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spk05: Good morning and welcome to Sixth Street Specialty Lending, Inc.' 's third quarter and its September 30th, 2023 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Friday, November 3rd, 2023. I will now turn the call over to Ms. Cammie Van Horn, Head of Investor Relations.
spk00: Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending Inc. filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the third quarter ended September 30th, 2023, and posted a presentation to the investor resources section of our website, www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our form 10Q 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 third quarter ended September 30th, 2023. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.
spk02: Thank you, Cami. Good morning, everyone, and thank you for joining us. With us today is my partner and our president, Bo Stanley, and our CFO, Ian Simmons. For our call today, I will provide highlights of this quarter's results, and then pass it over to Beau to discuss activity levels and the portfolio. Ian will review our quarterly financial results in detail, and I will conclude with final remarks before opening the call to Q&A. After market closed yesterday, we reported strong third quarter financial results with adjusted net investment income per share of $0.60, corresponding to an annualized return on equity of 14.4%. and adjusted net income per share of $0.77, corresponding to an annualized return on equity of 18.5%. From a reporting perspective, our Q3 net investment income and net income per share, inclusive of accrued capital gains and Senate fee expenses, were $0.57 and $0.74, respectively. The $0.03 per share difference between the adjusted and reported metrics is a non-cash expense related to accrued fees on unrealized gains from the valuation of our investments. As a reminder, we exclude the 3 cents per share in the presentation of our adjusted results. If this year were to have ended on September 30th and we were to calculate the capital gains incentive fee that's payable to the advisor in cash, it would have been zero given the gains driving the fee accrual are unrealized. Our net investment income this quarter continued to be a function of robust net interest margin attributable to the asset sensitivity of our floating rate portfolio in this higher rate environment. The difference between this quarter's net investment income and net income of 17 cents per share was driven by 11 cents per share from unrealized gains, largely from the impact of credit spread tightening on the value of investments, and 6 cents per share from net realized gains. As many of you will recall, market volatility increased last year at the start of the rate hiking cycle. During Q2 2022, LCD firstly and secondly credit spreads widened by 123 and 206 basis points respectively, creating downward pressure on the fair value marks across our portfolio and resulting in 40 cents decline in net asset value per share related to spread movement alone. Over the five quarters since that time, net asset value per share has increased by 70 cents from 1627 to 1697 and now is above our Q1 2022 net asset value per share of 1688 for two primary reasons. First, the in the ground portfolio from Q2 2022 has experienced fair values have pulled towards par as first lien credit spreads have tightened 78 basis points. This has resulted in approximately 26 cents of uplift to net asset value per share. We have generated net investment income in excess of our quarterly base and supplemental dividends, which has contributed 31 cents in net asset value per share over the five quarter period. This over-earning is driven by our disciplined approach of deploying capital into investment opportunities that exceed our cost of capital, inclusive of any credit losses. With substantial levels of both capital and liquidity available, we were able to deploy capital into a better environment in terms of both economics and underwriting standards. This has led to successful deployment of nearly $1 billion of capital into new investments over the last five quarters, representing approximately 30% of the in-the-ground portfolio today. The remaining increase is attributable largely to accretion of OID from new investments, company-specific valuation marks, and net realized gains. Shifting now to the macro landscape, the overriding theme this year has been the realization that we are in a higher for longer scenario and the potential impact that brings to the economy. Zooming in on this topic for levered corporate credit, the higher for longer backdrop is twofold, including one that is immediate and the other one that is delayed. Over the last 12 to 18 months, BDCs, for example, have experienced higher portfolio yields from the rise in base rates, contributing to elevated operating return on equity relative to historical averages. This outperformance has been largely universal across the sector given the floating rate asset sensitivity of these vehicles. The real differentiation will become evident when we start to see the lagged impact of higher rates play out across portfolios. This will likely be in the form of increased defaults followed by losses. We believe that in the long run, the strength of our asset selection and portfolio management capabilities will differentiate our returns for shareholders. These competencies are deep within our culture It has been built over decades and gives us confidence in our ability to continue to provide top-tier results to shareholders for the foreseeable future. At quarter end, net asset value per share was $16.97, up $0.23 per share, or 1.4% from the June 30th figure of $16.74. This growth was primarily driven by the continued over-earning of our base dividend and net realized and unrealized gains from investments as discussed earlier. Yesterday, our board approved the base quarterly dividend of $0.46 per share to shareholders of record as of December 15th, payable on December 29th. Our board also declared a supplemental dividend of $0.07 per share related to our Q3 earnings to shareholders of record as of November 30th, payable on December 20th. Our Q3 2023 net asset value per share adjusted for the impact of the supplemental dividend is $16.90. With that, I'll now pass over to Beau to discuss this quarter's investment activity.
spk11: Thanks, Josh. I'd like to start by sharing some thoughts on activity levels in the public and private markets, followed by observations on the competitive environment. Activity levels have picked up in the back half of 2023 as we continue to see a steady trend of private credit taking share from the broadly syndicated loan markets. The total amount of outstanding in the leveraged loan index has declined by 23 billion, or 1.6%, over the last 12 months, and 2023 is on track to be the first year to show year-over-year decline since the global financial crisis. This shift has brought increased deal flow to the direct lending market, which we expect to continue as a broader reopening of the BSL market is largely dependent upon CLO creation, which remains challenged. Until the CLO machine resumes, which represents the largest buyer base of leveraged loan markets at roughly 65%, private credit is expected to continue to dominate as a leading credit provider to fund M&A transactions. Notably, approximately one-third of CLOs are now out of their investment period, with that the total increasing to approximately 40% by year-end. Without substantial and unexpected new CLO volume, this amount of the vehicles and harvest would imply a potential decline in the participation for longer maturity credit financings. That being said, the return of the BSL market in the future is inevitable, but we do believe there's been a more permanent structural shift to direct lending that will persist. Under this lens, we expect to see a portion of the $130 billion of leveraged loans maturing by the end of 2025 come to a private credit, creating opportunities to put capital to work when interesting opportunities arise. While activity levels have picked up and the pipeline is building, we are in a much different investment environment today than we were 12 months ago. At this time last year, capital was generally constrained across the sector, as funding activity in 2021 and the first half of 2022 peaked post-COVID, and repayment activity started to slow. Today, available capital has increased as a result of a lull in M&A activity through the first three quarters of the year, combined with a significant amount of dry powder from fundraising efforts in the private credit space. This dynamic has increased the amount of capital and number of players chasing and competing for new deals. With competition generally higher today compared to a year ago, terms are shifting as lenders are eager to deploy capital. As always, we are remaining true to our core underwriting tenants and are focused on investment opportunities that present the best risk return for our shareholders. Despite the moderately more competitive backdrop, we continue to see borrowed demand for financing partners with deep sector expertise and a broad range of underwriting capabilities. For the third quarter, we had $206 million of commitments and $152 million of fundings. These fundings were across eight new and two upsizes to existing portfolio companies. Our new investments this quarter were primarily first lien loans across six diversified user industries. New investment opportunities represented 97% of total fundings for the quarter, with just 3% of funding activities supporting upsizes to existing portfolio companies. Consistent with a moderate uptick of M&A activity in the third quarter, the majority of new investments were to support acquisitions. To highlight one of the largest fundings, Sixth Street Aged and Enclosed, a senior secured credit facility to support Lone View Capital's acquisition of smart link solutions. Our expertise in healthcare IT space provided a competitive advantage through our ability to act with speed and certainty within a tight timeline to support the sponsor's acquisition in a competitive process. Consistent with many of our other investments in the software services space, SmartLinks has a highly recurring revenue base combined with multi-year contracts providing long-term visibility into revenues. On the repayment side, we had seven full and 11 partial investment realizations totaling $159 million in Q3. For our three largest payoffs, one was driven by an acquisition while the other two were driven by refinancings. For both refinancings, the successful growth of the underlying portfolio companies allowed them to access a lower cost of capital in the bank market thereby providing a positive outcome for both our borrowers and our shareholders. Although the higher rate environment generally yields less portfolio turnover, we expect to continue to see opportunistic repayment activity in our portfolio, providing us with incremental capital for new deployment opportunities. Shifting now to the health of our existing portfolio, the portfolio remains in good shape despite the higher for longer macro environment that Josh mentioned earlier. Management teams across our portfolio Companies have shown an increased focus on liquidity management and are placing a much higher importance on capital allocation decisions today. Similar to last quarter, we are continuing to see top-line growth slowing as general slowdown and uncertainty in the economy has led to softness in bookings. However, we are still seeing revenue and EBITDA growth year-over-year and quarter-over-quarter across our portfolio. Although we have yet to see the demand destruction that we might have expected by this stage in the rate hiking cycle, we are starting to see signs of the consumer weakening at the margin as wage growth has slowed and consumer confidence is on the decline. Despite these developments, our portfolio is generally insulated from consumer discretionary trends given the B2B nature of the majority of our portfolio companies. Moving on to portfolio composition, in Q3, our portfolio's weighted average yield on debt and income-producing securities at amortized cost increased from 14.1% in the prior quarter to 14.3%. This increase was driven by the impact of higher interest rates. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment points on our loans of 0.9x and 4.7x, respectively. And their weighted average interest coverage declined marginally from 2.1 to 2.0 times, driven by the impact of higher cost of funds for our borrowers. As of Q3 2023, the weighted average revenue and EBIT of our core portfolio companies was $209 million and $69 million, respectively. In terms of portfolio underwriting and credit quality, we continue to be thoughtful about our loan structuring process with utmost focus on protecting our principal against losses from credit risk and other market factors. At quarter end, we had approximately two financial covenants per loan agreement and had effective voting control on 91% of our debt investments. In addition, we have meaningful call protection across our debt portfolio. From a credit quality standpoint, we continue to see stable deposit performance trends across a significant majority of our portfolio. The performance rating of our portfolio remains strong, with a weighted average rating of 1.17 on a scale of 1 to 5, with 1 being the strongest. Non-accruals are minimal at 0.7% of the portfolio at fair value, with no new portfolio companies added in non-accrual status from the prior quarter. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.
spk10: Thank you, Beau. For Q3, we generated adjusted net investment income per share of 60 cents and adjusted net income per share of 77 cents. Total investments were $3.1 billion, up slightly from prior quarter. Total principal debt outstanding at quarter end was $1.7 billion, and net assets were $1.5 billion, or $16.97 per share, prior to the impact of the supplemental dividend that was declared yesterday. Our debt to equity ratio decreased slightly from 1.16 times as of June 30 to 1.15 times as of September 30, and our weighted average debt to equity ratio for Q3 was 1.18 times. We continue to have significant liquidity for the size of our balance sheet with $952 million of unfunded revolver capacity at quarter end against $197 million of unfunded portfolio company commitments eligible to be drawn. At quarter end, our balance sheet and funding profile were in excellent shape. Shortly after our Q2 earnings call in August, we capitalized on what proved to be a small execution window and raised unsecured debt in the investment-grade capital markets. We priced a $300 million five-year bond offering at Treasuries plus 295 basis points. Consistent with our overall risk management framework to have floating rate assets and liabilities, We used interest rate swaps matching the principal amount and maturity of the bonds and converted the effective cost of these new notes to SOFR plus 299 basis points. We were very pleased with the strong reception we received from investors for our offering. We continue to view the unsecured market as an important component of our debt capital stack, irrespective of underlying base rates. The issuance also rebalanced our funding mix to 56% unsecured debt. In terms of our debt maturity profile, the issuance of the 2028 notes essentially pre-funded our nearest maturity, which does not occur until November of 2024. With nearly $1 billion of liquidity on our secured revolver, we have plenty of capacity to satisfy this maturity. Moving to our presentation materials, slide 8 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, We added $0.60 per share from adjusted net investment income against our base dividend of $0.46 per share. As Josh mentioned, there was $0.03 per share of non-cash accrued capital gains incentive fee expenses related to this quarter's net realized and unrealized gains. The impact of tightening credit spreads on the valuation of our portfolio had a positive $0.20 per share impact. Net realized gains added $0.06 per share to NAV, primarily from the exit of our equity investment in Clear Company, which generated an unlevered 19.7% IRR and 2.5 times MOM upon payoff. Other changes represented $0.08 per share NAV reduction, which includes $0.06 per share as we reversed net unrealized gains on the balance sheet related to investment realizations, and $0.02 per share primarily from net unrealized losses on investments from company-specific events. Shifting to our operating results detail on slide 9, we generated a record level of total investment income for the second consecutive quarter of $114.4 million, up 6% compared to $107.6 million in the prior quarter. Walking through the components of income, interest and dividend income was $107.5 million, up from $102.6 million in the prior quarter, driven primarily by higher all-in yields. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were also higher at $2.5 million compared to $0.9 million in Q2, given the slight increase in repayment activity we experienced in Q3. Other income was $4.4 million compared to $4.1 million in the prior quarter. Overall, fees remained relatively muted during Q3 relative to historical trends, as many of our payoffs were older vintage investments including our largest repayment, Cairo Touch, which was in the portfolio for over six years and generated an unlevered 14.9% IRR and 1.7-time MOM for SLX shareholders. Net expenses, excluding the impact of the non-cash accrual related to capital gains incentive fees, were $61.4 million, up from $57.2 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 7.1% to 7.5%. We estimate undistributed income of approximately $1.01 per share at quarter end. As always, we will continue to review the level of undistributed income as the tax year progresses to ensure we minimize potential return on equity drag from the excise taxes while prioritizing returns to our shareholders. Through the first three quarters of the year, We've generated an annualized return on equity on adjusted net investment income of 14.2% and on adjusted net income of 17%. We are pleased with these strong results, driven largely by higher underlying reference rates, tighter credit spreads on the valuation of our portfolio, and most importantly, the avoidance of losses on our investments. Based on our performance through Q3, we expect to meaningfully outperform the top end of our previous guidance range of $2.17 of adjusted NII per share for full year 2023 and exceed the corresponding return on equity based on adjusted net investment income of 13.2%. With that, I'll turn it back to Josh for concluding remarks.
spk02: Thank you, Ian. In closing, I'd like to take a minute to discuss how we're thinking about the future of private credit. Sounds like a big topic. As Bo mentioned earlier, the massive shift towards private credit has significantly increased the dry powder and number of players in the space. While there are more firms in today's market, we continue to be one of a few who can drive structure and terms given our ability to write sizable checks with speed and certainty of execution. In addition to the significant capital base across the Sixth Street platform that provides attractive investment opportunities for SOX, we believe that our long-term success in today's growing market will be a product of two key differentiators. First, SOG benefits greatly from the shared resources of the Sixth Street platform. We just returned from our annual general meeting of lamented partners in San Francisco last week, where leaders from each of our business units across the franchise came together to provide insights and updates on different segments of the market. The broad range of sector expertise and cross combined with cross-platform collaboration enhances the deployment opportunities available to SOX as evidenced by higher all-in returns relative to the sector. And second is our continued focus on the shareholder experience. Since our first investment in 2011, we have worked to uphold a distinguished return profile for investors by working to avoid credit losses and being disciplined allocators of our shareholders' capital. This has been our commitment to shareholders since inception. As a final note, and probably to end on a somewhat somber topic in our prepared remarks, the world feels very much in a dark place right now. There's a lot of pain and suffering. Risks and instability are elevated both economically and from a geopolitical standpoint. With this in mind, what we can do is focus on aspects that are within our control, including active portfolio management and optimal capital allocation. With that, thank you for your time today. Operator, please open up the line for questions.
spk05: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile a Q&A roster.
spk06: Our first question comes from Finning O'Shea with Wells Fargo Securities.
spk05: Your line is open.
spk09: Hi, everyone. Good morning. Josh, first question on the direct lending platform. It looks like your headcount jumped up a bit this quarter. So seeing if you could double click on that, particularly if it relates to adding a new strategy or if this is part of your build out to larger market origination.
spk02: Hey, Sam. Good morning, first of all. Thanks for the question. Look, we always continue to add resources across the platform Some of that's been in general sponsor coverage, given the opportunity in the direct lending market, given the challenges in the broadly syndicated loan market. In addition to that, we've added other expertise, for example, in the healthcare side with the senior hire that used to work with us at Goldman. So we continue to add resources for stakeholders and shareholders.
spk09: Great. Just another higher-level question. You mentioned that you expect the lagged impact of rates to play through. That sounded like it related more to the economy, but obviously direct lending borrowers have already been feeling this sort of on the front line of experiencing the higher base rates, and as we know, most have sort of treaded water so far at at very low interest coverage. So can you talk about the sort of State of the Union on the sponsor side dealing with this? Is there maybe fatigue setting in, or is there dry powder running off, or anything that would say finally catalyze a wave of keys being handed over? Or is there still a lot of runway in your view? Thanks.
spk02: Yeah. Great. Look, I think what's been a little shocking to us, and quite frankly, why we're in this hire for longer moment is that the economy has been relatively robust. So if you look at the portfolio quarter-over-quarter growth. I think it's been about 6% in our portfolio. Earnings have been kind of in line with that quarter-over-quarter, year-over-year revenue growth has been about 12%. And so you've had this, you've had obviously fixed charges go up, but you've had, you know, given the strength of the economy and the strength of the U.S. consumer, which is showing on the margin that some signs of weakening, but still historically is in a relatively good position. You've had a decent backdrop for revenue growth and earnings growth that you haven't had a huge, although you've had declining coverage, you haven't had a huge pinch. I think on the sponsor side and capitulation side, I don't think we're seeing it. For example, on lithium, which I think is, Kronos on the schedule of investments is a software business that's had some idiosyncratic challenges, but the sponsor put in a ton of capital to support the business for just a year extension. And so I think we had that marked like at a 17% yield to maturity, and the sponsor put in a whole bunch of capital to continue to support the business. So I think that was only one of two kind of quote unquote credit amendments this quarter, but it feels like we're, you know, sponsors continue to support the business. There continues to be, fundamentals continue to be okay and good, although coverages are declining.
spk07: Thanks so much.
spk05: One moment for our next question.
spk02: Hey, Finn, just real quick. The one other thing I just want to address, which I think you saw the uptick. For comprehensive purposes, we've added our European direct lending team. We see a lot of opportunity there. That's obviously part of the bad bucket, but we have done some European deals in the U.S. fund, and so that team was added to the disclosure generally. So I think that is a piece of your first question.
spk09: Yeah, that makes sense. And just to clarify, that team existed at 6th Street previously, or did you?
spk02: Yeah, yeah. No, it most definitely existed, although we got into it.
spk09: Awesome. Thanks so much.
spk07: Thanks, Tim.
spk06: Our next question comes from Mark Hughes with Truist Securities. Your line is open.
spk04: Yeah, thank you. Good morning. Related to the last question, any specific numbers you can share in terms of the percent of the portfolio, maybe at or below one times in terms of interest coverage and kind of how you're modeling that progressing through 2024 if we do stay higher for longer?
spk02: Yeah, so look outside of the mass quickly outside the non accrual name, it's about 5%. The non accrual name is American achievement and although I would say. Two of those are really good businesses that just continue to make investments and have a ton of liquidity. So it's still at a reasonably low level. And, you know, again, I think companies are really focused on capital allocation. and solving for cash flow. So I don't know if that's the peak number, but it's surely companies are very much focused on it. The other thing I would say is interest coverage across the portfolio. So we just talked about the tail. but across the portfolio is about two times. And so ended up, you know, ended up down slight. And I think that's LQA annualized. And obviously we're kind of peakish rates. And I think that was basically flat down a tenth quarter over quarter.
spk04: Appreciate that. And then, Beau, you mentioned only 3% upsize this quarter. Is that reflective of maybe pressure on the companies that they are not in a position to raise more capital, or is that just some normal variation perhaps?
spk11: Yeah, I think it's really more driven by still a rather anemic M&A market. So when we see a lot of upsizes to portfolio companies, it's generally M&A related or it can be an investment related, as Josh just mentioned. I think companies have been focused on, you know, capital allocation. They were investing heavily, you know, prior when interest rates were lower, cost of capital was lower. Now folks just in terms of people investment, in terms of capital investments are, you know, really focused on areas that drive, you know, high ROIC. So you're seeing less of that and more focus on, you know, getting super efficient, driving more cash flows. But the big driver for this would be M&A.
spk07: Understood. Thank you.
spk06: One moment for our next question.
spk05: Our next question comes from Robert Dodd with Raymond James. Your line is open.
spk03: Hi, guys. Morning. So going back to one of your comments, Josh, and Finn's question, I mean, When you look at what's going to be the differentiator for private credit businesses and obviously BDCs long term, you're normally more off down to credit. Your comment being that the sponsors are stepping up, the economy is only really weakening at the margin. So what kind of timeframe do you think the credit differentiation between portfolios, between managers, between shareholder returns. What kind of timeframe do you think that's going to manifest on?
spk02: Yeah. Yeah. Thanks. I think, let me repeat the question back, which was, if there's differentiation in shareholder experience based on credit losses, when does that start appearing? Is that the question, Robert? Yes. Yes. Okay, cool. So, let me start off and say, I think, What we should have said if it wasn't clear is that there will be more differentiation. I think there is, if you look at the data and you know the data better than I do, there has been, even in the benign credit environment of the last eight to 10 years, there's been significant differentiation already across the space as it relates to investor experience, most of that driven by credit losses. And so I would say that the differentiation already kind of exists. I think since, if you look at since our IPO, for example, I think ROEs for the space have been averaged about 7%. Top quartile has been about, first point into the top quartile has been about 9%. We've been 13.3. Most of that's been on the credit line. And so there's already been vast kind of experience already. The funny thing about credit and losses and defaults, they tend to lag the economy. And so I would suspect it will happen in the next, you know, 12 to 15 months if it does happen. I would say the other vector I would think is I expect that, Private credit, so I think there's going to be dispersion and experience for private credit for people. I also think on the margin, private credit will do better than broadly syndicated credit. I think the big differentiator for private credit generally has been their ability to tilt into industries. And historically, it's financed higher quality industries. put aside health care services for a second which we don't really have exposure to but they they got to pick better industries and they were you know they didn't have to be in-depth huggers so I would expect that private credit outperforms on the loss line and on the total return line probably syndicated credit and I expect that there will be differentiation within private credit that different more differentiation that differentiation already existed Pre this moment in time. Got it. I appreciate that.
spk03: The second thing that kind of has historically driven your performance has been the fee income. And you tend to get more call protection than an average private credit lender, etc. when i look you did disclose the um if i look at your core protection in the portfolio the potential core protection of the portfolio today versus principal it's the lowest level it's been in a year i mean there's been a lot you know fee income was up this quarter but what's left looks to be relatively proposed potentially lower um is that you know is is some aging out of the portfolio and that's just taking the ratio of the two lines um it's some aging and portfolio is that just uh just a random volatility thing.
spk02: I think, let's come back to exactly, but I think some of that, if you're looking at the fair value as a percentage of call price,
spk03: I'm taking the ratio of that versus the fair value as a percentage of principal to get the fair value as a percentage of the core price.
spk02: Yeah, the fair value of percentage of core prices, most definitely that went up because fair value went up. But the portfolio is most definitely stuck around longer than usual given spreads have, you know, we've been in a wider spread environment, so repayments have slowed. And so there's been a slow, I won't call aging out, but there's been a roll down of call price in the book. And so I think if you look at the fair value side, fair values are up a little bit and repayments have slowed a little bit. Got it. Thank you.
spk05: One moment for our next question. Our next question comes from Melissa Waddell with JPMorgan. Your line is open.
spk01: Good morning. Thanks for taking my questions today. A lot of them have actually already been asked and answered, so I thought it might be helpful to look at maybe a couple of the new investments made during the quarter. There were a couple that were larger in size. If I'm looking at this right, maybe Skylark and Mercura. Those are listed as manufacturing and transportation sectors, respectively. Just wondering if you could walk through sort of your thinking there on, you know, are those a bit more cyclical? How do you get comfortable with that? Appreciate it.
spk02: Yeah. Yeah, Mercura is actually a software business mostly for providing and software and outsourcing business providing support solutions and cost management and payments to support the maritime and shipping industry. So think of it as business services software in the shipping industry. And so we think we're a little bit cyclical, but not cyclical, but very, very high quality business. The other name you mentioned, I think, was? Skylight from the ERP to the manufacturer. ERP, again, a European investment, ERP, software ERP business, mostly in-market manufacturing, so not cyclical.
spk06: Thank you.
spk05: As a reminder, to ask a question, please press star 1-1 on your telephone. And our next question comes from the line of Ryan Lynch with KBW. Your line is open.
spk08: Hey, good morning. First question I had was kind of a long, maybe convoluted question regarding your comments on... We're excited about that, Ryan.
spk02: That's a good meeting.
spk08: All right, well, It kind of has to do with just your comments on the broadly syndicated loan market. A lot of deals maturing by the end of 2025 and that as a potential opportunity. There's already been a decent amount recently of direct lenders taking out some broadly syndicated loans. I look at, you know, PeckVet, Hyland, Finestra. I don't believe that Sixth Street has kind of been an active participant in that market, but please correct me if I'm wrong in that. I would just love to hear a couple of questions on how do you view those? I'm sure you've looked at those deals. How do you view those current deals that have been refinanced out of the broadly syndicated low market, the quality of those deals? Are those deals in the future that potentially could come out? Would those be deals that would go into the BDC or would that go more your perpetual private BDC that maybe has a little bit more of a upper middle market focus? And then one of the critiques or the fears is that investors have is that, you know, the broadly syndicated loan market is a little challenged right now. But if that maybe changes a little bit and that can open back up, there's a fear of why are these investors going to private credit versus staying in? If they're already in the broadly syndicated loan market, why not stay in there when potentially you could get better terms? So why stay? would they go to the private credit market unless it's their guys who cannot finance in the broadly syndicated loan marks. So kind of like adverse credit selection. So kind of, if you can go over some of that stuff.
spk02: Yeah. Let me, let me, let me, a, I want to correct on the record, we don't manage a perpetually non-traded VDC. So I want to make sure that is clear for people. We have a institutionally backed drawdown private vehicle, but that is very, very different structurally. So I want to put that aside. Look, let me take it. I don't want to talk about specific credits. What I would say is that the great thing about our business is that we get up every day and we get to underwrite and make decisions that we think are appropriate for our shareholders' capital. And so the names you mentioned we've looked at and we didn't participate. And that's the great thing about a marketplace. People can have different views, different views about required returns, cost of capital, documents, momentum. you know, all those things. And so, and people have different risk tolerances and people have different incentives about putting money to work or not putting money to work, et cetera. So I don't, I like, you know, that's the great thing about a marketplace. And that's what our investors pay us for. The second thing I think you said is kind of what's happening in the broadly syndicated loan market. Look, I think the broadly syndicated loan market is, most definitely structurally more challenged. That market has been 60% buyers have been CLOs, 60% of those capital structures are AAAs. You know, AAAs are difficult to find in place today outside of a unique buyer base, particularly in Japan. And so that market is starting to amortize. And so that's the technical backdrop of that market. And the fundamentals of that market, my guess, are going to weaken. Downgrades are outpacing upgrades. Recoveries have been low. And so a lot of the existing CLOs are going to start amortizing. And people are going to have a fine, and they're subject to weighted average life. So the fundamentals are weakening slightly. The technicals are not great. Capital is going to have to find a new home. And, you know, some of it's going to flow as an opportunity set into the private market. And I wouldn't call, I wouldn't necessarily think that's all adverse selection. Although people are going to have different views on what that should be priced at, and what are good credits and bad credits, et cetera. And by the way, I'm not suggesting any of the deals that we've passed on were bad credits. So I don't think there's a, hey, all these things are going to be adversely selected. In addition to that, sponsors and companies have different business models and might need new capital and might, you know, which won't be available and might value certainty more, which is not available in the broadly syndicated loan market. So I don't think it's as linear as, you know, things are going to roll, you know, all the bad credits are going to roll into the private credit market at all. So I think the one thing I also should note is that People talk about a maturity wall in the broadly syndicated loan market in the global financial crisis, which never really materialized. The difference between today and in 2009 and 10 is that policymakers had the ability to lower rates and push people back into risk assets. Today, the policymakers don't have that. So, I think the maturity wall is going to have to be, you know, it's going to be harder to deal with.
spk08: Okay. That's helpful. Good background, thoughtful response and all that. The other question I had, maybe for you, Ian. You guys talked about some of the declines in NAV in 2022 from spread widening. You guys have had and continued this quarter of some spread, I think, tightening and an increase, kind of an uplift from spreads. I'm just curious. I know this is something we could probably calculate on our own by looking at your portfolio, but I'd just be curious if you have any sort of commentary on How much of that spread do you think is still, and meaning an uptick in loan values, do you think it's still to be recovered, or do you think we're kind of mostly done with it at this point?
spk10: Well, I think we're a little over halfway done, Ryan, so there's a little bit more to come. Some of that will come back to us through natural repayment activity, but we're probably, with call it two-thirds of the way on that particular pool of assets that was in place back in June of 2022.
spk02: Yeah, I mean, I think we try to do a pretty good job of bridging it. which is some of the portfolios that we try to look at the portfolio and the apples to apples basis before the Fed rate hiking cycle started. And I think we did it on a per share basis and how much of that has come back. And then obviously the portfolio that we put in the ground in the wire spread environment, most definitely at spreads of type and got a lot of that benefit. And so I think EANS is, I think that we will go back to the script and see the script. And then I think we, I think EANS instinct is right. And when I look at the fair value of like 98 and a half or something like that, my guess is, you know, EANS probably instinct is right. Okay.
spk08: Understood. I appreciate the time today. That's all for me.
spk05: And I'm showing no further questions at this time. I would now like to turn the conference back to Josh for closing remarks.
spk07: Great. Well, first of all, thank you for your participation.
spk02: We'll keep working hard for you. Obviously, as I said in my final remarks, it feels dark out there in the world with elevated risks. We'll keep working hard, and I hope everybody enjoys their Thanksgiving and holiday season to come, and we'll talk to people after Q4 and Q1, if not sooner. Thank you so much. Thanks, everyone.
spk05: This concludes today's conference call. Thank you for participating. You may now disconnect.
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