Sixth Street Specialty Lending, Inc.

Good day, and thank you for standing by. Welcome to the Sixth Street Specialty Lending Q2 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the conference over to your speaker for today, Cami Van Horn. You may begin.

Thank you. 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 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, Inc., filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the second quarter ended June 30th, 2022, and posted a presentation to the investor resources section of our website, www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc.' 's earnings release is also available on our website under the investor resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the second quarter ended June 30th, 2022. 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, Cammie. Good morning, everyone, and thank you for joining us. With us today is my partner and our president, Bo Stanley, and our CFO, Ian Simmons. 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. Ian will review our quarterly financial results in more detail. I will conclude with final remarks before opening the call to Q&A. In addition to today's earnings call, earnings press release, investor presentation, and Form 10-Q, we also published a letter outlining a number of perspectives we thought would be valuable to our stakeholders. Consistent with our approach to provide additional communication during the first few months of the pandemic, we wanted to share our framework to continue the confidence our stakeholders have placed in the stewardship of their capital. Given the outsized impact of the macroeconomic environment on markets and therefore our business, we thought it would be helpful to take the same approach with this quarter's earnings release. We encourage and welcome any feedback. After market closed yesterday, we reported second quarter financial results with adjusted net investment income per share of 42 cents, corresponding to an annualized return on equity based on that adjusted net investment income of 9.9%. Inclusive of marks in the fair value of our investments, we also reported adjusted net loss per share of 30 cents. Our adjusted net loss per share this quarter was driven overwhelmingly by unrealized losses as we incorporated the impact of wider market spreads on the valuation of our portfolio. Given its impact on our financial results, I'd like to spend a moment on the importance of our quarterly valuation framework. As we said before, we believe that an intellectually honest framework for portfolio evaluation is the bedrock for effective risk management. In determining fair value of assets at a moment in time, using inputs from the market is critical. As a result, we have incorporated the impact of market spread and movements into the valuation of our portfolio, adjusting for the expected weighted average life and other idiosyncratic factors specific to each investment. One of our most important jobs is capital allocation, and this cannot occur without marking our assets appropriately. We will continue to follow this framework as we have since inception, and we're confident it allows us to make sound investment and risk management decisions based on the market signals. We've laid out our framework more extensively in the letter I mentioned earlier. Our investment income reflected a period where our results were driven by the core earnings power of our portfolio. With little contribution from activity levels, driving other income 93% of this quarter's total investment income was generated through interest and dividend income compared to 85% across 2021 and 79% across 2020. The anticipated positive assets sensitivity of our portfolio combined with more normalized activity levels driving other income should further supplement our earnings results for the remainder of the year, providing support for an increase in our base dividend level, which I will discuss in a moment. Unrealized losses during the quarter resulted in a partial unwind of previously accrued capital gains incentive fees that we have discussed in prior quarters. Given this unwind is tied primarily to unrealized gains from our investments, consistent with how we've treated this line item in prior periods, we've adjusted this quarter's results to exclude the impact of this non-cash expense reversal, which was approximately $0.12 per share. Reported net investment income and net loss per share for Q2 were $0.54 and $0.18, respectively. Due to the strength of our historical credit performance in generating cumulative net realized gains in excess of unrealized losses, the remaining $0.09 per share of capital gains incentive fee on our balance sheet will continue to provide a cushion to any negative impact of market spread movements on net asset value. At quarter end, our net asset value per share declined by approximately 3.4% from 1684, which includes the impact of the Q1 supplemental dividend to 1627. As discussed, the primary driver of this decline was 66 cents per share of unrealized losses from the impact of credit spread widening and lower implied equity values on the valuation of our portfolio. Note, this approach to incorporate credit spread movements within our valuation framework follows a fair value requirement for BDCs under the Investment Company Act of 1940 and its accordance with the gap. Ian will walk through the other drivers of this quarter's net asset value bridge in more detail. Turning now to a few thoughts on the current market environment. With the possibility of a recession on the horizon, we remain highly focused on our risk management framework to guide our investment and capital allocation decisions. As we address those and other topics in our letter, we'll focus our time today on the impact of rising rates on our income statement. We expect to see meaningful positive asset sensitivity in the back half of the year. The combination of the rise in rates in Q2, we're now well above our average floor levels on our debt investments, and the shape of the forward LIBOR or SOFR curve support that expectation. The rise in rates will drive incremental interest income and outweigh the increases in the cost of our liabilities. To date, this has been largely muted because applicable reference rate resets occurred during or occurred earlier in the quarter. Based on the shape of the forward curve and reset dates of our issuers, we project the remainder of this year that rate movement loan will result in approximately 13 cents per share of incremental net investment income purely from the core earnings power of the portfolio relative to what we experienced in Q2. In addition, to the extent we see portfolio growth over this period, the core earnings power of our business will be further enhanced. In previous periods of rising interest rates, for example, from 2017 to late 2018, the reality of asset sensitivity has been called in question given the tendency of the BDC sector to sacrifice spread in order to prioritize asset growth. Given the spread environment today, our strong relative capital base and significant liquidity, we are well positioned to retain the asset sensitivity. Ian will provide an update on our full year guidance later on. WHILE WE VIEW THE RISING RATE ENVIRONMENT IN A POSITIVE LIGHT WITH RESPECT TO OUR EARNINGS PROFILE, WE ARE COGNIZANT OF THE IMPACT MORE BROADLY ON OUR BORROWERS OF RISING RATES COUPLED WITH INFLATIONARY PRESSURES ON IMPORT PRICES AND A MORE CHALLENGING OPERATING ENVIRONMENT. AS BO WILL DISCUSS, DESPITE THESE RISING COSTS, THE OVERALL HEALTH OF OUR BORROWERS FINANCIAL POSITION REMAINS STRONG. BASED ON OUR UPDATED VIEW OF FORWARD EARNINGS YESTERDAY, OUR BOARD APPROVED A THIRD QUARTER BASED DIVIDEND AT 42 CENTS PER SHARE TO SHAREHOLDERS OF RECORD as of September 15th, payable on September 30th. This represents an increase of $0.01 per share to our quarterly-based dividend. There were no supplemental dividends declared related to future earnings based on our formulaic supplemental dividend framework, largely due to lower activity-based fees during the quarter, as mentioned earlier. In a spread-winding period where valuations experienced downward pressure, the NAV limiter in our framework also serves to retain capital and stabilize needed asset value. We would note that following dialogue with and feedback from existing shareholders, our board approved the change to the payment date timing of our quarterly-based dividend, such that the record date and payment date will occur during the same fiscal quarter. This change has no material impact on our financial results. for accelerate the payment of the base dividend by approximately 15 days each quarter relative to our past practice. With that, I'll now pass it over to Beau to discuss this quarter's investment activity.