Sixth Street Specialty Lending(TSLX) - 2024 Q1 - Earnings Call Transcript

Financial Data and Key Metrics - Net asset value per share pro forma for the impact of the supplemental dividend was $17.11, with spillover income per share estimated at$1.06 [4] - Total commitments in Q1 were $264 million, with total fundings of$163 million across 9 new portfolio companies and upsizes to 5 existing investments [7] - Net funding activity was $54 million after$109 million of repayments [7] - Weighted average revenue and EBITDA of core portfolio companies were $275.5 million and$92.5 million, respectively [9] - Net asset value per share grew by 5.6% since the start of the rate hiking cycle, reaching $17.17 at quarter-end [10] - Total investment income for Q1 was$117.8 million, down 1.5% compared to $119.5 million in the prior quarter [12] - Adjusted net investment income per share was$0.58, with an annualized return on equity of 13.6% [95] - Total investments were $3.4 billion, up 3$4.4 billion acquisition of Alteryx [38] - The weighted average yield on debt and income-producing securities decreased slightly from 14.2% to 14.0% [106] Company Strategy and Industry Competition - The company emphasized its omnichannel sourcing capabilities and the value proposition of private credit [6] - The company is rotating out of the structured credit portfolio to crystallize returns and will opportunistically return to this theme [8] - The company highlighted its ability to access additional equity capital to generate attractive risk-adjusted returns [11] - The company amended its $1.7 billion secured credit facility, extending the final maturity on$1.5 billion of commitments through April 2029 [11] - The company is focused on maintaining a weighted average duration on liabilities that exceeds the weighted average life of assets funded by debt [42] - The company is selective in sector exposure, avoiding cyclical businesses and leaning into specific sector themes [90] Management Commentary on Operating Environment and Future Outlook - The company noted the increase in demand for financing solutions in public and private debt markets [32] - The company expects M&A activity to strengthen due to better financing costs and more parity between buyers and sellers [121] - The company remains optimistic about the ability of private credit portfolios to withstand macroeconomic headwinds [89] - The company anticipates the current environment will drive a dispersion between operating and GAAP earnings [88] - The company expects portfolio churn to increase with higher activity levels, driving additional economics [149] Other Important Information - The company declared a supplemental dividend of $0.06 per share and a base quarterly dividend of$0.46 per share [3][35] - The company added one new company to nonaccrual status, resulting in two portfolio companies on nonaccrual across the entire portfolio [107] - The company completed several capital markets transactions, including a bond offering, an equity raise, and a revolving credit facility extension [108] Q&A Session Summary Question: Trajectory of adjusted NII and impact of tighter spreads [46] - Adjusted NII stepped down $2.5 million sequentially, driven by a 5 basis point decline in base rates and tighter spreads [115] - The company remains comfortable with its guidance on adjusted NII for the year [47] Question: Competition and its impact on spreads and structure [157] - Competition has increased, primarily manifesting in compressed spreads, but the company remains selective to ensure it over-earns its cost of capital [33] - The weighted average number of covenants per credit agreement is 1.8$764 million available after adjusting for unfunded commitments [139] - The company is not planning to issue additional bonds unless it can grow assets through an equity raise [82] Question: Opportunity set and complex investments [135] - The company is seeing opportunities in larger companies with complicated capital structures, such as Equinox [122] - The company expects more opportunities in good companies with bad balance sheets due to the higher-for-longer rate environment [151]