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spk32: Good morning and welcome to 6th Street Specialty Lending, Inc.' 's fourth quarter and fiscal year ended December 31st, 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, February 16th, 2024. I will now turn the call over to Ms. Cammie Van Horn, Head of Investor Relations.
spk27: 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.' 's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the fourth quarter and fiscal year ended December 31, 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 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, 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.
spk19: Thank you, Kimmy. Good morning, everyone, and thank you for joining us. With us today is our president, Beau Stanley, and our CFO, Ian Simmons. For our call today, I will review our full year and fourth quarter highs and pass it over to Beau to discuss activity in the portfolio. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening up the call to Q&A. After the market closed yesterday, we reported fourth quarter adjusted net investment income of $0.62 per share or an annualized return on equity of 14.5%. an adjusted net income of 58 cents 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 gain instead of fee expense, were less than a penny per share higher. The difference between this quarter's net investment income and net income per share was primarily driven by the reversal of prior period unrealized gains related to investment realizations. Other drivers included unrealized losses from portfolio company-specific events, which were largely offset by realized and unrealized gains, largely from the impact of tightening credit spreads on the valuation of our investments. For the full year 2023, we generated adjusted net investment income per share of $2.36, representing a return on equity of 14.4% and a full-year adjusted net income per share of $2.66 or return on equity of 16.2%. Long-time followers of our business will know that we measure success based on returns, and 2023 was a strong year for shareholder returns. Excluding the post-COVID year rebound in 2021, full-year return on equity on adjusted net income of 16.2% reflects the highest calendar annual return equity since our IPO in 2014. While this partially reflects the round tripping of 2022 results, reviewed on a combined basis over the last two years, we remain pleased with our performance relative to the sector and in context of a complex macroeconomic environment. Over the last two years, we experienced the fastest rate hiking cycle in history, contributing to increased volatility and economic uncertainty. Despite these headwinds, we generated an average annualized return on equity on adjusted net income of approximately 12% for fiscal years 2022 and 2023. While we don't have a complete set of peer data available yet, we believe these returns are nearly double that of our peers over the same two-year period. That is supported by a two-year return on equity on a net income of 6.5% for our peers due September 30th, 2023. We believe that the return profile we delivered is largely the result of our disciplined approach to capital allocation. During 2023, we capitalized on attractive opportunities set by growing the balance sheet and issuing equity in May while operating at the upper end of our target leverage range throughout the year. We leaned into an investment environment where the deployment opportunities generated with earnings in excess of our marginal cost of capital. Our track record for efficiently allocating shareholder capital has been rewarded as evidence by our stock trading above book value. As a result, our shareholders benefit from access to the more recent asset vintage. We believe this exposure will continue to drive differentiation in our returns relative to the industry. We are humbled by what we've achieved in the past, but I'd like to spend time on how we're positioned in the future, starting with the health of the portfolio. Despite the challenging operating environment over the last two years, from elevated interest rates, higher inflation, and uncertain geopolitical events, The portfolio has shown resilience and remains in good shape. The weighted average revenue and EBITDA of our core portfolio companies both increased 6% quarter over quarter. We continue to have only one portfolio company on Monaco, which represents less than 1% of the total portfolio by cost and fair value. Interest coverage remains stable on a weighted average basis of 2.0 based on interest rates as of quarter end. Given the shape of the forward interest rate curve, we expect this to be the trough for interest coverage of our portfolio companies. While we highlight the overall health of the portfolio, the tails are getting bigger. We anticipate this will be a theme for 2024 for the sector as idiosyncratic credit issues arise and portfolios and losses drive divergence in returns, which I'll discuss further in a moment. The reality for private credit managers is the illiquid nature of the investment assets and the requirement to be long-only makes it challenging to reposition an existing portfolio with any level of speed as macroeconomic conditions change. We feel confident about the strength of our in-the-ground portfolio today for two key reasons. First, there's a deliberate asset allocation in our portfolio characterized by 91% personally and senior secure loans to businesses with strong underlying union economics. And second is the significant exposure we have to recent vintage assets, which makes up nearly 40% of our debt investments by fair value as of quarter end. These investments were underwritten after the start of the rate hiking cycle for higher quality companies with lower LTVs. Yesterday, our board approved a base quarterly dividend of 46 cents per share to shareholders of record as of March 15th, payable on March 28th. Our board also declared a supplemental dividend of $0.08 per share relating to our Q4 earnings to shareholders of record as of February 29th, payable on March 20th. Our quarter in net asset value per share, pro forma for the impact of the supplemental dividend that was declared yesterday, is $16.96. And we estimate that our spillover income per share is approximately $1.04. We would like to reiterate our supplemental dividend policy is motivated by careful consideration of a number of factors, including the RIC distribution requirements, not burdening our returns with excess friction costs incurred through excise tax, and our goal is steadily building net asset value per share over time. In connection with the Board, we analyze this framework on an ongoing basis. Before passing it to Beau, I'll spend a moment on how we're thinking about the broader macroeconomic environment and the impact for the sector. As we said in our last two earnings calls, we believe BDCs are at peak earnings, and we reiterate this view based on the shape of the forward interest rate curve. More broadly, our outlook for this sector remains cautious, as we know from history that credit deterioration takes time, and therefore, losses lag. This was evidenced during the global financial crisis, which began in 2007, and defaults didn't peak until 2009. As the credit cycle continues to evolve in 2024, we expect to see three impacts for the sector. First is a decline in net investment income driven by the downward shape of the forward interest rate curve. Second is an uptick in non-recruits from credit deterioration resulting in further declines in net investment income. And third is a downward pressure on net asset value driven by the potential for lower fair values from credit weakness and dividend policies and excessive earnings that result in a return of capital. The good news for our business is that we feel confident in our asset selection and credit quality, given our approach for being highly selective in our ability to lead in attractive investment environments. Additionally, we view the potential for lower interest rates and tighter spreads will likely increase portfolio turnover. This will result in potential for incremental economics through activity-based fees to offset the decline in net investment income from lower base rates. And finally, we are highly confident in our ongoing ability to overrun our base dividend, which Ian will discuss in more detail. With that, I'll pass it over to Beau to discuss this quarter's investment activity.
spk16: Thanks, Josh. I'd like to start by laying 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. 2023 was another productive year for private credit as the asset class continued to grow in terms of both supply and demand. On the supply side, private debt fundraising continued to outpace most private asset classes and investors allocate more capital to the sector. As for demand, the number of LBOs financed in the private credit market was more than six times the number financed in the broadly syndicated market in 2023, highlighting a clear preference for the private credit product. While private credit market share was up significantly in 2023, we expect to see a more balanced is to be more balanced in 2024 as a syndicated market becomes more active again. In terms of activity levels, transaction volumes are meaningfully lower in 2023. For context, total U.S. LBO transaction volume reached its lowest level in over 10 years and was down 37% from the trailing 10-year average. Despite a general slowdown in M&A transactions, we benefited from the large market share shift from the broadly syndicated to the private credit market. As the BSL market regains share in the future, we feel confident in our ability to find deployment opportunities driven by the all-cycle business model that we have created. This means that even when transaction volumes are lower or market share shifts, we remain active through our omni-channel sourcing approach that is not layered solely to M&A, sponsor activity, or specific sectors. Further, we are not reliant upon certain credit market conditions to prudently put capital to work while remaining highly selective. In Q4, we provided total commitments of $316 million and total fundings of $278 million across nine new portfolio companies and upsizes to five existing investments. We experienced 145 million of repayments from four full and four partial investment realizations. For the full year 2023, we provided 959 million of commitments and close 808 million of fundings. New investments represented 94% of total funding in 2023, with only 6% supporting upsizes to existing portfolio companies. Total repayments were $469 million for the year, resulting in net portfolio growth of $339 million. In 2023, portfolio churn was 15%, which is less than half of our long-term average of 41% since IPO. This slowdown in portfolio turnover contributed to our second highest net deployment year resulting in year-over-year portfolio growth of 18%. Given the tightening cycle and spreads, we expect to see increased level of repayment activity in 2024, creating incremental capacity for new investment opportunities. On funding trends in Q4, 97% of our new investments were in first lien loans, reinforcing our long-term focus on investing at the top of the capital structure. All nine new investments were cross-platform deals, where we leveraged the size of Sixth Street's capital base to lead and participate in transactions that presented attractive risk-adjusted return opportunities for high-quality credits. Our sector selection remained largely consistent with a broader software theme across the portfolio, including several new investments in fintech companies. As we've said in the past, we are more focused on the resilience of the underlying business models rather than the specific sectors or industries. Exposure in our portfolio to software businesses is driven by the attractive fundamental characteristics we see in these companies, including variable cost structures, mission-critical solutions, recurring subscription-based revenues, and high switching costs. To highlight one of the largest transactions during the quarter, 6th Street aged and enclosed on a senior secured credit facility to existing borrower, Kyriba, as part of a refinancing transaction. Over the life of the initial Sixth Street investment in 2019, Kairiba has shown strong growth resulting in e-leveraging and has become a leader in cloud-native treasury management software. Our long-term relationship with the company coupled with Sixth Street's ability to commit to the entire facility provided an opportunity to continue to grow with a company we like and know well. The exit of the original facility generated a gross unlevered asset level IRR and MLM of 13% and 1.7X respectively for our shareholders. We'd like to now take a moment to provide a quick update on one of our retail AVO investments, Bed Bath & Beyond. Since our last update, we've continued to receive periodic principal payments through the liquidation process. At quarter end, the outstanding par balance represents only 1.3% of our total assets. Moving on to repayment activity, the majority of the payoffs experienced during the quarter were older vintage names that were driven by refinancings. As spreads tightened in the back half of the year, we started to see borrowers take advantage of the opportunity to lower their cost of financing. This has continued into 2024, as January marked the highest level of repricing activity in the leveraged loan market in four years. We expect this may drive an increase in opportunistic refinancings, which have the potential to lead to incremental activity-based fees. In Q4, two of our largest payoffs, Price Chopper and Carlstar, which were 2021 and 2022 investments, respectively, included call protection as the borrowers capitalized on the ability to access lower costs of capital. These investments each resulted in gross unlevered asset-level IRRs of 16%. From a portfolio yield perspective, our weighted average yield on debt and income-producing securities at amortized cost decreased slightly quarter over quarter from 14.3% to 14.2%. The weighted average yield at amortized costs on new investments, including upsizes, for Q4 was 13.6% compared to a yield of 13.8% on exited investments. Looking at the year-over-year trends, our weighted average yield on debt and income-producing securities at amortized costs is up about 90 basis points from a year ago. A significant increase in our yields in 2023 illustrates the positive asset sensitivity of our business. from increased base rates 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 attached and detached points of 0.9 times and 4.7 times respectively, and the weighted average interest coverage remain constant at 2.0x. As a reminder, interest coverage assumes we apply reference rates at the end of the quarter to run rate borrower EBITDA. As of Q4 2023, the weighted average revenue in EBITDA for our core portfolio companies was $230 million and $79 million, respectively. Finally, the performance rating of our portfolio continues to be strong, with a weighted average rating of 1.16 on a scale of 1 to 5, with 1 being the strongest, representing an improvement from last quarter's rating of 1.17, driven by growth in the portfolio from new investments. We continue to have minimal non-accruals with only one portfolio company representing less than 1% of the portfolio at fair value and no new names added to non-accrual status during Q4. With that, I'd like to turn it over to my partner, Ian, to cover our financial performance in more detail.
spk03: 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 $0.62, resulting in full year net investment income per share of $2.31. Our Q4 net income per share was $0.58, resulting in full year net income per share of $2.61. We accrued $0.05 per share of capital gains incentive fees in 2023. However, none of this amount was payable at year end. Excluding the $0.05 per share that was accrued this year, our adjusted net investment income and adjusted net income per share for the year were $2.36 and $2.66, respectively. At year end, we had total investments of $3.3 billion, total principal debt outstanding of $1.8 billion, and net assets of $1.5 billion, or $17.04 per share, which is prior to the impact of the supplemental dividend that was declared yesterday. Our ending debt to equity ratio was 1.23 times, up from 1.15 times in the prior quarter, and our average debt to equity ratio also increased slightly from 1.18 times to 1.22 times quarter over quarter. For full year 2023, our average debt to equity ratio was 1.2 times, up from 1.03 times in 2022. We operated at the upper end of our previously stated target leverage range during the year and issued equity to take advantage of an attractive investment environment despite lower portfolio churn. We have started to see repayment activity pick up in 2024, which we expect will continue. In terms of our balance sheet positioning at year end, we had $820 million of unfunded revolver capacity against $226 million of unfunded portfolio company commitments eligible to be drawn. our funding mix was represented by 52% unsecured debt. Post-quarter end, we further enhanced our funding mix and liquidity profile through a $350 million long five-year bond offering in early January. Adjusted for the issuance, our funding mix reached approximately 70% unsecured, increased our unfunded revolver capacity to approximately 1.1 billion, and further improved our debt maturity profile. As discussed on last quarter's call, following the issuance of unsecured notes in August 2023, we have effectively pre-funded our nearest maturity of $347.5 million of 2024 notes, which occurs in November. With over $1 billion of liquidity on our secured revolver following the January offering, we have plenty of capacity to satisfy this maturity. As a result, we feel that our balance sheet is in excellent shape. Moving to our presentation materials, slide 10 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added 62 cents per share from adjusted net investment income against our base dividend of 46 cents per share. The impact of tightening credit spreads on the valuation of our portfolio had a positive 13 cents per share impact to net asset value. There was a 15 cents per share decline in NAV from net unrealized losses driven by portfolio company-specific events Other changes included $0.04 per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and a penny per share uplift from net realized gains on investments. Pivoting to our operating results detail on slide 12, we generated a record level of total investment income for the third consecutive quarter of $119.5 million, up 4% compared to $114.4 million in the prior quarter. Walking through the components of income, interest and dividend income was $112.1 million, up from $107.5 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 $3.5 million compared to $2.5 million in Q3, driven by call protection on two of our largest payoffs, Other income was $3.9 million compared to $4.4 million in the prior quarter. Net expenses, excluding the impact of a non-cash reversal related to unwind of capital gains incentive fees, was $65 million, up from $61.4 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 7.5% to 7.8%. and higher incentive fees as a result of this quarter's over-earning. During 2023, higher interest rates provided an earnings tailwind for BDCs. As interest rates increased, the floating rate assets that comprised the majority of BDC portfolios contributed to higher all-in yields for the sector. We earned $2.36 per share of adjusted net investment income, which reflects our highest annual operating earnings since inception. While we believe that operating earnings for BDCs likely peaked in 2023, we feel that our business is positively positioned to continue to outperform the sector in 2024, driven in part by our liability structure. As a reminder, 100% of our liability is a floating rate, as we use interest rate swaps on our fixed rate unsecured bonds to swap them to floating. Given the shape of the forward interest rate curve today and the expectation that rates will decline in 2024, our cost of funding will also decrease. As a result, the earnings profile of our business will show less sensitivity to falling rates relative to our peers. That being said, we recognize that being levered at approximately one-to-one times debt to equity minimizes the impact from liability sensitivity for us and the industry. Ultimately, we believe it is all about the left-hand side of the balance sheet, as asset selection has greater impact. Before passing it back to Josh, I want to provide a framework for how we are thinking about guidance for this year. We are mindful that the movement of spreads will be a key variable for NII in 2024, including the impact it has on the level of activity-based fees we expect to earn. Based on our financial model, which incorporates the forward curve and assumes spreads and leverage remain constant, We expect to target a return on equity on net investment income for 2024 of 13.4% to 14.2%. The lower end of this range reflects muted activity-based fees similar to what we experienced in 2023, while the upper end reflects a more normalized level of activity-based fees. Using our year-end book value per share of $16.96, which is adjusted to include the impact of our Q4 supplemental dividend, This corresponds to a range of $2.27 to $2.41 for full year 2024 adjusted net investment income per share. Given our belief that the sector has reached peak earnings, we are mindful of the earnings power of the business as interest rates decline with respect to our dividend level. Assuming our balance sheet remains constant as of quarter end, we expect every 25 basis points decline in reference rates to lower net investment income by 3 cents per share on an annualized basis. Based on the forward curve, this framework illustrates that our base dividend of $1.84 per share remains well-protected through 2026. Back to you, Josh.
spk19: Thank you, Ian. There's a lot to be excited about for the year ahead. As you heard from Beau and Ian, the pipeline continues to build, and the balance sheet is in excellent shape. More importantly, We believe we have the right team and resources to differentiate our business to benefit shareholders going forward. Beyond the dedicated direct lending team, we leverage the knowledge and sector expertise across the Sixth Street platform, including our energy, healthcare, retail asset-based lending teams. This broad range of sector expertise not only widens the top of our origination funnel, but also allows us to provide financing solutions for more complex and unique investment opportunities. As one of a few lenders with these capabilities, we can generate alpha from these transactions. We remain focused on finding the best risk-adjusted return opportunities for our stakeholders, and so the SOF is well positioned to do so. In closing, I want to take a moment to thank each and every shareholder of our business for your continued support over the last decade. Next month marks our 10-year anniversary since our initial public offering in March 2014. Over this period, Through the end of 2023, we have generated an annualized return on adjusted net income of 13.5% and a total return for shareholders of 276% on a dividend reinvested basis. We have achieved these results by protecting our stakeholders' capital through sound capital allocation and minimizing credit losses. We are proud of the track record we've delivered over this period of time and believe we are well positioned to continue building upon what we have achieved thus far. With that, thank you for your time today. Operator, please open the line for questions.
spk32: Thank you. As a reminder, to ask a question, 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. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mickey Schlein from Lattenburg-Solomon.
spk21: Yes, good morning, everyone. Josh, there's a lot of demand, as you mentioned, for private debt capital from larger borrowers. And I see that the portfolio's average EBITDA has about doubled over the last couple of years. I'm assuming some of that is just organic growth of your borrowers, but some of it is probably due to going up market. And I'm curious how you're viewing the terms available in the upper middle market versus the middle market where you've had excellent results historically?
spk19: Hey, Mickey. Good morning. Thank you. Look, I think what we've seen is the best risk-adjusted return and, quite frankly, the most activity levels has been upmarket. Maybe that changes, but we have seen, at least from our perspective, the kind of lower middle market, middle market, not as active as the big market, and our capital's been more valuable in the upper middle market given up until now, the probably syndicated low market was shut down. My guess is that ebbs and flows over time, and with SOX, I think our shareholders get both, and we can go up market, and given that we have a big platform and big pools of capital, SOX shareholders can participate in the up market deals, And then given the mid-market deals where, you know, we still write $30 to $50 million positions are also important to SOX. So I think we're uniquely positioned where we can toggle between markets and we can participate in both. Not many players can do that. Some are so large that they don't care about the middle market. Some are small that they don't have the balance sheet to participate in the market. But we've gone where the risk-adjusted returns and activity levels have been, but my guess is that changes.
spk21: Thanks for that, Josh. That's helpful. And just one follow-up. Ian, could you repeat how much accelerated OID and prepayment fee income was accrued in the quarter?
spk10: Sure, Mickey. Accelerated OID and prepayment, it was about $0.04 per share.
spk19: That was recognized, not approved. Yeah, it was actually heard.
spk21: Okay, thank you for that. Those are all my questions.
spk32: Thank you. Thank you. One moment for our next question. Our next question comes from the line of Brian McKenna from Citizens JMP.
spk23: Great, thanks. Good morning, everyone. So I believe last year was a record year of deployment for the broader Sixth Street platform. And Josh, I think you've said in the past you prefer investing environments where there's a lack of capital and liquidity broadly in the market. So with sentiment in the capital markets recovering here to start the year, how should we think about deployment activity throughout 2024 for the firm relative to 2023?
spk19: Yes, that's a great question. So I think you, on the direct winning side, no doubt last year was a largest deployment year across the 6G platform and funds. I would suspect that, I would suspect it's staying slightly down maybe. I think activity levels, general activity levels in the environment are going to be better, but market share is going to be down. And so last year, activity levels were really, really muted. I think as Beau mentioned, it was like 25%. What was the statistic you mentioned about M&A volumes?
spk15: Yeah, there was a 10-year historic low down 37%.
spk19: I think that's most definitely for a variety of reasons. One is less volatility in the interest rate curve. So people, private equity, dry powder, pressure on DPI for private equity sponsors to get money back to LPs. There's a lot of reasons why that's going to change on the activity level front. I think private credit market share will go down, and I think Sixth Street's market share in the private credit will probably stay the same and go up, given our capabilities. So I would say it's probably similar or the same. Last year was a really unique opportunity to deploy capital. And look, I don't know if this was clear in the transcript, but I think there's this circle for 6th Street shareholders, which is we deploy capital well, we protect the balance sheet, the stock trades above book value. Then those shareholders were actually able to participate in times like last year because we were able to raise capital. Few were able to raise capital in that environment. And 40% of the assets today are assets from a post-rate hiking cycle. of a more interesting vintage, to be honest. So most of that vintage did not end up in the current publicly traded BDC shareholder base. And so I'm very proud of what we've been able to do. I'm thankful for the SOX shareholder support. And ultimately, they got access to that vintage of last year's
spk23: Yeah, got it. Super helpful. And then just to follow up, you know, ABF is another area of focus across the broader alternatives industry. So how are you thinking about this opportunity at Sixth Street? Are you looking to expand capabilities here? Is there the potential to add some of these assets to TSLX's portfolio over time? And then could you maybe just walk through how these yields on these types of deals compare to the relative, you know, kind of regular way direct lending deals that you're doing?
spk19: Or maybe it's in... I think we added one last quarter. So, AVS is a large focus for us. We have a spectacular partner. We always had the capability business. We had a spectacular partner named Michael Dryden who ran that business at Credit Suisse that we hired before the issues at Credit Suisse. And we've built out a team and expertise across the different idiosyncratic asset classes in the ABF. We actually closed, it's called, I think it shows up as CLGF Holdings on November 7th at $325 million secure term loan. for a borrower that's basically ABF collateral. So that shows up. And those yields, I think were, give me one second. We'll come back to you, but I think my guess was mid-teen. It was a mix of senior and junior capital. Yeah, the 15% kind of went in, I guess. So, look, we have those capabilities. We're excited about it. We're excited about the team at Sixth Street. And I think that's part of the benefit for SOF shareholders is they get the benefit of this broad-based platform that, quite frankly, a monoline standalone manager have a $3 billion BDC to provide shareholders.
spk29: Got it. I'll leave it there. Thank you, guys.
spk19: Thanks so much.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Finian O'Shea from Wells Fargo.
spk30: Good morning, Fin.
spk02: Hey, good morning. How are you? So first question, with SSLP, the private BDC, up and running now, can you touch on the degree of overlap that they've had in origination so far? And then maybe how different the deals look, like how far apart are they in, say, enterprise value? I'll leave it there.
spk19: Yeah, so... Just for people to know, Sixth Street Lending Partners is a private BDC that's predominantly institutionally backed, just like SLX, focused on the large cap space. And so how we define kind of, you know, softly duties to offer is above $200 million credit facilities, SSLP has a first look below $200,000 SLX. given the size of the relative balance sheets. Given the co-investment order, I want to answer your question specifically. Given the co-investment order requires once a public fund, so those would be SSLP or SLX, invest in a company, they have to invest to continue to make follow-on investments. And so the degree of overlap is high in that by name of portfolio company. So you will see some small total positions. And if there's effectively a duty to offer an SSLP above $200 million, SOX will take a small piece of that so they might be able to participate in future transactions. If below $200 million, those credit facilities typically grow, SSLP will take a very small position So the degree by number is high. The degree of portfolio overlap by position size is small.
spk02: Awesome. That's very good color. Just a small follow-up on Bed Bath & Beyond. You seem to flag that as a bit of a special case here maybe, but it's still pretty well marked. So I guess can you give us some color on what the remaining collateral looks like, what kind of timeline? Sure, go ahead.
spk19: Probably, my guess, so today we've received probably about 56% including principal interest back on our original investment. The collateral pools are a whole bunch of pools ranging from receiving LCs back on the vendor program with banks, from insurance workers comp LCs coming back to litigation pools. And so there's varying time tails and timelines, but we, as of now, we think that it's still pretty well supported.
spk34: Great. Thanks so much.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Kenneth Lee from RBC Capital Markets.
spk12: Hey, good morning. Thanks for taking my question. In terms of the originations this year, last year there was a considerable mix within new investments versus upsized or add-on financing. Wondering for this year whether you would expect a similar mix or could it be a little bit more balanced? Thanks.
spk19: Yeah, so I think our fundings this year, most of it was new, I think. Like 94% of it was new. We were an agent on the majority of that. You know, I don't have a call. My guess is that it will probably be more balanced. A portfolio company is becoming more active and doing add-ons. We've started to see a little bit of that. I think we're talking about a name later today where there's, you know, I guess two names later today that are upsized opportunities. But, you know, I don't really have a crystal ball. The reality is last year, anything that was new, a change of control, new buyout, or, you know, financing had to be done in the private credit markets. And so we took advantage of that for shareholders.
spk12: Gotcha. Very helpful there. And then just in terms of a follow-up, any updated outlook on potential opportunities from banks optimizing their balance sheets due to the changing regulatory framework of banks?
spk19: Yeah, look, I would say, broadly speaking, and this is calling balls and strikes, bank balance sheets feel more stable. at least the large, the money center banks. I think the deposit shifting that was happening where deposits were flowing in the treasuries has kind of peaked and flowed and might slightly be reversing on the margin. And so deposits are much more stable in banks. And so we are seeing banks come back into purchasing securities including CLO, AAAs, et cetera. So that's been a, from a bank standpoint, I think that's been slightly different than last year. I think the smaller banks or those banks that have significant commercial real estate exposure obviously are going to, might not have liquidity issues like they did last year. who had issues last year had liquidity issues and not. So First Republic, obviously signature, you can go through the list. Banks this year, I think, are going to have more credit issues. Those credit issues will be around some, my guess is commercial real estate. Most banks don't hold non-investment grade corporate credit on balance sheets.
spk06: Got you. Very helpful there. Thanks again.
spk31: Thank you. One moment for our next question.
spk32: Our next question comes from the line. I'm Melissa Weddle from JP Morgan.
spk28: Good morning. Thanks for taking my question. First, I wanted to clarify an answer, I think, Josh, that you had to one of the earlier questions around origination outlook for the year. I think you were referencing roughly the same or maybe a little lower. I wasn't sure if you were referring to sort of gross originations or net, or were you talking about market share?
spk19: Yeah, first of all, I was talking about this. I think the question was related to the entire 6th Street platform. Um, uh, and so, uh, the platform last year, I think on the growth side, they're probably four to $5 billion of kind of origination. So, um, obviously some, you know, some of that has discussed based on kind of appetite when an SLS, I, a question I was referring to was growth. Um, but it was in the broader platform. My guess is repayments will pick up this year. We had the lowest repayment year, I think, ever last year. As I think Bo mentioned in the script, it was 15% portfolio turnover versus the average of like 40%. The average loan historically has been around for two and a half years or something. Last year, which is not the math you should do, the average loan would have been around, you know, around for five years or something like that, or six years, seven and a half, six years. So I think my guess is growth will be the same, just slightly lower maybe. I don't know. We're investors. We're going to do things that we think are interesting for our stakeholders. But net surely will be lower because portfolio turnover will pick up.
spk28: Okay. I really appreciate that clarification. As a follow-up, I wanted to circle back to something Ian had said about the outlook for the upcoming year and sort of thinking about the ROE framework. It seems like one of the embedded assumptions there is that spreads will remain roughly stable with sort of the variable factor maybe being around activity levels. I guess I wanted to just get your thoughts on you know, sort of spread stability in an environment where you're seeing a reopening of the broadly syndicated loan market? And is that a fair assumption, or could we see things narrow a bit more? Thank you.
spk19: Yeah, look, I think we're kind of hedged on spreads, at least in the near term, on earnings. Look, I think the earnings, when you think about the activity level, even at the top end of our guidance, wasn't that high. As with Lisa and I had per share. If you see spreads come in significantly, my guess is there's going to be a lot more activity level income in the book. So activity level income in 2023 was, you know, call it, I'm doing the math, 10, I mean, on Accelerator OID in prepayment fees was 10 cents per share. In 2022, it was $0.27 per share. In 2021, it was $0.47 per share. So even in our 2024 estimates in the range, it's still pretty muted. So what I would say is at least for 2024, if spreads do come in and we see some pressure on net interest margin, you surely will see activity levels pick up. That could be easier to go.
spk32: Got it. Thank you. Thank you. One moment for our next question.
spk31: Thank you. Our next question comes in the line of Eric Zwick from Hovde Group.
spk24: Good morning. Hi. Just a quick follow-up on the pipeline. I'm curious, as you look at it today, if there are any particular industries that are either comprising a larger share or look particularly attractive, and kind of on the flip side, if there's any industries that you're cautious or shying away from today.
spk19: Yeah. So, good question. Look, I think there's – I would frame it a couple ways. I think there are, in 2024, I'm more hopeful that our Good company, bad balance sheet opportunity set, which has historically been kind of a lane for us. We'll come back. We're working on a couple things that we think will provide good risk-adjusted returns that are complicated. So I think that's one theme. That is a theme. So good companies, bad balance sheets, capital structures that were put in place in a zero-rate environment that's no longer a zero-rate environment. The second theme is we have done actually more industrials and industrial services in the recent – I think the last quarter and this quarter that will show up in the book. We like those businesses where we think they're kind of at mid-cycle, slightly maybe above mid-cycle earnings, but are underwritable. They're surely not at peak earnings. And we like kind of the dynamics there. Retail cash flow deals still we don't love, but retail hopefully will be another good opportunity for us. The consumer continues to shift wallet share. I think you saw the negative print earlier this week on retail sales shifted from goods to experiences. Those balance sheets were bullied during COVID, given the consumer can only spend their excess savings on goods. They're coming back down to earth, so I think that's going to be a good opportunity. And then we'll continue to operate in our sector themes such as software, et cetera. But I do think you'll see more industrial. I do think you'll see the more complicated transactions show back up in 2024.
spk24: That's great, Keller. I appreciate it. Thanks for taking my question.
spk19: Of course.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd from Raymond James.
spk07: Morning, everyone. Um, so first one, maybe simple, maybe I missed it. Can you give us for Ian for the for the ROI and the earnings guidance? What what forward curve is factored into that? I mean, today, it's three cuts a month ago, it was six cuts. And we use an indicator. What do you?
spk13: Yeah, what'd you go? I think the exact date, by the way, which we got some help earlier was probably a week ago, or what was
spk19: Last Tuesday was the forward curve we used, and rates are slightly up from there. But, yeah, I think the forward curve has been very, very tricky. But we used the forward curve as of last Tuesday, and I think rates sold off a little bit and are up from there. But that helps.
spk07: Yeah, got it. Got it. Thank you. And then the other, I think when you prepared, I mean, there was some refinancing activity already in, or repricing, in the fourth quarter, but those were 21s, 22s. So they generate accelerated income, but not as much. If spread, can you give us an idea what you're thinking about how it could play out in 24? I mean, if spreads do come in, you know, did the 23 stop refinancing have spread to tie it up, which would generate a considerably more income if the if the younger versus old? I mean, any?
spk19: Yeah, look, I think you see, I think it's a great question. Obviously, there's more OID unamortized OID and call protection in the 23 versus the older vintages. So you have that right? So you most definitely can see that happen. That is not modeled in. What you might have picked up in our guidance is that the dispersion is higher I think this year in our guidance than it ever has been before.
spk22: That's right.
spk19: And it's because of the things that we're talking about on the last three questions. One is there's more, you know, there's more volatility on the curve. The curve had two big moves this past week. There's spreads and prepayment penalties. What I would say is in our base at two, whatever, 28 per share, we don't have that much in on accelerator ID and prepayment scheme. It's like 13 cents per share. So I don't know. The dispersion is wider for sure. Our guidance was wider for sure. And because the environment seems so continues to be volatile.
spk07: I appreciate that and the cover. I mean, if the market's highly active, 13 cents is one quarter, but I'll just leave that in the guidance. You're typically pretty conservative, so understood. Thank you.
spk33: Thanks, Robert. Thanks, Robert.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Maxwell Fritcher, from Truist Securities.
spk20: Hi, good morning. I'm calling in today for Mark Hughes. Are you seeing any more competition in winning deals from the stepped-up fundraising and direct lending that Bo had mentioned, particularly if the broadly syndicated market becomes more competitive?
spk19: Yeah, I mean, look, there's most definitely more competition, and there's been more capital. I think the overall, you know, whatever you want to call it, capital, credit's right powder compared to private equity's right powder. You know, I'm not a big, I don't love that kind of theme because the, you know, moments in time, it doesn't always play out. But that still holds. But there's most definitely more competition. I think the good news and the bad news is, That the asset class has been credentialized because it's provided a decent or good risk adjusted return for all different types of allocators and investors. But that leads to more competition. And so we'll continue really need to adapt and and evolve and iterate so we can continue to provide you know you know a great product service to our issuers with speed and certainty and understanding their business and also make sure we do that for our shareholders and stakeholders. So there's most definitely more competition.
spk20: Got it. That's helpful. Thank you. And so in the quarter for the new funding, there's a small step up in and equity investments. And I was just wondering if there's anything there or if that's just normal course of business.
spk16: Normal course. I think there's some idiosyncratic, you know, co-invest, but it's normal level of activity. Yeah. Yeah.
spk19: I mean, look, I think part of what we try to be, we're investors. And if we, you know, if there's a chance to make a small equity income, that's been really important for shareholders. We'll do it on businesses we like. We don't, our model is don't do it on everything. We're investors. Sometimes there's, Sometimes there's equity stories we understand and we can underwrite, and sometimes there's not. But when we can, we'll put small pieces on the balance sheet.
spk20: Got it. Thank you.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Ryan Lynch from KBW.
spk25: Hey, good morning. Hey, good morning. First question I had was, you know, we've seen some of the data of some of the purchase price multiples coming down for new transactions as I think private equity is finally starting to want to exit investments for return capital. I'm just curious, Have you seen the same decline in leverage levels on those transactions that you guys are seeing in the market, whereas the loan-to-value on those businesses, which have been very low over the last year, would still be in that same level? And the other question on that is, are loan-to-values – staying low, is that really, is that important to you, or is it more important just the absolute leverage levels on these businesses versus the equity checks and loan-to-values?
spk19: Yeah, first of all, it's a good question. Look, I think valuations are all over the place. I think we've seen them all over the place. I think generally they're down. They should be down. Discount rates are up. So if you take a series of cash flows and you apply a higher discount rate to them, you're going to end up with a lower MPV. That lower MPV over a same current EBITDA or operating cash flow number is going to be lower. So I think generally, valuations should be down directionally because of discount rates. Weighted average cost of capital has most definitely gone up given the move in treasuries. When we think about And then I would say, given the move in, again, risk-free, companies have less, generally speaking, have less capacity to take on debt and service debt given the higher interest costs. And so I think you most definitely have seen all those things. And I think LTVs are pretty stable. I would say the one thing I would frame up on LTVs is, We don't look at LTVs. We look at LTVs, but through our lens, which is what do we think the business is actually worth? That may be consistent with whether the sponsor is paying for it or not paying for it. And we don't really get a whole bunch of comfort on the size of the equity check because they have a different kind of risk return profile than we do. We're kind of always short. We've written a call option, and we're short of put, and they don't have that dynamic. So I would say, and I know I went deep, I would say we look at LTBs. It's through our lens. Debt capacity is down because the rates are up. LTBs are pretty stable, and valuations are slightly down, but they continue to be all over the place.
spk25: Okay, that's helpful color. The other question I had is with the market with BSL starting to that market started to pick back up. I'm just curious, are you seeing any sort of new terms that are coming in to deals that direct lenders are implementing in order to win deals? We've seen, you know, read and heard things like, you know, portability and things like that being put into new deals. Are you seeing any sort of like unusual terms or are terms kind of reemerged that you guys aren't super comfortable with in order for lenders to win deals as they're now more competing with the BSL markets?
spk19: Well, I don't know if it's a BSL thing. I mean, I think we saw terms generally getting looser because there was a whole bunch of more private credit raised in the last six months or years. So I think terms generally... have, you know, weakened, I think you have to look at it in the context of a idiosyncratic credit. And so, you know, is there more, you know, covenant light springing, you know, springing covenants on revolver draws in large cap private credit? Yes. But I think the market does an okay job, decent job of making sure it's for the right credit. So most definitely terms are, you know, continue to, I wouldn't say weaken, but continue to evolve. And, you know, that's part of, you know, hopefully what we bring to the table is being able to underwrite and make those decisions. Bo, anything to add there?
spk16: No, I think you hit it. It's, you know, what I would say is even though document terms are loosening, I think they're still on the margin better than they were kind of in the late cycle peak-ish levels in 2020, 2021. But with more competition, mainly from the direct lending market, you're seeing the general loosening of terms. We typically only play in deals, in fact, we only play in deals where we have a seat at the table in documentation, and we will not do deals if there's provisions that we're not comfortable with.
spk25: Okay. I just have one last one for me. You guys have always been willing to step into some complex fields in the past. You guys have certainly done some asset-backed fields that have been complex. I'm just curious, do you have any sort of expertise across the platform and or any desire for any transactions in the real estate space that could ever reach into TSLX's bucket, whether that's a direct loan. Obviously, there's going to be a lot of pieces to pick up in that space. It could be an opportunity, but I'm just not sure if you have that expertise or desire, whether it's a direct loan or even, I know in the past you've played in some of the structured products with CLOs. Maybe it's a structured product in that space. Just curious what's the appetite there or expertise in that area.
spk19: Yeah, we have tons of expertise. We've invested billions and billions and billions of dollars in real estate. That was a large theme post the global financial crisis. As people might have read, one of my longtime friends and colleagues at Goldman came on, Julian Falsberry, co-CIO with Alan and myself across the platform. He's most definitely engaged in the focus on real estate and building out the expertise or augmenting the expertise we already have. As it relates to does it fit in the SOX, we'll have to get some thought into that. But we surely have the expertise and we surely think it's going to be a unique area. Obviously, that is a bad asset. And so that's a constrained bucket for us. I mean, it's not constrained now, but it's it's a constrained resource, and so we'll have to figure that out.
spk25: Okay, makes sense. That's all for me. I appreciate the time today. Thank you.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Bryce Rowe from B Reilly.
spk08: Thanks. Good morning. Just wanted to hit on some questions on the right side of the balance sheet. If you think about some of the repayment activity that you think will be a little bit more elevated in 24 versus 23 and put that in the context of where your debt to equity is at this point, do you Do you think you can kind of manage to that higher end of your targeted debt-to-equity range, meaning that I guess net originations will be lower like you mentioned?
spk19: Yeah, I think I mentioned gross originations will be lower. My guess is net will be the same. So I think we'll be able to manage into that range. But I think people are asking growth, but I think NET will be able to manage that into that range.
spk08: And Josh, are you comfortable operating at the higher end of that range, or would you prefer to be in the lower end?
spk19: I think we're comfortable in the range. in the range. So we publicly stated our range up to 1.25, and I think we're comfortable with that. At moments we've got above that, I think people remember when we were 1.33 and did an equity raise to bring it back into the top end of the range. But I think we're comfortable in the range. I know we're comfortable in the range.
spk08: And then one more for me, you all mentioned pre-funding the 24 maturity. Does that kind of insinuate that you'll see the secure piece of the debt stack go up when we get to the end of the year? Or do you kind of like where you sit right now pro forma for the raise earlier here in 24?
spk19: Yeah, I'll let Ian, I'll power up and you can comments specifically. So I think our base case is SLX is not backed into the market this year on the bonds, but the market changes and we reserve the right to be opportunistic, but that is the base case, which means that our secured debt, we will borrow on the revolver to repay the 2024s. And so our funding mix will slightly change That has two impacts. One is secured versus unsecured funding mix. The other impact is that's our lowest cost of capital, and so it will bleed slightly into a lower cost of capital as we do that.
spk10: The other thing I'd add to that, Bryce, is we talked about getting to 70% unsecured in our mix performance of the January deal. If you look back at where TSLX has been historically, we've been in the 80s. So when there are moments in time where it's opportunistic and it's beneficial for us to increase that funding mix, then we like that unsecured market.
spk13: Yeah, the base case is we're funding on the revolver.
spk19: We pre-funded, like we said in the script. Yeah, we're taking care of it. Like we said in the script, we effectively pre-funded that and got that off the table is the base case. And over time, it should lower across the cap.
spk08: Got it. Thank you all for taking the questions. Thanks.
spk32: Thank you. At this time, I would now like to turn the conference back over to Josh Easterly for closing remarks.
spk19: Again, thank you so much for your time. We really appreciate people's support. I hope people have an excellent President's Day weekend, if you observe it. And we look forward to seeing people in the spring. Thanks, everyone.
spk32: this concludes today's conference call thank you for participating you may now disconnect Thank you. Thank you. Thank you. Bye.
spk00: Thank you. music music music music
spk32: Good morning and welcome to Sixth Street Specialty Lending, Inc.' 's fourth quarter and fiscal year ended December 31st, 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, February 16th, 2024. I will now turn the call over to Ms. Cammie Van Horn, Head of Investor Relations.
spk27: 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.' 's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the fourth quarter and fiscal year ended December 31, 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 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, 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.
spk19: Thank you, Kimmy. Good morning, everyone, and thank you for joining us. With us today is our president, Beau Stanley, and our CFO, Ian Simmons. For our call today, I will review our full year and fourth quarter highs and pass it over to Beau to discuss activity in the portfolio. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening up the call to Q&A. After the market closed yesterday, we reported fourth quarter adjusted net investment income of $0.62 per share or an annualized return on equity of 14.5%. adjusted net income of 58 cents per share or annualized return on equity of 13.6 percent 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 gain instead of fee expense were less than a penny per share higher the difference between this quarter's net investment income and net income per share was primarily driven by the reversal of prior period unrealized gains related to investment realizations. Other drivers included unrealized losses from portfolio company-specific events, which were largely offset by realized and unrealized gains, largely from the impact of tightening credit spreads on the valuation of our investments. For the full year 2023, we generated adjusted net investment income per share of $2.36 representing a return on equity of 14.4% and a full-year adjusted net income per share of $2.66 or return on equity of 16.2%. Long-time followers of our business will know that we measure success based on returns, and 2023 was a strong year for shareholder returns. Excluding the post-COVID year rebound in 2021, full-year return on equity on adjusted net income of 16.2% reflects the highest calendar annual return equity since our IPO in 2014. While this partially reflects the round tripping of 2022 results, reviewed on a combined basis over the last two years, we remain pleased with our performance relative to the sector and in context of a complex macroeconomic environment. Over the last two years, we experienced the fastest rate hiking cycle in history, contributing to increased volatility and economic uncertainty. Despite these headwinds, we generated an average annualized return on equity on adjusted net income of approximately 12% for fiscal years 2022 and 2023. While we don't have a complete set of peer data available yet, we believe these returns are nearly double that of our peers over the same two-year period. That is supported by a two-year return on equity on a net income of 6.5% for our peers due September 30th, 2023. We believe that the return profile we delivered is largely the result of our disciplined approach to capital allocation. During 2023, we capitalized on attractive opportunities set by growing the balance sheet and issuing equity in May while operating at the upper end of our target leverage range throughout the year. We leaned into an investment environment where the deployment opportunities generated with earnings in excess of our marginal cost of capital. Our track record for efficiently allocating shareholder capital has been rewarded as evidenced by our stock trading above book value. As a result, our shareholders benefit from access to the more recent asset vintage. We believe this exposure will continue to drive differentiation in our returns relative to the industry. We are humbled by what we've achieved in the past, but I'd like to spend time on how we're positioned in the future, starting with the health of the portfolio. Despite the challenging operating environment over the last two years, from elevated interest rates, higher inflation, and uncertain geopolitical events, The portfolio has shown resilience and remains in good shape. The weighted average revenue and EBITDA of our core portfolio companies both increased 6% quarter over quarter. We continue to have only one portfolio company on non-agro, which represents less than 1% of the total portfolio by cost and fair value. Interest coverage remains stable on a weighted average basis of 2.0 based on interest rates as of quarter end. Given the shape of the forward interest rate curve, we expect this to be the trough for interest coverage of our portfolio companies. While we highlight the overall health of the portfolio, the tails are getting bigger. We anticipate this will be a theme for 2024 for the sector as idiosyncratic credit issues arise and portfolios and losses drive divergence in returns, which I'll discuss further in a moment. The reality for private credit managers is the illiquid nature of the investment assets and the requirement to be long-only makes it challenging to reposition an existing portfolio with any level of speed as macroeconomic conditions change. We feel confident about the strength of our in-the-ground portfolio today for two key reasons. First, there's a deliberate asset allocation in our portfolio characterized by 91% personally and senior secure loans to businesses with strong underlying union economics. And second is a significant exposure we have to recent vintage assets, which makes up nearly 40% of our debt investments by fair value as of quarter end. These investments were underwritten after the start of the rate hiking cycle for higher quality companies with lower LTVs. Yesterday, our board approved a base quarterly dividend of 46 cents per share to shareholders of record as of March 15th, payable on March 28th. Our board also declared a supplemental dividend of $0.08 per share relating to our Q4 earnings to shareholders of record as of February 29th, payable on March 20th. Our quarter in net asset value per share proponent for the impact of the supplemental dividend that was declared yesterday is $16.96, and we estimate that our spillover income per share is approximately $1.04. We would like to reiterate our supplemental dividend policy is motivated by careful consideration of a number of factors, including the RIC distribution requirements, not burdening our returns with excess friction costs incurred through excise tax, and our goal is steadily building net asset value per share over time. In connection with the board, we analyze this framework on an ongoing basis. Before passing it to Beau, I'll spend a moment on how we're thinking about the broader macroeconomic environment and the impact for the sector. As we said in our last two earnings calls, we believe BDCs are at peak earnings, and we reiterate this view based on the shape of the forward interest rate curve. More broadly, our outlook for this sector remains cautious, as we know from history that credit deterioration takes time, and therefore, losses lag. This was evidenced during the global financial crisis, which began in 2007, and defaults didn't peak until 2009. As the credit cycle continues to evolve in 2024, we expect to see three impacts for the sector. First is a decline in net investment income driven by the downward shape of the forward interest rate curve. Second is an uptick in non-recruits from credit deterioration resulting in further declines in net investment income. And third is a downward pressure on net asset value driven by the potential for lower fair values from credit weakness and dividend policies and excessive earnings that result in a return of capital. The good news for our business is that we feel confident in our asset selection and credit quality, given our approach for being highly selective in our ability to lead in attractive investment environments. Additionally, we view the potential for lower interest rates and tighter spreads will likely increase portfolio turnover. This will result in potential for incremental economics through activity-based fees to offset the decline in net investment income from lower base rates. And finally, we are highly confident in our ongoing ability to overrun our base dividend, which Ian will discuss in more detail. With that, I'll pass it over to Beau to discuss this quarter's investment activity.
spk16: Thanks, Josh. I'd like to start by laying 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. 2023 was another productive year for private credit as the asset class continued to grow in terms of both supply and demand. On the supply side, private debt fundraising continued to outpace most private asset classes and investors allocate more capital to the sector. As for demand, the number of LBOs financed in the private credit market was more than six times the number financed in the broadly syndicated market in 2023, highlighting a clear preference for the private credit product. While private credit market share was up significantly in 2023, we expect to see a more balanced is to be more balanced in 2024 as a syndicated market becomes more active again. In terms of activity levels, transaction volumes are meaningfully lower in 2023. For context, total U.S. LBO transaction volume reached its lowest level in over 10 years and was down 37% from the trailing 10-year average. Despite a general slowdown in M&A transactions, we benefited from the large market share shift from the broadly syndicated to the private credit market. As the BSL market regains share in the future, we feel confident in our ability to find deployment opportunities driven by the all-cycle business model that we have created. This means that even when transaction volumes are lower or market share shifts, we remain active through our omni-channel sourcing approach that is not layered solely to M&A, sponsor activity, or specific sectors. Further, we are not reliant upon certain credit market conditions to prudently put capital to work while remaining highly selective. In Q4, we provided total commitments of $316 million and total fundings of $278 million across nine new portfolio companies and upsizes to five existing investments. We experienced 145 million of repayments from four full and four partial investment realizations. For the full year 2023, we provided 959 million of commitments and close 808 million of fundings. New investments represented 94% of total funding in 2023, with only 6% supporting upsizes to existing portfolio companies. Total repayments were $469 million for the year, resulting in net portfolio growth of $339 million. In 2023, portfolio churn was 15%, which is less than half of our long-term average of 41% since IPO. This slowdown in portfolio turnover contributed to our second highest net deployment year resulting in year-over-year portfolio growth of 18%. Given the tightening cycle and spreads, we expect to see increased level of repayment activity in 2024, creating incremental capacity for new investment opportunities. On funding trends in Q4, 97% of our new investments were in first lien loans, reinforcing our long-term focus on investing at the top of the capital structure. All nine new investments were cross-platform deals, where we leveraged the size of Sixth Street's capital base to lead and participate in transactions that presented attractive risk-adjusted return opportunities for high-quality credits. Our sector selection remained largely consistent with a broader software theme across the portfolio, including several new investments in fintech companies. As we've said in the past, we are more focused on the resilience of the underlying business models rather than the specific sectors or industries. Exposure in our portfolio to software businesses is driven by the attractive fundamental characteristics we see in these companies, including variable cost structures, mission-critical solutions, recurring subscription-based revenues, and high switching costs. To highlight one of the largest transactions during the quarter, 6th Street aged and enclosed on a senior secured credit facility to existing borrower, Kyriba, as part of a refinancing transaction. Over the life of the initial SixSuite investment in 2019, Kairiba has shown strong growth resulting in e-leveraging and has become a leader in cloud-native treasury management software. Our long-term relationship with the company coupled with SixSuite's ability to commit to the entire facility provided an opportunity to continue to grow with a company we like and know well. The exit of the original facility generated a gross unlevered asset level IRR and MLM of 13% and 1.7X respectively for our shareholders. We'd like to now take a moment to provide a quick update on one of our retail AVO investments, Bed Bath & Beyond. Since our last update, we've continued to receive periodic principal payments through the liquidation process. At quarter end, the outstanding par balance represents only 1.3% of our total assets. Moving on to repayment activity, the majority of the payoffs experienced during the quarter were older vintage names that were driven by refinancings. As spreads tightened in the back half of the year, we started to see borrowers take advantage of the opportunity to lower their cost of financing. This has continued into 2024, as January marked the highest level of repricing activity in the leveraged loan market in four years. We expect this may drive an increase in opportunistic refinancings, which have the potential to lead to incremental activity-based fees. In Q4, two of our largest payoffs, Price Chopper and Carlstar, which were 2021 and 2022 investments, respectively, included call protection as the borrowers capitalized on the ability to access lower costs of capital. These investments each resulted in gross unlevered asset-level IRRs of 16%. From a portfolio yield perspective, our weighted average yield on debt and income-producing securities at amortized cost decreased slightly quarter over quarter from 14.3% to 14.2%. The weighted average yield at amortized costs on new investments, including upsizes, for Q4 was 13.6% compared to a yield of 13.8% on exited investments. Looking at the year-over-year trends, our weighted average yield on debt and income-producing securities at amortized costs is up about 90 basis points from a year ago. A significant increase in our yields in 2023 illustrates the positive asset sensitivity of our business. from increased base rates in addition to our selective origination approach across themes and sectors. Moving on to the portfolio composition and credit stats, across our core bars for whom these metrics are relevant, we continue to have a conservative weighted average attached and detached points of 0.9 times and 4.7 times respectively, and the weighted average interest coverage remain constant at 2.0x. As a reminder, interest coverage assumes we apply reference rates at the end of the quarter to run rate borrower EBITDA. As of Q4 2023, the weighted average revenue in EBITDA for our core portfolio companies was $230 million and $79 million, respectively. Finally, the performance rating of our portfolio continues to be strong, with a weighted average rating of 1.16 on a scale of 1 to 5, with 1 being the strongest, representing an improvement from last quarter's rating of 1.17, driven by growth in the portfolio from new investments. We continue to have minimal non-accruals with only one portfolio company representing less than 1% of the portfolio at fair value and no new names added to non-accrual status during Q4. With that, I'd like to turn it over to my partner, Ian, to cover our financial performance in more detail.
spk03: 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 $0.62, resulting in full year net investment income per share of $2.31. Our Q4 net income per share was $0.58, resulting in full year net income per share of $2.61. We accrued $0.05 per share of capital gains incentive fees in 2023. However, none of this amount was payable at year end. Excluding the $0.05 per share that was accrued this year, our adjusted net investment income and adjusted net income per share for the year were $2.36 and $2.66, respectively. At year end, we had total investments of $3.3 billion, total principal debt outstanding of $1.8 billion, and net assets of $1.5 billion, or $17.04 per share, which is prior to the impact of the supplemental dividend that was declared yesterday. Our ending debt-to-equity ratio was 1.23 times, up from 1.15 times in the prior quarter, and our average debt-to-equity ratio also increased slightly from 1.18 times to 1.22 times quarter over quarter. For full year 2023, our average debt-to-equity ratio was 1.2 times, up from 1.03 times in 2022. We operated at the upper end of our previously stated target leverage range during the year and issued equity to take advantage of an attractive investment environment despite lower portfolio churn. We have started to see repayment activity pick up in 2024, which we expect will continue. In terms of our balance sheet positioning at year end, we had $820 million of unfunded revolver capacity against $226 million of unfunded portfolio company commitments eligible to be drawn. our funding mix was represented by 52% unsecured debt. Post-quarter end, we further enhanced our funding mix and liquidity profile through a $350 million long five-year bond offering in early January. Adjusted for the issuance, our funding mix reached approximately 70% unsecured, increased our unfunded revolver capacity to approximately 1.1 billion, and further improved our debt maturity profile. As discussed on last quarter's call, following the issuance of unsecured notes in August 2023, we have effectively pre-funded our nearest maturity of $347.5 million of 2024 notes, which occurs in November. With over $1 billion of liquidity on our secured revolver following the January offering, we have plenty of capacity to satisfy this maturity. As a result, we feel that our balance sheet is in excellent shape. Moving to our presentation materials, Slide 10 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added 62 cents per share from adjusted net investment income against our base dividend of 46 cents per share. The impact of tightening credit spreads on the valuation of our portfolio had a positive 13 cents per share impact to net asset value. There was a 15 cents per share decline in NAV from net unrealized losses driven by portfolio company-specific events Other changes included $0.04 per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and a penny per share uplift from net realized gains on investments. Pivoting to our operating results detail on slide 12, we generated a record level of total investment income for the third consecutive quarter of $119.5 million, up 4% compared to $114.4 million in the prior quarter. Walking through the components of income, interest and dividend income was $112.1 million, up from $107.5 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 $3.5 million compared to $2.5 million in Q3, driven by call protection on two of our largest payoffs, Other income was $3.9 million compared to $4.4 million in the prior quarter. Net expenses, excluding the impact of a non-cash reversal related to unwind of capital gains incentive fees, was $65 million, up from $61.4 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 7.5% to 7.8%. and higher incentive fees as a result of this quarter's over-earning. During 2023, higher interest rates provided an earnings tailwind for BDCs. As interest rates increased, the floating rate assets that comprised the majority of BDC portfolios contributed to higher all-in yields for the sector. We earned $2.36 per share of adjusted net investment income, which reflects our highest annual operating earnings since inception. While we believe that operating earnings for BDCs likely peaked in 2023, we feel that our business is positively positioned to continue to outperform the sector in 2024, driven in part by our liability structure. As a reminder, 100% of our liabilities are floating rate, as we use interest rate swaps on our fixed rate unsecured bonds to swap them to floating. Given the shape of the forward interest rate curve today and the expectation that rates will decline in 2024, our cost of funding will also decrease. As a result, the earnings profile of our business will show less sensitivity to falling rates relative to our peers. That being said, we recognize that being levered at approximately one-to-one times debt to equity minimizes the impact from liability sensitivity for us and the industry. Ultimately, we believe it is all about the left-hand side of the balance sheet, as asset selection has greater impact. Before passing it back to Josh, I want to provide a framework for how we are thinking about guidance for this year. We are mindful that the movement of spreads will be a key variable for NII in 2024, including the impact it has on the level of activity-based fees we expect to earn. Based on our financial model, which incorporates the forward curve and assumes spreads and leverage remain constant, We expect to target a return on equity on net investment income for 2024 of 13.4% to 14.2%. The lower end of this range reflects muted activity-based fees similar to what we experienced in 2023, while the upper end reflects a more normalized level of activity-based fees. Using our year-end book value per share of $16.96, which is adjusted to include the impact of our Q4 supplemental dividend, This corresponds to a range of $2.27 to $2.41 for full year 2024 adjusted net investment income per share. Given our belief that the sector has reached peak earnings, we are mindful of the earnings power of the business as interest rates decline with respect to our dividend level. Assuming our balance sheet remains constant as of quarter end, we expect every 25 basis points decline in reference rates to lower net investment income by 3 cents per share on an annualized basis. Based on the forward curve, this framework illustrates that our base dividend of $1.84 per share remains well-protected through 2026. Back to you, Josh.
spk19: Thank you, Ian. There's a lot to be excited about for the year ahead. As you heard from Beau and Ian, the pipeline continues to build, and the balance sheet is in excellent shape. More importantly, We believe we have the right team and resources to differentiate our business to benefit shareholders going forward. Beyond the dedicated direct lending team, we leverage the knowledge and sector expertise across the Sixth Street platform, including our energy, healthcare, retail asset-based lending teams. This broad range of sector expertise not only widens the top of our origination funnel, but also allows us to provide financing solutions for more complex and unique investment opportunities. As one of a few lenders with these capabilities, we can generate alpha from these transactions. We remain focused on finding the best risk-adjusted return opportunities for our stakeholders, and so the SOF is well positioned to do so. In closing, I want to take a moment to thank each and every shareholder of our business for your continued support over the last decade. Next month marks our 10-year anniversary since our initial public offering in March 2014. Over this period, Through the end of 2023, we have generated an annualized return on adjusted net income of 13.5% and a total return for shareholders of 276% on a dividend reinvested basis. We have achieved these results by protecting our stakeholders' capital through sound capital allocation and minimizing credit losses. We are proud of the track record we've delivered over this period of time and believe we are well positioned to continue building upon what we have achieved thus far. With that, thank you for your time today. Operator, please open the line for questions.
spk32: Thank you. As a reminder, to ask a question, 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. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mickey Schlein from Lattenburg-Thalmann.
spk21: Yes, good morning, everyone. Josh, there's a lot of demand, as you mentioned, for private debt capital from larger borrowers. And I see that the portfolio's average EBITDA has about doubled over the last couple of years. I'm assuming some of that is just organic growth of your borrowers, but some of it is probably due to going up market. And I'm curious how you're viewing the terms available in the upper middle market versus the middle market where you've had excellent results historically?
spk19: Hey, Mickey. Good morning. Thank you. Look, I think what we've seen is the best risk-adjusted return and, quite frankly, the most activity levels has been upmarket. Maybe that changes, but we have seen, at least from our perspective, the kind of lower middle market, middle market, not as active as the big market. And our capital has been more valuable in the upper middle market given up until now, the probably syndicated low market was shut down. My guess is that ebbs and flows over time. And with, you know, SOX, I think our shareholders get both and we can go up market. And given that we have a big platform and big pools of capital, SOX shareholders could participate in the up market deals. And then given the mid-market deals where, you know, we still write $30 to $50 million positions are also important to SOX. So I think we're uniquely positioned where we can toggle between markets and we can participate in both. Not many players can do that. Some are so large that they don't care about the middle market. Some are small that they don't have the balance sheet to participate in the market. But we've gone where the risk-adjusted returns and activity levels have been, but my guess is that changes.
spk21: Thanks for that, Josh. That's helpful. And just one follow-up. Ian, could you repeat how much accelerated OID and prepayment fee income was accrued in the quarter?
spk10: Sure, Mickey. Accelerated OID and prepayment, it was about $0.04 per share.
spk19: That was recognized, not approved. Yeah, that's actually earned.
spk21: Okay, thank you for that. Those are all my questions.
spk19: Thank you.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Brian McKenna from Citizens JMP.
spk23: Great, thanks. Good morning, everyone. So I believe last year was a record year of deployment for the broader Sixth Street platform. And Josh, I think you've said in the past you prefer investing environments where there's a lack of capital and liquidity broadly in the market. So with sentiment in the capital markets recovering here to start the year, how should we think about deployment activity throughout 2024 for the firm relative to 2023?
spk19: Yes, that's a great question. So I think you, on the direct winning side, no doubt last year was a largest deployment year across the Sixth Street platform and funds. I would suspect that, I would suspect it's same, slightly down maybe. I think activity levels, general activity levels in the environment are going to be better, but market share is going to be down. And so last year, activity levels were really, really muted. I think as Beau mentioned, it was like 25%. What was the statistic you mentioned about M&A volumes?
spk15: Yeah, there was a 10-year historic low down 37%.
spk19: I think that's most definitely for a variety of reasons. One is less volatility in the interest rate curve. So people, private equity, dry powder, pressure on DPI for private equity sponsors to get money back to LPs. There's a lot of reasons why that's going to change on the activity level front. I think private credit market share will go down, and I think Sixth Street's market share in the private credit will probably stay the same and go up, given our capabilities. So I would say it's probably similar or the same. Last year was a really unique opportunity to deploy capital. And look, I don't know if this was clear in the transcript, but I think there's a circle for 6th Street shareholders, which is we deploy capital well, we protect the balance sheet, the stock trades above book value. Then those shareholders were actually able to participate in times like last year because we were able to raise capital, few were able to raise capital in that environment. And 40% of the assets today are assets from a post-rate hiking cycle. of a more interesting vintage, to be honest. So most of that vintage did not end up in the current publicly traded BDC shareholder base. And so I'm very proud of what we've been able to do. I'm thankful for the SOX shareholder support. And ultimately, they got access to that vintage of last year's
spk23: Yeah, got it. Super helpful. And then just to follow up, you know, ABF is another area of focus across the broader alternatives industry. So how are you thinking about this opportunity at Sixth Street? Are you looking to expand capabilities here? Is there the potential to add some of these assets to TSLX's portfolio over time? And then could you maybe just walk through how these yield on these types of deals compared to the relative, you know, kind of regular way direct lending deals that you're doing?
spk19: Or maybe it's in... I think we added one last quarter. So, ABS is a large focus for us. We have a spectacular partner. We always had the capability business. We had a spectacular partner named Michael Dryden who ran that business at Credit Suisse that we hired before the issues at Credit Suisse. And we've built out a team and expertise across the different idiosyncratic asset classes in the ABF. We actually closed, it's called, I think it shows up as CLGF Holdings on November 7th at $325 million secure term loan. for a borrower that's basically ABF collateral. So that shows up. And those yields, I think were, give me one second. We'll come back to you, but I think my guess was mid-teen. It was a mix of senior and junior capital. Yeah, the 15% kind of went in, I guess. So, look, we have those capabilities. We're excited about it. We're excited about the team at Sixth Street. And I think that's part of the benefit for SOF shareholders is they get the benefit of this broad-based platform that, quite frankly, a monoline standalone manager have a $3 billion BDC to provide shareholders.
spk29: Got it. I'll leave it there. Thank you, guys.
spk19: Thanks so much.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Finian O'Shea from Wells Fargo.
spk30: Good morning, Fin.
spk02: Hey, good morning. How are you? So first question, with SSLP, the private BDC, up and running now, can you touch on the degree of overlap that they've had in origination so far? And then maybe how different the deals look, like how far apart are they in, say, enterprise value? I'll leave it there.
spk19: Yeah, so... Just for people to know, Sixth Street Lending Partners is a private BDC that's predominantly institutionally backed, just like SLX, focused on the large cap space. And so how we define kind of softly duties to offer is above $200 million credit facilities, SSLP has a first look below $200,000 SLX. given the size of the relative balance sheets. Given the co-investment order, I want to answer your question specifically. Given the co-investment order requires once a public fund, so those would be SSLP or SLX, invest in a company, they have to invest to continue to make follow-on investments. And so the degree of overlap is high in that by name of portfolio company. So you will see some small total positions. And if there's effectively a duty to offer an SSLP above $200 million, SOX will take a small piece of that so they might be able to participate in future transactions. If below $200 million, those credit facilities typically grow, SSLP will take a very small position So the degree by number is high. The degree of portfolio overlap by position size is small.
spk02: Awesome. That's very good color. Just a small follow-up on Bed Bath & Beyond. You seem to flag that as a bit of a special case here maybe, but it's still pretty well marked. So I guess can you give us some color on what the remaining collateral looks like, what kind of timeline? Sure, go ahead.
spk19: Probably, my guess, so today we've received probably about 56% including principal interest back on our original investment. The collateral pools are a whole bunch of pools ranging from receiving LCs back on the vendor program with banks from insurance workers' comp LCs coming back to litigation pools. And so there's varying time tails and timelines, but as of now, we think that is so pretty well supported.
spk34: Great. Thanks so much.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Kenneth Lee from RBC Capital Markets.
spk12: Hey, good morning. Thanks for taking my question. In terms of the originations this year, last year there was a considerable mix within new investments versus upsized or add-on financing. Wondering for this year whether you would expect a similar mix or could it be a little bit more balanced? Thanks.
spk19: Yeah, so I think our fundings this year, most of it was new, I think. Like 94% of it was new. We were the agent on the majority of that. You know, I don't have a call. My guess is that it will probably be more balanced. A portfolio company is becoming more active and doing add-ons. We've started to see a little bit of that. I think we're talking about a name later today where there's, you know, I guess two names later today that are upsized opportunities. But, you know, I don't really have a crystal ball. The reality is last year, anything that was new, a change of control, new buyout, or, you know, financing had to be done in the private credit markets. And so we took advantage of that for shareholders.
spk12: Gotcha. Very helpful there. And then just in terms of a follow-up, any updated outlook on potential opportunities from banks optimizing their balance sheets due to the changing regulatory framework of banks?
spk19: Yeah, look, I would say, broadly speaking, and this is calling balls and strikes, bank balance sheets feel more stable. at least the large, the money center banks. I think the deposit shifting that was happening where deposits were flowing in the treasuries has kind of peaked and flowed and might slightly be reversing on the margin. And so deposits are much more stable in banks. And so we are seeing banks come back into purchasing securities including CLO, AAAs, etc. So that's been a, from a bank standpoint, I think that's been slightly different than last year. I think the smaller banks or those banks that have significant commercial real estate exposure obviously are going to, might not have liquidity issues like they did last year. So banks who had issues last year, had liquidity issues and not. So First Republic, obviously, signature, you can go through the list. Banks this year, I think, are going to have more credit issues. Those credit issues will be around some, you know, my guess is commercial real estate. Most banks don't hold non-investment grade corporate credit on the balance sheet.
spk06: Got you. Very helpful there. Thanks again.
spk31: Thank you. One moment for our next question.
spk32: Our next question comes from the line of Melissa Weddle from JP Morgan.
spk28: Good morning. Thanks for taking my question. First, I wanted to clarify an answer, I think, Josh, that you had to one of the earlier questions around origination outlook for the year. I think you were referencing roughly the same or maybe a little lower. I wasn't sure if you were referring to sort of gross originations or net, or were you talking about market share?
spk19: Yeah, first of all, I was talking about this. I think the question was related to the entire 6th Street platform. Um, uh, and so, uh, the platform last year, I think on the growth side, they're probably four to $5 billion of kind of origination. So, um, obviously some, you know, some of that has discussed based on kind of appetite when an SLS, I, a question I was referring to was growth. Um, but it was in the broader platform. My guess is repayments will pick up this year. We had the lowest repayment year, I think, ever last year. As I think Bo mentioned in the script, it was 15% portfolio turnover versus the average of like 40%. The average loan historically has been around for two and a half years or something. Last year, which is not the math you should do, the average loan would have been around, around for five years or something like that, or six years, seven and a half, six years. So I think my guess is growth will be the same, just slightly lower maybe. I don't know. We're investors. We're going to do things that we think are interesting for our stakeholders. But net surely will be lower because portfolio turnover will pick up.
spk28: Okay. I really appreciate that clarification. As a follow-up, I wanted to circle back to something Ian had said about the outlook for the upcoming year and sort of thinking about the ROE framework. It seems like one of the embedded assumptions there is that spreads will remain roughly stable with sort of the variable factor maybe being around activity levels. I guess I wanted to just get your thoughts on you know, sort of spread stability in an environment where you're seeing a reopening of the broadly syndicated loan market? And is that a fair assumption, or could we see things narrow a bit more? Thank you.
spk19: Yeah, look, I think we're kind of hedged on spreads, at least in the near term, on earnings. Look, I think the earnings, when you think about the activity level, even at the top end of our guidance, wasn't that high. As with Lisa and I had per share. If you see spreads come in significantly, my guess is there's going to be a lot more activity level income in the book. So activity level income in 2023 was, you know, call it, I'm doing the math, 10, I mean, on accelerated OID and prepayment fees was 10 cents per share. In 2022, it was $0.27 per share. In 2021, it was $0.47 per share. So even in our 2024 estimates in the range, it's still pretty muted. So what I would say is at least for 2024, if spreads do come in and we see some pressure on net interest margin, you surely will see activity levels pick up. That could be easier to go.
spk32: Got it. Thank you. Thank you. One moment for our next question.
spk31: Thank you. Our next question comes in the line of Eric Zwick from Hovde Group.
spk24: Good morning, all. Hi. Just a quick follow-up on the pipeline. I'm curious, as you look at it today, if there are any particular industries that are either comprising a larger share or look particularly attractive, and kind of on the flip side, if there's any industries that you're cautious or shying away from today.
spk19: Yeah. So, good question. Look, I think there's – I would frame it a couple ways. I think there are, in 2024, I'm more hopeful that our Good company, bad balance sheet opportunity set, which has historically been kind of a lane for us. We'll come back. We're working on a couple things that we think will provide good risk-adjusted returns that are complicated. So I think that's one theme. That is a theme. So good companies, bad balance sheets, capital structures that were put in place in a zero-rate environment that's no longer a zero-rate environment. The second theme is we have done actually more industrials and industrial services in the recent – I think the last quarter and this quarter that will show up in the book. And so – We like those businesses where we think they're kind of at mid-cycle, slightly maybe above mid-cycle earnings, but are underwritable. They're surely not at peak earnings. And we like kind of the dynamics there. Retail cash flow deals still we don't love, but retail hopefully will be another good opportunity for us. The consumer continues to shift wallet share. I think you saw the negative print earlier this week on retail sales shifted from goods to experiences. Those balance sheets were bullied during COVID, given the consumer can only spend their excess savings on goods. They're coming back down to earth, so I think that's going to be a good opportunity. And then we'll continue to operate in our sector themes such as software, et cetera. But I do think you'll see more industrials. I do think you'll see the more complicated transactions show back up in 2024.
spk24: That's great, Keller. I appreciate it. Thanks for taking my question.
spk19: Of course.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd from Raymond James.
spk07: Morning, everyone. Um, so first one, maybe simple, maybe I missed it. Can you give us for Ian for the for the ROI and the earnings guidance? What what forward curve is factored into that? I mean, today, it's three cuts a month ago, it was six cuts. And we use an indicator. What do you?
spk13: Yeah, what'd you go?
spk19: I think the exact date, by the way, which we got some help earlier was probably a week ago, or what was Last Tuesday was the forward curve we used, and rates are slightly up from there. But, yeah, I think the forward curve has been very, very tricky. But we used the forward curve as of last Tuesday, and I think rates sold off a little bit and are up from there. But that helps.
spk07: Yeah, got it. Got it. Thank you. And then the other, I think when you prepared, I mean, there was some refinancing activity already in repricing, in the fourth quarter, but those were 21s, 22s. So they generate accelerated income, but not as much. If spread, can you give us an idea of what you're thinking about how it could play out in 24? I mean, if spreads do come in, you know, did the 23 stop refinancing have spread to tie it up, which would generate a considerably more income if the if the younger versus old? I mean, any?
spk19: Yeah, look, I think you see, I think it's a great question. Obviously, there's more OID unamortized OID and call protection in the 23 versus the older vintages. So you have that right? um uh so you you most definitely can see that happen that is not modeled in what you what what what you might have picked up in our guidance is that the the variability the the um the dispersion is higher i think this year in our guidance than it ever has been before that's right and it's because of the things that we're talking about on the last three questions One is there's more, you know, there's more volatility on the curve. The curve had two big moves this past week. There's spreads and prepayment penalties. What I would say is in our base at two, whatever, 28 per share, we don't have that much in on accelerator ID and prepayment scheme. It's like $0.13 per share. So I don't know. The dispersion is wider for sure. Our guidance is wider for sure. And because the environment seems so continued to be volatile.
spk07: I appreciate that. I mean, if the market's highly active, $0.13 is one quarter. But I'll just leave that. You're typically pretty conservative, so understood. Thank you.
spk33: Thanks, Robert. Thanks, Robert.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Maxwell Fritcher from Truist Securities.
spk20: Hi, good morning. I'm calling in today for Mark Hughes. Are you seeing any more competition in winning deals from the stepped-up fundraising and direct lending that Bo had mentioned, particularly if the broadly syndicated market becomes more competitive?
spk19: Yeah, I mean, look, there's most definitely more competition and there's been more capital raised. I think the overall, you know, whatever you want to call it, capital credit dry powder compared to private equity dry powder. I'm not a big, I don't love that kind of theme because the moments in time, it doesn't always play out, but that still holds. But there's most definitely more competition. I think the good news and the bad news is that the asset class has been credentialized because it's provided a good risk-adjusted return for all different types of allocators and investors. But that leads to more competition and so we'll continually need to adapt and evolve and iterate so we can continue to provide a great product service to our issuers with speed and certainty and understanding their business, and also make sure we do that for our shareholders and stakeholders. So there's most definitely more competition.
spk20: Got it. That's helpful. Thank you. And so in the quarter for the new funding, there was a small step up in equity investments, and I was just wondering if there's anything there or if that's just normal course of business.
spk16: Normal course. I think there's some idiosyncratic co-invest, but it's normal level of activity.
spk19: Yeah, I mean, look, I think part of what we try to be, we're investors, and if there's a chance to make a small equity in co-invest, that's been really creative for shareholders. We'll do it on businesses we like. Our model is don't do it on everything. We're investors. Sometimes there's equity stories we understand and we can underwrite, and sometimes there's not. But... When we can, we'll put small pieces on the balance sheet.
spk20: Got it. Thank you.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Ryan Lynch from KBW.
spk25: Hey, good morning. Hey, good morning. First question I had was, you know, we've seen some of the data of some of the purchase price multiples coming down for new transactions as I think, you know, private equity is finally starting to, you know, want to exit investments for return capital. I'm just curious, have you seen the same decline in leverage levels on those transactions that you guys are seeing in the market, whereas the loan-to-value on those businesses, which have been very low over the last year, would still be in that same level. And the other question on that is, are loan-to-values staying low? Is that important to you, or is it more important just the absolute leverage levels on these businesses versus the equity checks and loan-to-values?
spk19: Yeah, first of all, it's a really good question. Look, I think valuations are all over the place. I think we've seen them all over the place. I think generally they're down. They should be down. Discount rates are up. So if you take a series of cash flows and you apply a higher discount rate to them, you're going to end up with a lower MPV. That lower MPV over a same current EBITDA or operating cash flow number is going to be lower. think generally valuations should be down directionally because of the you know of discount rates rate of average cost of capital has most definitely gone up given the move in treasuries um when we think about and then i would say given the move in again risk-free companies have less generally speaking have less capacity to take on debt and service debt given the higher interest costs. And so I think you most definitely have seen all those things. And I think LTVs are pretty stable. I would say the one thing I would frame up on LTVs is we don't look at LTVs, we look at LTVs but through our lens, which is what do we think the business is actually worth? That may be consistent with whether a sponsor is paying for it or not paying for it. and we don't really get a whole bunch of comfort on the size of the equity check because they have a different kind of risk return profile than we do. We're kind of always short, we've written a call option and we're short of put and they don't have that dynamic. So I would say, and I know I went deep, I would say we look at LTVs, it's through our lens, Debt capacity is down because the rates are up. LTBs are pretty stable. And valuations are slightly down, but they continue to be all over the place.
spk25: Okay. That's helpful, Keller. The other question I had is with the market, with BSL starting to, that market starting to pick back up, I'm just curious, are you seeing any sort of new terms that are coming in to deals that direct lenders are implementing in order to win deals? We've seen, you know, read and heard things like, you know, portability and things like that being put into new deals. Are you seeing any sort of like unusual terms or terms kind of reemerge that you guys aren't super comfortable with in order for lenders to win deals as they're now more competing with the BSL markets?
spk19: Well, I don't know if it's a BSL thing. I mean, I think we saw terms generally getting looser because there was a whole bunch of more private credit raised in the last six months or years. So I think terms generally have weakened. I think you have to look at it in the context of a idiosyncratic credit. And so, you know, is there more, you know, covenant lights springing, you know, springing covenants on revolver draws in large cap private credit? Yes. But I think the market does an okay job, decent job of making sure it's for the right credit. So most definitely terms are, you know, continue to... I want to say weakened, but continue to evolve. And, you know, that's part of, you know, hopefully what we bring to the table is being able to underwrite and make those decisions. Bo, anything to add there?
spk16: No, I think you hit it. It's, you know, what I would say is even though document terms are loosening, I think they're still on the margin better than they were kind of in the late cycle peak-ish levels in, you know, 2020, 2021. but with more competition, mainly from the direct lending market, you're seeing the general loosening of terms. We typically only play in deals, in fact, we only play in deals where we have a seat at the table in documentation and we will not do deals if there's provisions that we're not comfortable with.
spk25: Okay. I just have one last one for me. You guys have never been, you guys have always not been willing, you guys have been willing to step into some complex fields in the past. You guys have certainly done some asset-backed deals that have been complex. I'm just curious, do you have any sort of expertise across the platform and or any desire for any transactions in the real estate space that could ever reach into TSLX's bucket, whether that's a direct loan? Obviously, there's going to be a lot of a lot of pieces to pick up in that space. It could be an opportunity, but I'm just not sure if you have that expertise or desire, whether it's a direct loan or even, I know in the past you've played in some of the structured products with CLOs. Maybe it's a structured product in that space. Just curious what's the appetite there or expertise in that area.
spk19: Yeah, we have tons of expertise. We've invested billions and billions and billions of dollars in real estate. That was a large theme post the global financial crisis. As people might have read, One of my longtime friends and colleagues at Goldman came on, Julian Falsberg, co-CIO with Alan and myself across the platform. He's most definitely in confusion to focus on real estate and building out the expertise or augmenting the expertise we already have. As it relates to does it fit in the SOX, we'll have to get some thought into that. But we surely have the expertise and we surely think it's going to be a unique area. Obviously, that is a bad asset. And so that's a constrained bucket for us. I mean, it's not constrained now, but it is a constrained resource. And so we'll also figure that out.
spk25: Okay. Makes sense. That's all for me. I appreciate the time today. Thank you.
spk32: Thank you. One moment for our next question. Our next question comes from the line of Bryce Rowe from B. Reilly.
spk08: Thanks. Good morning. Just wanted to hit on some questions on the right side of the balance sheet. If you think about Um, some of the, some of the repayment activity that you, that you think will be a little bit more elevated in 24 versus 23. And put that in the context of, of where your debt to equity is at this point, do you, do you think you can, you, you can kind of manage to that higher end of your targeted debt to equity range? Um, you know, meaning that, you know, I guess net originations will be, will be, will be, will be lower, like, like, like you, like you mentioned.
spk19: Yeah, I think I mentioned growth originations will be lower. My guess is net will be the same. So I think we'll be able to manage into that range. But I think people were asking growth. But I think net will be, I think we'll be able to manage net.
spk08: Josh, are you comfortable operating at the higher end of that range, or would you prefer to be in the lower end?
spk19: I think we're comfortable in the range. We publicly stated our range up to 1.25, and I think we're comfortable with that. At moments we've got above that, I think people remember when we're 1.33 and did an equity raise to bring it back into the top end of the range. I think we're comfortable in the range. I know we're comfortable in the range.
spk08: And then one more for me. You all mentioned pre-funding the 24 maturity. Does that kind of insinuate that you'll see the secure piece of the debt stack go up when we get to the end of the year? Or do you kind of like where you sit right now pro forma for the raise earlier here in 24?
spk19: Yeah, I'll let Ian, I'll color it up and then you can comment specifically. So I think our base case is SLX is not back into the market this year in the bonds. but the market changes and we reserve the right to be opportunistic. But that is the base case, which means that our secured debt, we will borrow on the revolver to repay the 2024s. And so our funding mix will slightly change. That has two impacts. One is secured versus unsecured funding mix. The other impact is that's our lowest cost of capital And so it will bleed slightly into a lower cost of capital as we do that.
spk10: And the other thing I'd add to that, Bryce, is we talked about getting to 70% unsecured in our mix pro forma for the January deal. If you look back at where TSLX has been historically, we've been in the 80s. So when there are moments in time where it's opportunistic and it's beneficial for us to
spk13: Yeah, the base case is we're funding on the revolver.
spk19: We pre-funded, like we said, we affected, we pre-funded that and got that off the table is the base case. And over time, it should lower a lot of capital.
spk08: Got it. Thank you all for taking the questions. Thanks.
spk32: Thank you. At this time, I would now like to turn the conference back over to Josh Easterly for closing remarks.
spk19: Again, thank you so much for your time. We really appreciate people's support. I hope people have an excellent President's Day weekend, if you observe it. And we look forward to seeing people in the spring. Thanks, everyone.
spk32: This concludes today's conference call. Thank you for participating. You may now disconnect.
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