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Will Yields Revive Earnings for Blackstone’s Credit Division?

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Updated

Impact of public markets

Blackstone’s (BX) credit division reported a fall in its revenue by 68% to $23 million in 4Q15 compared to the same quarter last year. The credit division’s economic income fell by 87% during the fourth quarter mainly due to energy commodity pricing, turbulence in the credit market, and technical pressure caused by year-end selling. In 1Q16, Blackstone expects a strong rebound in credit markets. Alternatives have shown more interest after the worst selloff in speculative-grade debt since the financial crisis. Average yields on dollar-denominated notes have increased to 9% as compared to 6.8% in 1Q15, although few bonds actually trade with such yields.

Blackstone manages or sub-advises senior credit-focused funds, distressed debt funds, mezzanine funds, and general credit-focused funds concentrated in the leveraged finance marketplace.

Blackstone’s total assets under management stood at $336 billion. Let’s compare this to the assets under management of Blackstone’s peers:

  • The Carlyle Group (CG) had $193 billion.
  • KKR & Co. (KKR) had $98 billion.
  • BlackRock (BLK) had ~$4.5 trillion.
  • Apollo Global Management (APO) had $163 billion.

Together, these companies form ~1.4% of the Financial Select Sector SPDR Fund (XLF).

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High dry powder

The division’s total assets under management rose by 9% and reached $79 billion, driven by new product launches. Blackstone launched a total of eight collateralized loan obligations. The division’s fee-earning assets under management rose by 5% year-over-year, driven by capital deployed in the drawdown funds as well as the capital raised in hedge fund strategies and performing credit businesses. The gross composite returns for the fourth quarter fell by 7.7%, 11.2%, and 5.7% for mezzanine, rescue lending, and hedge fund strategies, respectively, due to energy commodity pricing and turbulence in the credit markets. The company deployed a record $2.6 billion during the quarter primarily in the energy sector and the European direct lending space on attractive valuations.

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