The above holdings are from 2/28/22 and BGX held 434 long positions, no short positions at that time. Using the above data, I was able to determine which BGX issuers have the most exposure since the CEF can own multiple assets from the same issuer.
BGX has no more than three assets from the same issuer. Over 90% of assets are from US-based issuers.
BGX Cast Review
The Fund employs a “dynamic” distribution strategy based on the net income earned by the Fund. The Fund declares a set of monthly distributions each quarter, the amounts of which are closely related to the Fund’s recent average monthly net income. As a result, monthly distribution amounts for the Fund generally vary from quarter to quarter.
Monthly installments have fallen steadily since 2019, with the current quarter pegged at $0.073, down from $0.078 in the first quarter of 2022 and $0.11 when COVID hit. Hopefully portfolio rotation will reverse soon as new loans are purchased with higher coupons than maturing ones. At the end of January, 9% of assets matured within 3 years, 47% within 5 years. All payments are listed as ordinary income.
BGX Price and NAV Review
BGX has seen its price drop by 31% and its net asset value by 22% since launch. It seems like every rally in NAV has peaked below where it was before every big drop.
Since 2013, BGX has mostly sold at a discount to its net asset value, with the current rate of 7.8% being one of the highest since COVID hit. It almost went premium last November, which opens up the possibility that it could again.
Part of any due diligence is researching similar funds to compare risk and return. Seeking Alpha has a Peers feature which can be a good starting point. Here are the funds he chose for comparison. I deleted one because it doesn’t show any data.
Although BGX has the best CAGR since 2013, it trails all but the ETF over the recent three-year period. BGX does well when risk/reward is measured by both ratios. Price level, only the Apollo Senior Floating Rate Fund (AFT) has a bigger discount.
Based on recent history of not selling short positions, I personally think BGX can be compared to other CEFs that only invest in long positions, which is what the funds above do. If BGX’s discount move mimics its CEF sister, the Blackstone/GSO Senior Floating Rate Term Fund (BSL), whose discount has fallen 8% in recent weeks, there is potential for excess return.
These five funds are just a small subset of the thousands available in the world of fixed income, but are a good starting point. afteras an investor, you know what objective you have in mind for this investment or any investment.