TSLX - Earnings call transcript Q2 2022 | Sixth Street Specialty Lending, Inc.

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Operator

Good day and thank you for standing by. Welcome to the Sixth Street Specialty Lending Q2 2022 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker for today, Cami VanHorn.

You may begin.

Cami VanHorn

Thank you.

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

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

Joshua Easterly

Thank today and Simmonds. and my for thank President, you, CFO, our is our Stanley; Bo and partner us. With Good Cami. Ian morning, joining everyone, us you

review with highlights will to call quarterly For to I it will before results over and financial call discuss activity detail. for to results remarks more conclude this I our our will and opening today, Ian Q&A. provide portfolio. Bo quarter's in this then pass final quarter's the origination

placed wanted framework the additional pandemic, perspectives in stakeholders. provide valuable the letter outlining months Form their with press we share investor of and of have confidence communication to our a to we earnings to XX-Q, few capital. our also the earnings call, addition number be first stakeholders Consistent published to thought would the today's approach stewardship release, to In our during of our a continue presentation we

forward encourage release. the closed with reported business, would macroeconomic take feedback. and on approach earnings market on net we environment any of helpful loss per second we welcome to $X.XX. fair same marks investments, outsized on their the adjusted income financial We it per in be $X.XX, and net investment annualized based X.X%. markets equity we quarter quarter's impact results investment Given of adjusted value corresponding share of yesterday, return of that the Inclusive an adjusted income After to thought also net of this with of share the reported our

overwhelmingly unrealized Our incorporated adjusted of net driven by loss we market on losses spreads the was impact as of our per quarter wider valuation share this portfolio. the

impact the Given importance spend results, financial quarterly valuation to on I'd moment this a framework. like our of on our

believe an determining risk for we a value assets intellectually In As at the the is said of that we management. for honest critical. market is using effective bedrock valuation in moment time, portfolio before, from framework fair inputs

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and allocation, this occur assets our appropriately. cannot important capital most marking of is without One jobs our

the framework risk and We've as sound make the out market management inception in decisions to on us allows I continue signals. we framework letter will it mentioned We to since our this confident we're investment extensively more follow based and have weighed earlier.

our XXXX. combined power through our contribution sensitivity The asset and prior was of year, results XX% in little quarters. total providing of generated partial in during portfolio accrued base positive should our were the for dividend unwind XX% where in of the increase more which in resulted core will with with losses that remainder from level, income to by other period earnings our for supplement have a anticipated normalized other the income further a reflected quarter income earnings this previously investment activity interest I Unrealized activity discussed and levels income. levels gains driving portfolio, of a of our capital income results XXXX driven compared an XX% dividend discuss driving quarter's the we fees investment moment. across support Our across incentive

supplemental prior income noncash primarily Given expense net of market cumulative quarter-end, declined per to per of will for incentive approximately performance reversal, share Due dividend, share. $X.XX, in credit includes quarter's item $XX.XX. we've sheet approximately adjusted on were QX gains fee this $X.XX net of spread the our of share impact impact gains and net this to on share which realized movements asset by of the unwind consistent value. generating which from is QX net per treated the investment continue tied this per unrealized Reported impact this historical cushion At value loss any from respectively. the to our $X.XX balance line capital results investments, unrealized was provide to excess with exclude to how we've losses, a in asset $X.XX to gains net our our and $XX.XX, the and negative remaining periods, of strength X.X%

the approach framework under our of other valuation primary of widening will this this the XXXX in within Ian in and spread values follows portfolio. with movements through accordance net valuation value discussed, equity is credit of the the incorporate implied quarter's decline requirement and As to detail. fair asset the bridge Company Investment drivers our walk share GAAP. on of the Note, BDCs value Act per more was for of this credit of unrealized from lower $X.XX impact driver losses spread

current on the a now Turning environment. few market thoughts to

risk the we management focused capital With remain horizon, recession of framework the decisions. highly possibility our and on a guide to investment our on allocation

letter, rates As the on rising statement. our and we'll we of topics our focus income time address our in those impact other on today

largely of this the earlier relative of levels year experienced loan the the investments cost rising The rates the muted dates Based issuers, asset our reference curve share earnings on from shape of to of in that will or approximately per purely portfolio in floor LIBOR SOFR the of applicable rate We in we been occurred drive see of combination net To of income -- of reset income in resets investment result The during expect above project well the of quarter. our to remainder forward debt sensitivity the movement because power now expectation. the and meaningful half liabilities. the rising core in occurred shape the has on QX the rate will our forward the rates back are increases what curve support positive $X.XX that our average we date, QX. and the this in incremental interest and outweigh year. incremental

for to given of In late addition, spread see rates, period, been rising extent portfolio interest further the asset previous growth. In to power XXXX, order from reality of over has in be XXXX growth core BDC the this will tendency the to of periods the called the our in enhanced. we question, prioritize example, earnings asset sacrifice business sector sensitivity of to

guidance capital provide full on. to liquidity, retain Ian today, environment the spread we an strong asset will Given relative year are the sensitivity. later positioned base significant on well and update our our

positive rate with a borrowers broadly the of rising on cognizant of to the on rates, impact coupled view inflationary respect with our a profile, import challenging operating are environment in rising our we prices environment. more more While pressures light we earnings and

our our In increase share an quarter, earnings will overall updated based dividend. yesterday, during accelerate serves shareholders, the capital Bo related on Board were activity-based Based payment of timing dividends limiter occur date or during financial downward This on such discuss, view quarter. these relative record to of stabilize fiscal QX spread this represents third payment the to and same to retain With with base record date to discuss payment pass the base activity. to framework earlier. XX, note formulaic from lower dividend the borrowers' dialogue has largely Bo where forward the XX. over will net on change per of quarterly base to our our shareholders our by following change results despite There costs, due supplemental it and to on our asset no approximately the declared dividend position in of practice. share quarter's As per rising our no dividend pressure, fees that as This quarter date that, and dividend that the Board of September valuations feedback payable $X.XX widening the impact our financial We quarterly value. our each of supplemental the material existing quarter as I'll NAV also of now period a base health investment remains would approved past experience of September our mentioned to strong. $X.XX days XX framework, to approved earnings

Robert Stanley

Thanks, like more the Josh. and portfolio opportunities some the way by relates thinking backdrop layering market. how to I'd about the additional and thoughts of specifically, our start market the on current to the broader positioning on it we're in

portfolio of important we we on that Although a the the confident positioned actions couple our feel cannot predict economy, reasons. of is severity impact, or the timing defensively Fed's for

of among First our analyzing and companies. which economics to portfolio the understanding, things, foremost, includes we approach unit other differentiated and follow a underwriting, of

expect will fixed positioned pass attributes, ongoing high companies having high increases. predominantly are variable with with key We variable inflationary costs and the price power and switching concentration. those structures are and believe limited as low than heavily revenue cost invested be structures, to in cost environment ability better We characteristics that these to in recurring large by customer commodities, strong exposure through will costs be we businesses fundamental characterized pricing

the capital feel positioning in In losses capital industries expectations value of likely we to serve at and lien indicating the and that capital on equity environment, top with invested the that increase, are return first definitive our fair at this our structure of credit to remain profile. will preserve top we by robust the support Secondly, loans. XX% portfolio of our with our structure market

XX.X% exposures our limited majority leverage financial with followed at payment underlying integrated Our are services top X the value, regulatory fair businesses services financial at Note bank financial the BXB are of software and industry of respectively. vast services XX.X% portfolio risk. business to and that by exposure

serve, on Retail borrowers at market levels software represent XX% recurring remained our and our business of exposures models. a oriented X.X% from While and end our our of basis value with a relatively of based fair end. at resilient portfolio the we on companies businesses exposure of portfolio approximately industry services quarter revenue ABL lens, broader that high present low

likely in the active expect more to rate and we inflationary become high create the space. environment However, interesting will environment for us opportunities

backdrop. market spend Now I investment opportunities we're want to a on portfolio how current viewing against activity moment and the

high were broadly markets quarter, sidelines given the and the syndicated yield on During environment. loan the mostly

there liquid discovery period markets the buyers reprice looking and privately were held deploy to in largely anticipate solutions quick terms slower balance of be to valuation. in in as react, capital much between well looking markets as We as and bolster price active remain will provide direct of sellers opportunities Although lending more to private have sponsors a sheets. to been companies remain to their

Our opportunities. these omnichannel approach to sourcing is critical driving in

increased allocating second flow bar this our for a potential of opportunities period. and for with half our selective the very we With to XXXX, during have the continue in set investment capital be deal high

approach the priority our shareholders, to which us to generating attractive in said we've As for our disciplined risk-adjusted primary deploying capital. be returns requires is our in past,

company products, underlying relationship CrunchTime's resulting lien was portfolio, the to to largest million focus management our million investments us services we investments, we commitments quarter. act Consistent our portfolio with business exited portfolio new embedded investment in were X a of complementary term the first recurring Merative, of Zenput, during and and relates in that quickly a of high-quality it basis. had the upsizes previous existing As our across maintaining $XXX to on X and fundings companies loan activity, revenue highly successful to defensive acquisition companies allowed X from deeply of a CrunchTime with $XXX to software a solutions. support XXXX where enterprise CrunchTime in with the

the June, a As for our of certain complex as platform formerly known Partners we the financing our investment carve-out leveraged secured acquisition to form as to of the Francisco IBM in the Sixth Street funding support involving assets. for Watson's of are defensive underlying we senior facility end transaction We of provide the speed agreed sponsor a software business, at a Merative power follow transaction back provide industries that we partnered with Merative, investments Healthcare of environment. it underwriting the deep stable carve-out in credit spread as of of in with the these impact of determining a certainty QX. pricing that that and although to date in through with to execution. closed relationship the and this well a thematic current and of and of the in approach of Notably, February, end transaction the for sectors were becomes Both our was believe and the reference terms date only the movements

of there's portfolio portfolio which to has of to resulted market approximately fair the fundings share new the well purchases as energy as quarter of as that of existing our new on increased and $XX While made performance, $X.XX on several BBB fair BB loan name during volatility, upsizes in companies in determination include Staples approach unrealized quarter which merchants in comprise and we no as end. periods to approximately the of investment of energy space a investments gas, value oil deterioration such and a during been basis X.X% the Other our per of an liabilities, the for value Similar in quarter. QX. CLO million the of prior exposure loss to in deals

Sixth opportunistic core of in their X-year to Street the an in at market themes, on with a losses. We terms of credit significant our certain moments market with of use capital to recovery present of a time, differentiated of especially benefit significant opportunities broader securities with highlights of deployment our dislocation. yield par profile. expertise protect investments XX.X% these in credit the times subordination one the purchased at TSLX investment As future platform We in believe structured providing to approximately discount return further these against efficient

by during with to subsequent the full the Of paydowns X and on which realization. Moving thereby $XXX X offsetting X there in, repayments, side, driven new quarter. we of full were partial fundings repayment paydown participated refinancings, investment across were X million paydowns the the

the activity repayment our historical line the of in majority in month the with of first QX during the occurred was Although vast averages, quarter. paydowns

As in lower back we spreads more repayments fees. slowdown half saw meaningful resulting activity-based of widened in a the in QX,

occurred during quarter in of For activity XX% reference, repayment the April.

and in reflecting income. our of the portfolio Our period nature quarter's Illuminate, X resulted XX.X% total represented investment largest payoff, of Supporting outstanding occurred older an was shares QX X.Xx activity. vintage quarter the whole the and of of limited in the XX% IRR X.X during on generated investment payoffs announcement April performance a years, Biohaven. the the This OID May repayment of the this in net on all XX Pfizer of acquiring MOM

average reflecting from increased anticipated during fees of underlying exposure the impact weighted Biohaven companies. quarter, the XXX% mark our to the of to in on the Our XXX% portfolio embedded

capacity crystallization the new and for expected the in through QX in value fees investment resulting mark, fees While payoff, flow will incremental the capital the income incorporated investment at fair eventually opportunities. base of creating our of time increasing activity-related deployment

was is on at points average The to XX.X% debt securities quarter-over-quarter year XX XX.X% basis a compared a and new upsizes up from cost was about on this cost investments. XX.X% Our exited amortized to at quarter, ago. income-producing amortized on and yield up investments, X.X% average of weighted weighted yield yield including from

our have to on and we core credit of X.Xx relatively metrics respectively, X.Xx. the interest these loans stable remained points their our and average stats. Moving detach Across and conservative borrowers continue whom for are attach average at coverage to and relevant, composition weighted portfolio X.Xx weighted on

strong our a prior on The million, continues of average no $XXX scale revenue being X.XX rating performance of QX the of was to average our representing X a XXXX, with respectively. portfolio EBITDA on portfolio with of weighted and weighted X rating to strongest, of million change core and quarter. As be $XX companies the the X from

We of QX. no nonaccruals The nonaccrual continue quality value underlying than during credit no portfolio minimal to in at stability quarter-over-quarter have there at been of the deterioration to new illustrates added portfolio. our X.XX% metrics has the fair names of with these less

performance. we've While tell. matters a time positioning important, believe recognize our is always, date, we good but future will done historical to really portfolio is as We what data job

last to pipeline continues Finally, we that call attractive our provide strong earnings deployment us the opportunities. referenced with during

liquidity strong true competitive and is that peers be capital operated to advantage position, that our with of a higher Given financial leverage. to relative levels

this expect over to it like to period We aspect may access of constrained. that, financial performance With Ian become to to our cover to in current the more I'd volatility extend more as detail. turn in capital

Ian Simmonds

Thank you, Bo.

the end, of $X.XX. loss $X.X prior slightly investment billion, of net or the quarter we QX, end valuation was share activity, income funding were total of share. At net impact investments net Total outstanding adjusted from marks $XX.XX of a partially $X.X net and debt on quarter $X.XX quarter as offset billion our and adjusted result lower per principal at by assets share billion portfolio. per were up per $X.X For generated

decreased our dropping low up X.XXx in March debt-to-equity at by of in of the average and decrease debt-to-equity X.XXx, beginning ratio April. ratio X.XXx leverage X.XXx a average with driven X.Xx, slightly XX quarter, from ratio debt-to-equity quarter-over-quarter was was our to repayment at the to in activity XX. The Our June from

the X.XXx marks quarter funding impact at portfolio. investment to ratio of activity valuation a weeks of in net fundings specifically, XX. leverage we a quarter, higher in metric As of in during of have half the reported end a the latter pause with quarter of repayments More the X.XXx June isolation end, our delta leverage saw last being and on Bo would mentioned, in resulting at our increased reported resulted few in the figure

undrawn the liquidity, end, of our against facility loan profile of only available had Before be funding At turning we of credit the underlying company of capital million on and requirements on position. our unfunded portfolio $XXX agreements. to quarter our results, contractual $X.X drawn like revolving billion to based to commitments capacity I reiterate in strength would

our In attractive end having investment shareholders. opportunities us liquidity, of target of addition scenarios of and positioning. value enhances the liquidity significant pandemic, X.XXx, well competitive importance on our believe We varying leverage for to capitalize capital ability across well with proved us during providing the this top we which position, and below our the operating previously positions combination and our remain stated to its

for our us top on market subject Our mind we've letter. capital allocation in current given framework remains as well dynamics, this elaborated of and

to it on maturity the any and liquidity, impact principal notes material our profile on our settled our of debt with August on As relates no remaining impact liquidity. convertible value X, Monday,

As value, equity mentioned share Close invest of in was our quarters, current resulting our estimate this liquidity and notes, to of approximately points with basis creating corresponding X.XXx, mix improved transaction week shares. in as to our broad our reflected debt. debt stock, This of issuance notes with inclusive these market the $XXX After base, funding week will leverage issuance this additional the and of primarily for which secured XX convertible comprised results. translated forma outstanding lowering Pro approximately we these asset approximately the unsecured quarter and positioning net settle settlement billion. of our year, thereby amounts fundings and to to to capital credit our spread the converts to in our XX% Quarter-to-date, of equity amount XX% in stock settled principal arise. interesting we approximately they new convertible net settlement prior be elected funding early new X.X end, an is per XX% capital tightening earlier this $X.XX approximately million investments net of of opportunities the earlier since our in capacity is of impact QX million. and increasing ratio leverage accretion financial by $X of of the

materials. presentation Slide this X our to quarter's bridge. NAV contains Moving

previously respective driver on credit absent broad Again, spreads maturities. unrealized $X.XX Josh our a As most to referenced we end since I $X.XX we by per as with of movement unwind of share NAV result NAV quarter of base would investments during related $X.XX against from this movement which the earlier. NAV decline the added to a mentioned, market per to the spread gains expect estimated approximately There $X.XX credit these unrealized gains this unrealized over far portfolio dividend see the in of unwind of was the QX. there of mentioned net of $X.XX drivers share. our of quarter, significant of finally, from capital losses, losses related impact unwind $X.XX per And of saw tightening per per investment share impact a that NAV to uplift per Josh widening credit share spread the permanent fees, losses losses a through of incentive time we paydowns. approach was the credit share also the of share. earlier unrealized as Walking The accrued reversal quarter income other was represents their valuation

million our Total detail components was activity explained movement was QX, driven the we fees, million prior base in which and $XX.X million repayment quarter, compared up fees through excluding to X.X%. average Walking on quarter. average rates, $XX.X paydowns, movement highlighted in quarter during rates the the primarily from $X.X rates lower million is reference in the upfront $X.X on income debt in at weighted the to compared quarter measures noncash Moving earlier. $X.X of to was was of There compared the funding to amortization our $X.X is fees increase million, by prior dividend that results prior increased in accelerated the net The upward Slide $XX.X Other operating on income prepayment for were were expenses and quarter. a from income, this of increase on slightly rising by from by given up from weighted the the average on to income representing interest to in impact approximately lag X. X% outstanding Other and incentive activity driven lower the million, the impact $XX.X net from rate investment million to income the unscheduled debt QX. fees, million Net of rate expenses, accrual gains from prior prior average capital outstanding impact largely X.X% quarter-over-quarter quarter. interest related interest interest quarter. on the

we our $X.XX of those year, in the of in discuss sensitivity track to estimate or metric, Year-to-date, noting Josh of $X.XX I XX, asset remainder investment Based June that approximately have income impact we for on higher anticipated net basis. income for income our share a share per of investment the to referred share business we that to of the XX% XX.X% the the the target per resulting guidance of adjusted net on earlier, per full equity Before have I'd quarter, for this with that, on corresponding our combined $X.XX, range for return on the through Josh XXXX. XXXX as the of exceed generated XX%. remarks. equity to our to top that year our to portfolio, to is strong of articulated of $X.XX. an return the target it With end expect annualized like concluding to compares overall back This health spillover end throughout we positive that turn

Joshua Easterly

your what shareholder read we will is important to please We we stakeholders open value of that, and in Operator, summer hope with their our solutions. take create and in in serve creative ones. matters apologize understanding questions. our Ian. to portfolio financial We business, of really the results letter, wonderful everyone loved Brevity for strengths. the with outline for companies, of rest driving want driving friends continue to financing thank think we time sponsor teams advance. partners what our isn't for wish I up our With In a closing, our and Thanks, people today. the of line With of management the clear returns. you as time a

Operator

[Operator Instructions].

the line of Finian comes Our O'Shea first with question Fargo. Wells from

Finian O'Shea

same you as it the Street same has the Sixth -- new or investment how Can file? us Would within the Street Would TSLX? fall compare? fall tell on line within BDC origination would on about line it file? has as style origination the otherwise, Sixth And

Joshua Easterly

we up its rules. Specialty what and and our private we it at it's than the in rules, way. Sixth limited opportunity hard raise so I that Obviously, we're there different placement would as the Street last market the any Specialty given a moment. it's But our Lending or be no on completely placement obviously you sole we for Look, creating private I shareholder time you strategy But the guess, talk about should focus will on impact given assure significantly. that Lending, cannibalize and Street base unwillingness all What capital about years given what -- be we have say investment to direct this on Sixth has And continued in I Street talk know, set is And XX focus Specialty Lending's focus overlap. are the there involved formed Sixth areas in. be since equity market can will TSLX's to lending the years, returns. the opened limited that can't XX

Finian O'Shea

helpful. Okay. That's

peers BDC week. its lowered to this that, think any assets sort a initial fee yesterday the on your it what NAV essentially accrue if how of it? one of of instead have you thoughts might As you on industry, base about mean follow-up, for Seeing

Joshua Easterly

try strategy and also snarky of problems the investment time. I'll over a that and side to is, say Look, not on I things, long I can of snarky performance had history change a think One say peer lot things.

is NAV their investment a think given fee now portfolio at yield look the like X.X% you simple fee, and like XX on when think about yield. think their you I just points. the debt investments basis portfolio They're effective I minus the is

portfolio, prior in cost our And and is... When so amortized think net I to is like incentive you at leverage and look in the X%, other to SLF yield fees costs. their right, prior yield

Ian Simmonds

XX.X%.

Joshua Easterly

Doing same X.X%, adjusted XX.X%. gets the that you for math, to...

Ian Simmonds

X.X%.

Joshua Easterly

X.X%.

forma So significantly equity, return do points we're for we're related we're higher financial -- quite loss skills basis leverage using and that still XXX credit less running frankly, to so. to on pro I higher and to and prior think, generating accounting

over had put I look, of They they a their in thread strategy So and whole credit have issues a on change of had side. performance bunch they the -- book time. compression

shocking, NAV. purchase was price not that the say the it's the thing at is but affiliate last as then So it I is I too. a about appropriate confused stock other understand, might the is be people, below way strategy. owned given NAV for that by I would little And And

reasons little but So was to I'm there sure was confusing, that. a that do

Operator

with Our next question Schleien comes Mickey of Ladenburg. from the line

Mickey Schleien

prepared reconcile said in remarks, against to improve expect year. fee light would a typically, this income the quarter rates rising be to everyone. as your little your or Could us Good second Josh, were follow-up -- why to fee you understood just to in the rate rising I think income fee expect of why to that you morning, prepayments. historical the half And the you question, I relative environment? levels? income that Because fee limit -- was we a help a

Joshua Easterly

Yes.

mortgage we all, of don't a first I book. So run think

when spreads that's in true think mortgage I in that think it I So matter.

to spreads, point is a taking we if book don't So sensitive compared think have -- you -- but prepayments. your about rate widening

compared We prepayments. have to sensitive a spread book

time figure valuations of they of out. -- to and have they were private sellers valuations it for and And needs have so that valuation. spreads want and obviously, new to businesses, out sellers refi don't to Borrowers opportunistically spreads public private access buyers

One increase even over is are two So we though spreads the expect things I time. on to widening, M&A would forward. say

-- and that private the change other but will And where speak to acquirer, timing been our I protection control that's this some But valuation announced, given I in team Pfizer, don't in is think there's churn, the to Biohaven part and item, then is which not that portfolio I'm that disconnect. think a of is part of the there's is and of want I happen, transaction call the that. that. clear significant And ultimately of of the which doesn't markets so and management period of

going I be be whatever, definitely know will QX rolling it's so And that rolling it's half, back or but don't through, through. to if most

didn't then they M&A increase that and expect at thaw. will idiosyncratic that certain as -- bit. Biohaven things churn as so portfolio in look such in sellers are we think eye, the we markets a the visibility buyers M&A book thaw our little have can to people, eye QX thaw, see And and into. look And markets of I And we there to combination

Mickey Schleien

the I of go, understand. market distressed one question. I appreciate the at little defaults of north look that. where Josh, we is X%. a might sort If last And as an of leveraged indicator ratio loan

And this do Looking year, out you credit expect the that crystal do year the behave going we're next those climb levels? rest the you expect portfolio to ball of to your in given for economy? terms and of to in defaults how into at seeing trends your

Joshua Easterly

people you what telling think it higher is you ride. look free no read letter, rising very our be will default growth. there proxy, if I differently if defaults are a low given should our broad-based ride, lead free a said is We perspective you head the return rates And think on, credit cycle, Mickey, extend where behaves hit needed losses. to believe that spreads on inflation, especially which and we've if stagflationary to as environment is at rates. credit we're there's you credit portfolio spreads but some in Rising

There's So -- bunch single net number that ways XXX And But historically, don't math. ball think crystal if had average you post given a forward going less losses losses increase there's net losses losses. I But and bunch you and BDC prior do a income do can think to the think of only definitely the defaults XXX what whole investment on has most space going the the at I realized of in spread investors math. the that basis and have is. to a are space, look of in the whole a ways B I directionally, can points, to spreads.

important. think So really that's I

cost The structure, really second Top recurring the XX% and portfolio service was structure, it's in really defensive. variable inflation. prepared software, basically think no whether that revenue inputs lead thing is the capital of of is and would our I to business, remarks and

pricing And power. good quite so and feel I we think frankly, really

And is our headed. really where feel so about good I we think portfolio

and are real and solving In -- portfolio they is companies -- pricing like customers all for are of problems our their addition to they're problems solving them. attributes, attributes have why because those valuable those that for power those why to things

was so was at look you about If think annualized. Quarter-over-quarter our portfolio, portfolio X.X%, XX% XX%. about year-over-year growth I

strong our surely the in much portfolio portfolio on of levers you're our decelerating, cost in portfolio cost variable companies, companies, given growth So their nature. growth, core you're have companies -- clearly still revenue still is of it more portfolio although but side of our

I rising inflection earnings given good portfolio. our of feel the good feel pretty the about business our about rates. forward So power pretty on I

whole embedded advantage more And of more positive in have business, and have take lending in the we bunch a quite better so a of that our I'm power we given earnings environment. to liquidity space frankly, capital,

excited. So I'm

Mickey Schleien

all the very We appreciate Josh. certainly it transparency. appreciate for I much. Thanks that,

Joshua Easterly

Thanks, Mickey.

Operator

Our line of Kevin from JMP next Securities. question the with comes Fultz

Kevin Fultz

this at Mickey's credit touched cost with in X.X%. You shape portfolio excellent quality on of Clearly, a question. nonaccruals is bit in

there about Just curious recession verticals issues, you're to where evolve? certain to sit, things, more more continues Josh, you see environment whether in the due environment, monitoring at how from as current labor inflation, closely or that fears risk the think and are macro you risk geopolitical that's as you that

Joshua Easterly

Yes.

it's So question. a great

of thoughtful mean, positive yes, we've And look, where very that been how the in So our we capital about on the we're characteristics companies built portfolio. portfolio and those invest we've and I structure.

for And of under get the today, back in to the also unfortunately. to control way their make you cetera. kill investment and decisions, companies to consumer, world The part increasing policy, inflation what's the only out and takes under policymakers of get et of consumer happening If have cost and killing giant pocket a effectively take to capital restrictive hiring step is which them a the of inflation the is decisions control. monetary dollars to

So you worse in can going expect shape. that employment the get -- consumer is unemployment to is going to rise,

et I saw yesterday think credit debt's headline card and consumer debt's a cetera. up up, where I

question can of landing they that the soft get the figure we're where Fed environment. out. to a market in to proverbial land trying think kind needle So I but head ahead, the the to on The plane kill the not can land a And tricky economy. of is the is, think to a I really kill the enough consumer

generally portfolio. BXB Our a is portfolio

they ABL. so have don't don't of don't have a -- consumer. bunch And retail structure we those -- portfolio cost of whole cost have that have that that nature of of We our have have don't bunch the the of where but a there's in don't commodities We of we inputs outside business company they that where been commodity we have whole can't any on, inflation any don't structure. have -- can't -- price --

they have margins forward, by I that going So would aware margins are going or of affected are or that or have that businesses those have I well. low-margin be power. don't businesses think EBITDA as inflation, commodity And those -- EBIT have businesses inputs around probably be that too, measured to challenged pricing consumers by

too. think BXB feel going insulated I good portfolio. world this positioning. the to our -- we But definitely, talk tried be to relatively letter. the the portfolio affected, about, And a But So economy more about in interconnected. very defensive is again, look, I and is our have I most

Operator

Lee with Our Kenneth Capital line question comes of Markets. RBC next from the

Kenneth Lee

you on Just mentioned. CLO investments one the

talked an of it capital. efficient use You being about

these debt macro your And well, just wondering especially most as compared you investments? how the compare about with Just under of risks, investments with how your traditional you could investments? deterioration flesh out think other whether do debt further more potential

Joshua Easterly

Yes. Yes. It's a great question.

strategy had we've over all, time. of first place this in So

in we it 'XX. think in 'XX, did We invested in I a COVID. bunch

forced think out when mutual was market coming the it blip because 'XX in held -- might they're of done those selling of lot markets there's we there of a where I 'XX, a have funds. lot by a

ability those think long loss-taking high rates are force When default loan syndicated securities, for you very, to have so very be you time. sellers. to broadly stay And people look that high have in and a at the

portfolio, point points. the And about idiosyncratic been sorry, defaults, now -- offered had they're investment the BBs in, -- usually historically, at so And basis negative a the on -- less can flat private BBs. a by that they the premium basis premium to portfolio premium BBBs basis was although idiosyncratic we've XXX XXX early to a when XXX not environment when names, greater so a that around spread And basis. of if point look the have environment you But loans look although underlying insight, basis you and change go premium names have although premium and at point to at basis to XXX XXX kind we loss-taking look the at you you look ability is in period. an when underlying

value in teens. the yield were the so really the recoveries relative and wide And was really, of low of kind

can much just source it's more of our a efficient source it's frankly, we so never liquidity. of of And be capital, a quite loans, liquidity think and unlike also a use private which

We've done So we that. like it.

appreciation was on using on We total a basis. think and so we to have security defaults where or on a capital think default. it, the in focused end been have a that BBB a XX spread. we'll with world losses have basis is shareholders' ability buy would at X been with a team returns, loss-taking insights XX a XX-point to on both -- have ever BBBs, and our capital as again, I And unique -- like we're and and again, It of forward a spread no-brainer. focused with with efficiently create and lot we OID it good And have -- just can if you of start seems

Kenneth Lee

within the Got value it the idiosyncratic some you. follow-up, prepared the may, if valuation One It was did changes spread-driven. portfolio? the remarks, there. like much I on of mainly Very helpful from drive Wondering how lot fair sounds of factors just a the changes.

Joshua Easterly

Yes.

in, risk and premiums premiums, them two And being broad-based then So as well. equity small book the spread I two equity movements. categories we would as categories. you really, And a widen have know,

in book broadly markdowns the It's we instruments the performance-based of came is any down. really The equity on performing. wasn't there book. combination valuations hold, So a

through other then they Now because a have the bucket you -- finance, a should don't they maturity. but if maturity or the is, books if valuation, from credit, should duration get those all actually about should the it's because our trough have and is think credit unwind And spread go-forward corporate from a maturity, before earn, generate some kind the less the basis equities longer so and where point, visible of -- return we're at we that frankly, all on losses right stood back unrealized unwind. it went those quite at par all will should

there really down. came in markdowns broad-based our on a not and It equity widening valuations performance combination So spreads any book, was is of equity the book.

Operator

next Our Raymond of line with from comes question James. the Dodd Robert

Robert Dodd

I that of, that of the lot expect of acquirer the structure going? the protection couple the think not from usually topic. kind and because Or lot frankly, a Thanks loans, for really you embed protection how case an of borrower look market an of by the is call event? letter, do the years, increasingly NAV M&A doesn't competitive generated structures, any next it given the private care Maybe in way a core amount fee -- protection pushback On income have you is on is at call on you paid you borrowers of credit the much you over a When historically, this color in -- from the interesting. but cetera. on that's in environment, not quite et

Joshua Easterly

Cool. I'm is made of sure the protection proceeds. It an the acquirer seller in event. call by M&A comes not out the

historically, structure. I if think, of competitive at is margin changing first that's in, I is I significantly They So lack put in bear their retail that would people of the I significantly of the we've the being or flows know leverage. that or top capital the don't the all, premise -- seen products than I end the on think which of structure. more it's the of that cost the put environment, I capital -- seller's so say

the we reflected seen it of seeing now. And capital. loans. spreads in have We And quarter, our But with we're broadly less end we it at that's what the along so book, increase. saw there's syndicated

reinvestment really increase. we're seeing spreads so And

world down. go the seeing -- seeing and we're so go leverage And we're fees and up

valuations. And so because a better place place becoming is buyers equity at also lower world on of it kind better guess lenders. private is the side My they're is the buying a for a becoming better for

The the one NAV generally, -- much would change in and is the book. in sellers so and environment. fair metric the weight at income the I investment proxy value getting how is how you kind through think that look will protection should think, that either And looked line. that look our section much for when I terms we at embedded getting think valuation unrealized-realized I and is tells increase the you the terms portfolio related how say lender-friendly of better that buyers book through if is much today, you call because the of post rolling roll some are being to date gains The more how of are are much given

-- This quarter, part of because I and is think is this markdown, the XX.X%. was it

last quarter, it was So XX.X%.

people at a looking cheapest book price, in look as been it's the to of X been quarters you are last it relates as it when at creating at it's call least it. I've so our where percentage the And

Robert Dodd

a mean, it. cases. that call look a assets at I line. -- time what the Got degree, as mean over it. many not I And protection in goes to obviously, down degree. do I to it age, that, goes -- Got

changed you that shifting protection, terms on values probability the -- cetera, have et the when piece up in of anything on coming is weight your mean, fair I change of... So call cetera, any there you're et with framework

Joshua Easterly

That was the (inaudible) we like.

increased has or fair the at therefore, average book you call I a bit. with -- have cube. call is up of value And because protection a of think our ice life investments, we value the your that fair the come little changed probability effectively, when look we've decreased of was has our protection question Sorry, when sorry, -- weighted melting

was I make I just question, I question. that the the want sure to got think

Robert Dodd

Yes.

Joshua Easterly

answer I margin. Yes, is think yes the on the

increased definitely spread life Given a average the the weighted wider environment, has most bit. little

Operator

of Our Wedel comes next the from line JPMorgan. with question Melissa

Melissa Wedel

to on the than would up I be the the appreciating of about seen that I Do they in shareholder a detail bit half that perhaps a expecting it necessarily more. And on made a that? more first if rate given half. be might the we've little So market companies lot follow comment the with in wanted sort little wouldn't the say a guys lot to to? you how And an want elevated that stressed bit in posted about so, second I'll unless be of you're touch had in you how reiterate the pipeline what think second fair to just environment. of environment, about to the half? prior mitigating thinking comments earlier you're you letter wanted about pipeline perhaps a

Joshua Easterly

Yes.

on think ton this. dry I it's really interesting equity -- private powder. comment because So there's and of Bo -- Look, The a should

that transact there that. to -- So willing people are are buyers and seeing are we're

first quarter $XXX fundings If you look was million. at net

correct excess right. I'm this me whatever quarter -- date... So first if to Ian, quarter, Not QX

Ian Simmonds

basically. July yes. date, to Quarter

Joshua Easterly

July million. was $XXX

you demand on relates average So credit historically $XX on the million and net to between think. That tells that $XX I side. for M&A fundings the about million,

-- already debt July to Xx to equity we're plan, we net up used we the ended million approximately debt to we're On $XXX after the at X.XXx quarter if the date. effectively We've converts. already -- equity, used

don't So we've we've we at last been the than I probably months. think -- used capital. now And XX been busier we've think look I when -- there's -- we're were you in --

I'm buy the now on don't and Public And buyers there a They've valuation, out going eye capital dip, little had seeing the mind, And of started things there sellers where combination is in sellers a to of a capitulate going to having oh, private take power you're there say companies start in whole on their is equity system. to themselves, so dry big you've to time capitulating private now bunch privates. bit. change. And on are are eye side. equity the to where

getting are valuation terms and for lending the and better better. buyers -- So getting are terms

of works. it kind so And all

with going our space. pretty opportunities we're the positioned bullish equity, the the of about I'm forward, target low end and end at and of low the at positioned set to So we're debt

strategy. I the who We rest have capital, was have competitor who space. who of mean, their more the X.Xx more liquidity one fees, I than think different a debt-to-equity at cut

think I was at X.XX. -- they're

liquidity more have for more capital, our balance than the sheet -- space. so And we we're relatively

high-quality jazzed a higher and spreads so rate forward And environment the base a with I'm and about portfolio. wider

And so Bo, I if don't you anything have to know add.

I it your think took thunder. all

Robert Stanley

that. pipeline would in You seeing come world with took opportunistic as we'll that seeing the that, all only from last a best the it both world the as bolstering opportunistic private quite where have sheets from cheap And the I we're equity are M&A, actually credit very is in of look, add see turning it. to values But bolster corporate over good balance offensive. busy is raising to markets businesses have and The of has to years. that X some been and lot time thing And down are been yes, are be their also their lastly, the X the now balance very sheets cheap then equity. equity the businesses versus to markets on M&A

pricing leverage seeing us So a much we're the come the half quite with that favorable bullish lending on in, where fees second go combination in combined has environment of set opportunity year, and the up. more

Joshua Easterly

I Yes, got them. fully -- completely

hit actually better I it You than did.

Melissa Wedel

very All helpful.

to but risk, it, how of be on also commitments of would Or So portfolio the clarify, on you are case? target And then you want shareholder sort from that bullishness clarify have of the I would of on team one, touched you is macro just taking the the that. end about balance to of -- and want Is a sort also sheet? range that sort up follow that is leverage? of to higher appreciate in that the given leverage greater into that standpoint, that also this the up undrawn where And environment, two, you given letter? -- thinking like inclusive comfortable leverage which you leverage to capacity

Joshua Easterly

question, question. complicated Yes. It's a really great

capital what X.Xx. side. We we're to think the it about going make we never up I don't to to to going don't -- this take on would The tell -- we're commitments. we up is think reserve balance our I on take it I way to sheet reserve think is So is you front-funding it

because this new widening to that side, capital their reserve the reserve capital of like to have for get those dry a because increases front-funding to funded, structure liquidity powder we too. reduces And it commitments on would when reduces is that credit applicable our make investments investments. We make in leverage. our basis. our mark-to-market a spread capital We Some and

for a of moving given X.XX that's unfunding as the it's if that a burden X.X, that. well, because that our of range, have capital have it's so that it's burden kind function we commitments target in and liquidity And to but we to

our back business overlay business? Or you we how and of to target. the If you we capital do today, in forward work say, weekly capital the range. of in understanding the we than thoughtful value capital what about and look balance capital. daily on you cost step take because in is capital to financial that own have and so that moving our But at liquidity, our it and it like have our margin, -- a we're it it's constraints, pipeline. pretty sheets a our run creation. times or kind the read constraint And not I policies shareholder so is or way. or like path think that's Is put if more don't given is we But liquidity capital we constraint it's And

Operator

Our next the of with line question comes KBW. Lynch Ryan from

Ryan Lynch

high-yield kind in to the in opportunities now leverage to bonds just on then any a CLOs? is it But right markets. I in that's set sort in private quarter, opportunities seeing in markets. in positions, investments still there sounds to loans some we've this direct whether made with the in First markets, exist CLOs invest seen of And just CLO marketplace? ton two-parter contributed marketplace you seeing the that. a the of like question of dislocations Or you you are Are any kind the in is the liquid also, which One, of it today? that opportunities limited any opportunity or mentioned obviously you're secondary the the was had

Joshua Easterly

Yes.

were X I think points that. kind something point on the low of or the So then prices have think I and XXX on basically during CLOs. on we to like up things X And quarter was flat purchases the those come

margin, a haven't think made makes This I then And being value when again, don't relates relative This kind like additional in would purchases we is use on we clients on as you definitely the it not structure. we're -- secondary offer all like any in they first strong So And is our if is value it most about looking. to the to of do CLO a things the equal, there's of not as protection how capital this names, basis. equity. CLOs relative to capital think structure. losses or purchases. support sense like our then capital, where our use against the we to loss

this in the private actually clients. I we're think paid about getting if I order, like at And like job enough, to we've loans I'd we over looking So pecking time. that's support no-brainer because done like and good we've do start pretty moment we're when relative rather think about I of our than relative business stuff, it done of of history, it. and then And if value. again, liquid that the at do value seemed a And a to going

rate credit, I'll say the -- life. on the rather because just they're -- looked capital support most generally making weight is like margin, about high So at But does though average I'll an and yield we thing implicit last clients. I'd use our you're a that syndicated have have of tougher to that definitely but for and probably we loans us shorter private -- say is -- our longer duration

attractive. life your is, weighted And yield, less you the about very attractive is high per average so versus think discount metric average spread life, that if margin, your weighted

set talk syndicated don't have probably and lenders. so to -- well, So as kind to loans they're they their up of

Ryan Lynch

Understood. Okay.

just was the and make kind I nature a of companies mentioned can that is about having not if structures. would of variable your portfolio one you structures referring if maybe other and your assume they But sure Can that's toggle what lot you're I that software I'm on maybe The of and like cost can I'm curious, exactly? that toggle? the what businesses, to you had more they marketing, off. cost case, sales is variable a it's the explain

Joshua Easterly

Bingo. Yes, it. you hit

Ryan Lynch

say X $X.XX amount assume And expect second half cumulative LIBOR clear, with that estimate, kind of quarters, The and XXXX. like... the kind sure. the total, shape where would -- just a just be just would of last of just then clarification And commentary build that Ian of QX $X.XX and today you XXXX, curve like so is of make -- I I in Okay. you would the or $X.XX something $X.XX that throughout to would a want could in from to in rough gave and one the over earnings given you of QX is additional the that second guys half just that, of LIBOR, SOFR, the be for

Ian Simmonds

$X.XX and Yes. $X.XX.

You're spot on, $X.XX Brian, and $X.XX.

Joshua Easterly

Ryan, to is book. of like in asset -- it little -- We floors. right had We LIBOR had our our was the way which about effect effect our LIBOR was the above we asset sensitivity very think weighted XXX. in quarter average had book no of -- past this

it like bottoms-up I Q can XXX. the people basis, at And up a The we if at XXX, basis, then well, wrong, and there. -- reset we -- would XXX think at in QX, if correct went of everybody reset from bottoms-up goes end we're I'm be by a on reset. on me

asset of it our So net interest you adjust less just kind that sensitivity have in and on the because Q, income fee as at for investment -- table a -- we kind basis. flips that's of to on net on incentive looked a to the cost

about incentive the given resets you to about take book adjust we're the off. So floors, and is have through is book the fee. it But to -- the the is for

Ryan Lynch

Yes.

you letter. you appreciate in sense. and taking for makes That Okay. questions I appreciate gave your my I details really shareholder the

Operator

no back remarks. closing I'm I showing call further the now for Josh turn queue. questions in to over to would like the Easterly

Joshua Easterly

a important or for so the for me. remind everybody keep although as around you fall. the letter office with you has Thank the summer in for much. appreciate time. in are XX-page didn't reading you disclosures. Labor great Great. really their -- questions. read we're Thank hope Day it. of family. I the But the Thank Board a Hopefully And we're time a you our rest back We full those And would as the and I saying, XX-page.

free think and out and pandemic feel look little companies to getting of with I come the getting we road. the shareholders And other please are, seeing hopefully, back and and So stakeholders nice visit bit where thing as sponsors. at post we of a on and portfolio we're

And so welcome we're Thank in you people on the and so our back office. much. road out

Robert Stanley

you. Thank

Ian Simmonds

Thanks, everybody.

Operator

your call. today's concludes this you Thank for participation. gentlemen, and Ladies

You may now disconnect.

Sixth Street Specialty Lending (TSLX) 3 Aug 222022 Q2 Earnings call transcript