TSLX - Earnings call transcript Q2 2024 | Sixth Street Specialty Lending, Inc.

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Operator

Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s Second Quarter ended June 30, 2024, Earnings Conference Call. [Operator Instructions].

As a reminder, this conference is being recorded on Thursday, August 1, 2024.

I'll now turn the call over to Ms. Cami VanHorn, Head of Investor Relations.

Cami VanHorn

you. Thank

of today's of made like contain forward-looking during Statements number than begin listeners remind forward-looking risks statements I during of results other remarks made and guarantees that the statements performance that call, are we may of to would our statements. this not Before call facts result future constitute or historical call a may Inc.'s factors, involve Street those Actual those in materially the no of update such results a Exchange as statements Specialty the obligation uncertainties. time number and from any assumes and from forward-looking a including Sixth described The to filings may forward-looking in company statements. Commission. to Securities differ time with Lending,

issued presentation to yesterday www.sixthstreetspecialtylending.com. Investor our the should section. press be ended SEC. The closed, earnings website in quarter second our of Specialty after release conjunction the a XX, the the market Sixth on with XXXX, presentation posted website XX-Q reviewed Inc.'s June Resources release we our Resources Investor available section is with and for under Street our also the Lending, earnings filed Yesterday, Form

figures of today's quarter mentioned all remarks are prepared as otherwise, noted June XX, Unless and performance second the for in ended XXXX.

call As replay purposes. recorded this being a reminder, for is

Street of I Inc. will now turn the Joshua Easterly, Specialty Lending, Sixth call Executive Officer to Chief over

Joshua Easterly

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

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

adjusted equity XX.X%. of After the and reported annualized return equity on per an return investment we on yesterday, quarter per of of income second XX.X% income share market or net of annualized or net share $X.XX an $X.XX adjusted closed

in net the presented both investment inclusive our income and incentive unwind As QX accrued higher. per $X.XX of fee were our noncash gains share net per the income capital financial share statement, of expense

net value new all-time $XX.XX, since of the of in a At X.X% an high inception, per and asset share growth annualized impact year-over-year XX, increase an part supplemental X.X% that June over our special representing of time. were dividends of at distributed reached

said higher earnings, support calls. to a earnings but record, want are remains but our don't operating sector We this the interest broken we've outlook tails for sound for BDC in the on within provides environment previous The like consistent with rate portfolios for longer our what margin. growing

quarterly of Our QX Adjusted continuation XX%. a quarterly base fees. level income of investment QX net dividend these by our exceeded results reflected

we the interest of our curve. assess forward over projected the at the look As shape we long dividend term, coverage rate

bottomed rate well of environment. this we As curve, base a at this remains out by on in approximately share terminal dividend the forward believe interest our $X.XX today, per rate Based of earnings rate of curve operating supported X.X%. that

operating between earnings losses. in started last [indiscernible] outperformed portfolios may higher [indiscernible] were to talking to We sales rate that this rate dispersion base play basis operating these as as highlights we about to for interest said slightly been net on growing income quarters. QX we've have ROEs below lead we in within ROEs. the results results X see several deterioration GAAP and our We points expect for As see our approximately This XXX credit for QX. credit earnings potential calls, a ultimately

has are our of equity, always cost Before emphasize earning our a step passing creating but our in business I'd of to to it for big value means minimum, we like to back At goal Bo, take shareholders. a that been what exceeded. the

environment cost fund the private equity. earn in the be that Given key and investment spread selectivity to This us what asking required is is rapid is investments operator environment. change competitive X discipline of that a and themselves, on market credit maintain an in should is which question, the framework to guides a

passing allocated generate actively industry's are on We [indiscernible] acknowledge deals, BDC equity. spreads. the in capital pricing in an return investments low should and estimated exists We would of not cost that the below certain that floor model be to

of We'll which capital the detail of X.X%. of data cost incorporates on clearly for equity across based XX-year demonstrate its of start a with This about BDCs that now walk to in assumption our allocation. the a traded this is through average operating successful that Bloomberg treasury. BDC We'll for set, publicly discipline peer

For simplicity and operating incentive LTM sensor of for fees, and we funds will the the on sector. leverage, cost based assume average management

over portfolio [indiscernible]. While required Using the life, not management X%, [indiscernible] earn as points a is current as well leverage fee in do basis cost different X.X% equity these conclusion. the vary industry, the a [indiscernible] differences spread a X-year OID XXX structures incentive across of result swap approximately rate minor X.X% to of approximately X-year

assumption spread to range agencies output losses designated be Direct assets investment of to on applying have Index, data, the leverage by end Cliffwater at XXX grade and indicated Historically, annual on cost XXX credit note based losses XXX reflects of XXX top Lending averaged that losses. the required approximately rating It is important credit to before including the this credit according of basis impact is points. equity the our to basis to points this

losses X.X% spreads, these explicitly let alone on return before done getting basis X% earning To current its and to yield the dividend of At XXX cost why spread credit below, a equity -- equity. the deals after passing are and X.X% of not sector is losses. its show at at we on points

we viewed the a shareholder math creation. yet While value the we in acknowledge disruptive path be outlined be this on portfolio to must illustrative basis, to

average. we have Bloomberg had equity and lower industry For significantly our data, based us to due specifically, is losses cost factor on lower the credit of the long-term than the

the portfolio, our including average, model, basically quarter XX% average of our of are spread investments spread the in average basis look math activity-based new this at we losses value a XX leverage a weighted fees weighted on at XX% a Again, on return over X.X%. economic at and basis This the fair investments, was equity. output and to X%. X-year is spread weighted X.Xx on quarter's is earn compares we cost points, a average historical unit If equity. Taking X a this indicates new points credit X between clearly continuing apply XXX of to that which our to to portfolio of

generating net in IPO on demonstrates XXXX income since a Our its track annualized ROE record our further of consistency. XX.X%

September approved per quarterly September shareholders of share our record dividend Yesterday, Board base a of payable of on as XX, XX. $X.XX to

declared XX. payable also August of supplemental Board QX on $X.XX Our share of to per our XX, related earnings to September a dividend as of record shareholders

for share asset pro discuss to spillover forma With impact supplemental that net activity. approximately is share that, value the per estimate Our dividend that investment I'll yesterday income and secured our the this to Bo was pass of over $X.XX. quarter's per [indiscernible] we to it

Robert Stanley

like credit some that's impacting the broader by I'd how environment markets. to activity private sharing the Josh. deal in observations and on Thanks, start macroeconomic

This evidenced anticipate levels years. show Over the rate in room the encourage and has we data to deal there started cuts claims past which in over softness on last of U.S. for rebound pricing be few historically an suggests signs reduced unemployment horizon, by the activity increase the power. low may economy from the will weeks, corporate experienced a X

deployment deal in pre-rate to not levels, yet back our the repayment and for quarter busy shoots terms hike the of environment in green activity. to another While contributed business

and $XXX across In portfolio totaled million commitments QX, and million $XXX existing fundings and X X companies. respectively, new

between base we transactions Six scale during underscores participated in opportunities the reward [indiscernible] where size the We and is small cap the platform value large quarter. the capital as benefit power continue for the as and appropriate our cap several Street's to can relative from we risk of This shareholders. and of large toggle

diversify deployment activity. maintain of competition can we portfolio through deal pace a and periods further higher for the lower Further, steady

our facility continue new funding on to opportunities quarter, source wide As a total this investment of highlight quarter funnel, we fundings new [indiscernible] result XX% with to the middle a in To to companies where largest relationship [ like core market our [indiscernible] ]. our originations in provider of companies. direct in reflected investment portfolio Mira is competency this we holdings. well credit our software secured senior This for be merit a solutions

we the the executed across inception X REIT connectivity transaction. on platform, our till business from Through the have the points touch of multiple we company with

in expertise finance this company niche in businesses. to best-in-class our software market markets us Additionally, vertical move with quickly of to SMB certainty allowed

financing X took payoff and advantage spreads $XXX XX On a treated net the activity million $XXX resulting partial quarter. reemergence for full, as their realizations, cost near-term and lower in repayments repayment of opportunity long from We tighter activity maturities. the X to repayment investment of of borrowers the of experienced of million way address side, structured credit to

loan. Our market credit refinancing including REFI and refinancings, a X driven high-yield repayment private by X activity a by the takeout largely in was the to market, bank

a our our and which team, million We investments. in discuss structured I'll also payoff of credit moment $XX sold experienced ABL opportunistically further retail a in

our from as quarter, older but XXXX $X.XX full increase X share still from of realizations investment being contain X names. income XXXX. came and being economics fee to lower an average payoffs owned below from assets payoffs the activity-based our We compared The of these and vintage our other newer of last ultra majority XXXX historical realizations investments vintage per with admitted long-term representing from

potential should accelerated through represented the new to We our second cycle. OID protection, positively half our hiking by of Following the this the the year. differentiate of other rate the portfolio and made exposure call activity-based is quarter's repayments, persist activity of economics believe after relative for fees portfolio vintage start our assets incremental the increase our repayment XX% investments to in sector,

X the software by refinancings Our credit in solutions Home largest driven during private the Care were quarter, market. [indiscernible] payoffs

companies importance allocation. given disciplined to successful refinancing basis, the reasons portfolio Josh capital While these both of on investments the earlier IRRs transactions generating passed on for mid-teens related gross the unlevered were we highlighted a of SLX,

form Another illustrates back our within team quarter that in was We space XXXX. thesis leveraged payoff underwriting expertise to our our the specialized portfolio XX original our a at Cents. during asset-based retail investment lending in the

resulting under June. that in the provided funded and dip in IRR several repaid XX.X% generated term for and loan for total during a SLX including dip ultimately XX.X% company shareholders on period, the Over term a IRR the borrower the XX loan a company April filing maturity investment, in X.X-year IRR support a original an To was on unlevered bankruptcy the gross the we worked extensions and in We case, Chapter XX.X% alongside hold term loan. on April. through restructurings the SLX of amendments,

flows, we've for producing more average was income From more slightly cost recently new perspective, half and ebbs in XX.X% in The year. the on of goods experiences. services shifts portfolio to securities set and yield by exited seen new average our from including an on a consumer and this continue opportunity to amortized at demand QX theme to funded yield XX.X% end, of XX.X%. amortized a investments. to a cost weighted for yield increase Post this quarter XX.X% While of debt the compared weighted yield second this quarter-over-quarter see investments, fully and at -- upsizes declined expect driven and investment in we trend specifically

fair X.X% remained of To to some nonaccruals credit today, the portfolio value. quality total investment color the strong provide limited by on portfolio with

successful internal we on feel rating borrowers are liquidity teams cost-cutting portfolio a and strongest. X.XX% of risk pleased operating managing environment. of our to through have quarter-over-quarter Our initiatives X.XX% being our the the improved in Overall, of and performance with that management generally the X with challenging executing been companies from

health have in the sufficient material interest related indicator and despite portfolio average continued deleveraging is basis a across not the X% to costs higher liquidity, quarter-over-quarter We top weighted has covenants positive portfolio. amendment or contributed of companies approximately core On another which cost. a line growth our experienced liquidity increase to of of

from and requests, repricing this momentum robust has growth portfolio While largely an strong performance. come led spreads has to in companies tighten demonstrating increase

the average for credit these whom and metrics to on points conservative and X.Xx, core Moving weighted portfolio stats. detach Across of are composition relevant, X.Xx our continue attach borrowers have respectively. and to

X.Xx quarter-over-quarter. increased Our interest slightly coverage X.Xx from to average weighted

of As end coverage apply to borrower rates assumes quarter the a steady-state interest EBITDA. the reminder, we at reference

core nonaccrual our million, of revenue and the quarter. $XXX.X average portfolio were XXXX, respectively. of As the no QX was million There EBITDA weighted status investments during new and added companies $XXX.X to

cover our more over detail. Ian, to I'd With that, to financial to like my performance turn in partner, it

Ian Simmonds

Bo. Thank you,

income Total $X.X to investment the net and adjusted of result down generated X.X% billion share per supplemental a activity. at we of share net quarter that per $X.X end prior quarter $XX.XX the of assets QX, of repayment Total billion, net were For outstanding adjusted as from per billion, income or principal the $X.XX. impact yesterday. was $X.XX, were investments declared was $X.X net debt dividend share prior and

Turning sheet now positioning. to our balance

ratio debt-to-equity ratio June as X.XXx and QX the from was X.XXx by for decrease debt-to-equity XX XX, was quarter. Our decreased as average March weighted of of activity X.XXx. our net repayment to during our primarily driven The

to $X.X last maturity call, including billion these of facility our As quarter's amendment extending mentioned $X.X credit billion on closed in April on commitments revolving XXXX. April, final we an the through

drawn. that unfunded ample $X.X be commitments of have billion capacity with to liquidity portfolio We of against revolver unfunded eligible continue [indiscernible] million $XXX company to

into strength second We are the with profile our of half funding XXXX. pleased heading the of

the to on Moving upcoming maturities.

for undrawn XXXX capacity our the of X.XXx November our $XXX notes $XXX for excess our facility. our we leverage quarter of After we continue under To of those further end liquidity in utilize a revolver reserved to debt capacity of due equity reach of unfunded revolving go top liquidity. target of have million. million $XXX.X and have to we further, end credit we notes, to the revolver for repayment commitments, as We have if of step range drawdown unfunded assume million eligible the adjusting

notes. in [indiscernible] notes, 'XX 'XX, profile XXXX our unsecured our with maturity for the outstanding is Beyond and 'XX debt maturities well

in access unsecured market year. have the said increase our at the financing in the over is we the levels this of and form past, continue to funding, source we've to of course attractiveness primary of As of

and broader to unsecured pleased and the of market TSLX been development view the positive the the for a years sector. have as We it last over see few

net our through bridge. in February of of in $X.XX on April impact presentation X Working effect dividend per primarily NAV per QX. NAV resulted in to a tightening of per contains the to There the fair We materials, was equity portfolio. main Slide the related Pivoting growth, our added $X.XX share share this drivers NAV value quarter's base $X.XX investment to from adjusted spreads credit to per issued our $X.XX NAV shares [indiscernible] upward against share income raise from share. in the of our positive market

this markdown in $X.XX expected, the as The At value from NAV. this in Net primarily related the portfolio in our fair unrealized our and in investment of not performed a and resulted losses company-specific mark of range reflects events technologies This was per is [indiscernible] outcomes. a share of lithium the possible to is decline assessment. process, there from quarter-over-quarter. company middle has company stage, strategic

the from realizations gains changes quarter. we included uplift realized net sheet Other during primarily share per from share as on to $X.XX sales structured unrealized balance NAV net to gains reversed on related investment reduction credit $X.XX the investments per and

during to increased the and accelerated operating QX, we at the income up slightly investment the by a Interest quarter. repayment $X.X $XXX.X to $XXX.X fees million X, $XXX.X quarter, in prepayment our record upfront of in in total $X.X results million, compared was of representing driven quarter. compared income million. for the activity was were As unscheduled income the $XXX.X fees prior dividend for million [indiscernible] from million amortization prior elevated generated above to $X.X fees experienced detailed million from of X% higher activity-based paydowns and Slide quarter prior $X quarter. Other compared on million million

incentive in capital prior held from the million, the annual quarter the fees the expenses noncash Net May. by and for quarter, shareholder related the up $XX.X incurred during were were million in of to excluding expenses, $XX.X unwind meetings driven gains special slightly reversal the impact that

lower our outstanding average to weighted average unsecured shift Our led by X.X%, funding from activity net debt outstandings interest rate given to mix our X.X% on repayment slightly revolver. on towards financing lower-cost increased driven

shift repayment quarterly the small be almost our of as lower weighted impact will $X.XX will of the a in share there funding in positive economic of debt. mix average Following notes XXXX implied November, the per cost XXXX

to wanted Before circle passing back back I metrics. ROE to our it Josh, to

it generated share, net income of per of for For target the we XX.X%. $X.XX return to corresponding stated half to This $X.XX, XX.X% year-to-date investment annualized income return compares on adjusted period, corresponding to turn this previously of that, year. our net equity investment I'll range to a for Josh back of $X.XX adjusted heading We a to to on the of With equity second the for XX.X% into concluding remarks. full maintain outlook XXXX.

Joshua Easterly

no private you, tighter. surprise assume has that the had credit spreads with increased growth graded Thank in market, [indiscernible] Ian, significant competition and

manager, opportunity regarding As in means only as investors, business when us, to investment what allocators. further capital not choices an we as that having view invest this an to disciplined To being our time but differentiate disciplined and invest.

business optionality our this X create in We ways. in

deal and waiting risk do shareholders. importantly, absolute investments large the toggle return and value, in themes our [indiscernible] between origination exposure, wide pass platform. relative on the [indiscernible] platform base the [indiscernible] targeted the for not operate means on that second such without in flow regardless accomplished our a [indiscernible] wide First, meets raise size selective us equity. return constrained participation meet present, capital. growth we market investing on objective not Despite We we required This by of do calls make ongoing that range or the allows because of capital we today, thoughtful of opportunity is in risk-adjusted benefits that to of that running return yet returns we remain a a sheet the production ability to leverage appropriate funnel. balance has a our to This competitive And within the can deals broader market active our range set. the taking most sector as

make As better shareholder loss the disciplined investors, leads choices believe over long-term top returns to which lower translates a of credit shareholder we selection these mind, credit with ultimately experience. better to and we and

thank you for time that, today. questions. the please With for open the line Operator,

Operator

WFS. Our from line question comes Finian with the Instructions] O'Shea first [Operator of

Finian O'Shea

that's the you're opening of Does credit or deals a deals complexity due comments assuming on the of and out private lot there's, so Taking of then of you think, say to change that deterioration to market, scale? And can raised some in how firms I yield you there capital more on are noted, amount references the passing rapid in forth. a the relates underwriting market there on? -- that credit cost Would the relate capital. passing to you're this at it been do

Joshua Easterly

Fin, so it's straight vanilla sponsor of stuff, a sort kind of stuff.

only hold, flag even things. concern that deals. think capital where in given deterioration just would those our longer the of sector, One It's and place BDC the the they i.e., some leverage credit is return specifically, not X and credit have put or really cost that cost space. I to underwriting equity curve I that be -- in of can exceeds amount they is expenses, on deterioration assets it's meets stuff, they create of a equity X.XXx certain borrow fees at or prices the no the that good all those with

stuff. in we So that the find sponsor

quarter, talked for stuff, which equity. If about was, at earning think, our cost our -- you and of predominantly our our is above this I sector which sponsored the look above we spreads

you at or to because look quarter-to-date, you -- in has basis If than basis that. shifted And it's what's stuff. that if funded pipeline, XX XX it it's sponsor the significantly we nonsponsor what wider points from at XX than wider look

like fees, in that's known in so FBX the [ example, is XXX predominantly stuff. And spread and ] sponsor pipeline for

origination the continue it's think again, size are create to capabilities And important the of being compared of think shareholder really, capital to the your your sponsor mostly stuff. your platform, value. in and I how to of relationship size So really the I able

Finian O'Shea

this remind seem you that? you of there? That's quarter deals were to the was market? quarter. very your the -- saw the in footprint growth us Is more in Or there helpful. those And new have that Can a of best deals follow-up Europe this most you this on be

Joshua Easterly

Yes. Yes.

when say dollar but So you not -- it's at look referring look, amount. we're Europe, I number, -- you're to think by necessarily by I probably would

So is think true a by deals. sure has [indiscernible] statement. dollar want exemptive is true SOX that make invest the to amount, a that's the Under we ability relief, in continue strategy statement to our I to don't

those it in a And take X needs so day position to investments.

a And are kind that to of small positions those lot hold of referring so positions. to you're

been Our time. in it the on better platform better It's a the U.S. Europe growing. in -- in is sponsor return And stuff is than in is moment, been for market Europe successful. the We've very that risk frankly, quite in the long

with I on think that. Bo, me you would agree

Robert Stanley

for Yes, sure.

Joshua Easterly

predominantly, I again, So or return. -- U.S. like dollars think it's number by the we by but risk still

did For eBay the to you which was U.S. what [indiscernible] has example, assets Europe. one things nice of the a kind the And compared in buyout was larger of can auction a the of we that in spread find

Operator

next Our comes JMP. Mckenna Citizens the question Brian with line of from

Brian Mckenna

lot started a portfolio within raising talked beginning the the you since rates. So about turnover the Fed

of over of capital does years. how think repositioning. rotation of kind then, for the for the vintages lot guess, the portfolio here a recycled continued the And Obviously, that that's about been good the all here? this and performance I underlying and new from we mean into portfolio turnover past loans? But what You've should few from

Joshua Easterly

frame so would I Brian, it. Yes.

where location were portfolio has hiking Turnover we and turnover. that. did because so light been to we slightly predominantly I below X premise of are going wasn't we changed We which So the is I to that -- it is mostly the vintage, post-rate portfolio just really did -- not leverage we hiking -- the the wrong, slightly the driven think post-rate I convert able plus it's which -- hiking equity by raises which is our think that, would composition had raise target was rate cycle. nice, is into cycle portfolio cycle

see could could activity-based You in starting see that in but -- that the up, actually fees. pick you to

the portfolio, to pivot more turnover picks is in -- have activity pivots, kind picks spreads [indiscernible] started up the spreads which set up, I activity will guess coming will feel up, in, come in September, like basis economic natural there they in my to think forward, an but the will had And those is line this would fees had SLX activity-based up in activity-based we a you pick first quarter up from with net pick little the that. repayments benefit shareholders we a bit short activity-based of so quarter saw -- because up. fees from fees be already and term, deal -- going had -- we which slightly of picked this --

Brian Mckenna

And here, likely bit but a slowing quite several into credit 'XX, and the be cuts there's then it does lot seem bigger just just economy will here. Helpful. rate public on year. next thoughts be macro. Okay. a to broader your accelerating, question over looking in get Josh. like of are markets takes term great Longer equity It capital and come rates activities markets the have well, a out recently. performing Clearly, the puts There's going is

are And how the the these thinking today? about case pieces you're the new some underwriting moving when expectation you year? -- base So over deals what's next of guys macro for

Joshua Easterly

and tricky Actually, a the on about today. a in the rate cutting Those rate a with haven't environment. stimulus pretty of rate of tricky comes it's or underwritten had demand tailwind vintages that a the based environment, -- it's vintages the Fed where you -- bullish of are So cut. higher I'm

improved. and a was years' hiking in post clarity value given of vintages, So rate you had were you the rate cycle. last cycle, standards tightening be got to There on couple writing bullish

is So helpful. that, I think, think I

I and perform think vintages really well. the the going previous vintages. be going But the will to really, to tails recent tails, there's be are in

this for started X about that. the than tails definitely be operating will or ROEs. talked economic of between like see which higher divergence We've is most which You're and this to quarters, GAAP ROEs, total idea

between difference a you [indiscernible] little the bit. see that NII So

little that see you'll continue think I a bit.

I'm allowing the but most pivots, the financial and a economy the spur -- is going to get which [indiscernible] economy which demand Those level. should conditions. separately Fed at -- So Fed is stable the pivot should again -- softening,

-- most and tails, points, I'm So on points knows? going especially constructive macro. that and like pain pinch be There's definitely most cohorts are relatively the the there's geopolitical, definitely end consumer the be on will be who lower then and to that

Operator

. Mark Truist question next the of to comes Hughes Securities. Our line with

Mark Hughes

selective. Your [indiscernible] it? changed more materially of working deal last How is the terms the your rate you're on that [indiscernible]. to over out X if with having in success flow just that that rate Has months be

Joshua Easterly

to Yes. book and be would credits equity we sure we I on equity. higher we at making of I is there's very what's and earn -- generally, return we with probably And a on cognizant on I is we yield, return changed look, return of when maybe. today at lower -- say a our and shareholder mean generate return But our will head say, the driving things want for 'XX. the -- cognizant I back though 'XX that you do bit look little rate I'd think materially And prices don't. even a equity. that we have like -- we're

the don't like except I the we there just think So hit we our that things prices. are like that credits, rates similar

Mark Hughes

but you XQ, in commitment average the say, average an to at be this compared little lower the snapshot, seeing end market? just The a may the of commitment, unfair smaller Yes. more XQ. was Are opportunity

Joshua Easterly

or I deals reflection taken where a of SOX large have a in deals the European European co-investment cap mean, position. smaller No. deals, that's strategy no, for

million But you million, to look there's at positions million $XX dragging commitment. And $X $X European down. those like on like if whole -- it [indiscernible], like million of deals a bunch so core the of $XX the like were kind

of order little the more the new -- a bit co-investment and co-investment So just that participation it's how REITs?

Mark Hughes

Yes.

-- that that? support Is more described cohorts. Or shifted I helping think spreads part? pipeline more And intentionality in how is nonsponsor. you from broader sponsor the better the market the to mentioned on are you looking then as that you've the question, the your final

Joshua Easterly

I between the mean aperture wide know, we billion this as platform billion the people great thing about having to being toggle things. that and part get $XX $XX of,

[indiscernible] a ABL a was end, get news that did capital weekend pharma a is deal. funnel, So the of we did quarter We consumers having we're I safety done great come. that -- return. think shareholder and we the is nonsponsor, be top quarter, like We nonsponsored We're again, to probably more driving which sure We picking, to financing, deal. space. we wide is a kind of big retail did this there's like post -- choosing and -- making we that the

Operator

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

Mickey Schleien

ask not on spread to think that's overwhelming wanted supply dead you just approaching debt of an that's of cut spreads. think we're some a floor? massive Or private for to it's Josh, question beat you follow-up sort do Fed rates a a the potential of causing Do capital but to horse I this you the tightening? issue here, a

Joshua Easterly

And or the I think from hear heard you. a think earnings Mickey. my -- it's sense great X I to don't we from X it's is the question, by way, last good calls.

So hear to it's good your voice.

value capital of You was a is very private questions. There had allocators lot understand credit, private the that institutionalized. proposition. been always My have now the good sense has

they've capital. allocated So

that's on so And capital. the supply of

from demand M&A capital, wasn't natural M&A. for environment, that demand the On given that there

surely get so in picking sense that more back here up. Fed and cutting And my M&A is equilibrium with we'll the

the of supply from to incentives, incentives be -- we've very but and we and that And in to shareholder et work And those of to always about put were tried we've this and of to outpaced demand are on. and incentives cetera, those fight experience. managers and so wanted And incentives kind be disciplined. those the the long-term think those fight acknowledge always early earn roll fees, kind

drive kind will demand drive more get that demand will hope M&A and CapEx and and [indiscernible] in a in environment my So coming of more that that balance. is will growth the from supply investment with

Mickey Schleien

light And more you do risk see that think the That's regulation of good follow to could last Josh, the many the sort I hear. And that -- with come probability do think the do disintermediation banks up, think occurred over commercial to of developing the private if and you years credit, that's what is credit? you of we'll of the will rise systemic road? . down there's private

Joshua Easterly

the thing -- I have a Look, this. about Yes. whole

comes would think a haven't put So And the silly. specific taxpayers risk for little banking that the unlike taxpayers, the through that for a from system, FDIC private first specific that asset for I banks. is program, the risk of of little put is I credit. point backstop effectively bit say that some a bit sources And and obligation written thing is the --

systemic is not is and about the leverage in and match the that second credit life short private issue the with And X.X I but assets The talked soften, our assets average has We ALM long is years. credit. like come does ALM. think fund of and risk -- liabilities people -- X leverage exist is from most which funded are that thing private an years like versus

where reinvestment risk. alone systemic institutions. And so small let issues liquidity or with And risk, that have most actually that we of is kind financial come

of X I capital is private would specifically compared credit between BDC third space. hold and amount thing the in Xx banks The X, say somewhere as to

about so to XX% capital And BDCs risk-bearing XX%. are on

If or bank you leverage about sale Xx leverage about capital. X% X.Xx think and

the of so real risk there as to loss with idea the [indiscernible] private and given me is shareholders, overall capital And higher that credit systemic well. the

I business you -- you X% this own you would with long, equity, do the I models, would win you is bar went If on and X capital, conversation of I started analogy business for listeners. describe idea return model short. people. for this that One

return required X lot The say, funded. required model, be on would equity say, other what business models is capital, hold a the of And would XX% my equity you the you latter I return for business academically, business those are guess same, on the would credit on That's return the business about BDCs lower match would of amount you totally models, are Is true. requirement in and capital the given is of ALM. credit more bank's model. helpful, actually business model credit equity private of robustness The not the robust private which much Mickey? the that the a private model and be business

Mickey Schleien

general there's well would if headwinds that on clarity last your at Lithium credit is And underlying BDCs? -- is in because cause time, more customer company. of mistaken, focus realize I whether my Josh, something customer other just I and as headwinds. of in care which sector over lithium That's appreciate is And I'm moment care can into the the the software part concern any that a curious Technologies, at that question, I'm gears. switching that. you very yours helpful. [indiscernible], run based not I think

Joshua Easterly

is Yes. purely [indiscernible]. Lithium

that businesses probably -- is were So the it thought critical impacted was hit on businesses There software a I through positive that engagement like unwound. had the would space, positively media platforms, tailwind COVID levered when by were social online COVID. was everybody be X thing the were and negatively impacted This by of probably about in business some margin COVID. that's that that a negative us that

purely it's So [indiscernible].

Operator

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

Kenneth Lee

you're Wonder new like seeing newer investments across of and could seeing, any some Sounds little comment about a timing more might originations, industry. new bit you're a if in be spread there on of terms of what terms just the these deals, recently? seeing documentation of in the terms you changes

Joshua Easterly

Look, document stable. I say, pretty been would stock's

people that much is good financial the the things in their I [indiscernible] in pretty the where would But in back they [indiscernible] I the X spread all stuff the be 'XX. like to think that what's they're not are curve, cost we there send are in remain shape. underwriting weighted private the leaning understanding standards is the was 'XX today But average and sit good covenants and if on the too And equity. in do same and or you into place, basically book. again cost ROEs So credit. of where question where required critical our mean

Kenneth Lee

just I helpful X if And broadly. follow-up, Very just there. may, more Great.

to we investment is Or well? a -- In complex seeing potential before there? the pickup complex more a terms have complex of more more something wait when you this investment activity of more macro opportunities for a see opportunities perhaps where as rebounds M&A start slowdown opportunities, we in could

Joshua Easterly

is we Then frankly, The going that -- a poorly. tailwind up, is, it's I very pipeline to X tails there's Yes. things. the is One got -- complexity rates, think with I low complexity Look, think -- from again, I think capital of come I that live also going that in allocated environment will -- of easier yesterday's what. people our if think mistakes, no people. to of some is there the and to persecute lot less stuff with that's picks competitors matter M&A our quite or competitors, is be an

eyes way. And will go that so their

And as in compounding kind M&A have so focused that. people's be natural you picks kind are us on will I effect, which is glare opportunity of the provide think complexity. will tails which And up, of growing, for X

And so complexity pretty couple about I bullish think the of our I'm theme. next years for

Operator

Our the with next line Johnson question comes from of Paul KBW.

Paul Johnson

have where sponsor risk flow of the you wondering adverse but concentration liability as common lender to your development as management, calculus development the of plural pro portfolio, of if and the not sponsors event partnering site, just of with that's just thoughts and events well? risk type in of X those whether groups well on realizing obviously exercises just recently I'm within So your issues working increase of there's your an as the deal of with the kind

Joshua Easterly

Yes.

that have not anything involved. were were involved. involve, to not we So add We're we're look, that I don't not [indiscernible] involved. side. Not We that really

like of specific. that my anything was So was -- existed, as dock in the not kind the I of a else there would And -- that seen I I to do see -- that it on it. that it. it I low is was understanding and as that's do exist outside islands lender of understand do thing for market, of if -- slightly like is seeing say an lender I that seem don't that so it, you're also somebody think existing broadly concern the the situation it adopt good -- that can't because is [indiscernible] add got I -- I a where the a private will of [indiscernible], didn't so portfolio, range we docks you've which wasn't no credit. don't in done overblown is, then -- I our think that And

sure XX% Over historically, existing book -- which sponsor today. the On don't sponsor XX% we've related exactly not have sponsor -- we done really concentration, an stuff, concentration. they're nonsponsor a about I'm

XX%. above sponsor have no We

like So XX it's we sponsors -- have in the XX and or book.

I see related, So think your helpful. them I don't -- if question, I -- I I I'm that's answered don't see not -- would but

Paul Johnson

like bad a that's underlying, an I very think is I bad here? do is event the mean layers credit basically fault helpful. of that that. just you that, documentation? Yes, that appreciate are result Or this that

Joshua Easterly

can't speak -- to don't to blame really never [indiscernible] to want would I not I involved. speak I --

on like historical business is lot about a about little industry of a our don't bit to -- going analog going and our and part been The the the use Like so figuring what stuff out trying good in of about I business, an So business. things thing and that to to the thing have we've only for happen side very our as business that. looks is things up credit are the pops happen. is future structures

flows cash -- -- that's And specifically. to the And that capital selection on in on it in and value so that in going the future. future get margin, sometimes I important. can't wrong. and industry the so we're the relates based I [indiscernible] as is you But you're the because And structure. invest think where future underwriting how performs business speak to

Paul Johnson

the that. Appreciate I kind was the it. bit I little Yes, asking just of [indiscernible]. Got more appreciate but space, on a answer broadly

Joshua Easterly

Look, never I would on provider. blame the service something

So we're our principles. decisions. We own

-- on as service it. lawyers like a blame it -- we're there's to We principles own were So -- mistake, tough their I and lawyers, when team. so a providers, own

Operator

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

Melissa Wedel

you kind quick asked size already. -- us? it? have at going been A Or forward. clarification. you did of the for miss that mine did Did When you pipeline, of actually I about talked all Most

Joshua Easterly

Yes.

bucks like that is repayments. a in I'll it soft on So I real the quarter, near-term in side kind hit million of It's like think, the helpful probably you growth of missed before that's next quick. the it. if look, hundred Like -- -- couple the this

Melissa Wedel

to sort versus the owned tend be of those that. of tend appreciate specifically And different more bit deals? investments little better nonsponsor sponsored separately, Got those side we But bit that for digging Yes. type you for a your a do larger, is take hear the few kind on it. I They little smaller line, companies. think When then a then diligence spread, -- to tend any syndicated as into be also to the under deals nonsponsor, I'm mentioned. bit. curious, and of maybe you some does close? time longer Or a to across team I

Joshua Easterly

Yes.

think the difficult, would the manager, competition resources. takes longer, time, I the see for So a profitable takes asset more side. management say entry we less more more I on on it It side, is both underrated much business. for is why to barrier takes less the It it

to it -- average tends and is so life be the shorter. And

higher. the so company The return the capital return on for shareholders management is And on a is lot for lower. capital a lot our

our as X.X knows the people-intensive. feeds think And -- stuff, understands example it you on of lot a why, not years, X X earning average on harder to something life fees life It's and easier but the -- actually, it's on give could people everybody It's than resources. years has the that shocking stuff, persecute if persecute. average specialized what I do. ABL that fees was people is lot so historically, a life to something to the But it's sometimes same of in an average bigger. is The need it's I earn the you that's -- ABL business,

Robert Stanley

opportunity. And Yes. is, add generally. are we'd that not small are These the necessarily of these A is businesses lot only times thing bigger. large

Melissa Wedel

And what it. funds M&A Got or use of is is strategic other? the

Joshua Easterly

No.

balance restructuring, bankruptcy it's bankruptcy, and the exiting sheet entering So sometimes sometimes a dip. it's

know don't exactly balance where do sheet secured. that it senior overlevered bridge balance a over-levered we they an somewhere sheet, -- They didn't somewhere, know have it's deal, they when where the because don't but that where Sometimes [indiscernible] is going. were we know really exactly like we was to

of a things. So whole host [indiscernible].

Operator

Bryce of with Our question Riley. the Rowe B. from next comes line

Bryce Rowe

a year, -- follow-up question you And the X gross of the increased saw the least near first the of you'll see second growth? some of year about This have bit in all or of of for this over offset second talked offer term. continue will activity up -- to certainly you Melissa's in kind size potential to how you activity. that at you or to handicap will terms wanted Helpful originations I the there. curious half of possible kind of net net we see that Kind Maybe perspective? to the potential that quarter. balance to think to from for repayment Do little portfolio the a it some repayment

Joshua Easterly

Yes.

originations being create having to the think which would in today, I Is think that are I books. participate them of Ian. good. will flattish, kind like net we [indiscernible]. will, the pick flat, debt-to-equity have which But to our of our is in think which opportunities big there's I give where actually -- room we will were kind economics flattish, -- without us so pick growth base in cases up up, will activity of as levels repayments net when

Bryce Rowe

helpful, kind what XX I on the in driving around think lower comment, and That's I rates onset the it. expand years how time guess deal least get Bo first driving Josh. -- XX, of but of have the comment of lower guess, the flow. of appreciate we at the at that flow at rates those more actually what lower for can the that I deep kind mean, whether that a And you -- future. thoughts was real maybe environment we I'm that rates getting kind rates you get? might type deal in your credit I made cycle possibly and of around question point the behind around it in on -- Can some a some And

Joshua Easterly

XXXX, year-over-year, don't growing is that. I growing I like feel But credit relatively at look elevated I you real think Look, see -- Yes. is portfolio has XXXX well. tails. you quarter, Businesses don't do last quarter-over-quarter. just cycle. The performed when have growing, it's

soft to that get to landing. the of reasonably they've a good job Fed's done think the trying credit, into kind of I

to period But step I time. So has that misallocated real a was I take pre-COVID, capital do X% you long had post-COVID created -- X% for you see credit. while back, don't basically see that of a rates which a when tails which interest will

there But And consumer misallocation be been has that earn, I of don't of to that a kind cycle have capital. continue has relatively credit to to some deep so reckoning able been of see a the to strong. given businesses

Fed balance. I actually pretty a think decent the found

-- Everybody be like Fed, critical pretty of impact likes a balance. feels to the but found the think it I decent found they've

Operator

Robert last line of question comes Dodd which next Raymond our the with is Our question, James. from

Robert Dodd

just asked the actually main Bryce question.

So about growth.

more kind that. quarter of going I about little that bit little be this in a a you you complex add-on this year, a then of of [indiscernible] to year, expect So those flat deals, to faster. mean rotation. be if Is up. theme the that more mentioned of talked result coming a should we but nonsponsored to turn kind We

turn the really of So that 'XX, maybe you -- keep acceptable some you'll sponsor order in this but see more more time this the expect over what's they'll not size? of then market the to do then faster at just year, in pricing to become period that and 'XX you need portfolio

Joshua Easterly

question. good a It's Yes.

we For to you what shareholders top the our shareholders. it's where but spec where of of how significant energy. the capital, they up return business just as how overlap unlevered don't go health for if go to our it's risk set exactly our us, of to philosophically we good provide an equity allocators whole bunch on and and a we we here really different the requirements created -- basis of to it on retail, -- on of answer strategies. the I how going where question, me I the telling is I And and care sponsored know. question. pharma, we have value me, say, Non-sponsored, options I the business really have where To meet the the let sit funnel does it's shareholder Not up because And tell set return answer out, kind that know you we play silly.

where public that for think, We've XX-plus company so set the years, equity. drive is a to the and of of to really feels constrained you, the of because to and it our cost -- because we we That honest able top I acknowledgment now been be model like then and shareholder funnel I and options us what that value been the able drive. that curve we've allows longer, capital, been we've we pick to -- return on the that to, can like And me model combination of with formula.

in know what going top don't options Now are of do to funnel? the be exactly money I on the know. I the

Operator

back showing I'm turn like time. no Josh questions the call to now closing would remarks. further for at this to Easterly I

Joshua Easterly

Okay. hope a to and and November, I summer crazy everybody with their engaging be end and really in guess. great everybody's my families, talk And appreciate we'll Look, a of going questions. we the has thoughtful November, it's

for love always around, thank you. and we hard Thanks. engagement, We're keep shareholders. working our So the we'll

Operator

now Thank you you. This disconnect. conclude and does the program, may

Sixth Street Specialty Lending (TSLX) 1 Aug 242024 Q2 Earnings call transcript