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spk11: Good morning and welcome to the Sixth Street Specialty Lending, Inc. fourth quarter and fiscal year ended December 31st, 2022 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Friday, February 17th, 2023. I will now turn the call over to Ms. Kami Van Horn, Head of Investor Relations. Thank you. Hello.
spk40: 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 fourth quarter and fiscal year ended December 31, 2022, and posted a presentation to the Investor Resources section of our website, www.sixstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-K 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 fourth quarter and fiscal year ended December 31st, 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 6th Street Specialty Lending.
spk32: Thanks, 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 review our full year and fourth quarter highlights and pass it over to Bo to discuss our originations, activity, and portfolio metrics. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported fourth quarter adjusted net investment income of 64 cents per share or an annualized return on equity of 15.5%, an adjusted net income of $0.56 per share, or an annualized return on equity of 13.6%. As presented in our financial statements, our Q4 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gains incentive fee expense, were both 1 cents per share higher at 65 cents and 57 cents respectively. For the full year 2022, we generated net investment income per share of $2.01 or return on equity of 12% and a full year adjusted net income per share of $1.27 or return on equity of 7.6%. The difference between net investment income and net income for the year was driven overwhelmingly by unrealized losses as we incorporated the impact of wider credit market spreads on the valuation of our portfolio. The impact of increased risk premiums was presented throughout nearly every asset class in 2022. During the calendar year, LCD 1st and 2nd lean spreads widened by 135 and 686 basis points respectively. There has been a lot of talk about the lack of volatility in private asset marks. In this regard, we agree with Cliff Asens' description of this as volatility laundering. As we've said in the past, And four, the reasons we outlined in our previous public shareholder letter, we believe that using inputs from the market is not only critical but required in determining fair value of assets. Of the 75 cents per share difference between our net investment income and net income results for 2022, the majority, or 57%, was related to to unrealized losses from credit spread movements alone that we expect to recover over time as credit spreads tighten or investments are paid off. And 20% was driven predominantly from the decline in equity valuations. The remaining difference between net investment income and net income is primarily related to one, the unwind on our interest rate swaps that are not subject to hedge accounting, and two, the reversal of unrealized gains that flow through net investment income upon realization. The overall health of our portfolio remains strong with no changes in non-accruals from the last quarter. For the third consecutive quarter, our board has increased our quarterly based dividend, raising the figure by one cent per share to 46 cents per share the shareholders of record as of March 15th and payable on March 31st. Year over year, we've increased our base dividend by 12.2%. We are also pleased to share that our board declared a supplemental dividend of 9 cents per share related to our Q4 earnings to shareholders of record as of February 28th, payable on March 20th. In the near term, we expect that net investment income will exceed our newly established base dividend level due to our increased earnings power. However, we determined 46 cents per share to be an appropriate level based on looking at the forward interest rate curve through 2025, which is subject to changes in the market. 2022 was a year characterized by spread income as a driver of earnings given repayment activity slowed in the wake of increased market volatility. Portfolio turnover, which is calculated as total repayments over total assets at the beginning of the year, was 26% in 2022 compared to 43% and 41% in 2021 and 2020, respectively. The wider spread environment naturally causes slowdown in repayment activity. As a result, fee generating income represented a smaller portion of our total investment income for the year relative to historical trends. We generated a return on assets calculated as total investment income divided by average assets of 11.6% for 2022 compared to 11.3% in 2021, which was a year defined by record level of repayment activities. This further highlights the positive impact on the rise in reference rates and driving incremental returns for our shareholders. Our year and net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday is 1639, and we estimate that our spillover income per share is approximately 77 cents. We would like to reiterate that our supplemental dividend policy is motivated by, one, RIC distribution requirements. Two, not burdening our returns with excess friction costs incurred through excise tax. And three, the goal of steadily building net asset value per share over time. Before passing it to Beau, I'll spend a moment on how we're thinking about the broader macroeconomic environment. Big picture, we're cautious. But when we think about our portfolio, we are constructive on how we are positioned for the road ahead. The U.S. economy faces a number of headwinds in 2020-23 that are largely the result of inflation and the resulting shift in monetary policy in 2022. The restrictive monetary environment will surely have an impact on growth. The idea of a near-term Fed pivot remains challenging until job growth slows and a consumer weakens. In summary, it feels like we're living in a transitionary period with restricted Fed policy that will continue to dampen growth until we see an increase in unemployment and further demand destruction. A broad base flow down in the economy, coupled with the current rate environment, will cause some stress for borrowers. This highlights the importance of why we are focused on business models with high variable cost structures and with those that have pricing power. Eighty-two percent of our portfolio by fair value was comprised of software and business services companies at quarter end and are generally characterized by high levels of recurring revenue, predictable cash flows, variable cost structures, and pricing power. Our portfolio has shown resiliency to date, and we believe that underlying business models of our borrowers are robust and durable. However, we believe economic cycles do exist. As such, we will continue to focus on staying on top of the capital structure and operate in the middle of our target leverage range. With that, I'll pass it over to Beau to discuss this quarter's investment activities.
spk27: Thanks, Josh. I'd like to start by landing on some additional thoughts on the direct lending environment, and more specifically, how it relates to the positioning of our portfolio and the way we're thinking about current opportunities in the market. 2022 was a year that underscored the value proposition of private credit for borrowers. New issues leveraged loan volume reached a 12-year low and was down 63% from 2021 as public credit markets were largely unavailable. As a result, private credit providers stepped in as a main source of financing solutions, given the ability to provide speed and certainty of execution despite instability in the broader markets. One of the main themes over the last few quarters has been the growing market share of direct lenders in the large syndicated sponsor financings. Direct lenders, with the ability to write sizable checks, are benefiting from the opportunity to participate in larger transactions, which otherwise would have been financed in the broadly syndicated loan market. Notably, these investment opportunities present attractive risk-reward dynamics as deal terms have moved in a more lender-friendly direction, indicated by wider spreads tighter documents, and lower leverage. We believe this shift in the underwriting terms reflects the appropriate compensation to lenders given the uncertain environment we're investing in today. We are well positioned to take advantage of this opportunity in the market given our ability to invest alongside affiliated Sixth Street funds. As capital has generally become more constrained, the power of the Sixth Street platform has allowed us to finance larger or established companies while remaining selective. We believe this creates a competitive advantage in today's investing environment as the number of direct lenders willing and able to participate in larger transactions is limited. In addition to the strong originations activity supporting this opportunity in the market in Q4, we have a robust pipeline for the first half of 2023, including several large financings that have already been publicly announced. As we have the ability to co-invest with Sixth Street affiliated funds on these transactions, We have flexibility to determine the optimal final hold sizes for our balance sheet. Turning now to our investment activity for the quarter, Q4 was productive with total commitments of $241 million and total fundings of $212 million across seven new portfolio companies in upsizes to five existing investments. We experienced $282 million of repayments from seven full and three partial investment realizations. The increase in repayment activity was largely driven by idiosyncratic payoffs of our two largest investments by fair value as of 9-30 that we discussed on our last earnings call, Biowave and Frontline, which represented 58% of repayments for the quarter. For the full year of 2022, we provided $1.1 billion of commitments and closed $864 million of fundings. Total repayments were $654 million for the year, resulting in net portfolio growth of $210 million. Year over year, our portfolio grew by 11%, which reflects our deliberate effort to grow responsibly. We are able to remain selective in the investments that we make, given the size of our capital base does not require us to be asset gatherers, but rather bottoms up fundamental investors and focus on driving return on capital for our investors. 82% of total commitments this year were sponsored transactions within our specialized sector sub-teams. We continue to execute on our software and business services themes, where we believe we have a competitive advantage, and where the underlying companies have attractive revenue characteristics, high-quality customer bases, and robust business models. At December 31st, our top industry exposure by fair value was to business services at 14.4%. We'd like to take a moment to provide an update on one of our retail ABL investments that has recently been in the press, Bed Bath and Beyond. As mentioned during our Q3 2022 earnings call, we had agented a FILO term loan commitment in September of 2022 to support the operational turnaround by the company and provide additional liquidity. As a result of this transaction, we hold a $55 million par amount commitment as of 12-31 of the FILO term loan, which represents less than 2% of our total assets as of year-end. On February 6th, the company announced it was raising up to $1.025 billion of new equity capital through a public offering. This offering allows the company to avoid bankruptcy filing in the near term, which is a positive for all the company's stakeholders, including employees. Along with the capital raise, 6th Street made an additional investment in a more senior position in the capital structure. Our position, which is already underwritten to liquidation value, is improved as a result of the new capital raise and our more senior position in the capital structure. Obviously, this remains an ongoing situation, but at this moment, we feel good about our security. Our retail ABL capabilities have been a distinguishing feature of our investment strategy since we began the company back in 2011. We have executed over 25 transactions and invested over $1 billion of capital through TSLX. On these investments, we have taken nine through the bankruptcy process without any losses. From a performance perspective, gross unlevered return on fully realized retail ABL investments is 20.8% as of 12-31. We have a core competency in managing these types of investments, and we'll look to continue to execute on this strategy through the same playbook we established years ago. Moving on to the repayment side, one realization that we'd like to highlight is our investment in TherapeuticsMD, which demonstrates the positive impact of proactive asset management for our shareholders. Since our initial investment in 2019, the company faced multiple challenges, including impacts from COVID-19, resulting in underperformance relative to expectations. As the situation evolved, Sixth Street worked with the company as advisors toward a path to exit, including multiple amendments and a large partial pay down prior to our exit. In December 2022, Sixth Street's debt was fully repaid when the company licensed full commercial rights of its products. TXMD will continue to be a public company receiving milestone payments and 20 years of royalties on sales. Through active portfolio management and extensive experience in the healthcare space, TSLX generated approximately 15.5% IRR and 1.4x MOM on the investment with a beneficial outcome for both parties. From a portfolio yield perspective, Our weighted average yield on debt and income-producing securities at amortized cost increased to 13.4% from 12.2% quarter-over-quarter. The increase primarily reflects a rise in the weighted average reference rate reset of 115 basis points over the quarter. The weighted average yield at amortized costs on new investments, including upsizes for Q4, was 12.6% compared to a yield of 11.9% on exquisite investments. Looking at the year-over-year trends, our weighted average yield on debt and income-producing securities at amortized costs is up about 320 basis points from a year ago. The significant increase in our yields in 2022 illustrates the positive asset sensitivity for our business from increased base rates beyond our floors, in addition to our selective origination approach across themes and sectors. Moving on to the portfolio composition and credit stats, across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points of 0.9 times and 4.5 times, respectively. And weighted average interest coverage decrease from 2.6x to 2.2x. The decrease in interest coverage is in line with our expectations from the impact of rising rates on the cost of funds for our borrowers. Our interest coverage metric assumes we apply reference rates as at the end of the year to the run rate borrower EBITDA. We believe this is a better representation of our position of our borrowers as opposed to a look-back metric such as LTM. One additional nuance we'd like to highlight on interest coverage relates to the positioning of our portfolio towards software and business services. These businesses generally see more limited fixed charge requirements, such as capital expenditures. Other more capital-intensive industries experience higher fixed charges in addition to financing costs, meaning interest coverage metrics likely understate fixed obligations of those businesses. As of Q4 2022, the weighted average revenue in EBITDA of our core portfolio companies was 152 million and 46 million, respectively. represented an increase in both metrics from Q3. 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, representing no change from last quarter's ratings. We continue to have minimal non-accruals, with only one portfolio company on non-accrual representing less than 0.01% of the portfolio at fair value, and no new names added to non-accrual during Q4. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.
spk16: Thank you, Beau. We finished the year with a strong quarter from an earnings and investment activity perspective. In Q4, we generated net investment income per share of $0.65, resulting in full-year net investment income per share of $2.13. Our Q4 net income per share was $0.57, resulting in full-year net income per share of $1.38. There was an 11 cents per share unwind of previously accrued capital gains incentive fees in 2022, which is a non-cash reversal. Excluding the 11 cents per share unwind for this year, our adjusted net investment income and adjusted net income per share for the year were $2.01 and $1.27, respectively. At year end, we had total investments of $2.8 billion, total principal debt outstanding of $1.5 billion, and net assets of $1.3 billion, or $16.48 per share, which is prior to the impact of the supplemental dividend that was declared yesterday. Our ending debt to equity ratio was 1.13 times, down from 1.16 times in the prior quarter, and our average debt to equity ratio also decreased slightly from 1.15 times to 1.14 times quarter over quarter. Before year 2022, our average debt-to-equity ratio was 1.03 times, up from 1 times in 2021, and well within our previously stated target range of 0.9 to 1.25 times. Our liquidity position remains robust, with $866 million of unfunded revolver capacity at year-end against $178 million of unfunded portfolio company commitments eligible to be drawn. Our year-end funding mix was represented by 53% unsecured debt. Post-quarter end, we satisfied the maturity of our $150 million January 2023 unsecured notes through utilization of undrawn capacity on our revolving credit facility. The settlement marginally decreased our weighted average cost of debt and had no impact on leverage. Moving to our presentation materials, slide 10 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added 64 cents per share from adjusted net investment income against our base dividend of 45 cents per share. There was 11 cents per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognized these gains into this quarter's income. The reversal of unrealized gains this quarter was primarily driven by the early payoff of Biohaven which resulted in an unwind of 12 cents per share from unrealized gains to net investment income for the quarter. There were minor positive impacts from changes in credit spreads on the valuation of our portfolio and a positive one cent per share impact from portfolio company specific events. Pivoting to our operating results detail on slide 12, we generated a record level of total investment income for the quarter of 100.1 million, up 29% compared to 77.8 million in the prior quarter. The increase was driven by a rise in the contractual interest income earnings power of the business, as well as other income related to the Biohaven payoffs specifically. Walking through the components of income, interest and dividend income was 85.8 million, up 15% from the prior quarter. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were 11 million, up from 429,000 in the prior quarter, due to higher portfolio repayment activity. Other income was 3.4 million, up from 2.7 million in the prior quarter. Net expenses, excluding the impact of the non-cash reversal related to unwind of capital gains incentive fees, were 47.5 million, up from 40.3 million in the prior quarter. This was primarily due to the upward movement in reference rates which increased our weighted average interest rate on average debt outstanding from 4.3% to 5.6%, and higher incentive fees as a result of this quarter's over-earning. During 2022, base rates increased by approximately 425 basis points, and the impact on earnings became evident in the back half of the year given the lag in reference rate resets for borrowers. Given the low financial leverage embedded in BDCs, asset sensitivity has a larger impact than liability sensitivity and proved to be a tailwind for our business as we saw increased asset level yields drive return on equity. For a year characterized by spread income, the rise in interest rates and wider spreads resulted in the business exceeding the upper end of our beginning year ROE, Adjusted Net Investment Income, target of 11.5% or $1.92 per share for 2022. Net unrealized losses largely from the impact of spread widening experienced in Q2 on portfolio marks had a significant impact on our net income for the year, which we expect to unwind as credit spreads tighten or investments are paid off. Based on our expectations for our net asset level yields, the movement in reference rates, cost of funds, and financial leverage, we expect to target a return on equity for 2023 of 13% to 13.2%. Using our year-end book value per share of $16.39, which is adjusted to include the impact of our Q4 supplemental dividend, this corresponds to a range of $2.13 to $2.17 for full year 2023 adjusted net investment income per share. As we said, we expect to over earn our $1.84 per share annualized base dividend in the near term. And we'll continue to distribute over earnings to shareholders through our supplemental dividend framework. With that, I'd like to turn it back to Josh for concluding remarks.
spk32: Thank you, Ian. We believe we are transitioning from an era of easy money to a new macro super cycle that we believe will magnify volatility relative to recent history. With such volatility will come dispersion returns and will elevate the importance of management's capabilities and skills. The irony is, however, that even in low volatility and low rate environment, return dispersion has already existed. Now we can only expect it to increase. Power rates for the foreseeable future will most definitely cause stress for certain borrowers, followed by an uptick in defaults from the historical low levels we've experienced more recently. That being said, we anticipate credit issues to be heavily related to borrowers with weaker underlying business models, and we are confident in the durability of our portfolio companies. We believe our track record of the past 12 years since inception supports our ability to continue to generate industry-leading returns for our shareholders. We have generated an annualized return on equity on net income since our March 2014 IPO of 13.1%. We attribute a large portion of our success that our shareholders have enjoyed to our ability to over earn our cost of capital by avoiding credit losses and appropriately pricing spreads on investments that take into account the cost embedded in operating our business. We remain constructive on the opportunity set ahead of us. We continue to experience elevated all in yields on our assets. We expect credit costs remain low given our investment selection discipline and the health of our existing portfolio. We begin the year with significant liquidity and capacity to drive incremental ROEs and are optimistic about opportunities to enhance our capital structure through the course of the year. With that, thank you for your time today. Operator, please open the line for questions.
spk11: Thank you. If you have a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk10: One moment while we compile our Q&A roster. Our first question comes from the line of Mark Hughes with Truist. Your line is open. Please go ahead.
spk33: Hey, Mark.
spk00: Mark, your phone might be on mute.
spk08: Yes, my phone is on mute. I'm so sorry. Good morning. Good morning, Mark. Yeah, my question was, how are you thinking about fees, fee revenue in 2023? You've given some good guidance on NII. Just curious what you think the fee environment is going to be like.
spk32: Yeah, it's a good question, Mark. It's really hard to tell because it's a function of kind of repayment velocity, but to just give you some numbers. In 2000, when we think about fees, we think about it in basically uh i would say two categories um or three categories which is um accelerated oid prepayment fees and amendment fees and other income that's historically been i think in 2022 those fees were and then that about 37 cents per share in 2021 those fees were about $0.56 per share. In 2023, we actually, in our guidance numbers, they're significantly below those levels that are embedded in our guidance. So in our guidance numbers, they are about $0.22 per share. So that's heavily weighted towards, again, another year of spread income. If you see velocity in the book, obviously it's going to be much, much higher, but it's significantly below 22 levels and 21 levels. That's helpful.
spk08: Yeah, I appreciate the specifics there. And then when you look at the curve, you talked about keeping the base dividend at, you know, the 46 cents informed by your look out at the 2025? How much cushion just, you know, generally speaking, would you still have over the dividend, you know, over those next couple of years?
spk32: Yeah, significant. I think we just went through the math on 2023, which 2023 has, you know, again, it's mostly spread income. Our per share guidance is 213 to 217. The base dividend level is? $1.84. So there's really a lot of cushion. In 2024, similarly, again, we don't really model significant levels. We think about upside and fee income as kind of being upside to our guidance. So in 2024, those levels, of fee income are basically the same. And again, our base dividend is $1.84. And we think, you know, we think we're significantly above that as well. So we knew we were going to over-earn for the next couple of years, but we didn't want to put ourselves in a position where we would have to cut the dividend. And so we set the dividend where we knew there was significant push in the next couple of years. We were just looking at the curve.
spk08: Perspective. Yeah. Thank you very much.
spk10: Thank you. And one moment for our next question. Our next question comes from the line of Finian O'Shea with Wells Fargo.
spk11: Your line is open. Please go ahead.
spk29: Hi, everybody. Good morning. A question on the large club deals. It looks like we have one this quarter with Avalara, not signaling in on that name, but I don't think those are too typical for you to partake in. Can you talk about the threshold for what makes that kind of deal compelling? Is it company quality or terms as to why you so seldom to invest in those. And then on the downside, perhaps, can you talk about the structural elements you do give up, how much less control you might have, and so forth? Thank you.
spk32: Yeah. First of all, good morning, Finn. I hope you're doing well this morning. So look, we've talked a lot about this. In the upper middle market, and that large cap space has significantly changed given the environment we're in. And so pre- You know, 12 months ago, you know, it was obviously we thought was competitive and offered, you know, with a little relative value compared to the Brawley syndicated market. That's completely changed. But frankly, that upmarket, we find that the marginal capital most fuels are able to drive better terms. And you can finance larger companies that are at scale. So as I think people know, we've been involved in most of those deals that have been announced, including Emerson, which is as yet to close, which we've led, Maxar, which is yet to close, which we've led, and other ones. So we find there's a lot of value in that the marginal capital is able to drive pricing and structural enhancements. And so, and then, obviously, given the macro, you're financing those businesses in an environment where you are, you have a known rate environment and kind of a known growth environment compared to historically. So, we like the value that's being offered in that market. The trade-offs is that they're clubs, and so you got to figure that, you got to think that you're with like-minded people and that that document works. We think it does. So, Bo, anything to add there? The only thing I'd add is you had a specific question on what we give up.
spk27: I think given that there's the scarcity value of capital, a lot of the terms and document-specific terms have gotten much tighter in these upper middle market deals over the past six months and, frankly, are not all that different from what you're seeing in no market documents. So you have a large margin of safety at low LTBs. a scale business that seems to be experienced by the BSL market at very attractive with adjusted returns in this current environment.
spk28: Thanks, Finn. Sure. That's helpful. Thanks so much.
spk10: Thank you. And one moment for our next question. And our next question comes from the line of Mickey Sheelan with Lattenberg.
spk11: Your line is open. Please go ahead.
spk18: Yes, good morning, everyone. Josh, in the fourth quarter, we continue to see middle market loan spreads widen, which is obviously good for your financial performance, assuming the credit quality holds up, but it is stressing borrowers, as you mentioned in your remarks, with interest coverage declining to 2.2. So I'd like to understand, you know, when we think about those trends, what is your outlook on how private lenders will behave this year in terms of spreads and the amount of leverage they're looking for on deals?
spk32: Yeah. So, Mickey, I think when you look at the LCD first lean, LCD second lean spreads, they actually tighten in Q4 slightly. But year over year, they've significantly widened, which we've hit. So I just want to frame up. We did not see, so when you look at unrealized gains and unrealized losses, they were negligible given that you actually had spreads tighten quarter over quarter slightly. Look, credit quality is top of mind. It's what's historically driven performance or outperformance or underperformance. It's credit losses for the industry. It's been the biggest piece that drives, you know, when you think about the union economics of the sector, return on assets is a point of differentiation. Fees and expenses are basically all pinned near each other. Financial leverage is pinned near each other. Cost of leverage is pinned near each other. So it's really return on assets and credit costs that ultimately drive returns to the sector. And that's going to be a function of the portfolio that were built in their own place now. And we think our portfolio is differentiated and is robust, given the nature of those businesses. But it is in this economic environment where you have flowing growth and higher rates, you are most definitely going to have tails in credit. We have yet to see those in our portfolio. But they are most definitely emerging in the broadly syndicated loan market. So it's all about credit. I don't know if I answered your question.
spk17: Appreciate that, Josh. That's it for me this morning. Thanks, Ricky.
spk10: Thank you. And one moment for our next question. And our next question comes from the line of Kevin Flutes with JMP Securities.
spk11: Your line is open. Please go ahead.
spk29: Hi, good morning, and thank you for taking my question. You know, as Bo mentioned in his prepared remarks, volatility in the public markets and the pullback from banks has created an increased opportunity for direct lenders to finance larger deals. I'm just curious what your appetite is to act as a syndication provider to potentially generate additional fee income.
spk32: Yeah. Look, when there's an opportunity, surely we'll take advantage of that. And, you know, so we'll surely take advantage of that. That's historically been a relatively low level of attribution of our income. I think over the years it's been somewhere between at the high end, you know, if you look back five cents since 2013 and the low end zero and this year a penny. So, I mean, there surely will be an opportunity. I wouldn't lean in as a massive driver of our performance of earnings.
spk29: Okay, that's fair. And then last one, you utilized the revolving repay the 2023 notes. I'm just thinking about the right side of the balance sheet in your funding mix. Do you see additional opportunity to further optimize or diversify your funding profile in this environment? And I guess if so, what structures are most appealing?
spk32: Yeah, so let me take a step back. And I think we've done a really good job of this, which is we've always built into the economics of our business holding more liquidity than the rest of the space. And when you look at revolver size compared to assets or as a metric or availability compared to unfunded commitments, we've always... created flexibility so we were never a forced issuer. And so when you look at our business model this year, we have a lot of flexibility about when we issue or if we issue in the unsecured market, which quite frankly we think is the most attractive way to access markets, additional capital outside the revolver. But we have the flexibility to do so given how much liquidity that we hold and that we burden the unit economics for and our shareholders have paid for. What's really amazing when you take a step back is that we've generated outside return on equity compared to the space. We're holding more liquidity and paying for that liquidity option than everybody else in the space. And I think that gives us a lot of flexibility. It gives us flexibility not to be a forced issuer. It gives us the flexibility in COVID to actually have equity to be able to invest in the market, which created outsized return on equity for the following two years. And so we will most definitely be opportunistic, but how we've built our balance sheet, we've created a whole bunch of flexibility that we think benefits our shareholders.
spk15: Ian, anything to add there? I think the flexibility and being willing to pay for that flexibility just really proved its worth. it's now three years ago and we like that model and we're comfortable with what that cost burdens us with given the flexibility of the forges okay that all makes sense and i'll leave it there congratulations on our next quarter great thank you so much thank you and one moment for our next question
spk11: And our next question comes from the line of Ken Lee with RBC Capital Markets. Your line is open. Please go ahead.
spk05: Hi, good morning. Thanks for taking my question. I just wonder if you could talk a little bit more about the asset-backed lending opportunities that you see over the near term and whether you could either be taking a more offensive or defensive stance around such opportunities given the macro backdrop. Thanks.
spk32: Yeah, we like that space a lot, the asset-based lending space. If you look at retail specifically, we thought in COVID there was going to be a significant opportunity. That opportunity went away very, very quickly. We did a couple of deals in COVID. And then post-COVID, given kind of what happened on the macro level, the consumer was very strong. Consumers only could spend money by buying goods versus services or experiences. in the retail space, that meant that those companies had better earnings and better balance sheets than they ever had. That is changing. The consumer is starting to weaken, and the retailers who have goods and services, I mean, who have goods and sell goods and who have inventory, they have less market share of the consumer's wallet. And so we expect that sector to continue weakening which will provide an opportunity for us to provide capital into that space. And so we like that. You know, it's asset management intensive. It's, you know, which you have to have a core competency in doing it, which we think we do, but we think that opportunities that will grow and we'll continue to allocate capital to it where we find good risk adjusted returns.
spk05: Gotcha. Very helpful there. And then just one follow-up, if I may. Within the portfolio, non-accrual rates are still de minimis. I wonder if you could talk a little bit more about what you're seeing in terms of amendment activity in the portfolio. Thanks.
spk32: Yeah, I would say it's picked up slightly, but still really, really benign compared to COVID. So no really significant or material amendments We are seeing amendments related to SOFR transition, which we think is most definitely positive from LIBOR. All the new loans are LIBOR or SOFR-based. But I would say from a credit perspective, it's picked up a little bit, but nothing material.
spk05: Gotcha. Very helpful there. Thanks again.
spk11: Thank you.
spk10: And one moment for our next question. Our next question comes from the line of Eric Zwick with Hovde Group.
spk11: Your line is open. Please go ahead.
spk30: Thanks. Good morning. Just a question on the pipeline. It sounds like you've got pretty good visibility for at least the next six months. Curious if you could provide a little color into the industry mix in the pipeline today and if it's fairly consistent with the current portfolio, if there's any industries or sectors that you are targeting or staying away from today.
spk32: Yeah, look, so I would say it's consistent with some outliers. Emerson's an industrial business, which is a little bit of an outlier for us. So we like that business a lot. We think Blackstone did a great job in buying that business and think it's really, really interesting, which we led. And we think it's kind of mid-cycle earnings and the capital structure built for this time. Maxar, also a public to private, take private, is, again, slightly different businesses, is a satellite business. We like that business model. We like the visibility of revenues. We like to sponsor a lot. And then, you know, we'll always mix in kind of our small energy stuff. But other than that, we're mostly focused on, you know, business services and software. But we have pretty good visibility in the pipeline for the next six months, as you mentioned.
spk30: Thanks. I appreciate the detail there. And just one more quick one from me. I'm just curious where our floors are today for new commitments. Where are you able to put those in?
spk32: They are most definitely – unfortunately, I don't think we've been able to push them up. They're most definitely in the 75 basis points to 100 basis points. I think 80 basis points, so 75 to 100, I wish we most definitely would be able to push them up, but the market's not there yet.
spk23: Thanks for taking my questions today.
spk11: Thank you, and one moment for our next question. And our next question comes from the line of Melissa Waddell with...
spk13: jp morgan your line is open please go ahead thanks good morning a lot of my questions have been asked already but i thought it would be interesting to touch on just sort of the activity levels in 4q certainly we were surprised by net exits during the quarter so given that you're expecting a few larger exits already that you had talked about during the third quarter call i'm curious if uh there with some deal slippage into the first quarter, or if that's sort of commentary on how you're seeing the opportunities at right now.
spk32: Right. I totally get the question. I think just to put most of our exits in Q4, we knew in Q3, and we tried to tell people in our Q3 call, which was frontline in Biohaven. And I think there was a couple more, but those were the big drivers of the Q4 exit.
spk15: And Melissa, there was prepayment fees and amortization of upfront fees.
spk13: Yes. Apologies if my question wasn't clear. I guess what I was looking to explore a little bit more was the level of capital deployments during the quarter, especially since you knew about some of the larger exits. So the fact that it was a slower fourth quarter for you guys compared to previous years, is that a function of deal slippage into the first quarter, or is that really commentary on the opportunity set? I got it.
spk32: It's actually, when you look at our activity levels in Q4, I would say they were significantly up. So the commitments we made in Q4 are way over historical levels. They happen to be related to mostly take privates that have time periods on that will close in the first half of 2023. So the opportunity set was as strong as it's ever been. It just happens to be that they were you know, they were shaded as a large cap, take privates, which have a regulatory process for that inventory to be turned into funding. So that commitment is to be turned into funding.
spk13: Got it. Thanks, Josh.
spk11: Thank you.
spk10: And one moment for our next question. Our next question comes from the line of Ryan Lynch with KBW.
spk11: Your line is open. Please go ahead.
spk31: Hey, good morning. I just had one question. You talked about on one hand kind of big picture, you're cautious given the dynamics of inflation and the shift in monetary policy and how that impacts growth. But on the other hand, you talked about your portfolio being mostly in software business with highs. high variable cost structures and pricing power. So I'm just curious, as you study your portfolio and monitor it closely in this kind of current changing dynamic environment, what are some of the key metrics or trends that you guys are monitoring? And is there anything that you guys are seeing thus far that is sort of a concerning trend?
spk32: No. So I think revenue growth was like 7% for the quarter. We obviously look at revenue growth on an annualized basis. So revenue growth has most definitely slowed, although still positive. We look at things such as growth margin, churn, customer acquisition costs. I would say on the churn side, flat quarter over quarter. We've grown the customer acquisition costs by a little bit. But the portfolio, I think, is in pretty good shape. And by the way, people talk about things in averages. it's kind of a long way to think about it because you're kind of stuck with the tails. And so I think when you look at our portfolio and look at the tails, we feel pretty good that there's no significant tails. But Bo, do you have anything to add on that?
spk27: The only thing I would add is, you know, we also look at bookings as an indicator for future revenue growth. We saw real demand destruction in Q3. And we're closely monitoring Q4 across our portfolios, especially across the business services side. Early returns on the bookings across the portfolio have been actually relatively strong in Q4. Now, there's a question if that was just a lot of pull-through demand that people were trying to get their budgets sent this year. But the early indications are pretty positive on the booking side across the portfolio in Q4.
spk31: Okay, that's good to hear. Just on that point, I mean, we've seen, I guess, has your software companies, have they started to, I guess if the fundamentals are fine, maybe this is not a concern, but have they started to reduce those fixed charges in their business? So we've obviously seen a lot of layoffs happening in the public software companies. which obviously shows the strength of the business. Has your portfolio company started to make those shifts yet, or is the business performing well enough that that's not really been an impact?
spk32: Yeah, I think in the tail, we have some that are starting to look at their costs, and we like that and encourage that. Look, I think if you think about the environment we were in post-COVID up until last year, in a zero-rate environment, everything kind of economically hurtled. And so you can make the math work for anything. And so there was a lot of dollars spent in investment made that should have probably not been made across both public and private markets, both on the investment side and inside companies. And so I think on the margin, you're seeing a little bit of people looking at their cost structure, obviously not the level that you see in big tech. But most definitely, and just that's a sign of good management teams.
spk27: Books are trying to get more efficient. We would expect that. The great thing about the business is they have a very durable business model.
spk31: Gotcha. Okay. That's all for me this morning.
spk32: I appreciate your time. Hey, Ryan, just on one topic, which I think you did hit on a little bit, which is, I think we talked about it in the read script, but I think the space gets, I think people get wrong, which is software businesses might have higher financial leverage, they have left fixed charges given no capex and so you kind of have to look at leverage in a ebit basis or an ebitda minus capex basis or operating cash flow minus capex and when you look at that metric i think those businesses have you know or or you know on a leverage basis or in line or less than you know like the industrial space or specialty chemicals etc so i think you have to burden cash flow by all fixed charges, just not fixed charges related to financial leverage.
spk31: Gotcha. I understand the point. I appreciate the time today. Thank you.
spk11: Thank you.
spk10: And one moment for our next question. And our next question comes from the line of Robert Dodd with Raymond James.
spk11: Your line is open. Please go ahead.
spk21: Hi, everyone. I've got two questions, if I can. The first one goes back to the guidance and kind of follow up to Mark Hughes in your answer to that. I mean, so the guidance is about $0.22. I mean, if I look back, the lowest four-quarter period you guys have ever had was $0.35, which is still 50% higher than the $0.22. And you've only had three quarters in your history of less than five, right? So, you know, is it that you're being extremely conservative or is your view that there's a high risk that 2023, the market in 2023 is even more disrupted than it was in 22, in which case very low activity levels would make sense. So, you know, is it a market view that's informing that or is it just being very conservative?
spk32: Yeah, it's a good question. I think you've asked this question last year, too. A similar question maybe last year. Look, we don't model activity. We don't really model activity level. We've never sort of been that. We've updated guidance throughout the year based on activity level, but we've never modeled at the beginning of the year. It's just too hard based on credit spreads. effectively based on credit spreads or some, you know, idiosyncratic things that happen in our portfolio. And if those are known, we most definitely model them. But given that none of those are known and we don't model directional credit spreads that drive portfolio churn, we just never historically modeled it. And so it's not modeled really this year as well. I think, you know, when you look at activity levels such as OID and prepayment fees, I think the assumption is we use kind of two to three year portfolio turnover on an individual basis, which drives some level of those fees. But in a tiny market spread environment, average portfolio life will be much lower or activity level will be much higher. And so we just don't model it. So I don't think it's a market view. I think it's just how we build our models that we leave room, you know, that's the upside in the model because it's very difficult to model.
spk21: I appreciate that. I really appreciate that comment. It's not really a market view. It's a more important thing. Second one, if I can.
spk32: Just real quick, if you ask me to like give you my best, I would say that we're, that the market will be bifurcated, which will be good companies will have access to capital in 23 and 24, which will probably drive some activity level and people will have to deal with the tails. But credit spreads are starting to come in a little bit. You've seen it in Q4. I think you've seen it year to date. And so that is a leading indicator of activity levels, probably, or portfolio turnover increase in the inner book.
spk20: Understood, and you don't have a lot of tails in your portfolio.
spk21: On the other question, after the repayment of the unsecured in January, you're at about 40% unsecured of your capital stack, which is acceptable, right, towards the lower end of what? what you've historically run, and it's towards the lower end of what the rating agencies want, et cetera. It's not going to go down again until November 2024, right? But what's your feeling where you'd really like that to be? Understand that right now it's a pretty expensive environment for unsecured, but are you comfortable at 40 for now?
spk32: Well, I think we are. I think, look, we've built our balance sheet. We've built our – it's a function of – how much revolver capacity one has. And we have a ton of revolver capacity and liquidity. And so we've paid for that. And it's burdened our economics. It's burdened our economics in the sense that we pay commitment fees on that, on the unused portion. We've paid upfront fees on that. And so it's burdened our economics. And we like paying for that insurance to allow us to ride out moments where the unsecured market is not as attractive. Although spreads have started coming in significantly in the last two to three months. And so we'll be opportunistic. We'll most definitely have to low end. If there's portfolio growth, it'll creep a little bit lower because our mix will be, the marginal portfolio growth will be funded on the revolver, on the secured side. So I wouldn't say it will be flat from here on out because that assumes no portfolio growth. The portfolio growth on the marginal basis would be funded with revolver, We most definitely will be back in that market. We like that market. I think we're one of two people in space who have at least a BBB flat rating. I think it's us and Aries. And so we're one of the two higher rated people in the space. And so we like that market. We have access to that market. And we'll most definitely be opportunistic. But we've paid for an insurance. And since we paid for it, we're going to use it. and we've priced that into our economic for our shareholders. So hopefully that answers your question. Ian, I don't know if you have anything to add.
spk15: I think it does answer the question, just maybe more directly. Robert, we're pretty comfortable just given the options that we have available to us.
spk21: Got it. It answered my question for sure. Thank you.
spk11: Thank you. And I am showing no further questions, and I'd like to turn the conference back over to Josh for any further remarks.
spk32: Great. So thank you so much for the interactive call. We appreciate people getting on the new format of the call, vis-a-vis the web or the changes, lack of that one. But we really appreciate it. And we look forward to chatting people with people in the spring. And I hope everybody has a nice end of the winter and the beginning of the spring. We'll be back for our Q1 earrings call soon. Thanks so much. Thanks, everyone.
spk11: This concludes today's conference call.
spk10: Thank you for participating. You may now disconnect. Everyone have a great day. you Thank you. Bye. Thank you.
spk11: Good morning and welcome to the Sixth Street Specialty Lending, Inc. fourth quarter and fiscal year ended December 31st, 2022 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Friday, February 17th, 2023. I will now turn the call over to Ms. Kami Van Horn, Head of Investor Relations. Thank you.
spk40: 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 fourth quarter and fiscal year ended December 31, 2022, and posted a presentation to the Investor Resources section of our website, www.sixstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-K 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 fourth quarter and fiscal year ended December 31st, 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 6th Street Specialty Lending.
spk32: Thanks, 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 review our full year and fourth quarter highlights and pass it over to Bo to discuss our originations, activity, and portfolio metrics. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported fourth quarter adjusted net investment income of 64 cents per share, or an annualized return on equity of 15.5%, an adjusted net income of $0.56 per share, or an annualized return on equity of 13.6%. As presented in our financial statements, our Q4 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gains incentive fee expense were both 1 cents per share higher at 65 cents and 57 cents respectively. For the full year 2022, we generated net investment income per share of $2.01 or return on equity of 12%, and a full year adjusted net income per share of $1.27 or return on equity of 7.6%. The difference between net investment income and net income for the year was driven overwhelmingly by unrealized losses as we incorporated the impact of wider credit market spreads on the valuation of our portfolio. The impact of increased risk premiums was presented throughout nearly every asset class in 2022. During the calendar year, LCD 1st and 2nd lean spreads widened by 135 and 686 basis points respectively. There has been a lot of talk about the lack of volatility in private asset marks. In this regard, we agree with Cliff Asens' description of this as volatility laundering. As we've said in the past, And four, the reasons we outlined in our previous public shareholder letter, we believe that using inputs from the market is not only critical but required in determining fair value of assets. Of the 75 cents per share difference between our net investment income and net income results for 2022, the majority, or 57%, was related to to unrealized losses from credit spread movements alone that we expect to recover over time as credit spreads tighten or investments are paid off. And 20% was driven predominantly from the decline in equity valuations. The remaining difference between net investment income and net income is primarily related to one, the unwind on our interest rate swaps that are not subject to hedge accounting, and two, the reversal of unrealized gains that flow through net investment income upon realization. The overall health of our portfolio remains strong with no changes in non-accruals from the last quarter. For the third consecutive quarter, our board has increased our quarterly based dividend, raising the figure by one cent per share to 46 cents per share to shareholders of record as of March 15th and payable on March 31st. Year over year, we've increased our base dividend by 12.2%. We are also pleased to share that our board declared a supplemental dividend of 9 cents per share related to our Q4 earnings to shareholders of record as of February 28th, payable on March 20th. In the near term, we expect that net investment income will exceed our newly established base dividend level due to our increased earnings power. However, we determined 46 cents per share to be an appropriate level based on looking at the forward interest rate curve through 2025, which is subject to changes in the market. 2022 was a year characterized by spread income as a driver of earnings given repayment activity slowed in the wake of increased market volatility. Portfolio turnover, which is calculated as total repayments over total assets at the beginning of the year, was 26% in 2022 compared to 43% and 41% in 2021 and 2020, respectively. The wider spread environment naturally causes slowdown in repayment activity. As a result, fee generating income represented a smaller portion of our total investment income for the year relative to historical trends. We generated a return on assets calculated as total investment income divided by average assets of 11.6% for 2022 compared to 11.3% in 2021, which was a year defined by record level of repayment activities. This further highlights the positive impact on the rise in reference rates and driving incremental returns for our shareholders. Our year and net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday is 1639, and we estimate that our spillover income per share is approximately 77 cents. We would like to reiterate that our supplemental dividend policy is motivated by, one, RIC distribution requirements. Two, not burdening our returns with excess friction costs incurred through excise tax. And three, the goal of steadily building net asset value per share over time. Before passing it to Beau, I'll spend a moment on how we're thinking about the broader macroeconomic environment. Big picture, we're cautious. But when we think about our portfolio, we are constructive on how we are positioned for the road ahead. The U.S. economy faces a number of headwinds in 2020-23 that are largely the result of inflation and the resulting shift in monetary policy in 2022. The restrictive monetary environment will surely have an impact on growth. The idea of a near-term Fed pivot remains challenging until job growth slows and a consumer weakens. In summary, it feels like we're living in a transitionary period with restricted Fed policy that will continue to dampen growth until we see an increase in unemployment and further demand destruction. A broad base flow down in the economy, coupled with the current rate environment, will cause some stress for borrowers. This highlights the importance of why we are focused on business models with high variable cost structures and with those that have pricing power. Eighty-two percent of our portfolio by fair value was comprised of software and business services companies at quarter end and are generally characterized by high levels of recurring revenue, predictable cash flows, variable cost structures, and pricing power. Our portfolio has shown resiliency to date, and we believe that underlying business models of our borrowers are robust and durable. However, we believe economic cycles do exist. As such, we will continue to focus on staying on top of the capital structure and operate in the middle of our target leverage range. With that, I'll pass it over to Beau to discuss this quarter's investment activities.
spk27: Thanks, Josh. I'd like to start by landing on some additional thoughts on the direct lending environment, and more specifically, how it relates to the positioning of our portfolio and the way we're thinking about current opportunities in the market. 2022 was a year that underscored the value proposition of private credit for borrowers. New issues leveraged loan volume reached a 12-year low and was down 63% from 2021 as public credit markets were largely unavailable. As a result, private credit providers stepped in as a main source of financing solutions, given the ability to provide speed and certainty of execution despite instability in the broader markets. One of the main themes over the last few quarters has been the growing market share of direct lenders in the large syndicated sponsor financings. Direct lenders with the ability to write sizable checks are benefiting from the opportunity to participate in larger transactions, which otherwise would have been financed in the broadly syndicated loan market. Notably, these investment opportunities present attractive risk-reward dynamics as deal terms have moved in a more lender-friendly direction, indicated by wider spreads, tighter documents, and lower leverage. We believe this shift in the underwriting terms reflects the appropriate compensation to lenders given the uncertain environment we're investing in today. We are well positioned to take advantage of this opportunity in the market given our ability to invest alongside affiliated 6th Street funds. As capital has generally become more constrained, the power of the 6th Street platform has allowed us to finance larger or established companies while remaining selective. We believe this creates a competitive advantage in today's investing environment as the number of direct lenders willing and able to participate in larger transactions is limited. In addition to the strong originations activity supporting this opportunity in the market in Q4, we have a robust pipeline for the first half of 2023, including several large financings that have already been publicly announced. As we have the ability to co-invest with Sixth Street affiliated funds on these transactions, We have flexibility to determine the optimal final hold sizes for our balance sheet. Turning now to our investment activity for the quarter, Q4 was productive with total commitments of $241 million and total fundings of $212 million across seven new portfolio companies in upsizes to five existing investments. We experienced $282 million of repayments from seven full and three partial investment realizations. The increase in repayment activity was largely driven by idiosyncratic payoffs of our two largest investments by fair value as of 9-30 that we discussed on our last earnings call, 508 and the front line, which represented 58% of repayments for the quarter. For the full year of 2022, we provided 1.1 billion of commitments and closed 864 million of fundings. Total repayments were 654 million for the year, resulting in net portfolio growth of $210 million. Year over year, our portfolio grew by 11%, which reflects our deliberate effort to grow responsibly. We are able to remain selective in the investments that we make, given the size of our capital base does not require us to be asset gatherers, but rather bottoms up fundamental investors and focus on driving return on capital for our investors. 82% of total commitments this year were sponsored transactions within our specialized sector sub-teams. We continue to execute on our software and business services themes, where we believe we have a competitive advantage, and where the underlying companies have attractive revenue characteristics, high-quality customer bases, and robust business models. At December 31st, our top industry exposure by fair value was to business services at 14.4%. We'd like to take a moment to provide an update on one of our retail ABL investments that has recently been in the press, Bed Bath and Beyond. As mentioned during our Q3 2022 earnings call, we had agented a FILO term loan commitment in September of 2022 to support the operational turnaround by the company and provide additional liquidity. As a result of this transaction, we hold a $55 million par amount commitment as of 12-31 of the FILO term loan, which represents less than 2% of our total assets as of year end. On February 6th, the company announced it was raising up to $1.025 billion of new equity capital through a public offering. This offering allows the company to avoid bankruptcy filing in the near term, which is a positive for all the company's stakeholders, including employees. Along with the capital raise, Sixth Street made an additional investment in a more senior position in the capital structure. Our position, which is already underwritten to liquidation value, is improved as a result of the new capital raise and our more senior position in the capital structure. Obviously, this remains an ongoing situation, but at this moment, we feel good about our security. Our retail ABL capabilities have been a distinguishing feature of our investment strategy since we began the company back in 2011. We have executed over 25 transactions and invested over $1 billion of capital through TSLX. On these investments, we have taken nine through the bankruptcy process without any losses. From a performance perspective, gross unlevered return on fully realized retail ABL investments is 20.8% as of 12-31. We have a core competency in managing these types of investments, and we'll look to continue to execute on this strategy through the same playbook we established years ago. Moving on to the repayment side, one realization that we'd like to highlight is our investment in TherapeuticsMD, which demonstrates the positive impact of proactive asset management for our shareholders. Since our initial investment in 2019, the company faced multiple challenges, including impacts from COVID-19, resulting in underperformance relative to expectations. As the situation evolved, Sixth Street worked with the company as advisors toward a path to exit, including multiple amendments and a large partial pay down prior to our exit. In December 2022, Sixth Street's debt was fully repaid when the company licensed full commercial rights of its products. TXMD will continue to be a public company receiving milestone payments and 20 years of royalties on sales. Through active portfolio management and extensive experience in the healthcare space, TSLX generated approximately 15.5% IRR and 1.4x MOM on the investment with a beneficial outcome for both parties.
spk22: From a portfolio yield perspective,
spk27: Our weighted average yield on debt and income-producing securities at amortized cost increased to 13.4% from 12.2% quarter-over-quarter. The increase primarily reflects a rise in the weighted average reference rate reset of 115 basis points over the quarter. The weighted average yield at amortized costs on new investments, including upsizes for Q4, was 12.6% compared to a yield of 11.9% on exquisite investments. Looking at the year-over-year trends, our weighted average yield on debt and income-producing securities at amortized costs is up about 320 basis points from a year ago. The significant increase in our yields in 2022 illustrates the positive asset sensitivity for our business from increased base rates beyond our floors, in addition to our selective origination approach across themes and sectors. Moving on to the portfolio composition and credit stats, across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points of 0.9 times and 4.5 times, respectively, and weighted average interest coverage decrease from 2.6x to 2.2x. The decrease in interest coverage is in line with our expectations from the impact of rising rates on the cost of funds for our borrowers. Our interest coverage metric assumes we apply reference rates as at the end of the year to the run rate borrower EBITDA. We believe this is a better representation of our position of our borrowers as opposed to a look back metric such as LTM. One additional nuance we'd like to highlight on interest coverage relates to the positioning of our portfolio towards software and business services. These businesses generally see more limited fixed charge requirements, such as capital expenditures. Other more capital intensive industries experience higher fixed charges in addition to financing costs, meaning interest coverage metrics likely understate fixed obligations of those businesses. As of Q4 2022, the weighted average revenue in EBITDA of our core portfolio companies was 152 million and 46 million, respectively. represented an increase in both metrics from Q3. 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, representing no change from last quarter's ratings. We continue to have minimal non-accruals, with only one portfolio company on non-accrual representing less than 0.01% of the portfolio at fair value, and no new names added to non-accrual during Q4. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.
spk16: Thank you, Beau. We finished the year with a strong quarter from an earnings and investment activity perspective. In Q4, we generated net investment income per share of $0.65, resulting in full-year net investment income per share of $2.13. Our Q4 net income per share was $0.57, resulting in full-year net income per share of $1.38. There was an 11 cents per share unwind of previously accrued capital gains incentive fees in 2022, which is a non-cash reversal. Excluding the 11 cents per share unwind for this year, our adjusted net investment income and adjusted net income per share for the year were $2.01 and $1.27, respectively. At year end, we had total investments of $2.8 billion, total principal debt outstanding of $1.5 billion, and net assets of $1.3 billion or $16.48 per share, which is prior to the impact of the supplemental dividend that was declared yesterday. Our ending debt to equity ratio was 1.13 times, down from 1.16 times in the prior quarter, and our average debt to equity ratio also decreased slightly from 1.15 times to 1.14 times quarter over quarter. Before year 2022, our average debt to equity ratio was 1.03 times, up from 1 times in 2021, and well within our previously stated target range of 0.9 to 1.25 times. Our liquidity position remains robust with $866 million of unfunded revolver capacity at year end against $178 million of unfunded portfolio company commitments eligible to be drawn. Our year-end funding mix was represented by 53% unsecured debt. Post-quarter end, we satisfied the maturity of our $150 million January 2023 unsecured notes through utilization of undrawn capacity on our revolving credit facility. The settlement marginally decreased our weighted average cost of debt and had no impact on leverage. Moving to our presentation materials, slide 10 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added 64 cents per share from adjusted net investment income against our base dividend of 45 cents per share. There was 11 cents per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognized these gains into this quarter's income. The reversal of unrealized gains this quarter was primarily driven by the early payoff of Biohaven which resulted in an unwind of 12 cents per share from unrealized gains to net investment income for the quarter. There were minor positive impacts from changes in credit spreads on the valuation of our portfolio and a positive one cent per share impact from portfolio company specific events. Pivoting to our operating results detail on slide 12, we generated a record level of total investment income for the quarter of 100.1 million, up 29% compared to 77.8 million in the prior quarter. The increase was driven by a rise in the contractual interest income earnings power of the business, as well as other income related to the Biohaven payoffs specifically. Walking through the components of income, interest and dividend income was 85.8 million, up 15% from the prior quarter. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were 11 million, up from 429,000 in the prior quarter, due to higher portfolio repayment activity. Other income was 3.4 million, up from 2.7 million in the prior quarter. Net expenses, excluding the impact of the non-cash reversal related to unwind of capital gains incentive fees, were 47.5 million, up from 40.3 million in the prior quarter. This was primarily due to the upward movement in reference rates which increased our weighted average interest rate on average debt outstanding from 4.3% to 5.6%, and higher incentive fees as a result of this quarter's over-earning. During 2022, base rates increased by approximately 425 basis points, and the impact on earnings became evident in the back half of the year, given the lag in reference rate resets for borrowers. Given the low financial leverage embedded in BDCs, asset sensitivity has a larger impact than liability sensitivity and proved to be a tailwind for our business as we saw increased asset level yields drive return on equity. For a year characterized by spread income, the rise in interest rates and wider spreads resulted in the business exceeding the upper end of our beginning year ROE adjusted net investment income target of 11.5% or $1.92 per share for 2022. Net unrealized losses largely from the impact of spread widening experienced in Q2 on portfolio marks had a significant impact on our net income for the year, which we expect to unwind as credit spreads tighten or investments are paid off. Based on our expectations for our net asset level yields, the movement in reference rates, cost of funds, and financial leverage, we expect to target a return on equity for 2023 of 13% to 13.2%. Using our year-end book value per share of $16.39, which is adjusted to include the impact of our Q4 supplemental dividend, this corresponds to a range of $2.13 to $2.17 for full year 2023 adjusted net investment income per share. As we said, we expect to over-earn our $1.84 per share annualized base dividend in the near term, and we'll continue to distribute over-earnings to shareholders through our supplemental dividend framework. With that, I'd like to turn it back to Josh for concluding remarks.
spk32: Thank you, Ian. We believe we are transitioning from an era of easy money to a new macro super cycle that we believe will magnify volatility relative to recent history. With such volatility will come dispersion returns and will elevate the importance of management's capabilities and skills. The irony is, however, that even in low volatility and low rate environment, return dispersion has already existed. Now we can only expect it to increase. Power rates for the foreseeable future will most definitely cause stress for certain borrowers, followed by an uptick in defaults from the historical low levels we've experienced more recently. That being said, we anticipate credit issues to be heavily related to borrowers with weaker underlying business models, and we are confident in the durability of our portfolio companies. We believe our track record of the past 12 years since inception supports our ability to continue to generate industry-leading returns for our shareholders. We have generated an annualized return on equity on net income since our March 2014 IPO of 13.1%. We attribute a large portion of our success that our shareholders have enjoyed to our ability to over earn our cost of capital by avoiding credit losses and appropriately pricing spreads on investments that take into account the cost embedded in operating our business. We remain constructive on the opportunity set ahead of us. We continue to experience elevated all in yields on our assets. We expect credit costs remain low given our investment selection discipline and the health of our existing portfolio. We begin the year with significant liquidity and capacity to drive incremental ROEs and are optimistic about opportunities to enhance our capital structure through the course of the year. With that, thank you for your time today. Operator, please open the line for questions.
spk11: Thank you. If you have a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
spk10: One moment while we compile our Q&A roster. Our first question comes from the line of Mark Hughes with Truist. Your line is open. Please go ahead.
spk33: Hey, Mark.
spk00: Mark, your phone might be on mute.
spk08: Yes, my phone is on mute. I'm so sorry. Good morning.
spk01: Morning, Mark.
spk08: Yeah, my question was, how are you thinking about fees, fee revenue in 2023. You've given some good guidance on NII. Just curious what you think the fee environment is going to be like.
spk32: Yeah, it's a good question, Mark. It's really hard to tell because it's a function of kind of repayment velocity, but to just give you some numbers. In 2000, when we think about fees, we think about it in basically uh i would say two categories um or three categories which is um accelerated oid prepayment fees and amendment fees and other income that's historically been i think in 2022 those fees were in the math about 37 cents per share in 2021 those fees were about $0.56 per share. In 2023, we actually, in our guidance numbers, they're significantly below those levels that are embedded in our guidance. So in our guidance numbers, they are about $0.22 per share. So that's heavily weighted towards, again, another year of spread income. If you see velocity in the book, obviously it's going to be much, much higher, but it's significantly below 22 levels and 21 levels. That's helpful.
spk08: Yeah, I appreciate the specifics there. And then when you look at the curve, you talked about keeping the base dividend at the 46 cents, informed by your look out at the 2025? How much cushion, just generally speaking, do you still have over the dividend over those next couple of years?
spk32: Yeah, significant. I think we just went through the math on 2023, which 2023, again, is mostly spread income. Our per share guidance is 213 to 217. The base dividend level is? $1.84. So there's really a lot of cushion. In 2024, similarly, again, we don't really model significant levels. We think about upside and fee income as kind of being upside to our guidance. So in 2024, those levels, of fee income are basically the same. And again, our base dividend is $1.84. And we think, you know, we think we're significantly above that as well. So we knew we were going to over-earn for the next couple of years, but we didn't want to put ourselves in a position where we would have to cut the dividend. And so we set the dividend where we knew there was significant push in the next couple of years. We were just looking at the curve.
spk08: Perspective. Yeah. Thank you very much.
spk10: Thank you. And one moment for our next question. Our next question comes from the line of Finian O'Shea with Wells Fargo.
spk11: Your line is open. Please go ahead.
spk29: Hi, everybody. Good morning. A question on the large club deals. It looks like we have one this quarter with Avalara, not signaling in on that name, but I don't think those are too typical for you to partake in. Can you talk about the threshold for what makes that kind of deal compelling? Is it company quality or terms as to why you so seldom to invest in those. And then on the downside, perhaps, can you talk about the structural elements you do give up, how much less control you might have, and so forth? Thank you.
spk32: Yeah. First of all, good morning, Finn. I hope you're doing well this morning. So look, we've talked a lot about this. In the upper middle market, and that large cap space has significantly changed given the environment we're in. And so pre- you know, 12 months ago, you know, it was obviously, we thought it was competitive and offered, you know, little relative value compared to the Brawley syndicated market. That's completely changed. But frankly, that upmarket, we find that the marginal capital in those fuels are able to drive better terms and you can finance larger companies that are at scale. So, you know, as I think people know, we've been involved in most of those deals that have been announced, including Emerson, which is as yet to close, which we've led, Maxar, which is yet to close, which we've led, and other ones. So we find there's a lot of value in that the marginal capital is able to drive pricing and structural enhancements. And so, and then, obviously, given the macro, you're financing those businesses in an environment where you are, you have a known rate environment and kind of a known growth environment compared to historically. So, we like the value that's being offered in that market. The trade-off is that they're clubs, and so you got to figure, you got to think that you're with like-minded people and that that document works. We think it does. So, Bo, anything to add there? The only thing I'd add is you had a specific question on what we give up.
spk27: I think given that there's the scarcity value of capital, a lot of the terms and document-specific terms have gotten much tighter in these upper middle market deals over the past six months and, frankly, are not all that different from what you're seeing in middle market documents. So you have a large margin of safety at low LTBs. a scale business that seems to be experienced by the BSL market at very attractive with adjusted returns in this current environment.
spk28: Thanks, Vince. Sure. That's helpful. Thanks so much.
spk11: Thank you.
spk10: And one moment for our next question. And our next question comes from the line of Mickey Sheelan with Lattenberg.
spk11: Your line is open. Please go ahead.
spk18: Yes, good morning, everyone. Josh, in the fourth quarter, we continue to see middle market loan spreads widen, which is obviously good for your financial performance, assuming the credit quality holds up, but it is stressing borrowers, as you mentioned in your remarks, with interest coverage declining to 2.2. So I'd like to understand, you know, when we think about those trends, what is your outlook on how private lenders will behave this year in terms of spreads and the amount of leverage they're looking for on deals?
spk32: Yeah. So, Mickey, I think when you look at the LCD firstly and LCD secondly in spreads, they actually tighten in Q4 slightly. But year over year, they've significantly widened, which we've hit. So I just want to frame up. We did not see, so when you look at unrealized gains and unrealized losses, they were negligible given that you actually had spreads tighten quarter over quarter slightly. Look, credit quality is top of mind. It's what's historically driven performance or outperformance or underperformance. It's credit losses for the industry. It's been the biggest piece that drives, you know, when you think about the union economics of the sector, return on assets is a point of differentiation. Fees and expenses are basically all pinned near each other. Financial leverage is pinned near each other. Cost of leverage is pinned near each other. So it's really return on assets and credit costs that ultimately drive returns to the sector. And that's going to be a function of the portfolio that were built in their own place now. And we think our portfolio is differentiated and is robust, given the nature of those businesses. But it is in this economic environment where you have flowing growth and higher rates, you are most definitely going to have tails in credit. We have yet to see those in our portfolio. But they are most definitely emerging in the broadly syndicated loan market. So it's all about credit. I don't know if I answered your question.
spk17: Appreciate that, Josh. That's it for me this morning. Thanks, Ricky.
spk10: Thank you. And one moment for our next question. And our next question comes from the line of Kevin Flutes with JMP Securities.
spk11: Your line is open. Please go ahead.
spk29: Hi, good morning, and thank you for taking my question. You know, as Bo mentioned in his prepared remarks, volatility in the public markets and the pullback from banks has created an increased opportunity for direct lenders to finance larger deals. I'm just curious what your appetite is to act as a syndication provider to potentially generate additional fee income.
spk32: Yeah. Look, when there's an opportunity, surely we'll take advantage of that. And, you know, so we'll surely take advantage of that. That's historically been a relatively low level of attribution of our income. I think over the years it's been somewhere between at the high end, you know, if you look back five cents since 2013 and the low end zero and this year a penny. So, I mean, there surely will be an opportunity. I wouldn't lean in as a massive driver of our performance of earnings.
spk29: Okay, that's fair. And then last one, you utilized the revolving repay the 2023 notes. I'm just thinking about the right side of the balance sheet in your funding mix. Do you see additional opportunity to further optimize or diversify your funding profile in this environment? And I guess if so, what structure is the most appealing?
spk32: Yeah, so let me take a step back. And I think we've done a really good job of this, which is we've always built into the economics of our business holding more liquidity than the rest of the space. And when you look at revolver size compared to assets or as a metric or availability compared to unfunded commitments, we've always... created flexibility so we were never a forced issuer. And so when you look at our business model this year, we have a lot of flexibility about when we issue or if we issue in the unsecured market, which quite frankly we think is the most attractive way to access markets, additional capital outside the revolver. But we have the flexibility to do so given how much liquidity that we hold and that we burden the unit economics for and our shareholders have paid for. What's really amazing when you take a step back is that we've generated outside return on equity compared to the space. We're holding more liquidity and paying for that liquidity option than everybody else in the space. And I think that gives us a lot of flexibility. It gives us flexibility not to be a forced issuer. It gives us the flexibility in COVID to actually have liquidity to be able to invest in the market, which created outsized return on equity for the following two years. And so we will most definitely be opportunistic, but how we've built our balance sheet, we've created a whole bunch of flexibility that we think benefits our shareholders.
spk15: Ian, anything to add there? I think the flexibility and being willing to pay for that flexibility just really proved its worth. it's now three years ago and we like that model and we're comfortable with what that cost burdens us with given the flexibility of the forges okay that all makes sense and i'll leave it there congratulations on our next quarter great thank you so much thank you and one moment for our next question
spk11: And our next question comes from the line of Ken Lee with RBC Capital Markets. Your line is open. Please go ahead.
spk05: Hi, good morning. Thanks for taking my question. I just wonder if you could talk a little bit more about the asset-backed lending opportunities that you see over the near term and whether you could either be taking a more offensive or defensive stance around such opportunities given the macro backdrop. Thanks.
spk32: Yeah, we like that space a lot, the asset-based lending space. If you look at retail specifically, we thought in COVID there was going to be a significant opportunity. That opportunity went away very, very quickly. We did a couple of deals in COVID. And then post-COVID, given kind of what happened on the macro level, the consumer was very strong. Consumers only could spend money by buying goods versus services or experiences. in the retail space, that meant that those companies had better earnings and better balance sheets than they ever had. That is changing. The consumer is starting to weaken, and the retailers who have goods and services, I mean, who have goods and sell goods and who have inventory, they have less market share of the consumer's wallet. And so we expect that sector to continue weakening which will provide an opportunity for us to provide capital into that space. And so we like that. You know, it's asset management intensive. It's, you know, which you have to have a core competency in doing it, which we think we do. But we think that opportunities that will grow and we'll continue to allocate capital to it where we find good risk-adjusted returns.
spk05: Gotcha. Very helpful there. And then just one follow-up, if I may. Within the portfolio, non-accrual rates are still de minimis. I wonder if you could talk a little bit more about what you're seeing in terms of amendment activity in the portfolio. Thanks.
spk32: Yeah, I would say it's picked up slightly, but still really, really benign compared to COVID. So no really significant or material amendments We are seeing amendments related to SOFR transition, which we think is most definitely positive from LIBOR. All the new loans are LIBOR or SOFR-based. But I would say from a credit perspective, it's picked up a little bit, but nothing material.
spk05: Gotcha. Very helpful there. Thanks again.
spk11: Thank you.
spk10: And one moment for our next question. Our next question comes from the line of Eric Zwick with Hovde Group.
spk11: Your line is open. Please go ahead.
spk30: Thanks. Good morning. Just a question on the pipeline. It sounds like you've got pretty good visibility for at least the next six months. Curious if you could provide a little color into the industry mix in the pipeline today and if it's fairly consistent with the current portfolio, if there's any industries or sectors that you are targeting or staying away from today.
spk32: Yeah, look, so I would say it's consistent with some outliers. Emerson's an industrial business, which is a little bit of an outlier for us. So we like that business a lot. We think Blackstone did a great job in buying that business and think it's really, really interesting, which we led. And we think it's kind of mid-cycle earnings and the capital structure built for this time. Maxar, also a public to private, take private, is, again, slightly different businesses, is a satellite business. We like that business model. We like the visibility of revenues. We like to sponsor a lot. And then, you know, we'll always mix in kind of our small energy stuff. But other than that, we're mostly focused on business services and software. But we have pretty good visibility in the pipeline for the next six months, as you mentioned.
spk30: Thanks. I appreciate that detail there. Just one more quick one for me. I'm just curious where our floors are today for new commitments. Where are you able to put those in?
spk32: They are most definitely – unfortunately, I don't think we've been able to push them up. They're most definitely in the 75 basis points to 100 basis points. I think 80 basis points, so if it's 75 to 100, I wish we most definitely would be able to push them up, but the market's not there yet.
spk23: Thanks for taking my questions today.
spk11: Thank you, and one moment for our next question. And our next question comes from the line of Melissa Waddell with...
spk13: jp morgan your line is open please go ahead thanks good morning a lot of my questions have been asked already but i thought it would be interesting to touch on just sort of the activity levels in 4q uh certainly we were surprised by net exits during the quarter so uh given that you're expecting a few larger exits already that you had talked about during the third quarter call i'm curious if uh there with some deal slippage into the first quarter, or if that's sort of commentary on how you're seeing the opportunities at right now.
spk32: Right. Melissa, I totally get the question. I think just to put most of our exits in Q4, we knew in Q3, and we tried to tell people in our Q3 recall, which was frontline in Biohaven. And I think there was a couple more, but those were the big drivers of the Q4 exit.
spk15: And Melissa, there was prepayment fees and amortization of upfront fees.
spk13: Yes. Apologies if my question wasn't clear. I guess what I was looking to explore a little bit more was the level of capital deployments during the quarter, especially since you knew about some of the larger exits. So the fact that it was a slower fourth quarter for you guys compared to previous years, is that a function of deal slippage into the first quarter, or is that really commentary on the opportunity set? I got it.
spk32: It's actually, when you look at our activity levels in Q4, I would say they were significantly up. So the commitments we made in Q4 are way over historical levels. They happen to be related to mostly take privates that have time periods on that will close in the first half of 2023. So the opportunities that was as strong as it's ever been, it just happens to be that they were you know, they were shaded as a large cap, take privates, which have a regulatory process for that inventory to be turned into funding. So that commitment is to be turned into funding.
spk11: Got it. Thanks, Josh. Thank you.
spk10: And one moment for our next question. Our next question comes from the line of Ryan Lynch with KBW.
spk11: Your line is open. Please go ahead.
spk31: Hey, good morning. I just had one question. You talked about on one hand kind of big picture, you're cautious given the dynamics of inflation and the shift in monetary policy and how that impacts growth. But on the other hand, you talked about your portfolio being mostly in software business with highs. high variable cost structures and pricing power. So I'm just curious, as you study your portfolio and monitor it closely in this kind of current changing dynamic environment, what are some of the key metrics or trends that you guys are monitoring? And is there anything that you guys are seeing thus far that is sort of a concerning trend?
spk32: No, so I think revenue growth was like 7% for the quarter. We obviously look at revenue growth on an annualized basis. So revenue growth has most definitely slowed, although still positive. We look at things such as growth margin, churn, customer acquisition costs. I would say on the churn side, flat quarter over quarter. We've grown the customer acquisition costs by a little bit. But the portfolio, I think, is in pretty good shape. And by the way, people talk about things in averages. It's kind of a long way to think about it because you're kind of stuck with the tails. And so I think when you look at our portfolio and look at the tails, we feel pretty good that there's no significant tails. But Bo, do you have anything to add on that?
spk27: The only thing I would add is, you know, we also look at bookings as an indicator for future revenue growth. We saw real demand destruction in Q3. And we're closely monitoring Q4 across our portfolios, especially across the business services side. Early returns on the bookings across the portfolio have been actually relatively strong in Q4. Now, there's a question that that was just a lot of pull-through demand that people were trying to get their budgets sent this year. But the early indications are pretty positive on the booking side across the portfolio in Q4.
spk31: Okay, that's good to hear. Just on that point, I mean, we've seen, I guess, has your software companies, have they started to, I guess if the fundamentals are fine, maybe this is not a concern, but have they started to reduce those fixed charges in their business? So we've obviously seen a lot of layoffs happening in the public software companies. which obviously shows the strength of the business. Has your portfolio company started to make those shifts yet, or is the business performing well enough that that's not really been an impact?
spk32: Yeah, I think in the tail, we have some that are starting to look at their costs, and we like that and encourage that. Look, I think if you think about the environment we're in post-COVID up until last year, in a zero-rate environment, everything kind of economically hurtled. And so you can make the math work for anything. And so there was a lot of dollars spent and investment made that should have probably not been made across both public and private markets, both on the investment side and inside companies. And so I think on the margin, you're seeing a little bit of people looking at their cost structure, obviously not the level that you see in big tech, but most definitely And just have to sign a good management team.
spk27: Books are trying to get more efficient. We would expect that. The great thing about the business is they have a very durable business model.
spk31: Gotcha. Okay. That's all for me this morning.
spk32: I appreciate your time. Hey, Ryan, just on one topic, which I think you did hit on a little bit, which is I think we talked about it in our e-script, but I think the space gets – I think people get wrong, which is software businesses might have higher financial leverage. but they have less fixed charges given no CapEx spend. And so you kind of have to look at leverage in a EBIT basis or an EBITDA minus CapEx basis or operating cash flow minus CapEx. And when you look at that metric, I think those businesses have, you know, or, you know, on a leverage basis are in line or less than, you know, like the industrial space or specialty chemicals, et cetera. So I think you have to burden cash flow by all fixed charges, just not fixed charges related to financial leverage.
spk31: Gotcha. I understand the point. I appreciate the time today. Thank you.
spk11: Thank you.
spk10: And one moment for our next question. And our next question comes from the line of Robert Dodd with Raymond James.
spk11: Your line is open. Please go ahead.
spk21: Hi, everyone. I've got two questions, if I can. The first one goes back to the guidance and kind of follow up to Mark Hughes in your answer to that. I mean, the guidance is about $0.22. I mean, if I look back, the lowest four-quarter period you guys have ever had was $0.35, which is still 50% higher than the $0.22. And you've only had three quarters in your history of less than five, right? So, you know, is it that you're being extremely conservative or is your view that there's a high risk that 2023, the market in 2023 is even more disrupted than it was in 22, in which case very low activity levels would make sense. So, you know, is it a market view that's informing that or is it just being very conservative?
spk32: Yeah, it's a good question. I think you've asked this question last year, too. A similar question maybe last year. Look, we don't model activity. We don't really model activity level. We've never sort them out. We've updated guidance throughout the year based on activity level, but we've never modeled at the beginning of the year. It's just too hard based on credit spreads, effectively based on credit spreads or some, you know, idiosyncratic things that happen in our portfolio. And if those are known, we most definitely model them. But given that none of those are known and we don't model directional credit spreads that drive portfolio churn, we just never historically modeled it. And so it's not modeled really this year as well. I think, you know, when you look at activity levels such as OID and prepayment fees, I think the assumption is we use kind of two to three year portfolio turnover on an individual basis, which drives some level of those fees. But in a tiny market spread environment, average portfolio life will be much lower or activity level will be much higher. And so we just don't model it. So I don't think it's a market view. I think it's just how we build our models that we leave room, you know, that's the upside in the model because it's very difficult to model.
spk21: I appreciate that. I really appreciate that comment. It's not really a market view. It's a more important thing. Second one, if I can.
spk32: Just real quick, if you ask me to like give you my best, I would say that we're, that the market will be bifurcated, which will be good companies will have access to capital in 23 and 24, which will probably drive some activity level and people will have to deal with the tails. But credit spreads are starting to come in a little bit. You've seen it in Q4. I think you've seen it year to date. And so that is a leading indicator of activity levels, probably, or portfolio turnover increase in the inner book.
spk20: Understood, and you don't have a lot of tails in your portfolio.
spk21: On the other question, after the repayment of the unsecured in January, you had about 40% unsecured of your capital stack, which is acceptable, right, towards the lower end of what? what you've historically run, and it's towards the lower end of what the rating agencies want, et cetera. It's not going to go down again until November 2024, right? But what's your feeling where you'd really like that to be? Understand that right now it's a pretty expensive environment for unsecured, but are you comfortable at 40 for now?
spk32: Well, I think we are. I think, look, we've built our balance sheet. We've built our – it's a function of – how much revolver capacity one has. And we have a ton of revolver capacity and liquidity. And so we've paid for that. And it's burdened our economics. It's burdened our economics in the sense that we pay commitment fees on that, on the unused portion. We've paid upfront fees on that. And so it's burdened our economics. And we like paying for that insurance to allow us to ride out moments where the unsecured market is not as attractive. Although spreads have started coming in significantly the last you know two to three months and so we'll be opportunistic we'll most definitely have to low end um you know if there's portfolio growth it'll creep a little bit lower because our mix will be the marginal portfolio growth will be funded on the on the revolver on the secured side so i want to say it will be you know flat from here on out because that assumes no portfolio growth um the portfolio growth on the marginal basis would be funded with revolver but We most definitely will be back in that market. We like that market. You know, I think we're one of two people in space who have at least a BBB flat rating. I think it's us and Aries. And so we're one of the two higher rated people in the space. And so we like that market. We have access to that market. And we'll most definitely be opportunistic. But we've paid for an insurance. And, you know, since we paid for it, we're going to use it. and we price that into our economic for our shareholders. So hopefully that answers your question. Ian, I don't know if you have anything to add.
spk15: I think it does answer the question, just maybe more directly, Robert, we're pretty comfortable just given the options that we have available to us.
spk21: Got it. It answered my question for sure. Thank you.
spk11: Thank you. And I am showing no further questions, and I'd like to turn the conference back over to Josh for any further remarks.
spk32: Great. So thank you so much for the interactive call. We appreciate people getting on the new format of the call, vis-a-vis the web or the change of the lack of that one, but we really appreciate it. And we look forward to chatting people with people in the spring. And I hope everybody has a nice end of the winter and the beginning of the spring. We'll be back for our Q1 earnings call soon. Thanks so much. Thanks, everyone.
spk11: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
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