Sixth Street Specialty Lending, Inc.

Good morning and welcome to the 6th Street Specialty Lending Incorporated. First quarter ended March 31st, 2021 earnings conference call. Before we begin today's call, I would like to remind our listeners that remarks made during this call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results. and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending's incorporated filings with the Security and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, the company issued its earnings press release for the first quarter ended March 31, 2021, and posted a presentation to the investor resource section of its website, www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with the company's form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending Incorporated's earnings release is also available on the company's website under the investor resource section, Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the first quarter ended March 31st, 2021. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Thank you. Good morning, everyone, and thank you for joining us. With me today is my partner and our president, Bo Stanley, and our CFO, Ian Simmons. I hope that everyone is well. For our call today, I will provide highlights for this quarter's results and then pass it over to Bo to discuss this quarter's origination activity and portfolio metrics. Ian will review our quarterly financial results in more detail, and I will conclude with final remarks before opening the call to Q&A. After market closed yesterday, we reported strong first quarter financial results with adjusted net investment income per share of 53 cents, corresponding to an annualized return on equity of 13.3 percent, and adjusted net income per share of 88 cents, corresponding to an annualized return on equity of 22.1 percent. This quarter, we continue to accrue capital gains incentive fee expense related to changes in net realized and unrealized gains and losses. This non-cash expense, which was not paid or is not payable, was approximately $0.07 per share for the quarter. Our Q1 net investment income and net income per share, inclusive of the accrued capital gains and fee expense, was $0.46 and $0.81, respectively. Pausing on the impact of these adjustments for a moment, as an illustration, if we were to end the year as of March 31st, the $0.08 per share of cumulative accrued capital gains incentive fee expenses that we had at quarter end would not be paid or payable since the gains must be realized in order for us to be eligible to receive these fees. In addition, it's also worth noting that a portion of these unrealized gains today are related to the impact of call protection on the valuation of our debt investments, which, if realized, would ultimately flow through net investment income and, therefore, trigger a reversal of associated crude capital gains and fee expenses. Now back to our results. Our strong net investment income this quarter continues to be a function robust net interest margin attributable to our floating rate liability structure in this low rate environment in connection with liable floors on our debt investments. Net investment income was also supported by higher interest and dividend income from an increase in the average size of our portfolio as well as fee income from portfolio prepayment activity. The difference between this quarter's net investment income and net income was a result of net realized and unrealized gains, primarily from the small portion of our portfolio represented by equity investments, as well as net unrealized gains from the impact of credit spread tightening on the valuation of our debt investments. At quarter end, net asset value per share was $16.47, up 3.8% from pro forma net asset value per share at year-end of 1586 that we discussed on our last earnings call. As mentioned, net realized and unrealized gains from our investments were meaningful contributors to this quarter's net asset value per share growth. Other contributors included accretion from our follow-on equity raise in February and the continued overrunning of our base dividends. Ian will discuss our net asset value bridge in more detail later on this call. Yesterday, our board approved a base quarterly dividend of 41 cents per share to shareholders of record as of June 15th, payable on July 15th. Our board also declared a supplemental dividend of 6 cents per share based on Q1 adjusted net investment income to shareholders of record as of May 28th, payable on June 30th. pro forma for the impact of the Q1 supplemental dividend. Our quarter and net asset value per share was 1641. If we were to take a step back and think about how our business has performed through the pandemic, one way to do this is to look at the total economic returns, which measures the change in net asset value per share plus cumulative dividends per share. Since January and since the year in 2019, which is just prior to the onset of the pandemic, we've generated a total economic return of 21.8%. Another lens is to look at total net asset value per share growth, which in our case should incorporate our special and supplemental dividends per share. Since year end 2019, we grew our net asset value per share, adjusted for the impact of the special and supplemental dividends by 9.5%. We're pleased that our ongoing focus in building a business model for not only performance, but thrives in periods of market uncertainty, delivered such strong results for our stakeholders. As important, over the past year, our business model allowed us to provide capital to our portfolio companies, their management teams, and sponsors, when many of our competitors weren't able to do so, in order for them to create value for their own respective stakeholders. Having an enduring business model, in spite of the regulatory and other constraints for BDCs, not only provides value for stakeholders, but also allows us to be a stable and certain provider of capital to our portfolio companies. With that, I'll now pass it over to Bo to discuss our portfolio activity and metrics.

Thanks, Josh. Let me start with some observations on the competitive environment in Q1. With continued accommodative fiscal and monetary policies from the Fed and the U.S. government, investor appetite for risk assets remained elevated, bolstered by the search for yield and prospects for strong near-term growth. This sentiment was evident in the leveraged loan market, where strong demand pushed pricing in terms in favor of borrowers. During Q1, LCD spreads tightened across the securities and rating spectrum. with all-in yields for new issuers reaching post-financial crisis lows. Illiquidity premiums, as measured by the spread differential between large corporate and syndicated middle market loans, fell to seven-year lows, and covenant light as a percentage of new loans issued reached a record high of 89%. In the direct lending market, elevated competition from BDC peers and private funds with record levels of dry powder meant that we continued to skew our originations activities towards opportunities where we had clear competitive advantages as a capital provider. Despite the competitive backdrop, we continued to see borrower demand for financing partners with deep sector expertise and a broad range of underwriting capabilities. For this quarter, we had $145 million of commitments and $130 million of fundings. These fundings were across two new and six upsizes to existing portfolio companies. Our new investments this quarter were both first lien loans for mission-critical software providers with attractive revenue characteristics. We were also active during the quarter by supporting our existing portfolio companies on their strategic growth and capital needs, with nearly 45% of this quarter's fundings serving our existing borrowers. Our repayments in Q1 slowed after a busy 2020, totaling $85 million across four full and three partial investment realizations and sell-downs. This resulted in net funding activity in Q1 of $45 million. The larger repayments this quarter were predominantly M&A driven, with the exception of our $17 million par value Neiman exit term loan. With a strong market backdrop in late March, Neiman issued notes in the high yield market to refinance its exit term loan, which had call protection of 110 at the time of repayment. This call protection, in addition to the acceleration of unamortized OID on our loan, contributed meaningfully to our fees this quarter. Recall on our Q3 2020 earnings call, we disclosed that approximately $4 million of backstop fees related to our exit term loan commitment were booked as OID and that these fees were payable in common stock of the reorg company. Post-quarter end, we sold our entire Neiman equity position at a price above our 331 mark, thereby fully exiting all of our Neiman investment. Looking back, we've been a provider of liquidity and transitional capital for the retailer as its management team navigated through a pandemic and a Chapter 11 process. We believe this has been a fruitful partnership that has allowed both parties to create value for our respective stakeholders. Based on our total capital invested in Neiman's since 2019, we've generated a gross unlevered IRR of approximately 25% on our fully exited investments, which includes the post-quarter end sale of TSLX equity position. Turning now to a quick update on JCPenney. Recall that in December, upon the company's emergence from Chapter 11, our pre-petition debt and dip loan positions were converted to non-interest-paying instruments, but with rights to immediate and future distributions in cash and other securities. During the quarter, our $13.3 million fair value dip loan position was extinguished in connection with the closing of the PropCo, and we received a small cash distribution along with equity interest in the PropCo. At quarter end, our PropCo equity interest had a level two fair value mark of $18.1 million. Across Q1, our JCPenney investments drove $5.4 million of net realized and unrealized gains, or a positive eight cents per share impact to our NAV this quarter. At quarter end, our portfolio's retail and consumer exposure was 11.4% at fair value, and nearly 80% of this consisted of asset-based loans. Cyclical names, which exclude our asset-based retail loans and energy investments, continued to be limited at 4% of the portfolio, and our energy exposure at quarter end was 1.7%. During Q1, our portfolio's first lien composition decreased slightly from 96% to 95% on a fair value basis, and our equity investments increased slightly on a fair value basis, through the combination of our JCPenney PropCo equity interest as well as valuation tailwinds from a robust equity market and M&A environment. At quarter end, our equity investments represented 4.3% of the portfolio at fair value compared to 3.7% in the prior quarter. In Q1, our portfolio's weighted average yield on debt and income-producing securities at amortized cost was 10.1% compared to 10.2% in the prior quarter. This slight decrease was primarily driven by the impact of new versus exited investments. The weighted average yield at amortized costs on new investments were 10.6% this quarter compared to a yield of 12.8% on exited investments. Shifting now to the portfolio and underwriting in credit quality. We continue to be thoughtful about our loan structuring process with utmost focus on protecting our principal against losses from credit risk and other market factors. At quarter end, We averaged approximately two financial covenants per loan and had effective voting control on 87% of our debt investments. In addition, we continue to have meaningful call protection and LIBOR floors across our debt portfolio. We believe our financial results over the past 12 months underscore our disciplined underwriting and its importance in driving differentiated outcomes. From a credit quality standpoint, we continue to see stable to positive performance trends across the significant majority of our portfolio. Quarter over quarter, non-accruals decreased from 0.9% to 0.02% of the portfolio at fair value, following the completion of American's achievements out of court restructuring. As previewed on our last earnings call, our first lien loan for American achievement remained outstanding post-reorg, and the interest that we received while the loan was on non-accrual status was applied to our loan principal. As part of the restructuring, the lender group received a majority stake of the common equity and subordinated notes in the restructured business. At quarter end, these subordinated notes accounted for all of our outstanding investments on non-accrual status at fair value. This quarter, our portfolio's weighted average performance rating on a scale of 1 to 5, with 1 being the strongest, was 1.14, improving from 1.18 in the prior quarter. And credit metrics across our core borrowers remained relatively stable quarter over quarter, with weighted average attached and detached points of 0.4 times and 4.3 times, respectively. The weighted average interest coverage on our core borrowers was stable at 3.2 times at quarter end. With that, I'd like to turn it over to Ian.