Sixth Street Specialty Lending, Inc.

Good morning and welcome to Sixth Street Specialty Lending, Inc.' 's third quarter and September 30th, 2021 earnings conference call. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and will not guarantee the 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 the number of factors, including those described from time to time in Sixth Street Specialty Lending Inc.' 's filings with the Securities 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 third quarter and its September 30th, 2021, and posted a presentation to the Investor Resources section of its website, www.sixstreetspecialtylending.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. Six Streets Specialty Lending, Inc.' 's earnings release is also available on the company's website and in the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks or as of and for the third quarter ended September 30th, 2021. As a reminder, this call is being recorded for replay purposes. I'll now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Joshua Easterly 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. For our call today, I WILL REVIEW THIS QUARTER'S RESULTS AND PASS IT OVER TO BO TO DISCUSS THIS QUARTER'S ORIGINATION ACTIVITIES AND PORTFOLIO METRICS. IAN WILL REVIEW OUR QUARTERLY FINANCIAL RESULTS IN MORE DETAIL AND I WILL CONCLUDE WITH FINAL REMARKS BEFORE OPENING THE CALLS TO Q&A. AFTER MARKET CLOSED YESTERDAY, WE REPORTED THIRD QUARTER ADJUSTED NET INVESTMENT INCOME OF 55 CENTS PER SHARE AND ADJUSTED NET INCOME OF 80 CENTS PER SHARE. These as well as correspond to an annualized year-to-date return on equity on adjusted net investment income of 12.9% and an adjusted net income of 21.5%. This quarter's robust net investment income was driven by higher fees from elevated repayment activity relative to the first half of the year. It was also supported by a robust level of interest income from the strength and the core earnings power of our portfolio. The difference between this quarter's net investment income and net income was due to the net unrealized and realized gains from portfolio company-specific events, which Bo and Ian will discuss later in the call. As a result of this quarter's net gains, we continue to accrue capital gains and incentive fees, fee expenses, totaling $0.05 per share, which we've excluded in the presentation for this quarter's adjusted results. Again, this is because we believe the expense accrual requirement creates noise around the fundamental earnings power of our business. If the year were to have ended on September 30th and we were to calculate the capital gains incentive fees that are actually payable to the advisor in cash, it would have been zero because the gains driving this fee accrual are unrealized. At quarter end, We had approximately 21 cents per share of cumulative accrued capital gain incentive fees on the balance sheet. And approximately half of these would be payable in cash if our entire portfolio would be realized at their quarter end mark and normal course. The rest of the accrued fees are tied to unrealized gains resulting from the valuation of our debt investments, inclusive of call protection, which if prepaid would result in a recognition of fees investment income and trigger a reversal of previously accrued capital gains and the fees related to these investments. If we were to hold these debt investments to maturity, realizing them in normal course at par over time, there would be an uplift to our NAV of approximately 10 cents per share related to the reversal of accrued capital gains and the fees. RETURNING TO OUR Q3 RESULTS, THE OVEREARNING OF OUR BASE DIVIDEND AND NET GAINS THIS QUARTER DROVE GROWTH IN OUR REPORTED NET ASSET VALUE PER SHARE TO A NEW HIGH OF 1718. THIS RESULTS, THIS REPRESENTS A 2% INCREASE FROM THE PRIOR QUARTER AND IT'S TWO CENTS PER SHARE IN EXCESS OF OUR PRIOR RECORD HIGH IN Q4 2020 OF 1716. RECALL THAT UPON THE RELEASE OF OUR Q4 RESULTS THIS FEBRUARY, OUR BOARD declared a special dividend of $1.25 per share. Since that time, we have fully rebuilt our net asset value per share, primarily through net gains in our portfolio that continued over-earning of our base dividend and the benefit of tightening credit spreads and the valuation of our investments. Over the trailing 12-month period, we've generated total shareholder economic return of 20 percent through dividends and growth in net asset value per share. Let me now provide an update on our convertible notes due in August 2022, of which 143 million principal value remained outstanding at quarter end. On September 30th, these notes became eligible for early conversion and holders of approximately 43 million principal value of notes opted to early convert subsequent to quarter end. Based on the calculations laid out in the venture, the nearly all stock settlement we've elected to apply on this portion of the notes translate to approximately $0.04 per share of accretion in net asset value. To offset the deleveraging impact of the stock settlement, our Board has declared a special cash dividend of $0.50 per share to shareholders of record as of December 7th, payable on December 20th. This special dividend also serves to enhance our capital efficiency by eliminating nearly all of the excise tax drag on our spillover income, which is currently estimated to be two cents per share on an annualized basis. Given that the combination of these transactions is leveraged neutral, the reduction in our excise tax burden will result in approximately 10 basis points of ROE uplift on an annualized basis. YESTERDAY OUR BOARD ALSO APPROVED A BASE QUALITY DIVIDEND AT 41 CENTS PER SHARE TO SHAREHOLDERS OF RECORD AS OF DECEMBER 15TH PAYABLE ON JANUARY 14TH. OUR BOARD ALSO DECLARED A SUPPLEMENTAL DIVIDEND OF 7 CENTS PER SHARE BASED ON Q3 ADJUSTED NET INVESTMENT INCOME TO SHAREHOLDERS OF RECORD AS OF NOVEMBER 30TH PAYABLE ON DECEMBER 31ST. ANY NET ASSET VALUE per share inclusive of the impact of the special and supplemental dividends that was declared yesterday would be 1661. With that, I'll now pass it over to Bo to discuss this quarter's origination activities and portfolio metrics.

Thanks, Josh. Let me first provide our thoughts on the current direct lending environment and how our business is positioned to serve borrowers and management teams, as well as our stakeholders for the period ahead. It was 10 years ago when TSLX made its first direct lending investment, and the landscape of private credit has changed dramatically since then. In the last 10 years, private debt AUM has grown over threefold, and what was a relatively niche asset class has become increasingly institutionalized, attracting new managers and investors into the space. The value proposition of private credit for borrowers over this time has remained constant. Speed and certainty of execution, documentation flexibility for management teams to achieve strategic goals, and the opportunity to work with value-added, trusted financing partners. The pandemic-induced market volatility and growth trends in sponsor M&A have only underscored the value proposition of direct lenders. More so than ever, we're seeing an increasing number of borrowers and sponsors turn to the direct lending market for larger financings instead of the traditional syndicated markets. We believe this broadening of the opportunity set is a net positive for our sector, and specifically for our business and our stakeholders, given our ability to be solutions providers at scale to co-investment with our affiliated funds. While competition for direct vendors is likely to remain strong in both the larger cap and traditional mid-market for the foreseeable future, we believe that our thematic investment approach and differentiated underwriting capabilities will allow us to expand our borrower and sponsor relationships and continued generating attractive risk-adjusted returns for our shareholders. Moving now to this quarter's origination activity, we funded five investments, including upsizes to our existing portfolio investments, totaling $105.4 million in commitments and $65.4 million in fundings. We mentioned in our last earnings call that we had a strong funding pipeline heading into the second half of the year. Given the timing of various M&A processes, Our funding activity is now back-end weighted for the fourth quarter. Post-quarter end of date, we've already funded approximately $100 million of new investments, including one where we're the agent on a $975 million credit facility. Based on our current pipeline, we'd expect to fund another $150 to $250 million of net investments by year-end, including what is funded to date. Circling back to Q3 activity, a new investment this quarter was a $317 million TSLX agent in its senior security facility to support the sponsor acquisition of Extra Hot Networks, a provider of cloud-based cybersecurity solutions. We believe that the sponsor chose us to lead the financing as a result of our deep knowledge of the sector and our ability to be constructive early in our financing process. This, in turn, allowed us to structure attractive risk-adjusted returns to our security approximately $50 million of which was held by TSLX at quarter end. Also this quarter, we in the Sixth Street platform completed $250 million term loan facility upsize for Biohaven, a biopharmaceutical company. Our initial $500 million Biohaven term loan facility was completed in August of last year to support the company's commercialization of its FDA-approved migraine drug, which has had strong fundamental performance post our investment to date. The upsized facility, which generates an attractive blended yield to maturity of over 11% on our total investment, will be used to support the continued commercialization of this drug and the clinical development of the company's pipeline assets. We believe that ExtraHop and BioHaven are examples of how our platform's expertise across sectors and themes allows us to source and underwrite strong risk-adjusted returns across both sponsored and non-sponsored landscapes. On the repayment side, after a quiet first half of the year, we fully realized six investments and partially sold one investment, totaling $284 million in the third quarter. Our full investment realizations were driven by a combination of company-specific M&A as well as a favorable refinancing environment. Through prepayment-related fees and equity upside that we structured into these fully realized investments, we generated a weighted average MLM of approximately 1.2x based on our capital invested. From a portfolio yield perspective, funding and repayment activity this quarter had a slight positive impact to our weighted average yield on debt and income-producing securities at amortized cost. Yields increased from 10.1 percent to 10.2 percent quarter-over-quarter and is on par with what it was a year ago. The weighted average yield at amortized costs on new investments including upsizes this quarter was 11.7% compared to a yield of 9.5% on exited investments. Moving on to the portfolio composition and credit stats. This quarter, our portfolio's equity concentration increased slightly from 6% to 7% on a fair value basis quarter over quarter, primarily driven by our increase in the fair value of our existing equity positions. The biggest driver was our IRG equity position, whose fair value at quarter end reflected the pending sale of certain of the company's assets at a contracting price meaningfully above what was implied by our prior quarter's fair value mark. The IRG sale process is expected to be completed in the first half of 2022. While we continue to be focused on investing at the top of the capital structure, with approximately 93% of our portfolio being first lien at quarter end, From time to time, we may like to selectively increase our junior capital exposure in sectors and companies that we believe have strong K1s and resilient business models. Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 1.12 on a scale of 1 to 5, with 1 being the strongest. We continue to have minimal non-accruals at less than 0.01% of the portfolio at fair value. With that, I'd like to turn it over to Ian to cover this quarter's financial results in more detail.