TSLX - Earnings call transcript Q3 2018 | Sixth Street Specialty Lending, Inc.

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Operator

Good morning and welcome to TPG Specialty Lending Inc's September 30, 2018 Quarterly Earnings Conference Call.

Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in TPG Specialty Lending Inc's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Investor closed, third issued XXXX, quarter a to market release earnings and the its presentation the of for ended the after the its company press posted website, Yesterday, www.tpgspecialtylending.com. section Resources September XX, with be yesterday XX-Q SEC. conjunction the Company's Form The presentation in the should reviewed filed with Investor release Inc's TPG available the section. Specialty earnings Lending Company's Resources on also is website under the XX, performance are third all otherwise, figures September as quarter and noted today's remarks mentioned Unless prepared the of for ended XXXX. in

reminder, turn to a of will Chief recorded call for replay being As Inc. Officer this is the conference purposes. Executive TPG Lending I Josh now Specialty over call Easterly,

Josh Easterly

and Good start metrics to our hand us. everyone morning Bo you thank President, I and you. my with for to portfolio of will overview and partner discuss origination joining quarter. results it Thank an Stanley for off and quarterly third the our

our share quarter per net base I the our which our in Simmonds, Our per results more quarter financial Ian Q&A. financial with $X.XX. and to share call remarks and detail yesterday, of $X.XX $X.XX, final market investment share After will we CFO, closed reported with results exceed conclude third income income before review both will dividend third at net strong per of opening

paid $XX.XX, impact asset XX.X% was dividend, to was effect spreads to January Our unrealized December of the quarter-end of giving of respectively. XX.X% driven primarily of and QX value quarter-over-quarter. record of of during the annualized XX. income over dividend Yesterday on return QX. share prior the supplemental earning imply net movement at and announced QX as fourth credit per Board and certain Reported of quarter our an after payable to of net results net base increase equity to QX on income XX the positive Net a $X.XX dividend, share value which quarter per investment asset an specific of on net companies $X.XX shareholders portfolio the our tightening during by impact gains was compared

declared $X.XX shareholders also a November of XX. Board Our supplemental share dividend XX per payable record to QX December of of

$X.XX while increase value declared net the an Over the a declared same asset in of of dividends per per XX increasing period, supplemental of forma base for impact of dividends, months share share XX.X%, we total total This supplemental over $XX.XX. $XX.XX dividend level net from in an represents pro trailing period. X.X% asset over the the to increase of dividends

XXX% appropriateness the reduce stability to shareholders debt XXX% the level of equity to say our power approval base favor proposal. our context ensure earnings in one or while ratio the TSLX coverage voted voted shareholder the limit received our to maximum way of another value. of from requirements, assess have to to to quarter to asset asset optimizing net preserving end, times. minimum of the XX% in Of satisfying to we two approximately who from continue Post distributions increase of business – dividend cash We power we're and underlining our earning

by humbled We our shareholder the are continued base. of support

believe to beneficial return equity the drive to this As environment in revolving Act, Investment our our allow regulatory detail. to regulatory to all coverage us look all for relief also announced will have Availability facility provided relief will discuss access necessary yesterday, incremental our shareholders. through permitting, modestly Ian we credit revised completed stakeholders. by a to financial of Business amendments more reduced requirement Small policy on provided incremental we leverage We is for Credit through use asset

two an last iHeart call: and provide me names let side portfolio Rex highlighted Energy. our the update On on in

approximately totaling in that QX made visibility outcomes. two recall $X.XX per lack at have the the may reserves related on income specific time to given bankruptcy we share You investments related of these

During upon earned full Asset in cash filing. the we Company’s sale QX Rex upon loan payment strategic fees received to of accrued buyer, Chapter a completion along of with XX and the interest quarter a debtor-in-possession

UCC filed committee principal this of the X.XXX As – all On our expect ABL Chapter released iHeart’s that company Sears July lenders. concern The a quarter's to repayment code. of of connection ABL we assets. the of funding remaining to during on received prior million result our in of call income whenever of voluntary we $XXX,XXX On result, reserve reserve reserves October we the established companies into financing. income filed portfolio certain an intends quarter release during for related created prior of XX removes objection a quarter. relief this that petition QX certain ABL reorganization unsecured fourth interest for bankruptcy in reserved by with the in our of the we plan debtor-in-possession the and under this iHeart, store income We received upon of claims rationalization this the as income. new creditors going The the the a now company’s portions a supports loan XX we and objection sale pursue to

calls additionally to of which out sale which debtor-in-possession cash and the million first-lien was be mandatory $XX.X company’s believe par first-lien assets financing, well – pledged. working by additional our from for loan Our We in real value the rolled collateral sales. ABL for capital the repayments company’s investments of secured expected asset estate proceeds is the

that will walk of more detail. the in over we case, XXXX. first the originations portfolio and on to investment in you metrics through Bo, With Given the milestones the to be repaid to expect who call fully quarterly bankruptcy our turn our I'd like half principal within

Bo Stanley

on selection to Thanks, of Josh. lending capital high The direct maintained In their structure QX and response, degree investment competitive. sector discipline. continues late-cycle in environment focused be has we stayed highly

$XXX to to affiliated two During existing portfolio million upsizes originations originations, and generated across $X gross the million million third $XXX allocated quarter, and the commitments. unfunded investments $XXX four companies. were million we consisted funds of Of of gross of new

$XX resulting aggregate net portfolio repayments in full fundings realizations front, the the amount $XXX On were of million there quarter. totaling for three principal million

We be on originations sector high that quarter four to thematic and Three software this customer platform bases businesses expertise of that strong quality focusing continue new our relationships. investments technology approach correspond uncorrelated the characteristics, were on our to returns out opportunities revenue have capital. and invested in

differentiate technology and capabilities TSSP platform. sector given become While across direct move our lending have the to competitive, to scale deep increasingly has the to knowledge through commitments able ability software quickly the been to large we ourselves make companies

of September sector we what through the ability a in of premium. we upon risk been which in loan be in earn QX million million to XX.X% generate IRR our received on IRR XXXX, portfolio our excess returns. of a in quarter, be September way opportunistic themes gross the to returns XX%. closing to a totaling We've strong quarter-end $X Rex returns exceeded pay Since The a mark reflects would value where billion gross XX, million a connection fully drive discussed generated alone October platform's deployment whole high realized late resulted sector investment invested oil. prior to approximately of portfolio. investments implied QX in of post Rex resulting investments recently by realized adjusted of par since and P&L our adjusted dislocations refinancing as approximately growth The proceeds current of Upstream in this transaction energy Across EMP, continue One of northern across value inception down this the our our been a risk on We’ll most net our unlevered the investment cash and we investment across Oil the generate a opportunistic given strategies one IRR continues inception unlevered to investments. with a was loan, realized $XXX on in sector opportunistic investment $XX a able expertise the our we've our has and make fully realized Northern on Josh capital our of fair our loan invested. was mark since in on our and scenario $XX.X unlevered debt generated on quarter-end announced the in through refinancing. Since, XX% energy with we've XX. to

on now portfolio metrics our of financial X.X to our control yields average investment an Turning historical consistent XX% debt and on debt voting with at investment we had levels. per effective quarter-end covenants

protection the in form value quarter a have the This of prepayment for get call As that end as portfolio near-term. our of a percentage additional risk XX.X%. was metric our economics we in mitigating should repaid protection of means the portfolio fair

average XX, income-producing the to XX.X% end quarter decrease at exited investments. impact amortized value features was be despite September environment. us XX% This at Our to by direct non-intermediated new due debt total slight portfolio the XX. portfolio weighted competitive was securities and on the our through origination debt into our to continue yield cost structuring protection of channels. lending At strategy XX.X% allowed downside of At our to versus sourced June has fair compared meaningful

with of mix approach. our first-lien basis asset our Regarding on at XX% defensive investments quarter-end fair value a consistent were

diversified across XX in Our is well companies portfolio industries. portfolio XX

financial of limited the and underlying to at value. of services value at of value. business portfolio cyclical are regulatory XX.X% low companies services Our services at was by be BXB financial all exposure X.X% largest payment at of integrated continues portfolio with At Note time bank our leverage of industry followed exposure portfolio financial energy quarter-end XX.X% fair an at fair portfolio majority at our businesses fair software vast risk. excluding the

to were quality X.X% Northern a post turn has or Our fair portfolio investments Overall on for X.X% with of of scale X improvement Oil portfolio energy like performance there no Ian. portfolio represented over to X.XX on being from highest. trended the that I'd at our X it exposure From quarter-end. X adjusted perspective, quarter-end. at alone status With quarter-end based the X.XX quarter-over-quarter value to well assessment non-accrual of at pay-down the

Ian Simmonds

ended million with outstanding billion per share, of in Thank or is billion, total per to of $X.XX $X.XX the debt $XX.XX and assets net that prior share the be QX. $XXX total quarter supplemental investments third which paid of $X.XX impact will you, We dividend Bo. of

compared income was X.XX and the share prior mentioned net per times $X.XX in Average to the times our per during share. debt-to-equity quarter was X.XX net Josh investment $X.XX quarter. was our As income

with earnings Company's the reduce XXX% announced minimum our higher capacity. levels In yesterday's timing to things. during debt-to-equity with we to to repayments, $XXX million from ended into quarter had top-end liquidity, certain and end, This the significant range. amendment inside coverage times, of release, agreement X.XX Given undrawn historical quarter asset with we quarter an of covenant target to we of QX credit operate chose also accomplishes At visibility late the our conjunction of leverage at revolver XXX%. revolving two ratio our

First, cushion. we relief expanded now have significantly limit to SBCAA a by access provided with to the regulatory operate regulatory

Second, now We selectively from financial to the the on debt power our of revised fundamental policy process. growing our and flexibility business. of X.X the existing have by lenders to time assets earnings over equity execute on X.XX to increasing we support times appreciate this

In following addition, outlook stable grade of TSLX has investment strategy, a investment of Services an assigned Investors rating and record liquidity our a capital Moody's profile. structure review track BaaX with

pleased profile from Fitch investment Kroll. add our ratings to to We the rating and grade are Moody's existing S&P,

net income. was gains presentation our base and prepayment from There accelerated realizations the $X.XX from OID NAV investment various on and/or $X.XX bridge the per reversed fees per an for full Moving the contains we per share of unrealized added their $X.XX X, walking we net share. sheet the through dividend back against income investment reduction to took components investment quarter, share respective NAV materials as balance through to Slide a

that was tightening marginal our includes Bo of impact $X.XX primarily investment gains unrealized negative losses of share impact the per referenced to Northern offset Other per on earlier. share led changes share our related of spreads in a which by the to $X.XX $X.XX mark-to-market swaps. from partially quarter This to per from interest NAV valuation unrealized Oil positive credit portfolio, rate

forward the given of steepening or the the our floating implementing of upward fixed to shape reminder losses. to a date mark-to-market swaps outstanding all have shift to liabilities unrealized on practice the the floating in our swaps either risk rate Any a rate since inception curve of fixed match nature As their our through management of effect through LIBOR creating movements of assets.

at unrealized share each of included maturity per NAV losses related $X.XX Our as we of instrument. will QX the swap that over unwind swap approach end time date cumulative the on

weighted portfolio. was million $XX million investment down income income by and total effective debt the our average due quarter interest quarter an of Moving increase the fees quarter expense. million during million XX, increase investment the consist was to a that Other unscheduled Slide rate professional prior due $X.X up $X.X previous quarter increase quarter-over-quarter, higher in downs LIBOR previous upfront for fees, average to the of $XX.X points was to outstanding Note given were $X.X $X.X basis the earned accelerated the which this to were QX. coverage as the primarily asset size the on rate the includes of from quarter an was in pay for an $XX.X of in from from Breaking requirement. million components million outstanding first from $X.X syndication primarily interest million million fees million $X.X in for the compared expenses increase debt dividend the up to as LIBOR decrease income our effective reduction on quarter. average across outstanding given non-recurring Other prepayment fees in in interest down other XX operating debt debt income quarter. the the income prior related prior fees $XX.X Net expenses in increased the the statement our for the average our due quarter well to slight quarter amortization This of instruments. from on quarter the

Since provide Year-to-date Josh. generated economics the XX.X% both income yield increased sheet investment assets all leverage Before respectively. strong net passing net our XX.X%. investment average asset ROEs to I it XXXX we've on leverage. unit annualized business. increased to the update of from balance average our X.XX from robust X.XX quarterly in our on income of to to quarterly of an and And yields times. of income was based XX.X% and expansion times on wanted back year-end and XX% an ratio result This

of materially in By LIBOR. of X.X% in debt over LIBOR increase spread the of cost all increase maintaining investment over our Our increased our profile, does from hope that period largely overtime. result X.X% a this not on ratings our debt to grade is cost the

of is revised Given our below cycle today’s X.X time capital X.XX. target leverage in deployment important believe discipline, which to late competitive from to we we environment, our especially may and operate time range

our on the financial levels in incremental we allow leverage for ROEs. $X.XX range in our where As the will XX.X% on we would year year the growth. we from again of a end other our to full to updated our per of as of end policy we us which fees Last periods $XX.XX selective said we beginning the past, guidance our time of pro drive per in from the upper $X activity we year financial leverage, based disciplined see take range At given earnings support a based forma to $X.XX, repayment of some elevated full expect which $X.XX ROE share. revised of NII set reached decrease to corresponded on prior achieve, based higher year-to-date ROEs share. and quarter, beginning to approach our could results, to our had We XXXX to of guidance to target our XX.X%, shareholders NAV our target, believe

for remarks. the for like an of post of back concluding the guidance income year which revising With that to quarter fee $X.XX, a XX.X% and to repayment it performance QX full share turn our are Northern to to NII range our Oil XXXX. ROE I'd Josh our per $X.X loan Given XX.X% range of associated we implies to with end,

Josh Easterly

Thank you, Ian.

shareholders. We resulting pleased strong delivered have to in another incremental quarter our dividends to are

As of earnings I my the business, to underlying our opening shared in maximize while of goal to asset dividend our the maintaining distributions remarks, shareholders our subordinate framework on is value. power base

our sheet dividend increase look new as higher we base that for resize leverage opportunity business, balance would accordingly. and our return allows within the on to forward, Going the us with to operate equity targeted range market

we more consistently dividend there's set over sustainable we term where be ability we’ll Our and flexibility. so, during level – environments in if slow attractive only has the take allocation deploy in leverage a believe focus believe approach investment to return earned on our our practices we'd a same therefore we action capital can the at our intermediate capital cost We growth. to capital, on drive increase flex of the risk we’ll be returns, opportunity us to for growing that high most valuable be our is given asset. risk-adjusted return access our put periods to of adjusted undrawn we providing believe opportunities doing risk that is market tight We and stakeholders the power capital believe that business. earnings do premiums, appropriate In attractive doesn't an immediate deploy of deploy our with slow to When support offer equity. and optimal

to continue shareholders. oriented an time to and for you Operator, our your please interest I With adjusted line work questions. attractive continued returns thank be hard We that, your today. deliver risk open to and long-term for like for for

Operator

Thank [Operator comes from our And of Rick first you. Shane JPMorgan. Instructions] question

is Your line open. now

Rick Shane

industry for morning liquidity. essentially about questions. an to taking is Thanks influx Good Look, guys. of the experience my

is to the probably demand increase capital capital increase for supply as of won't going much. So

you of deal is are obviously kind As share, we about terms? how impossible. further like of the to gain and market enter pricing about are that concerned everybody How feels you erosion environment, it needs which concerned

Josh Easterly

Rick, Josh. Hey it's

earned the at has for long your spoke Look, period long, a under of cost equity think share I length industry of we've We time. concerns. about this this.

the public, book trading cost quite of value. why ROE been X.X%, is under the X.X% is which average industry think equity four frankly and is below we've the is I So since earning between years is

concerning have in the you capacity, is supply We've capital We're same idea focused that on Act, stakeholders, deeply being Business our focused never on So the in of to because providing think, Small the cost including that of risk and that share. focused share. excess our not protecting I we’re other time industry already change there at the adjusted can That the is been market will on capital earning see market creditors. not shareholders to said, and you on high as us. Availability Credit returns additional

said, oversupplied people create is environment will incentives, that deeply in I worse that terms. percent incentives ability the would operated the That confidence deal concerned our the we've supplied. over that. frankly, the an am managed argue to being I under I hundred that quite industry So is over long-term has industry supply in have more and And manage years for which last four been have through given,

is concerns. share I industry and that I And the hope been the and growth for your enemy would slowly. participants always rational the of enemy deploy of case. would and capital that So the I would hasn't quality. companies finance returns Obviously act suspect

Again I our And not I manage we being that. am your that so about share don't ability concerned – your concern. said, through to share

Rick Shane

and to to Yes, taking discipline also next the for the concerns look, of way. months going months, mean the you share influx twelve you world it the in happen view fair we capital. in guys right Thanks I in terms questions. – the what's we just right six appreciate the of appreciate about And enough. We your unless get can't

Josh Easterly

Thanks.

Operator

comes from Ryan KBW. next our question of And you. Lynch Thank

is line now Your open.

Ryan Lynch

morning for taking guys question. good Hey, my and thanks

for the recently And week able any seeing and opportunistic that Wall of be opportunistic know actually bond some markets? you guys the market, in a present some I talking you recent be flexible in was been, to Street disruption about been creative, grade has bond the and bond you all? get And speculative very very created in wondering, just article was they in bond you that and Are guys fast. have at that I sort last talked any to past market. couldn't and done. in sales of one, volatility guys equity sort opportunity polled the journal volatility markets reading does three I The first the with about were were

Josh Easterly

Yes, so great question.

and some in a) outflows. volatility bond market. over by a that mostly concern market, by fixed that's high driven the saw rate retail So b) outflows the – overrates you was driven And retail yield and

capital On not the less is volatility. base which quite leverage stable frankly loan did XX% is more that – see side, you CLOs is much

back in off three You but might eight, supply. low on have seen eight loans, bids

areas kind seen the so And other that you haven't move credit of of volatility spectrum. into

So is our see will that. that hope you

business model Our is long-haul.

closing biggest my, undrawn of XXXX. capital markets. remarks, that in end As allows QX our QX volatility our we talked us We about XXXX, because did – to is asset in attack that of right

think names. our But creep XX% been I in high basically zero. And at book in was haven't might yet. point X seen it's Level our there have today of you it

ask careful a feel what you But but little assets. haven't also year You think we're we're of of that good assets, so long you got bit we long bunch we'll whole long, about seen to yet. be well for we powder bunch whole a in it dry positioned, those but a

Ryan Lynch

actually And about at yield get over Yes, loan deals done in market couldn't tailwind color. talk move that leverage the one bond of those article then will market. in get the high and actually, helpful the done also the that's

your or economy I of quantity X.XX, there. have range? in today, credit makes the private you wanted range the makes to what not at and would and other have guys' And or operate given the to talk the the leveraged end, lower unusual, we have more of end sense versus you looking it or evaluate the pulse are guys just operate do that think of X.X towards you middle? But I not where quality right it's factors that more wanted to those about that’s the kind The sense guys get factors, same did consider having of upper end you deal range you So flow disclosed are to you guys mean, what end the that pretty kind wide I looking range. or a market competition, about lower in volatility in. middle guys at BDCs you range. of on upper the similar the commentary of – a

Ian Simmonds

Yes.

So that super question. a insightful is

The is wide. high us. where is is a In adjusted know the risk what to wide the market because have range we going you – range the for is an returns reason don't environment So would capital, think not the at where us range. of in right. slightly returns operate fair where today, market's to adjusted expect a high end you on market that Surely that, risk environment we offering afford the cheap. you In are we're expensive,

us to business driver a process take the into expect lower leverage. we that us part of, constructive at quite to that would to of is enemy going or range. even You is operate us least it's at of the as that frankly, going end of, on Obviously given big power standards And a underwriting of kind earnings market, and a take to leg were growth that kind the leverage of of if while it. the the

ROEs, guidance about what done expect, so think when you that. at XX.X% our than We've market told you year to significantly we've better was the to X.XX debt-to-equity. X.XX XX.X% think this And is can I

to kind the If of GAAP are what which on I envelope range significantly you the into and of yields, it expected GAAP the get back a can well, you EPS. taking – you of NAV so XX% better our by just losses, kind those asset is by depending credit than it most mean those times ROEs we'll on EPS that think call ROE, recent X.Xx we're obviously operating are XX% to with ROEs at Xx level same

don't, And is the don't we so know. answer we

approach risk And What the surely basis. market and cycle. so economic we the emphasis, on wait if adjusted providing does and are us a see in a where the return

Ryan Lynch

one and kind may helpful do that Okay. sounds in with maybe just something the guys like that it core last And potentially, one, are the you and future. then dividend evaluating That’s sense. makes of

Just mean, dividend, a guys get what are significantly over wondering dividend. special you want core through kind your NII at dividend don't plus skis, you are I are guys core the run raise top dividend the you looking core the variable you around guys the the On through and to significantly of of that, or understand dividend over I dividend.

at? guys of And sort what You're or at so looking you kind that are looking you NII above dividend, certain spreads that? that What look compress percentage guys a non-accruals earn kind before coverage do at of of scenario of would of the just at looking still some having are and core like your evaluating? it downside you potentially raise we can increase we

Ian Simmonds

you one things Let RIC first the me is tell the foremost that and want compliant. that be to we of

so earnings give basis that XX obviously, base of credit share. you with simple. have estimate, our At let a if the $X.XX income math do And our plus at distribute XX% an dividends, X.XXx not $X.XX you formula is RIC me we math. to your is meet LIBOR the requirements. And But the of is loss, this not to EPS but leverage points a curve,

could do XX%. compared math, divided X.XX plus you the minus by is to X.XX X times X.XX the So which XXX

think fall we short. I

obviously so it. of piece the And compliance a RIC is

where is have it GAAP want dividend that of The core ROEs second the scenario is, core piece and to cover dividend. to able be losses stress under the increase, we cover NII a

second And piece that's of the it. so

the which value a or the for they program at price, shares we piece product value fund we is priority, of to the option third kind to investments investors with creates The kind could could it a program, lowest gives other of What because the the cash DRIP preserving that's much which to prefer reinvest retirements, net while offer. they priority it, that but still shareholders is buy in is back to make does as of get asset DRIP discount or the them cetera. et

those of the the we're we're what event in types And signaling leverage. if think able combination increase financial to is slowly things, so of I

earnings increase given to have that our considerations but dividend to to the will not want we not RIC power RIC that the given cash will optimize but We only base only back given shareholders.

Josh Easterly

adjust And borne we again our base RIC did the issue a show The extreme you was not not to earnings the case XXX would if compliance was a accordingly. that X:XX dividend estimate. we

Ryan Lynch

that's I Josh. my That's today. insight, time Yes, helpful the questions. appreciate all

Operator

our Schleien question Thank next from Ladenburg. you. comes Mickey of And

line now is Your open.

Mickey Schleien

a well the of are morning year. – their EBITDA fixed Good companies couple think you their fast charge really just grow this least seeing Josh, in interest climbing? as terms Yes, everyone. your rates exceptionally been in at And coverage middle questions. have market in We're interested to portfolio, seeing sustain whether understanding enough ratios doing of I'm

Josh Easterly

Yes. Sure.

that’s So, good a Mickey, question.

the definitely most yes. think I is answer

good quo, price have are our about heavy We kind related the have status services, We They The manufacturing kind news have are war. you regarding issues software. trade do business the the that of If we environment of continue in a companies to of grow. think world don’t input. base. and is input to don’t most not

earnings positive. been And so has momentum

companies on average earnings. X growing have coverage interest Our with times

And continue not you That should in being which this increasing only economy, to are where continue increase, consumer not up, as and the be tail should which investments see so – spending risks interest to sustainable, I the economy. rates down, rates coverage, rates go slows to environment as fixed where is slows said, constructive credit. but this there think increasing charge relates hurdle you environment goes it on including

impacts [ph] wage Cardillo – risk doing we are expect given would but pretty they tail or price we say, I good not to be that big have that retail. able think increases I comps only economic stress are our niche And coverage, have some of and a have they with QX, so be you that issues and not have including into portion be credit clearly margins in general inflation. – I interest going would actually will corporate on okay, Obviously, and relatively rates that's to portfolio. poor will impacts rising be them the won't environment. given financings comps Retail pass good.

I the worker getting think the gains are for workers is which retail. decile seasonal bottom of wage most

would would you that feel in portfolio pressure of that the credit expect, we liquidation earnings to as some basis, see QX underlying about a on I going very good underwrite I retail So portfolio, forward. we so quality and expect know, on although

a the versus book repayment they issues probably the just the type where And of of to value, some source earning stuff. event to so between have kind of stress stress some In kind the continue an on or our based asset stuff I to stuff on we secondary wanted of side. will underwrite performing bifurcate

Mickey Schleien

we've risk, long been of through helpful, time a tightening it's fed And terms in since cycle. the seen That's goes Josh. a tail

there And tightening time will last downturn. helped was the precipitated that some argue folks or that, too precipitate much and

we're ratios cycle? do new but of the assume a now liens, underwrite lien, late your tightening you I'm you charge second fixed a to know EBITDA in second do to when I comfortable understanding be in make deals, appears in particularly, much going what those you lot stress interested in in and cycle and how don't coverage and So into you

Josh Easterly

Yes, do why we don't that's predominantly liens. second

Mickey Schleien

get I it. I Yes, understand.

Josh Easterly

when use as not investments. LIBOR always generally, curve it generally, we we the relates Look, our to underwrite

– kept Symphony. relates the basically effectively – equity of at you AFS, recently two business, we capital piece gross the also our – we as the We sold/recapitalized. lien the empowers what small stress a drivers one on earnings sensitize margins, is that EBITDA on margins sponsor high side, lien allocate business a cost to you which common equity wage so We to liens private to at it called obviously exact The our I'd financing had led second we second not that key both the updates are of a private depending equity for and book; is and The the has business owned equity, relatively to sold are, leverage and book inflation given second was give peak reason. trough market the that the – sales. ratios public, growth to to own compared and challenge

on well capital finance second basis so to basis, that name other And as well, a first our short refi order. the is is guess will we've Vertellus up moved in structure. actually at continue lien, some point, which We my that refi

attachment cyclical so can are – look participate. you continue never be at at see we withstand think get earnings zero, us basis headwinds, we basically our points in zero. saying than and you we'll So the less on second businesses and the on a going I the how that's strong of you can't the depending do secular not lien. power businesses to tell both could to second good We liens

cycle up move to given tried peak capital and we return a leverage. weight continually we've adjusted earnings so the basis, where risk And structure in are

Mickey Schleien

helpful, time. me That's this appreciate it very morning. your Josh. That's I for

Josh Easterly

Mickey. Thanks,

Operator

Vandegrift our And you. Thank from Raymond next Leslie James. comes of question

now is line Your open.

Leslie Vandegrift

couple But grade the have and Hi, good morning. similar you S&P Thank and on had about the investment do that and morning, I Moody's debt a security ago, you question for a well now wording good cost S&P your that talking taking going forward you get on guess my upgrade months now. questions. to the Moody's capital Quick as the cheaper? others, feel upgrade, as that could very portfolio of given this

Josh Easterly

Yes.

that What So is clarify, upgrade, I'll an wasn't say it really an initiation. it was Ian answer. let I’d

color let covered we but weren't the give by So a Moody's on originally, little Ian I’ll Moody's. you

Ian Simmonds

Yes.

of to the obviously marketplace. go the certain perception about investment grade part comes the investors was in universe the a how on we that think with I speak strategy of expanding we Moody’s do can side,

part was so those get us And And universe. be a universe. we would of if down funding attracted then do cost broader the a help byproduct that that allows keep good having that and first of investor broader it to how our

Joshua Easterly

thought partly exactly. regulatory lack Yes. Ian, going hasn’t because people to And I surprise add this that income would constructive for which a the Moody’s think BDCs know been that’s thing not for market that be the includes constraint and is that fixed that the on shallow. only I given of biggest it is reason, is was relatively they whatever The is cushion. probably

is I’m broaden shallow. our the to that can shallow. not time less to and we’ll – so less belief optionality a which agencies validate the continue deep, we create rating well if and market get that space, be support that, And over ever continue sure, but

generally it is will I give for – ratings but longer-term the funding where risk to market less only be sector, to adjusted the shallow could will TSLX. that get and we good think provide that but returns, very think that I Although beneficial to not

Leslie Vandegrift

it touched there, million income, fee Rex, lumpy quarter, And little you. Thank was $X.X tends the lower in to is a on the correct? income that because be from prepared there the but recorder, Perfect. bit topline you on core interest mark, in

Joshua Easterly

Yes.

Leslie Vandegrift

so far outline. on for then And fee income Okay. broken fourth the this I quarter, look

and this Oil the rate Given higher you of other you that’s the any Do Northern again? think quarter. like kind for or of quarter have that going quarters run to be one

Joshua Easterly

I Leslie. sorry, lost I’m question. the

Ian Simmonds

I Northern question was Oil. the think

Leslie Vandegrift

outlook yes. fee, quarter Fourth for

Joshua Easterly

that how marked payment on fee we Oil for price. equate just payment was on marked at large in outlook X.XX, I’ll X.XX than so quarter, – X.XX dollar, was quarter collecting use there’s the at ended that Northern a quarter more in – much the that I’ll fee, up at which position but Fourth a was estimate, position a end, X.XX use

a you that, so prepayment And impute can income there QX. amount of decent mean that will in QX, be I

think I said, isolate Ian if QX QX, between NII and As just basis Ian, $X.XX estimates on for you our are $X.XX.

Ian Simmonds

right. That’s

Leslie Vandegrift

Vertellus, of an in line And year. this August this quarter, due year, of was as there in due October perfect. last Okay, update Is marked there? as the marked first it’s

Joshua Easterly

Yes.

committed financing in, it that was So we going there participate is basically to are slow not to but close. a

backstop our facilitate did a that the bank provided month or income. not backstop the option but a that is not interest collect financing committed do of the to two it’s lenders. because why put to extension committed, why had existing existing so We existing group by committed actually there position decide financing, to knowing parties. that, one to And the not, extra We

Leslie Vandegrift

large Ferrellgas portfolio an the and that right And just was on marked up investment the now quarter on update the was in looking investment. Okay. on for

Joshua Easterly

me exact number. let I think you Ferrell the – get

more has relatively I a because quarter up point it it’s think. basis think position, maybe sorry, a on Ferrell was from was marked Ferrell large price, a on, I but – sorry.

mark the X.XX XXX. a X.XX quarter, the was a XXX mark was spot So

So where the And and a spreads there capital the perform discount as that the of the reflection a trade – of in expected. parts where other rate frankly small that’s other well. as a – markets to change and quarter-over-quarter a structure – of a parts was company there’s capital quite continues

Leslie Vandegrift

the And deliver just you. this again? All income what level right. question, modeling Thank lastly, was

Ian Simmonds

Sure. Leslie, it’s a share. $X.XX

Leslie Vandegrift

questions taking morning. Perfect. my this for Thank you

Joshua Easterly

Thanks.

Ian Simmonds

Leslie. Thanks,

Operator

next York our And Chris of Securities. from comes Thank you. JMP question

Your line now is open.

Chris York

questions. Good morning, for guys, and taking thanks my

a How fees of couple the modeling pursuit the non-recurring professional just were questions. So a as of SBCAA? much result

Joshua Easterly

and that. question. great special SBCAA dive quarter will expensive agencies, meeting Ianwill was into into rating The this but Chris, between the Ian that. dive

Ian Simmonds

we We on paid combination use and a of solicitation and would that’s Yes. special agencies. had rating incremental agent for fees. from number $XXX,XXX, a about fees I some Chris, a meeting the of legal

out So of estimate $XXX,XXX element is good for non-recurring a that.

Joshua Easterly

relief, paid Chris. she but for And question, good regulatory

Chris York

have some appreciation of also you equity or then And couple you. Thank companies. nice portfolio

You have co-investments.

your are in likely presume I any there well, limited, more influence monetization to any So investments near-term appear that ability exit? to result are

Joshua Easterly

equity, Yes. Look, we’ve that comfortable us truly because an public basis post control NOG, that’s feeling were a cleansed. NMPI in

then probably control So very, that. doing And is one is and very I little neat well. swift, we clearly a can that's think company which largest the

of that, a have preemptive but rights we the rights, typical We the have but done well. we monetization control don't the co-invest, including company very has

view. have Right. my place don't be a And really speculate. It wouldn't to so we

Chris York

other increment exit how thinking a comply. distributions at being if then, or would swift did NOG and you And factor company gain, realized Any it. then this on Got dividend there. move

Josh Easterly

make policy our material our I don't their earnings the don't The – what's distribution is think we I to more change I distribution what businesses. would the as policy, think change. think it to of it material enough relates core

not don't change think materially I it make versus and so policy And those are that material surely, compliant to noncompliant. the

Chris York

I you I've some origination expansion maybe, there. the alternative time. fair amount for software large companies lending in Got of Bo, affenpinschers. noticed lending long On other a a a companies it. quarter this In and recommend had skewed – Josh so from think But or software activities shifting even SaaS

what the So deterioration of deal companies? any the question for the competition software two, marginal have SaaS like does look quality and/or in pipeline is One, you twofold. And then or flow? noticed

Josh Easterly

take that. I'll sure, Well,

the has to the think there increase Exactly, to last space in add sure competition can it. for You been of two I over three years. an

As cyclical people the day these and they are resilient some manufacturing, into assets more believe more businesses. of that move than

add this count in long-term Mike XX with as think us, years, investor having us, um, a who's you influx, color So our the for seen been well. plus space call on if some partner can I we've certainly an Fishman,

we to we growth actually strong stay see technology to and on processes. understood aren't focus within secular can insight provide dramatic transactions. the areas, and where originations there, where and And models relief and sheet to exemptive balance those a provide as continue too technology I'm be and And uncertainty We value within software. business where

see, anything increased, opportunities has well. as I add continue set solid think the environment Mike, to our in seeing want competitive pretty has the you it? We're space to do And we to So and quarter. that opportunity remained in

Mike Fishman

segment. it. I share Just in in this to mean, interested address we're market not back even going

us. there we So continue a part, at because we increased we're of risk just opportunities what and a returns number true, of hurdle investments to fair amount is space which said in – just on seeing and in is see looking the you that competition for be selective we're this don't is

this more in to space, be do make much to a expect continue we So selective. to investments but

Chris York

Could therefore, and helpful. your And software that public in your, leverage use bigger area then very your the to balance for And and larger to maybe mean I disrupted? you It’s companies with lend the broadly when staying expertise on sheet. market companies. to syndicated a lending expansion potential then topic gets

Josh Easterly

Yes.

balance syndicated there some market idiosyncratic bigger to companies things stay and happened or in We and to try companies. very under it. been So those always capital there's the right NOG, where the has exceptions to that sheet I are Chris, loan of have but leverage strategy efficient broadly the mediums where access – between line who business, market I think under operate. would mean, Ferrell, a stay always was draw not our right lending bigger

our I in volatility, I don't with us will book our think XXXX new when this EBITDA market investments and is But and yield is were closed, bigger environment so the changes cheaper like That move markets companies for like high given, massively see capital the are EBITDA of if about and up up. was don't the today same slightly in bigger And moved being average EBITDA we up. I core $XX companies we deals start look much massive said, our and is you CLO market. weighted without back – well, I slightly those the as portfolio think think average access and core moved market don't you that to and have The $XX. so doing if $XX.X million, in

is, and And so clearly leverage what will I go and our high the yield you volatility us see think see market market as you market. do up down, loan shut

Chris York

you a behind your second your any makes Yes, to lot Yes, the year, Obligors little lien bit of exactly. liens, investment And position had to turn lenders that portfolio a sense. in to then have topic of off on last pivoting any today? may be distributions second

Joshua Easterly

Yes, that's a good question.

firm So private the of answer and we is CIT. no. outside TSLX JV some, seen was a our credit have We've

lending a not It's for LIBOR We a $XXX. TSLX. portfolio have senior a problem as as

payment deferred. in some tend not manufacturing-oriented wage seen have that issues it issues. more or and gross some second Those to having as being negotiated We seen But be payments we margin our sub companies relates lien have blockage inflation to book. debt

subordinated, those you have we are of If publicly payment have is example, traded blockage right. at Ferrellgas, unsecured look for bonds, none don’t which

Our cash with perspective free neutral of deposit lot flow, is levered a liquidity.

of a in book at not And debt. there’s lender, seen broader the well very an not nothing so, services the company a seen instance positioned – is instances I credit senior we’ve to book, but TSLX. in have TSLX or kind couple

Chris York

questions congrats it That’s on my for and for Thanks good me. a taking quarter. Great.

Josh Easterly

Thanks Chris. Great.

Operator

Thank you. from Securities. National comes Testa And question Christopher of our next

open. now is line Your

Christopher Testa

Thanks – reduced issuing sheet. the Have size you wanted of another questions. to guys the capacity asset talk for the I obviously you securitization guys instead and raising increasing revolver morning. coverage taking just about good discussing evaluated or Hi, the the potentially market of bond? balance my

Josh Easterly

Yes.

start. me let So

and it then in. frame me Let hop Ian will

markets So on the capital all is our table. answer transactions

a We’ve market. bond Outside revolver. funding and mix funding have between is obviously first increasing revolver – preference low Our our preference straight costs. the That to would our be unsecured. has secured of committed the

to be we that has at math for at been the the think priced space been market forward, our there than convert bond the a unsecured convert you convert the convert market. when if time. going is XX% think coming at access out investors. market guess going may periods if unsecured be so to XX% was The you historical increased Today which look been higher What basis, XX% cheaper be and capital. attractive an would think had now. is val provided say BDC’s basic has my val, may on earnings straight going you that about paper val, we of not generally And That val it or than to crisis which I because preference would where looking BDCs power actually the be there’s is is over it’s market higher work in of

that Ian? so price less our if makes Again, you probably on margin. what’s strike on the convert XX’s our look it And at is attractive that, the

Ian Simmonds

Effectively it’s now today, supplemental the less $XX.XX so $XX.XX.

Josh Easterly

as option deal, we going $XX.XX, and is to – to able credit continue in is. much when there be originally and or think there paper option financial so to as that did that there’s is didn’t was and frankly, value we that are leverage going a we value quite increase if in that to control value that lot costs, – of

going be the that probably business so, view in lower what list. And given the of power earnings our on core would forward,

– not market term that revolver attractive tends to the basis about on weighted cost is, appears costs of the although a securitization increase when you As think actual over upfront is secured minuses a secured you as spread the financing, as think the average to and as you liabilities. life be relates financing, the what pluses the our execute financing than it increase, it’s those market, it which shorter the when secured

convert is is opportunistic. the $XXX is to the have open, news near-term we the order, XXX. able but maturity The maturities, unsecured, liquidity, no near-term of revolver, is probably XXth, we’re with we’re securitization we’re million So good so which

you to myself, to add? I here I we’re so thinking be from able don’t know god, I’m Ian. to if my And opportunistic. everything anything not sitting have oh took

Ian Simmonds

to more add. Nothing

Christopher Testa

Josh. your on raising touching comment just on that everything you think nailed the on dividend. I potentially And

you philosophically to quarterly on dividend, increase rate or guys a you that of look how would you decide base? you to more the increase the leap If would and at the those base after some cushion the the take declaring supplemental? you basis be were want change Would still

Josh Easterly

formula I where nature, to two variety in increase framework to so given place cases definitely keep three follows, earn kind standard a think deviation that dividend supplementals risk to as we given think to shareholders. the which of our confidence. therefore And we would our adverse continued of of optimize – most we our be of in return we cash to can at would is going it be and and would be the

So way over think out will skis. you I our see don’t us get

it protect liked dividend our I that think at time. the we we make protect and because same framework the sure NAV

in paid the months, our last we’ve think we’ve look, it’s dividend. of I increasing means, getting – over $X.XX. it don’t XX a So you supplemental on But $X.XX see lot us dividends by over out the guess I skis that earned

lowers And because allows that our that sure hopefully on so, rock framework to we Ian keep of cost add equity. hope anything it I dividends make to think people we’ll view and solid – that? us

Ian Simmonds

I think that’s right.

You job. did a good

Christopher Testa

this a XXXX. rolled after up good to guys likely upsize. it just DIP repays Chapter going on Okay, has if A, been are got it. to maybe that there And That’s prepayment And first what half into on be wondering, Caris this a color. if in just loan, XX, a fee potential upsize was is to potentially you the when of the the

Josh Easterly

No, I prepayment. outsized as think it’s

Christopher Testa

Okay.

Josh Easterly

up I participate your loan, the depth, currently $XXX us have roll dollar were to able expect spot you you upsize. because We get the if and dollars if do additional terms. at pro – revolving I one-on-one. contemplated, I or upsize. today put to outside to which the loan own to ability our you you were us there, in don't prepetition put to love only think would It to own you you as rata. that the so, don't the able to trades has trades upsize of decent expect in to that million more term commitment,

their behind. anybody would leave So I doubt prepetition

I And will so which rata, something. an relatively, I our bucks doubt $X outside be million think upsize it's or is like opportunity there pro to

Christopher Testa

kind opportunistically been opportunities you Okay, wondering been And has I'm know for guys a of all just pipeline for how successfully investing and to Got oil have in E&P last it. there, right. one relatively me, stable I the space. bit. looks up

forward. of kind the looking opportunity you're going curious at set Just how

Josh Easterly

Yeah.

we'll and on things. do or dedicated zero would A-plus So outside expect of continued team. not, I is kind an we – we I We continue things have things in absolute value think there will zero – guess the pipeline, to have has X.X% the would expect we'll of opportunistic I team again, opportunistic think an at and to to find Houston, increase which that's basis. a be track And I platform fair of our energy. – do – number. us of I market book of basically And

Christopher Testa

your are time it. my all got Thanks questions. Those Okay, for today.

Operator

next question And Securities. our of [Operator Wells you. comes Thank Fin Instructions] from O'Shea Fargo

open. now is line Your

Fin O'Shea

much guys, question. so Hi my for taking thanks

Or Is pretty is allocation Sciences, delayed Just on ahead. and a from participation hold vertical? this a seeing this as small or another well. sorry, go is small Life draw – a one Caris this an

Josh Easterly

a question. that's good Yeah,

term and $XX draw We, convertible We notes affiliate for – with million loan, the acted on delayed sizing. order. which a along term the DTL given They bit $XX million agent convertible. loan or financing first the warrants further funds, million curve, of and our were included the the So as relief $XX loan the we exemptive Caris Caris, we notes. bite. is to little risk closed drove term unsecured and get out which TSL, a unsecured related $XXX million

was so think risk so the further think and kind proceeds out capacity, company but has loyalties. more salesforce, they sizing drove positioned We sequencing well the much – they expand expand – our privately that techie and business, biopharma, of were curve advance held to has are of the use we And versus the If R&D. diagnostics clearly our to which the on biotech which in-place laboratory it position. typical we of

position limited to left And right really we investments relief no think left both risk, first? so the and have What exemptive asymmetric wants as which look The down are TSL And that the allow like and kind was the of risk of the we'd tail tail the again, didn't the its exercises that curve. we risk. typical kind sizing of left it tail work it – given that which do have credit position.

Fin O'Shea

to Sure. you I about into appreciate given leverage Caris? of be this commitments that. would low have fundings gross Is verse as or a that a bit percent, but were And to quarter. then they quarter. just this talked that the know expected commitments context originations higher bring a a mostly I little your due

Josh Easterly

Caris. out of $XXX $XXX Yes, the million million, Caris. That's was

Fin O'Shea

you if it for was a So deal more suitable TSLX, funding. would have a had higher

sense. makes that Okay,

Josh Easterly

Exactly.

Fin O'Shea

guys. much so Thanks

Josh Easterly

closing over turn you. back Josh Thank the I'd to Easterly that you. for remarks. conference to like question-and-answer our session. And Thank concludes

Josh Easterly

Great.

Bo, forward We always of good to We We're holiday Mike good season Fishman a we and year. a holiday forward. good you look people if next season have both available great new new hope lot Ian So And thank we'll has a year. you. not questions. myself, look sooner. A And to hope and and everybody Lucy. and great talk people and quarter

Operator

thank and great Everyone, disconnect. a you conclude gentlemen, This today's conference. program, the all day. participating may for you does and Ladies in have

Sixth Street Specialty Lending (TSLX) 7 Nov 182018 Q3 Earnings call transcript