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spk36: Good day and thank you for standing by. Welcome to the 6th Street Specialty Lending, Inc. Q1 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Cami Van Horn, Head of Investor Relations. Please go ahead.
spk32: Thank you. Before we begin today's call, I would like to remind our listeners
spk31: 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 guaranteed to 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 6th Street Specialty Lending, Inc. filed 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 first quarter ended March 31, 2024, and posted a presentation to the Investor Resources section of our website, .6thstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. 6th Street Specialty Lending, Inc.'s earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance failures mentioned in today's prepared remarks are as of and for the first quarter ended March 31, 2024. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of 6th Street Specialty Lending, Inc.
spk17: Good morning, everyone, and thank you for joining us. With us today are our President, Beau Stanley, and our CFO, Ian Simmons. For our call today, I will review our first quarter highlights 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 the call to Q&A. After the market closed yesterday, we reported first quarter adjusted net investment income of $0.58 per share, or an annualized return on equity of 13.6%, an adjusted net income of $0.52 per share, or an annualized return on equity of 12.3%. As presented in our financial statements, our Q1 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gain incentive fee expense, or a penny per share higher. The difference between this quarter's net investment income and net income was driven by $0.09 per share of net unrealized gains from the impact of tighter credit spreads on the valuation of our investments, $0.14 per share on net unrealized losses from portfolio company specific events, and $0.03 per share of unrealized losses from the reversal of prior period unrealized gains related to investment realizations, and $0.03 per share of realized gains from investment sales. With these results in mind, I'd like to start by circling back to two remarks I made on previous earning calls in February. First, the BDC sector is at peak earnings, and second, the tail within portfolios is getting longer. On the first comment, we reported another strong quarter from an earnings perspective as net investment incomes continue to benefit from higher interest rates. Q1 was the first time in eight quarters, or since the start of the rate hiking cycle, that we experienced a modest decline in the weighted average reference rate resets on debt and income producing securities of five basis points. That said, the strength of the reset economic data in the higher for longer shape of the forward interest rate curve continues to support net investment income. Since our last earnings call, the forward curve has shifted towards higher for longer with year-end base rates estimated to be 4.9%, which is up from .2% as of our last earnings call in February. We anticipate the current environment will likely drive a dispersion between operating and gap earnings as higher base interest rates may ultimately lead to credit deterioration and potential for losses as we previously talked about. On my second comment, we're adding a nuance to the view this quarter, which is that the tail is growing on the margin. While we're seeing evidence of video credit credit issues arising from across the private credit sector, we remain optimistic about the ability for private credit portfolios to withstand the headwinds of today's macroeconomic environment for a couple of reasons. First and foremost, private credit managers underwrite investments with intent of holding that risk until maturity given the largely illiquid nature of the market. Secondly, thorough due diligence and bottoms-up analysis on every credit we undertake coupled with active portfolio management through the life of the investment. And second, private credit managers have the ability to be selective in terms of sector exposure. We have demonstrated selectivity in our portfolio by avoiding cyclical businesses, staying away from certain industries and leaning into specific sector themes. This optionality differs from the public debt market, which are forced to hold a much broader range of sector exposures, including those that we have to deliberately avoided. It is important to note that both of these benefits to private credit are not given and ultimately rely upon active management. Having the ability to determine when to invest as well to what to invest is a feature of our business model and a capital allocation discipline. Turning to our portfolio specifically, the difference between this quarter's net investment income and net income highlights our point on the growing tail. Individual portfolio company specific events result in a 14 cents per share net unutilized losses in Q1. A significant portion of this or 11 cents per share was related to the markdown in our investment in Astra Acquisition Corp. At quarter end, we add this investment to non-acquire status, driven by continued underperformance to the company. While this is evidence that the tail is growing on the margin, we remain focused on the bigger picture, which is our ability to grow net asset value over the long term. Despite idiosyncratic issues as existed in our portfolio, we have steadily and consistently grown net asset value over the 12 and a half years since we started this business, represented by a .5% annualized NAV growth before special and supplemental evidence since inception. We feel confident in our ability to continue this growth in the future, which we believe will result in outperformance relative to the sector. Turning now to the broader portfolio, credit quality remains strong with non-acquire limit to .1% of the portfolio by fair value. Revenue and EBITDA growth continued for another consecutive quarter. Several of our portfolio companies have started to see cost saving initiatives flow through the P&L resulting in expansion and positive EBITDA trends. All things considered, our underlying portfolio companies have shown resilience, which we believe is reflective of our discipline, credit selection, and effective portfolio management. Yesterday, our board approved a base quarterly dividend of $0.46 per share to shareholders of record as of June 14th, payable on June 28th. Our board also declared a supplemental dividend of $0.06 per share related to our Q1 earnings to shareholders of record as of May 31st, payable on June 20th. Our net asset value per share pro forma for the impact of the supplemental dividend that was declared yesterday at $17.11, and we estimate that our spillover income per share is approximately $1.06. Before passing it to Bo, I would like to note that in March 26, Fitch ratings agency published their annual review for the BDC sector, and we are pleased to note that 6th Street Specialty Lineings rating of BBB flat was revised from a stable to a positive outlook. Of the 22 firms in their rated universe, TSLX is one of two BDCs to hold a rating with a positive outlook from Fitch. With that, I'll now pass it over to Bo to discuss this quarter's investment activity.
spk14: Thanks, Josh. I'd like to start by sharing some observations on the broader market backdrop. In particular, the purpose and importance of direct lending in today's investing landscape. Through the first quarter of 2024, public and private debt markets welcomed an increase in demand for financing solutions after a historically low level of transaction volume in 2023. Access to the broadly syndicated market has improved, providing some borrowers with an option between public and private financing solutions.
spk04: With
spk14: both markets open for business, competition has generally increased compared to this time last year. However, we remain highly selective in where we transact to make certain we over-earn our cost of capital. Our omni-channel sourcing capabilities has contributed to a robust and building pipeline of opportunities that rely upon the structures and features available only in the market. We believe the current environment underscores a value proposition of private credit for borrowers looking for more than the cheapest cost of financing. Direct lending provides creative solutions, certainty in pricing, stability through market volatility, and structural flexibility such as delay draw features. All of these components differentiate the private credit markets from the BSL market and reinforce the importance of solutions we provide to the middle of the market. Our investments in Equinox during the quarter highlights our differentiated capabilities as we stepped in to provide an alternative solution to a company with a complicated capital structure. As part of the transaction, Sixth Street led and agented a $1.2 billion first-lean term loan and to a lesser degree participated in a $575 million second-lean term loan. SLX committed $47.9 million and $2.1 million in these loans respectively in support of the company's refinancing of existing debt. This investment is also representative of the increase in opportunities we are seeing for companies with durable business models looking to restructure their balance sheets. In most cases, the complexity of these transactions require a direct lender that is willing and able to structure and underwrite a creative solution. Given our extensive experience and dedicated resources across the Sixth Street platform, we are well positioned to lead these opportunities.
spk03: Additionally,
spk14: the level of competition is lower for these investments compared to more traditional loan structures which has contributed to our busy start to the year from an investment perspective with Self-Tivet 2 Now. In Q1, we provided total commitments of $264 million and total funding of $163 million across nine new portfolio companies in up-sizes to five existing investments. We experienced $109 million of repayments from three full, seven partial, and 18 structured credit investment realizations resulting in $54 million of net funding activity. There was another strong quarter for originations with 95% of total funding of new investments with 5% supporting up-sizes to existing portfolio companies.
spk35: This quarter's
spk14: funding has contributed to our diversified exposure to select industries with nine new investments across eight different industries. Consistent with a long-term approach of investing at the top of the capital structure, 95% of funding this quarter were in first lien loans bringing our total first lien exposure to 92% across the entire portfolio. We
spk03: continue
spk14: to benefit from the size and scale of Sixth Street's capital base as we've participated in several platform deals including our largest new commitment during the quarter which supported the take private transaction of Alterex. In March, Sixth Street aged and enclosed on a senior secured credit facility as part of the $4.4 billion acquisition of Alterex by Clear Lake Capital and Insight Partners. Our close relationship with both sponsors combined with our ability to commit to the deal and size were key to securing our leading role in the debt financing. Moving on to repayment activity, our two largest exits during the quarter, a SAO and Bill Highway, were older vintage assets that were driven by refinancing. These investments generated a weighted average asset level gross IRR of .2% for SLX shareholders. Beyond refinancing, another notable area of repayment activity during the quarter was in our structured credit portfolio. As a reminder, we purchased approximately $54 million of CLO liabilities at a significant discount to par during the market volatility that occurred in Q2 and Q3 of 2022. Rather than holding excess capital or deploying capital into investments that do not exceed our cost capital, we leveraged the experience across the Sixth Street platform to opportunistically invest in BBB and BBB CLO liabilities that presented an efficient use of shareholder capital.
spk22: Since then,
spk14: we have watched our thesis play out as we rotated out of approximately 85% of our CLO liability exposure today. We purchased those securities at a weighted average price of $88.5 with a three-year discount margin of approximately $8.80 and exited at a weighted average of $98.5 with a three-year discount margin of approximately $5.35. For Q1, these exits resulted in approximately $0.02 per share of realized gains for SLX shareholders. We expected continued rotating out of the structured credit portfolio to crystallize the returns we've generated and will opportunistically come back to this theme in moments where it presents an efficient use of capital based on the return profile. From a portfolio yield perspective, our weighted average yield on debt and income producing securities at enormous high costs decreased slightly quarter over quarter from .2% to 14.0%. This decline reflects the combination of 10 basis points of spread compression from lower spreads on new investments and five basis points from the decline in reference rate resets. New investment spreads were lower in Q1, largely driven by roughly two-thirds of our funding including an upsize falling into what we call our lane one bucket. Lane one has extraordinarily been about 65% of our total investment activity and generally includes regular way financing to sponsor back companies. In Q1, this includes investments in high quality companies such as Alturex and Clearance Technologies, which are skilled businesses with attractive financial profiles. The other third of our funding activity was in more complex lane two buckets, which typically includes higher yielding assets represented by our investment in Equinox during the quarter. As an illustration of the difference in yields, our new Q1 investments in lane one had a weighted average yield and amortized cost of .3% compared to .0% for our investments in lane two assets. On a consolidated basis, the weighted average yield and amortized cost of new investments including upsizes for Q1 was .2% compared to a yield of 14% on fully exited investments. Moving on to the portfolio composition and credit stats, across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points of 0.7 times and 4.9 times respectively. And our weighted average interest coverage remains constant at 2.0x. As a reminder, interest coverage assumes we apply reference rates at the end of the quarter to steady state borrower EBITDA. As of Q1 2024, the weighted average revenue in EBITDA of our core portfolio companies was $275.5 million and $92.5 million respectively. Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 1.15 on a scale of 1 to 5 with 1 being the strongest, representing improvement from last quarter's rating of 1.16 given by growth in the portfolio from new investments. As Josh mentioned earlier, we added one new company, Astor Acquisition Court, to non-accrual status at the end of the quarter resulting in two portfolio companies on non-accrual across the entire portfolio.
spk34: With that,
spk14: I'd like to turn it over to my partner Ian to cover our financial performance in more detail.
spk24: Thank you, Bo. For Q1, we generated adjusted net investment income per share of $0.58 and adjusted net income per share of $0.52. Total investments were $3.4 billion, up 3% from the prior quarter as a result of net funding activity. Total principal debt outstanding at quarter end was $1.9 billion and net assets were $1.6 billion or $17.17 per share prior to the impact of the supplemental dividend that was declared yesterday. Since the start of the rate hiking cycle two years ago, we have successfully grown net asset value per share by .6% from a trough of $16.27 in Q2 of 2022 to $17.17 as a quarter end. Additionally, net asset value per share is now back above the pre-rate hike level of $16.88 as of March 31, 2022 and is a penny below our historical high of $17.18. It has been a very busy start to the year as we completed several capital markets transactions, including a bond offering, an equity raise, and a revolving credit facility extension. Starting off in early January, we improved our funding mix and liquidity profile through a $350 million long five-year bond offering. In March, we executed a small equity raise to take advantage of attractive new investment opportunities while remaining below the top end of our target leverage range of 1.25 times debt to equity. Consistent with the framework we've outlined in the past, we issued equity above net asset value and deployed the new capital raised into assets generating estimated returns that exceed our calculated cost of capital. We'll spend a moment to walk through this math, starting with the assumption that our cost of equity is 9%, which we've sourced from Bloomberg. Based on this assumption, we can back into the required return on new assets by applying the cost structure of our business, including the marginal cost of leverage, fees, estimated credit losses, and other expenses to our unit economics model. This calculation results in a .6% return on assets, inclusive of credit losses, required to generate a 9% return on equity. In our case, we deployed the new equity capital into investments with an average asset level yield of 12% to 13.5%, depending on the assumed weighted average life, resulting in an estimated ROE range of approximately .5% to 14% for the capital deployed, well above our estimated equity cost of capital. Shareholder returns continue to be our priority, and we strongly believe that our ability to access additional equity capital allows us to generate attractive risk-adjusted returns for our investors. Post-quarter end, we further enhanced our debt maturity profile by closing an amendment to our revolving credit facility. With the ongoing support of our bank group, we amended our $1.7 billion secured credit facility, including extending the final maturity on $1.5 billion of these commitments through April 2029. We are pleased with this outcome of this transaction as we successfully converted a legacy non-extending lender to extending status and accepted an incremental commitment from an existing lender. There were no new non-extending lenders as part of this amendment, and we maintained the existing pricing and terms on the facility. The combination of the January bond issuance and the closing of the amendment to our credit facility extended the 4.4 years, which compares to an average remaining life of investments funded by debt of approximately 2.5 years. This element is important to our asset liability matching principle of maintaining a weighted average duration on our liabilities that meaningfully exceeds the weighted average life of our assets funded by debt. All three of our capital markets transactions bolstered our balance sheet by enhancing our liquidity profile. As of March 31, we had $1.1 billion of unfunded revolver capacity against $260 million of unfunded portfolio company commitments eligible to be drawn. In terms of capital positioning, our ending debt to equity ratio from the balance sheet decreased quarter over quarter from 1.19 times to 1.14 times. The decrease was driven by the equity raise in February combined with repayment activity, which was partially offset by portfolio growth from $1.1 billion of unfunded portfolio company commitments eligible to be drawn. As for upcoming maturities, we have reserved for the $347.5 million of 2024 notes due in November under our revolving credit facility. After adjusting our unfunded revolver capacity as of quarter and for the repayment of the 2024 notes, we continue to have ample liquidity of $764 million, representing 2.9 times the amount of our unfunded commitments eligible to be drawn. Additionally, the repayment of 2024 notes will have an economic impact in 2025 as the implied funding mix shift will lower our weighted average cost of debt. Pivoting to our presentation materials, slide eight contains this quarter's NAV bridge. In addition to the items Josh walked through earlier, the equity raise resulted in 14 cents per share uplift to NAV in Q1. Moving on to our operating results detail on slide nine, we generated $117.8 million of total investment income for the quarter, down .5% compared to $119.5 million in the prior quarter. Interest and dividend income was $112.1 million, down slightly from the prior quarter, driven by the marginal decline in interest rates off of peak levels experienced in Q4. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were lower at $1.5 million compared to $3.5 million in Q4, driven by lower call protection from payoffs of older vintage assets during the quarter. Other income was $4.3 million compared to $3.9 million in the prior quarter. Net expenses, excluding the impact of a non-cash reversal related to unwind of capital gains incentives fees, were $65.4 million, up slightly from $65 million in the prior quarter. Our weighted average interest rate on average debt outstanding decreased from .8% to 7.6%, driven by the marginal decline in reference rates. Before passing it back to Josh, I wanted to circle back to our ROE metrics. In Q1, we generated an annualized ROE based on adjusted net investment income of .6% and an annualized ROE based on adjusted net income of 12.3%. This compares to our target return on equity on net investment income of .4% to .2% for the full year, as articulated during our Q4 earnings call, and we maintain this outlook heading into the rest of 2024. With that, I'll turn it back to Josh for concluding remarks.
spk17: Thank you, Wayne. I'd like to close our prepared remarks today by encouraging our shareholders to participate and vote for upcoming annual and special meetings on May 23rd. Consistent with previous years, we're seeking shareholder approval to issue shares below net asset value, effective for the upcoming 12 months. To be clear, to date, we have never issued shares below net asset value under prior shareholder authorization granted to each of the past seven years. We have no current plan to do so. We merely view this authorization as an important tool for value creation and financial flexibility in periods of market volatility. As evidenced by the last 10 plus years since our initial public offering, our bar for raising equity is high. We've only raised equity when trading above net asset value on a very disciplined basis, so we would only exercise this authorization as you share below net asset value if there were there are sufficiently high risk adjusted return opportunities that would ultimately be accretive to our shareholders through over our costs of capital and any associated dilution. If anyone has questions on this topic, please don't hesitate to reach out to us. We have also provided a presentation which walks through this analysis in the investor resources section of our website. We hope you find the supplemental information helpful as a way of providing a rationale for providing the company with access to this important tool. As a final comment for today's call, I wanted to share my thoughts on the recent press focus on the perceived systemic risk in private credit. I would suspect that this narrative largely comes from participants that have lost market share in the associated fee streams from the growth of private credit. Clearly, private credit has been a disruptive force to the incumbent business model in the non-investment grade corporate credit space, which is banks acting as an intermediary, which we have called the moving business, sitting between issuers and ultimate holders of risk and collecting an economic rent. Private credit is no doubt disruptive to this model. The criticism of private credit is that it's taking more risk on the asset side. However, the historical data doesn't support this argument. According to Cliffwater's direct lending index, direct lending has had annualized losses in line with the JPM leverage loan index and significantly less than the high yield over the past one, five, 10, and 20 years. In addition, any systemic risk must be in the context of the business model, and we believe private credit has a superior business model. Unlike banks, where the business model is lending long and funding short, private credit is match as students of all types of models and financial services, the tail risk typically comes from liquidity issues and in its core, a poor asset liability matching model. This was apparent in the regional banking crisis. Furthermore, unlike banks, we have some protection through the FDIC program. A taxpayer put doesn't exist for private credit vehicles. And finally, we can't ignore the differences in capitalization. Risk bearing capital inside banks is somewhere between 9% to 12% versus private credit between 25% and 50%. That being said, we are sure there will be dispersion and results in private credit. Dispersion, however, shouldn't be conflated with systemic risk. With that, thank you for the time today. Operator, please open up the line for questions.
spk36: Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question will come from Brian McKenna of the CitizensJMP. Your line is open.
spk29: Okay, thanks. Good morning, everyone. My first question is on the trajectory of adjusted NII. It stepped down $2.5 million sequentially in the quarter. So what was the impact during the period? So did that contribute to the step down at all? And then how much did tighter spreads impact it on a per share basis? And I'm just trying to get a sense of a good jumping off point for NII and Q2 and beyond.
spk17: Yeah, great. Thanks for the question. It's a good question. So the non-call was at the end of the quarter, so it had very little or no impact on NII. I think the drivers of NII let it out was a small impact on, I would call it three things. One is base rates were down five basis points, a small amount quarter over quarter. So the curve, although the curve is up and higher for longer, the curve is downward sloping. So that's a piece of it. Spreads had a very small impact as well. So yield and advertised investments went from, I think it was down 20 basis, quarter over quarter, which five of that was base rates. Impact to a place rate. So 15 basis points. And then the rest was just kind of episodic fees, which I think Ian laid out. So when we think about our business, I think we're still very comfortable with our guidance on adjusting NII for the year, which was in? That was the 13 point forward. NII. That or are we NII?
spk28: Yep. Got it. Okay. Yeah, that's helpful.
spk17: Just NII was 227. So I think we still feel very comfortable with that.
spk29: Yep. Okay. Got it. Thanks. And then maybe just a follow up. So spreads have clearly tightened here over the past several months. And if I look at new floating rate commitments in the quarter, spreads declined about 100 biffs on average from the fourth quarter. So I guess my question is bigger picture around originations and just what spreads where they are and more liquidity broadly in both public and private credit markets. How are you making sure you're getting the right economics for the risk you're taking today, specifically as we move further into the current cycle?
spk17: Yeah. Again, I think these are really good questions. I think the easiest way to see the economic value of what we're providing to shareholders is actually related to the equity rates this quarter. So yields this quarter, I think we went through the math clearly, but yields this quarter were somewhere between yield average life of 11.5 and 14% on an average life basis with the swap curve. And that will bring ROE's similar into that range compared to our cost of equity of nine. So even in this spread tightening environment, you've seen I think value to our shareholders these are near cost of equity. But we were clear and I think the good news for SOX shareholders is we were one of the few public BDCs that had capital available to invest in the last vintage. And most definitely because of that, we're going to have a portfolio that kind of over earns. But even in this most recent quarter vintage, we have the ability to significantly earn our cost of capital and provide value to our shareholders.
spk38: Yeah. Okay. I'll leave it there. Thanks, Josh.
spk17: Let me round out the points that I think is helpful. Just because spreads have declined doesn't mean that we're not providing significant value to our shareholders. You can clearly see that even in this quarter's vintage given our cost of equity.
spk36: Yep.
spk38: Got
spk17: it.
spk36: Thank
spk38: you.
spk36: And one moment for our next question. Our next question will be coming from Maxwell Fitcher of Truist. Your line is open, Maxwell.
spk13: Hi. Good morning. I'm calling in from Mark Hughes. Kind of along the lines of Brian's question with the higher competition, more capital being provided, are you seeing any companies becoming more comfortable with increasing their M&A activity? And if so, how do you see this shaking out throughout the year?
spk15: Yeah. Well, I would say
spk17: as the forward curve, I would say the activity is generally to be up. So, you know, I don't think we saw, you know, we saw a little bit of that in Q1 when you look at Alltricks, for example, which was a take private. You saw Chuck White Co., which was a M&A, which was a portfolio company, which was a strategic investor owned by a sponsor buying another strategic asset. So you saw a little bit of that this quarter. I think as volatility in the rates markets subside and as rates come down a little bit, I think you'll see more activity. I think that more activity will have two impacts on our business. One is it will hopefully increase portfolio churn on the margin, which will drive additional economics that we haven't seen. It's kind of, you know, dried up. It's been sort of a big driver of our return on equity, but I think if you see activity levels, you'll see that portfolio churn, which will drive through economics for our business. And then there will obviously be more activity on the front end of things to do. So, Bo, anything to add there? No, I expect to see
spk14: M&A activity continue to strengthen after a pretty anemic couple of years, both because of better financing costs, but also because, you know, equity valuations are coming in. There's more parity between buyers and sellers as public equity markets have strengthened. And also a lot of businesses have grown into some of their valuations. So you're going to see better assets come to market over the next few quarters. And we're starting to see that in our pipeline today.
spk13: Thanks. That's very helpful. And Josh, you mentioned last quarter, and correct me if I misunderstood, but you were hopeful for more opportunities in 2024 to strategically invest in good companies with bad balance sheets. Any developments on this front thus far?
spk17: Yeah, we didn't even ask you to ask that question. I think we asked people to ask that question. But Equinox is a pretty good example of that. Equinox is a portfolio company of two strong sponsors, related to like partners. It was a company that was obviously COVID impacted, but it's one of the premier companies in the fitness space. It really only has one competitor and is a great company with a great brand and great unit economics. But obviously COVID happened and impacted that business. And their balance sheet got complicated. And so we let up $1.2 billion to your secure personal facility in connection with the new technical facilities by the sponsor and others to refinance that probably to the gay loan capital structure. We held roughly half of the investment. And so we were the lead, but we partnered with Aries and HPS. And so that was a business, an opportunity that we were super excited about. And then it was complicated. It was part of private equity due diligence. And was kind of right in the middle of good company, bad balance sheet that needed, that was complicated. But we really liked both the sponsors in that business, who are big consumers of that business and supportive and management team and the management team including the CEO. So we're excited. We think we're going to be given the right environment and the higher prolonger narrative. There's going to be many of those same situations that I think go right in our wheelhouse where we're going to have to provide capital, where we have an opportunity to provide capital that generates strong risk adjusted returns for our shareholders.
spk27: Great. Thank you.
spk36: And one moment for our next question. Our next question will be coming from Finian O'Shea of WFS. Your line is open, Finian.
spk26: Hey, everyone. Good morning. Josh, on your, sort of segueing there, but on your opening comments on the affirming of the rate curve and the expected dispersion, we'll see, is that happening in real time, say, in response to the rate curve? Are you seeing reorgs or LMEs and so forth and on the, in private credit and on the flip side, should that translate to a more abundant deployment opportunity?
spk17: Great.
spk26: Harry, your
spk17: work.
spk18: I think hopefully you're on the east, or on the
spk17: west, or kind of just waiting out here, but I think that's a good question. So I think our theme has been that higher or longer is a two, kind of, there's two sides to that coin. The first side of that coin is companies are going, you know, some companies are going to have problems in that environment, both due to demand, we should be monitoring, also, my impact demand for the products and services. The second is the balance sheet and that their cost of increasing, most definitely their interest costs. And so there's most definitely going to be issues. Hopefully, I think in general, those, and that will cause dispersion between NII and net income and total economic return. And we see that a little bit on that margin. Astra, you know, we put it out there, like, non-accruals are going so well for us at fair value, 1.1%. Anthology, which is we hold a small lean position, we put on non-accrual, we took a mark down. That is still paying cash, by the way, that will still pay cash, I think, to maturity. That will be the cash on cash returns in the 30s compared to fair value. That should be a tailwind in that asset value as we're taking that into account. But there will be small tails that pop up, I think those tails will be manageable for the industry. And given how much capital the industry holds, it shouldn't create any existential risk for the industry. On the flip side, that should provide a great opportunity for those who can deploy capital into those companies and help facilitate those LMEs or those restructurings like Equinox. So I think if they subway toward, I think the glory locks is you're good on credit, which we think we are, and that you have capital deployed either because the market trusts you to raise more capital, which they have or you have access balance sheet, plus you have the requisite skill set to actually execute those transactions, which we most definitely have, which will create good deployment opportunities. And so that's the glory locks. We think we have all those pieces of the glory locks, but we think it's going to be a really interesting environment for the next couple of years, given the higher prolonger is going to, and capital is misallocated in some ways given low rates, that this will be a good opportunity to participate in the opportunity set. But I think you need capital, which a lot of the industry doesn't have, given more trades, you need the requisite skill set, and then you need a clean portfolio.
spk26: Very good. Thanks. And a follow up, looks like the last out leverage has been somewhat declining, last handful of quarters at least. Seeing if this is market related or portfolio related, are you managing it down? And if we should expect that to continue and what it means for returns?
spk17: Yeah, look, what I would say is we have, we think on the margin, there are the opportunities set today in larger companies, larger capital structures. And in those companies, given how big those credit facilities are, it's hard to club together somebody taking a first out revolver. And so by number, my guess is that's going down, given what we think the opportunities set is. But that will kind of go up and down. That's a combination of, I think, two things. One is the large capital structures. The second thing is banks are still capital constrained. And we see that with a lot of our bank partners on the margin. So it doesn't have a huge impact, it doesn't have a huge impact on economic returns. But it's really both two things, which is where we see the opportunities that is and how banks are positioned.
spk25: Thank you.
spk36: One moment for our next question. And our next question will be coming from Robert Dodd of Raymond James. Your line is open.
spk08: Hi, everybody. I hope you can hear me okay. On the comment, Josh, you made, the tail is going to get fatter. I mean, the longer rates stay up, obviously, you know, it's going to get longer and fatter. I mean, but luckily your portfolio pick went up a little bit sequentially. Looks like that was mainly new investments, though. Your unfunded commitments ticked up again. Looks like it was mainly new investments, but it's hard to tell. Can you give us any color on are you seeing incremental revolver draws more broadly? I mean, obviously, there's a couple of assets, right? You know, ASTRA, for example, you just put on Monocor, but having some idiosyncratic issues. But are there any emerging signs in the portfolio that this higher for longer is starting to create pressure in terms of liquidity and liquidity?
spk17: No. Interest coverage is actually flattening out the increase. Earnings, I think, on a same sort of basis grew about 10%, quarter over quarter. Revenues grew by about 5%. I think the, the answer is no. I think some of the unfunded commitment increased quarter over quarter was all parrots, I think, where they're going through a process to negotiate with the bondholders to call those bonds in. But, you know, broadly speaking, you know, we don't, we don't, haven't seen that pressure. And then obviously, from a, from a ALM perspective, you know, we reserve for unfunded commitments and have close to three times post our bond, our bond maturity of liquidity for unfunded commitments. So haven't seen stress, like broad-based stress, interest coverage is kind of, you know, bottomed out as on the rise given earnings growth plus a combination of the forward curve, although higher for longer, it's still declining. So no.
spk08: Got it. Thank you. On the other fee income, obviously, it was low again this quarter, not a huge surprise. But if we go higher for longer, if there's less activity there, are we in, do you think there's a risk of a relatively prolonged period of lower other fee income from the portfolio given, obviously, the less activity, the older the assets get, the older they get, the less fee income they generate if they do anything anyway. So is there a little bit of a lull cycle here that could progress all the way through 24, maybe even 25 until the portfolio gets recycled or is it just transitory?
spk17: Yeah, it's a great question. Hard to model. What I would say is I think there's us and the industry. First, historically, we've had more of this type of income. Second, I think, so I think we can agree on that. So, that impacts us. I think when you look at our portfolio, unlike the rest of the industry, we were actually able to deploy post-rate hiking cycles. And so, we have more vintage in 22 and 23. And so, that was in the absolute higher spread environment. So, I think you're going to, either one of two things will happen is one is we'll hold those assets for longer, which should over earn or those assets will term if we can all re-spread to come in a little bit, which will create income. So, we have 43% of the portfolio was invested in the second half of 2022. So, I think we were, given how we've managed the business and how focused we've been on being good allocators of capital, the market has rewarded us with the ability to give us more capital, which allowed us to, during this vicious cycle, it allowed us to invest in 22, 23 vintage in a higher spread environment, which my guess will at some point turn.
spk12: Got it.
spk17: I think you have to like split it out between the industry and us. And we just have more 22, 23 vintage and we can all re-spread the comments.
spk10: Yeah, understood. Thank you.
spk36: In one moment for our next question. Our next question will be coming from Eric of Hold Group. Your line is open.
spk20: Good morning, everyone. First question is maybe a two-part question. You know, Bo noted that competition, you guys have talked about it in subsequent answers, so the competition has increased since last year. And I'm curious if that is manifesting primarily just in compressed spreads and on the pricing side or if you're seeing anything on the structure side as well. So, that's the first question. And I guess the second would be, you know, one of your slides, you note that the peer portfolio, the weighted average number of per credit agreement is 1.8. I'm curious if that has changed over time or if that's been pretty consistent as well.
spk00: It
spk17: most definitely will leak on the margin into the document. The documents are still better than relative to the K-Load documents, but it doesn't just stop at the door of spreads. But we still feel comfortable with the overall package. And then I would say there is a little bit of a tale of two cities. We most definitely have seen the opportunities at upmarket. And, you know, on upmarket there is those documents, there might be a few or less financial covenants and so, but that is a, we're making a choice between the trade-off between credit quality, size of company, and protections. And we think the wealth of value is still very good there. Just to size it up, you know, not everybody, there's a handful of people who can write $500 million checks. There's a lot of people that can write $40 to $50 million checks. And so, in this moment in time, and it always won't be that case, we've moved upmarket. You can see that in our, I don't know, even average EBITDA portfolio company, that's fine metric. I think it's gone from 35 a couple years ago to 90, Ian, what's the average now? It's over 90. Over 90. So anything to add there, Bo? No, the only thing I
spk14: would add is, you know, we continue to only invest in situations where we have control or influence on the documentation. And, you know, with competition, you're going to And tend to only play in situations where we believe the document still has the protections that we need as investors. So we have seen, you know, losing of terms, certainly from 18 to 24 months ago when docs got really tight, but they're still adequate to protect our capital.
spk20: Thanks. I appreciate the detailed commentary there. I guess just the only remaining question for me, and, you know, you just noted the ability to write large checks. And if I look at slide six and average investment size in your portfolio, if I look at it, you know, excluding the structured credit investments, it's actually down a little bit year over year. However, if you then include the structured credit, it's up year over year. So just curious about the kind of the divergence there and what's transpired on the structured credit side over the past year or so.
spk17: Yeah, the divergence has, you know, we've increased diversity in our portfolio for sure over time. And our capital base is relatively fixed in SOX. And so it's participating in larger deals across the platform. But our capital base is relatively fixed in SOX. And we've been focused on increasing diversity. So I hope I think I got that question.
spk19: Yes, thank you. That's all for me. Appreciate the answers. Thank you so much.
spk36: One moment for our next question. Our next question will be coming from Melissa Whittle of JPMorgan. Your line is open.
spk30: Good morning. Most of my questions have already been answered, but I wanted to follow up on your comment, Josh, about the opportunities that right now you're seeing it really with the larger companies and bigger capital structures. You know, based on Ian's comments, it seems in very detailed analysis of what the return threshold is for new investments and where you were able to source what you were able to source in the first quarter. Certainly, it looks like you're able to that threshold by a couple hundred basis points, at least in the first quarter. But as competition increases, I guess the question is, do you see the opportunity set evolving more in the more complex field? And you talked about a couple of those that you got done in the first quarter. Is that where the economics are? Is that where we should think about you being involved, primarily in the next few quarters?
spk40: Okay, let me tell you the power. I think this is
spk17: at the heart of our platform. I think this is in the heart of how we think about investing and how we build Sixth Street. So, I mean, I may go down a rabbit hole and then you can pull me up for a second. So, Sixth Street, I think people know $77 billion for $75 plus billion about the food management, 600 plus employees. We have people sitting across industries and verticals and focus on companies in all parts of their life cycle. And that includes by sector, by size, and then by where they are in their life cycle from growth restructuring. And the power of our platform is that we can go between on a relative value, go between all those sectors from size of company to where they are in their life cycle to what sectors we think are interesting. And at some point, sectors are thrown out for no reason and we think they're interesting. We can deploy capital there. Think of that as energy, which our returns have been very good. At one point, it was retail and consumer. And in software, we have a different view. And so we're really a relative value buyer across a big top of the funnel. That is our business model. And so the answer is I don't know. The difficult part of capitalism and capitalism is working is when there's excess returns, the capital will flow. And so you kind of have to keep chucking and jiving through the opportunities that that is the power of the business. And so it might be retail for six months or nine months. It might be software, business services. It might be industrial. It might be energy. It might be small cap. It might be large cap. That power of the platform, what we're delivering to investors is our ability to cross those opportunities that where we have a platform where we can collaborate, where we can deliver that to people. And so that is what we have built for people. That's what we'll continue to lean on. And so I know across environments, across opportunities that we're just not a monoline business. And that is where the durability
spk15: of the returns come from.
spk30: Okay. I appreciate that overview and reviewing of the opportunistic nature of what you guys are able to do. Maybe I should have rephrased my question a little bit just in terms of really sort of the pipeline on complicated investments and that idea of the good company, bad balance sheet in a higher for longer environment. Are you expecting more of that?
spk17: I would hope so. I mean, I look by my macro view of this difficult for the Fed to pivot. We've been saying this for a long time. The Fed hasn't pivoted. And that's going to cause stress in capital structures. And so my hope is that will be that, you know, like Equinox, that will be interesting. We did a depth and Q1, which is public for 99 cents. Which is a retail business. That liquidation is going very well. And so we like that opportunity. That is my hope. That is kind of right into the strike zone of the platform.
spk23: Thanks, Josh.
spk16: You got me all excited about what the platform delivers for value add. So sorry, I had to go down the rabbit hole.
spk36: Okay.
spk23: Also
spk36: good. And one moment for our next question. And our next question will be coming from Bryce Rowe of B Riley. Your line is open.
spk07: Thanks. Thanks. Good morning. Wanted to maybe just continue on this theme of churn within the portfolio and just churn generally within the industry. You all have clearly focused on putting money to work in 22 and 23 ventures and addressing any kind of maturities that you have in 24 and 25. And those are now kind of more limited. So if you could kind of talk about or size up the opportunity from an origination perspective versus what we might see from a repayment perspective within the portfolio and what that might mean for kind of net portfolio growth as we look forward. Thanks.
spk17: I would on the margin, I would think net portfolio growth is I guess hard because we're very kind of opportunities driven. But I would say on the margin payments will increase because of our exit of our business of 22 and 23. And I would say on the margin, I would expect our balance sheets to remain stable, you know, and not grow as significantly as it did in the last, you know, 18 months. That would be my guess. I mean, look, we want to lean in environments where there's really, really high risk adjusted returns. We can agree that with 22, 23 and grow the balance sheet. And not everybody can do that given their access to capital. We did that. And then, you know, which will mean that portfolio term will increase in the growth basis. And that basis, the opportunity is set to be marginally less. And so I think that means that our balance sheet will be, you know, relatively stable, maybe slightly growing, but it's not going to grow as it did only last a few months.
spk05: Okay. Okay. And
spk07: then maybe one more from me on the capital structure. I mean, you've been opportunistic in terms of raising both debt and equity. You know, as you and you've talked about kind of having free funded the 24 notes, do you think about layering in, you know, another, I guess, another round of notes, given, you know, how open debt capital markets are today, just, you know, giving yourself that much more liquidity or available liquidity, you know, as we think about capital structure?
spk17: Yeah, I think we talked about this a little bit. I think it's a question. I actually think on the margin, we hold too much liquidity today. So if you kind of think about, if you look at the post-refi of the 24 notes, we have about $750 million of liquidity. And we can't give it our, the constraint is debt to equity, which our range is 0.9 to 1.25. We can't really use that liquidity if you don't think we're growing the net asset value of the business to a new equity range. And so if we were to, our choices would be to give back unfunded commitments to banks, which I don't think we want to do because that's a low-stops capital. And if we were to raise more bonds, I don't see, we have, in that liquidity, I think it's very valuable and it's really good insurance, but it's limited given the constraint of our 1.25 debt to equity and how much our capital looks today. So I don't see us, and it has an economic cost to shareholders, so I don't see us doing a bond deal unless we think we can grow gross assets, which would require us to grow through an equity raise because we just have a whole bunch of trapezoids as an economic cost to shareholders.
spk06: Got it. Okay. Appreciate the color.
spk36: And I'm sharing no further questions. I would now like to turn the conference back to Josh for closing remarks.
spk17: Thank you. Look, I appreciate the time as people are heading into summer and the weather's turning. I hope people get to spend that with their families and enjoy their summer. We'll obviously be back in contact at 9-4 in August. Please vote in our shareholder meeting. If you have any questions, the democratic process, as well as the democratic processes, are really, really important, but thank you for your time and we're always around to answer questions, and I thought today's questions were really, really good. So thanks for the analytics community for putting in the work.
spk36: And this concludes today's conference call. Thank you for participating. You may now disconnect. Good day and thank you for standing by. Welcome to the 6th Street Specialty Lending, Inc. Q1 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Cami Van Horn, Head of Investor Relations. Please go ahead.
spk32: Thank you. Before we begin today's call, I would like to remind our listeners that
spk31: 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 6th Street Specialty Lending, Inc. filed 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 first quarter ended March 31, 2024, and posted a presentation to the Investor Resources section of our website, .6thstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-2 filed yesterday with the SEC. 6th 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 first quarter ended March 31, 2024. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of 6th Street Specialty Lending,
spk17: Inc. Good morning, everyone, and thank you for joining us. With us today are our President, Bo Stanley, and our CFO, Ian Simmons. Before our call today, I will review our first quarter highlights and pass it over to Bo to discuss activity and the portfolio. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported first quarter adjusted net investment income of $0.58 per share or an annualized return on equity of 13.6%, an adjusted net income of $0.52 per share or an annualized return on equity of 12.3%. As presented in our financial statements, our Q1 net investment income and net income per share inclusive of the unwind of the non-cash accrued capital gain incentive fee expense or a penny per share higher. The difference between this quarter's net investment income and net income was driven by $0.09 per share of net unrealized gains from the impact of tighter credit spreads on the valuation of our investments, $0.14 per share on net unrealized losses from portfolio company specific events, and $0.03 per share of unrealized losses from the reversal of prior period unrealized gains related to investment realizations, and $0.03 per share of realized gains from investment sales. With these results in mind, I'd like to start by circling back to two remarks I made on previous earning calls in February. First, the BDC sector is at peak earnings, and second, the tail within portfolios is getting longer. On the first comment, we reported another strong quarter from an earnings perspective as net investment income continued to benefit from higher interest rates. Q1 was the first time in eight quarters or since the start of the rate hiking cycle that we experienced a modest decline in the weighted average reference rate resets on debt and income producing securities of five basis points. That said, the strength of the reset economic data in the higher for longer shape of the forward interest rate curve continues to support net investment income. Since our last earnings call, the forward curve has shifted towards higher for longer with year-end base rates estimated to be 4.9%, which is up from .2% as of our last earnings call in February. We anticipate the current environment will likely drive a dispersion between operating and gap earnings as higher base interest rates may ultimately lead to credit deterioration and potential for losses as we previously talked about. On my second comment, we're adding a nuance to the view that this quarter, which is that the tail is growing on the margin. While we're seeing evidence of idiosyncratic credit issues arising from across the private credit sector, we remain optimistic about the ability for private credit portfolios to withstand the headwinds of today's macroeconomic environment for a couple reasons. First and foremost, private credit managers underwrite investments with intent of holding at risk until maturity given the largely illiquid nature of the asset class. For us, this means extremely thorough due diligence and bottoms up analysis on every credit we undertake coupled with active portfolio management to the life of the investment. And second, private credit managers have the ability to be selective in terms of sector exposure. We have demonstrated selectivity in our portfolio by avoiding cyclical businesses, staying away from certain industries and leaning into specific sector themes. This optionality differs from the public debt market, which are forced to hold a much broader range of sector exposures, including those that we have to deliberately avoided. It is important to note that both of these benefits to private credit are not given and ultimately rely upon active management. Having the ability to determine when to invest as well as to what to invest is a feature of our business model and a core principle of operating our business with capital allocation discipline. Turning to our portfolio, the difference between this quarter's net investment income and net income highlights our point on the growing tail. Individual portfolio company, Sysic events, result in a 14 cents per share net unutilized losses in Q1. A significant portion of this, or 11 cents per share, was related to the markdown in our investment in Astra Acquisition Corp. At quarter end, we add this investment to non-incrual status driven by continued underperformance to the company. While this is evidence that the tail is growing on the margin, we remain focused on the bigger picture, which is our ability to grow net asset value in the long term. Despite idiosyncratic issues as existed in our portfolio, we have steadily and consistently grown net asset value over the 12 and a half years since we started this business, represented by a three and a half percent annualized NAV growth before special and supplemental dividends since inception. We feel confident in our ability to continue this growth in the future, which we believe will result in outperformance as well to sector. Turning now to the broader portfolio. Credit quality remains strong with non-incrual swimming to 1.1 percent of the portfolio by fair value. Revenue and EBITDA growth continued for another consecutive quarter. Several of our portfolio companies have started to see cost saving initiatives flow through the P&L, resulting in margin expansion and positive EBITDA trends. All things considered, our underlying portfolio companies have shown resilience, which we believe reflective of our discipline, credit selection, and effective portfolio management. Yesterday, our board approved a base quarterly dividend of 46 cents per share to shareholders of record as of June 14th, payable on June 28th. Our board also declared a supplemental dividend of six cents per share related to our Q1 earnings to shareholders of record as of May 31st, payable June 20th. Our net asset value per share pro forma for the impact of the supplemental dividend that was declared yesterday, 1711, and we estimate that our spillover income per share is approximately one dollar and six cents. Before passing it to Bo, I would like to note that in March 26, Fitch ratings agency published their annual review for the BTC sector, and we are pleased to note that rating of Bb was revised from a stable to a positive outlook. Of the 22 firms in their rated universe, TSLF is one of two BTCs to hold the rating with a positive outlook from Fitch. With that, I will now pass it over to Bo to discuss this quarter's investment activity.
spk14: Thanks, Josh. I'd like to start by sharing some observations on the broader market backdrop. In particular, the purpose and importance of direct lending in today's investing landscape. Through the first quarter of 2024, public and private debt markets welcomed an increase in demand for financing solutions after a historically low level of transaction volume in 2023. Access to the broadly syndicated market has improved, providing some borrowers with an option between public and private financing solutions.
spk04: With both
spk14: markets open for business, competition has generally increased compared to last year. However, we remain highly selective in where we transact to make certain we over earn our cost of capital. Our omnichannel sourcing capabilities have contributed to a robust and building pipeline of opportunities that rely upon the structures and features available only in the private credit markets. We believe the current environment underscores a value proposition of private credit for borrowers, looking for more than the cheapest cost of financing. Direct lending provides creative solutions, certainty in pricing, stability through market volatility, and structural flexibility such as delay draw features. All of these components differentiate the private credit markets from the BSL market and reinforce the importance of solutions we provide to the middle market companies. Our investments in Equinox during the quarter highlights our differentiated capabilities as we stepped in to provide an alternative solution to a company with a complicated capital structure. As part of the transaction, Sixth Street led and agented a $1.2 billion first lien term loan and to a lesser degree participated in a $575 million second lien term loan. SLX committed $47.9 million and $2.1 million in these loans respectively in support of the company's refinancing of existing debt. This investment is also representative of the increase in opportunities we are seeing for companies with durable business models looking to restructure their balance sheets. In most cases, the complexity of these transactions require a direct lender that is willing and able to structure and underwrite a creative solution. Given our extensive experience and dedicated resources across the Sixth Street platform, we are well positioned to lead these opportunities.
spk03: Additionally,
spk14: the level of competition is lower for these investments compared to more traditional loan structures, which has contributed to our busy start to the year from an investment perspective, which I'll pivot to now. In Q1, we provided total commitments of $264 million and total funding of $163 million across nine new portfolio companies in up sizes to five existing investments. We experienced $109 million of repayments from three full, seven partial, and 18 structured credit investment realizations resulting in $54 million of net funding activity. It was another strong quarter for originations with 95% of total funding of new investments, with 5% supporting up sizes to existing portfolio companies.
spk35: This
spk14: quarter's funding has contributed to our diversified exposure to select industries with nine new investments across eight different industries. Consistent with a long-term approach of investing at the top of the capital structure, 95% of funding this quarter were in first lien loans, bringing our total first lien exposure to 92% across the entire portfolio.
spk03: We continue to
spk14: benefit from the size and scale of Sixth Street's capital base as we participated in several cross-platform deals, including our largest new commitment during the quarter, which supported the take private transaction of Alteryx. In March, Sixth Street aged and enclosed on a senior secured credit facility as part of the $4.4 billion acquisition of Alteryx by Clear Lake Capital and Insight Partners. Our close relationship with both sponsors combined with our ability to commit to the deal and size were key to securing our leading role in the debt financing. Moving on to repayment activity, our two largest exits during the quarter, a SAO and Bill Highway, were older vintage assets that were driven by refinancing. These investments generated a weighted average asset level gross IRR of .2% for SLX shareholders. Beyond refinancing, another notable area of repayment activity during the quarter was in our structured credit portfolio. As a reminder, we purchased approximately $54 million of COO liabilities at a significant discount to par during the market volatility that occurred in Q2 and Q3 of 2022. Rather than holding excess capital or deploying capital into investments that do not cost capital, we leverage the experience across the Sixth Street platform to invest in BBB and BBB CLO liabilities that presented an efficient use of shareholder capital.
spk22: Since then,
spk14: we have watched our investment thesis play out as we rotated out of approximately 85% of our CLO liability exposure today. We purchased those securities at a weighted average price of $88.5 with a three-year discount margin of approximately $8.80 and exited at a weighted average of $98.5 with a three-year discount margin of approximately $5.35. For Q1, these exits resulted in approximately $0.02 per share of realized gains for SLX shareholders. We expected continued rotating out of the structured credit portfolio to crystallize the returns we generated and will opportunistically come back to this theme in moments where it presents an efficient use of capital based on the return profile. From a portfolio yield perspective, our weighted average yield on debt and income producing securities at enormous high cost decreased slightly quarter over quarter from .2% to 14.0%. This decline reflects the combination of 10 basis points of spread compression from lower spreads on new investments and five basis points from the decline in reference rate resets. New investment spreads were lower in Q1 largely driven by roughly two-thirds of our funding including an up side of this falling into what we call our lane one bucket. Lane one has extraordinarily been about 65% of our total investment activity and generally includes regular way financing to sponsor back companies. In Q1, this includes investments in high quality companies such as Alturex and Clearance Technologies which are scaled businesses with attractive financial files. The other third of our funding activity was in more complex lane two buckets which typically includes higher yielding assets represented by our investment in Equinox during the quarter. As an illustration of the difference in yields, our new Q1 investments in lane one had a weighted average yield and amortized cost of .3% compared to .0% for our investments in lane two assets. On a consolidated basis, the weighted average yielded amortized cost of new investments including up sizes for Q1 was .2% compared to a yield of 14% on fully exited investments. Moving on to the portfolio composition and credit stats across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points of 0.7 times and 4.9 times respectively and their weighted average interest coverage remains constant at 2.0x. As a reminder, interest coverage assumes we apply reference rates at the end of the quarter to steady state borrower EBITDA. As of Q1 2024, the weighted average revenue in EBITDA of our core portfolio companies was 275.5 million and 92.5 million respectively. Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 1.15 on a scale of 1 to 5 with 1 being the strongest representing improvement from last quarter's rating of 1.16 given by growth in the portfolio from new investments. As Josh mentioned earlier, we added one new company Astor Acquisition Court to non-accrual status at the end of the quarter resulting in two portfolio companies on non-accrual across the entire portfolio.
spk34: With that,
spk14: I'd like to turn it over to my partner Ian to cover our financial performance in more detail.
spk24: Thank you, Bo. For Q1, we generated adjusted net investment income per share of 58 cents and adjusted net income per share of 52 cents. Total investments were 3.4 billion up 3% from the prior quarter as a result of net funding activity. Total principal debt outstanding at quarter end was 1.9 billion and net assets were 1.6 billion or $17.17 per share prior to the impact of the supplemental dividend that was declared yesterday. Since the start of the rate hiking cycle two years ago, we have successfully grown net asset value per share by .6% from a trough of $16.27 in Q2 of 2022 to $17.17 as a quarter end. Additionally, net asset value per share is now back above the pre-rate hike level of $16.88 as March 31, 2022 and is a penny below our historical high of $17.18. It has been a very busy year start of the year as we completed several capital markets transactions including a bond offering, an equity raise and a revolving credit facility extension. Starting off in early January, we improved our funding mix and liquidity profile through a $350 million long five-year bond offering. In March, we executed a small equity raise to take advantage of attractive new investment opportunities while remaining below the top end of our target leverage range of 1.25 times debt to equity. Consistent with the framework we've outlined in the past, we issued equity above net asset value and deployed the new capital raised into assets generating estimated returns that exceed our calculated cost of capital. We'll spend a moment to walk through this map, starting with the assumption that our cost of equity is 9% which we sourced from Bloomberg. Based on this assumption, we can back into the required return on new assets by applying the cost structure of our business including the marginal cost of leverage, fees, estimated credit losses and other expenses to our unit economics model. This calculation results in a .6% return on assets inclusive of credit losses required to generate a 9% return on equity. In our case, we deployed the new equity capital into investments with an average asset level yield of 12% to .5% depending on the assumed weighted average life, resulting in an estimated ROE range of approximately .5% to 14% for the capital deployed, well above our estimated equity cost of capital. Shareholder returns continue to be our priority and we strongly believe that our ability to access additional equity capital allows us to generate attractive risk-adjusted returns for our investors. Post quarter end, we further enhanced our debt maturity profile by closing an amendment to our revolving credit facility. With the ongoing support of our bank group, we amended our $1.7 billion secured credit facility including extending the final maturity on $1.5 billion of these commitments through April 2029. We are pleased with this outcome of this transaction as we successfully converted a legacy non-extending lender to extending status and accepted an incremental commitment from an existing lender. There were no new non-extending lenders as part of this amendment and we maintained the existing pricing and terms on the facility. The combination of the January bond issuance and the closing of the amendment to our credit facility extended the weighted average maturity on our liabilities to four years which compares to an average remaining life of investments funded by debt of approximately 2.5 years. This element is important to our asset liability matching principle of maintaining a weighted average duration on our liabilities that meaningfully exceeds the weighted average life of our assets funded by debt. All three of our capital markets transactions bolstered our balance sheet by enhancing our liquidity profile. As of March 31, we had $1.1 billion of unfunded revolver capacity against $260 million of unfunded portfolio company commitments eligible to be drawn. In terms of capital positioning, our ending debt to equity ratio from the balance sheet decreased quarter over quarter from 1.19 times to 1.14 times. The decrease was driven by the equity raise in February combined with repayment activity which was partially offset by portfolio growth from new investments. As for upcoming maturities, we have reserved for the $347.5 million of 2024 notes due in November under our revolving credit facility. After adjusting our unfunded revolver capacity as of quarter end for the repayment of the 2024 notes, we continue to have ample liquidity of $764 million representing 2.9 times the amount of our unfunded commitments eligible to be drawn. Additionally, the repayment of 2024 notes will have an economic impact in 2025 as the implied funding mix shift will lower our weighted average cost of debt. Pivoting to our presentation materials, slide eight contains this quarter's NAV bridge. In addition to the items Josh walked through earlier, the equity raise resulted in 14 cents per share uplift to NAV in Q1. Moving on to our operating results detail on slide nine, we generated $117.8 million of total investment income for the quarter, down .5% compared to $119.5 million in the prior quarter. Interest and dividend income was $112.1 million down slightly from the prior quarter driven by marginal decline in interest rates off of peak levels experienced in Q4. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were lower at $1.5 million compared to $3.5 million in Q4 driven by lower call protection from payoffs of older vintage assets during the quarter. Other income was $4.3 million compared to $3.9 million in the prior quarter. Net expenses excluding the impact of a non-cash reversal related to unwind of capital gains incentive fees were $65.4 million up slightly from $65 million in the prior quarter. Our weighted average interest rate on average debt outstanding decreased from .8% to .6% driven by the marginal decline in reference rates. Before passing it back to Josh, I wanted to circle back to our ROE metrics. In Q1, we generated an annualized ROE based on adjusted net investment income of .6% and an annualized ROE based on adjusted net income of 12.3%. This compares to our target return on equity on net investment income of .4% to .2% for the full year as articulated during our Q4 earnings call and we maintain this outlook heading into the rest of 2024. With that, I'll turn it back to Josh for concluding remarks.
spk17: Thank you, Wayne. I'd like to close our prepared remarks today by encouraging our shareholders to participate and vote for upcoming annual and special meetings on May 23rd. Consistent with previous years, we're seeking shareholder approval to issue shares below net asset value effective for the upcoming 12 months. To be clear, to date we have never issued shares below net asset value under prior shareholder authorization granted to us for each of the past seven years. We have no current plan to do so. We merely view this authorization as an important tool for value creation and financial flexibility and periods of market volatility. As evidenced by the last 10 plus years since our initial public offering, our bar for raising equity is high. We've only raised equity when trading above net asset value on a very disciplined basis, so we would only exercise this authorization as you share below net asset value if there were there are sufficiently high risk adjusted return opportunities that would ultimately be accretive to our shareholders through over our cost of capital and any associated dilution. If anyone has questions on this topic, please don't hesitate to reach out to us. We have also provided a presentation which walks through this analysis in the investor resources section of our website. We hope you find the supplemental information helpful as a way of providing a clear rationale for providing the company with access to this important tool. As a final comment for today's call, I wanted to share my thoughts on the recent press focus on the perceived systemic risk in private credit. I would suspect that this narrative largely comes from participants that have lost market share and the associated fee streams from growth of private credit. Clearly, private credit has been a disruptive force to the incumbent business model in the non-investment grade corporate credit space, which is banks acting as an intermediary, which we have called the moving business, sitting between issuers and ultimate holders of risk and collecting an economic rent. Private credit is no doubt disruptive to this model. The criticism of private credit is that it's taking more risk on the asset however, the historical data doesn't support this argument. According to Cliffwater's direct lending index, direct lending has had annualized losses in line with the JPM leverage loan index and significantly less than the high yield over the past one, five, ten, and 20 years. In addition, any systemic risk must be in the context of the business model and we believe private credit has been a superior business model. Unlike banks where the business model is lending long and funding short, private credit is match funded. As students of all types of models and financial services, the tail risk typically comes from liquidity issues and in its core a poor asset liability matching model. This was apparent in the regional banking crisis. Furthermore, unlike banks that have some protection through the FDIC program, a taxpayer put doesn't exist for private credit vehicles. And finally, we can't ignore the differences in capitalization. Risk bearing capital inside banks is somewhere between nine to 12 percent versus private credit between 25 and 50 percent. That being said, we are sure there will be dispersion and results in private credit. Dispersion, however, shouldn't be conflated with systemic risk. With that, thank you for the time today. Operator, please open up the line for questions.
spk36: Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. And our first question will come from Brian McKenna of the Citizens JMP. Your line is open.
spk29: Okay, thanks. Good morning, everyone. My first question is on the trajectory of adjusted NII. It stepped down two and a half million dollars sequentially in the quarter. So what was the biggest driver of that? I know you added one company to non-career status during the period. So does that contribute to the step down at all? And then how much did tighter spreads impact it on a per share basis? And I'm just trying to get a jumping off point for NII and Q2 and beyond.
spk17: Yeah, great. Thanks for the question. It's a good question. So the knockoff was at the end of the quarter. So it had very little to no impact on NII. I think the drivers of NII, Ian let it out, was a small impact on, I would call it three things. One is base rates were down five basis points, a small amount quarter over quarter. So the curve, although the curve is up and higher for longer, the curve is downward sloping. So that's a piece of it. Spreads had a very small impact as well. So yield and advertised investments went from, I think it was down 20 basis, quarter over quarter, which five of that was base rates. Impact to a base rate. So 15 basis points. And then the rest was just kind of episodic fees, which I think Ian laid out. So when we think about our business, I think we're still very comfortable with our guidance on adjusted NII for the year, which was in? That was the 13.4, NII. That or are we NII?
spk28: Yep.
spk17: Got
spk28: it. Okay. Yeah, that's helpful. Just NII was
spk17: 227. So I think we still feel very comfortable with that.
spk29: Yeah. Okay. Got it. Thanks. And then maybe just a follow up. So spreads have clearly tightened gear over the past several months. And if I look at new floating rate commitments in a quarter, spreads declined about a hundred bits on average from the fourth quarter. So I guess my question is bigger picture around originations and just what spreads where they are and more liquidity broadly in both public and private credit markets. How are you making sure you're getting the right economics for the risk you're taking today, specifically as we move further into the current cycle?
spk17: Yeah. Again, I think these are really good questions. I think the easiest way to see the economic value of what we're providing to shareholders is actually related to the equity rates this quarter. So yields this quarter, I think we went through the math clearly, but yields this quarter were somewhere between yield average life of 11.5 and 14% on an average life basis with the swap curve. And that will bring ROE's and similar into that range compared to our cost of equity of nine. So even in this spread tightening environment, you've seen, I think, value to our shareholders these are the cost of equity. We were clear and I think the good news for SLOX shareholders is we were one of the few public BDCs that had capital available to invest in the last vintage. And most definitely because of that, we're going to have a portfolio that kind of over earns. But even in this most recent quarter vintage, we have the ability to significantly out earn our cost of capital and provide value to our shareholders.
spk00: Yeah.
spk38: Okay. I'll leave it there. Thanks, Josh.
spk17: Let me round out the point because I think it's helpful. Just because spreads have declined doesn't mean that we're not providing significant value to our shareholders. You can clearly see that even in this quarter's vintage, given our cost of equity.
spk38: Yep.
spk36: Got
spk38: it. Thank you.
spk36: And one moment for our next question. Our next question will be coming from Maxwell Fitcher of Truist. Your line is open, Maxwell.
spk13: Hi. Good morning. I'm calling in from Mark Hughes. Kind of along the lines of Brian's question, with the higher competition, more capital being provided, are you seeing any companies becoming more comfortable with increasing their M&A activity? And if so, how do you see this shaking out throughout the year?
spk15: Yeah. Well, I would say
spk17: as the forward curve, I would expect activity levels generally to be up. So I don't think we saw a little bit of that in Q1. When you look at Alltricks, for example, which was a take private, you saw Truck Light Co., which was a M&A, which was a portfolio company, which was a strategic investor owned by a sponsor buying and another strategic asset. So you saw a little bit of that this quarter, I think, as volatility in the rates markets subside. And as rates come down a little bit, I think you'll see more activity. I think that more activity will have two impacts on our business. One is it will hopefully increase portfolio turn on the margin, which will drive additional economics that we haven't seen. It's kind of dried up. It's been a big driver of our return equity. But I think if you see activity levels, you'll see that portfolio turn, which will drive through economics for our business. And then there will obviously be more activity on the front end of things to do. So Bo, anything to add there? No, I expect to see
spk14: M&A activity continue to strengthen after a pretty anemic couple of years, both because of better financing costs, but also because equity valuations are coming in. There's more parity between buyers and sellers as public equity markets have strengthened. And also a lot of businesses have grown into some of the valuations. So you're going to see better assets come to market over the next few quarters. And we're starting to see that in our pipeline today.
spk13: Thanks. That's very helpful. And Josh, you mentioned last quarter, and correct me if I misunderstood, but you were hopeful for more opportunities in 2024 to strategically invest in good companies with bad balance sheets. Any developments on this front thus far?
spk17: Yeah, we didn't even ask you to ask that question. I thought we asked people to ask that question. But Equinox is a pretty good example of that. Equinox is a portfolio company of two strong sponsors related to like partners. It was a company that was obviously COVID impacted, but it's one of the premier companies in the fitness space. It really only has one competitor and is a great company with a great brand and great unit economics, but obviously COVID happened and impacted that business. And their balance sheets got complicated. And so we let up $1.2 billion to your secured personal facility in connection with the new technical facilities by the sponsor and others to refinance that probably to the capital structure. We held roughly half of the investment. And so we were the lead, but we partnered with Aries and HPS. And so that was a business, an opportunity that we were super excited about. And then it was complicated. It was part of private equity due diligence and was kind of right in the middle of good company, bad balance sheet that needed, that was complicated. But we really liked both the sponsors in that business, who are big stewards of that business and supportive and the management team, including the CEO. So we're excited. We think we're going to be given the right environment and the higher prolonging narrative. There's going to be many of those same situations that I think go right in our wheelhouse where we're going to have to provide capital, where we have an opportunity to provide capital that generates strongest adjusted returns for our shareholders.
spk27: Great. Thank you.
spk36: And one moment for our next question. Our next question will be coming from Finian O'Shea of WFS. Your line is open, Finian.
spk26: Hey, everyone. Good morning. Josh, on your, sort of the segueing there, but on your opening comments on the affirming of the rate curve and the expected dispersion, we'll see, is that happening in real time, say in response to the rate curve? Are you seeing reorgs or LMEs and so forth and on the, in private credit and on the flip side, should that translate to a more abundant deployment opportunity? Good to hear your, hear your
spk17: words.
spk18: I think hopefully you're on the east, or on the
spk17: west, or kind of just waiting on your, I think that's a good question. So I think our theme has been that higher longer is a, is, is, is a two kind of, there's two sides of that coin. The first side of that coin is companies are going, you know, some companies are going to have problems in that environment, both due to demand, we should be monitoring if all of them might impact demand for their products and services. The second is they're balance sheet and that their cost, their cost of increasing most definitely their interest costs. And so there's most definitely going to be issues. Hopefully, I think in general, those, and that will cause dispersion between NII and net income and total economic return. And we see that a little bit on that margin. Astra, you know, we put it out there, like non-accrual, so we're going so low for us at fair value, 1.1%. Anthology, which is we hold a small tech lean position, we put on non-accrual, we took a mark down. That is still paying cash, by the way, that will still pay cash. I think to maturity, that will be the cash on cash return really in the thirties on compared to fair value. That should be a tailwind in that asset value as we're taking that into amortized costs. But there will be small tails that pop up, I think those tails will be manageable for the industry. And given how much capital the industry holds, it shouldn't create any existential risk for the industry. On the flip side, that should provide a great opportunity for those who can deploy capital into those companies and facilitate those LMEs or those restructurings like Equinox. So I think if they double-edged sword, I think the glory locks is you're good on credit, which we think we are, and that you have capital deployed either because the market trusts you to raise more capital, which they certainly have, or you have access balance sheet, plus you have the requisite skill set to actually execute those transactions, which we most definitely have, which will create good deployment opportunities. And so that's the glory locks. We think we have all those pieces of the glory locks, but we think it's going to be a really interesting environment for the next couple years, given the higher prolonger, and capital is misallocated in some ways given low rates, that this will be a good opportunity to participate in an opportunity set. But I think you need capital, which a lot of the industry doesn't have, given more trades, you need the requisite skill and then you need a clean portfolio.
spk26: Very good, thanks. A follow-up, it looks like the last out leverage has been somewhat declining, last handful of quarters at least. Seeing if this is market-related or portfolio-related, are you managing it down and if we should expect that to continue and what it means for returns?
spk17: Yeah, look, what I would say is we think on the margin there are opportunities set today in larger companies, larger capital structures. And those companies, given how big those credit facilities are, it's hard to club together somebody taking a first-out revolver. And so by number, my guess is that's going down, given what we think the opportunities set is, but that will kind of go up and down. That's a combination of, I think, two things. One is the large capital structures, the second thing is banks are still capital constrained, and we see that with a lot of our banks. So it doesn't have a huge impact on economic returns, but it's really those two things, which is where we see the opportunities set is and how banks are positioned.
spk25: Thank you.
spk36: One moment for our next question. And our next question will be coming from Robert Dodd of Raymond James. Your line is open.
spk08: Hi, everybody. I hope you can hear me okay. On the comment, Joshua, maybe the tail is going to get fatter. I mean, the longer rates stay up, obviously, you know, it's going to get longer and fatter. I mean, but luckily your portfolio pick went up a little bit sequentially. Looks like that was mainly new investments, though. Your unfunded commitments ticked up again. Looks like it was making new investments, but it's hard to tell. Can you give us any color on are you seeing incremental revolver draws more broadly? I mean, obviously, there's a couple of assets, right? You know, Astra, for example, you just put on a call that having some idiosyncratic issues, but are there any emerging signs in the portfolio that this higher for longer is starting to create pressure in terms of liquidity and liquidity?
spk17: No, interest is actually flattening out the increase. Early as I think, a same sort of basis grew about 10%, quarter over quarter, revenues grew by about 5%. And I think the answers no, I think the I think some of the unfunded commitment increased quarter over quarter was all tariffs, I think, where they're going through a process to with a negotiation with the bondholders to call those bonds in. But no, broadly speaking, you know, we don't haven't seen that pressure. And then obviously, from a from a ALM perspective, you know, we reserve for unfunded commitments and have close to three times post our bond or bond maturity of liquidity for unfunded commitments. So haven't seen stress, like broad based stress, interest coverage is kind of, you know, bottomed out as on the rise given earnings growth plus a combination of the forward curve, although higher for longer, it's still defining. So no.
spk08: Got it. Thank you. On the other fee income, obviously, it was low again this quarter, not a huge surprise. But if we go higher for longer, if there's less activity there, are we in do you think there's a risk of a relatively prolonged period of lower other fee income from the portfolio given, obviously, the less activity the older the assets get, the older they get, the less fee income they generate if they do anything anyway. So is there a little bit of a lull cycle here that could progress all the way through 24, maybe even 25 until the portfolio gets recycled? Or is it just transitory?
spk17: Yeah, I think it's a great question. Hard to model. What I would say is, I think there's us and the industry. First, historically, we've had more of this type of income. Second, I think, so I think we can agree on that. So, that impacts us. I think when you look at our portfolio, unlike the rest of the industry, we were actually able to deploy post-rate hiking cycles. And so, we have more vintage in 22 and 23. And so, you know, that was in the absolute higher spread environment. So, I think you're either one of two things will happen is one is we'll hold those assets for longer, which should over earn or those assets will turn. We can all agree, spread this coming in a little bit, which will create income. So, we have, you know, 43% of the portfolio was invested in the second half of 2022. So, I think we were, you know, given how we've managed the business and how focused we've been on being good allocators of capital, the market has rewarded us with the ability to give us more capital, which allowed us to, during this vicious cycle, it allowed us to invest in 22, 23 vintage in a higher spread environment, which my guess will at some point
spk12: got it. But I think you have
spk17: to, I think you have to like split it out between then three and us. And we just have more 22, 23 vintage and we can all agree, spread the comment.
spk10: Yeah, understood. Thank you.
spk36: In one moment for our next question. Our next question will be coming from Eric of Hold Group. Your line is open.
spk20: Good morning, everyone. First question is maybe a two-part question. You know, Bo noted that competition, you guys have talked about it, you know, in subsequent answers. So, the competition has increased since last year. And I'm curious if that is manifesting primarily just in compressed spreads and on the pricing side, or if you're seeing anything on the structure side as well. So, that's the first question. And I guess the second would be, you know, one of your slides, you note that the fair portfolio, the weighted average number of covenants per credit agreement is 1.8. I'm curious if that has changed over time or if that's been pretty consistent as well.
spk00: And it
spk17: most definitely will leak on the margin into the document. The documents are sold better than, probably, to the K-Load documents, but it doesn't just stop at the door of spreads. But we still feel comfortable with the overall package. And then I would say there is a little bit of a tale of two cities. We most definitely have seen the opportunities at up market. And, you know, on up market there is those documents, there might be a few or less financial covenants. But that is a, we're making a choice between the tradeoff between credit quality, size of company, and protections. And we think the wealth of value is still very good there, just to size it up. You know, not everybody, there's a handful of people who get wrong, who can't write $500 million checks. There's a lot of people who can write $40 to $50 million checks. And so in this moment in time, and it always won't be that case,
spk21: we've moved
spk17: up market. You can see that in our, I don't know, my EBITDA, average EBITDA portfolio company, that's fine metric. I think it's gone from 35 a couple years ago to 90, Ian, what's the average now? It's over 90. Over 90. So anything to add there, Bo? No, the only thing I would
spk14: add is, you know, we continue to only invest in situations where we have control or influence on the documentation. And with competition, you're going to see looser documentation. But we still, you know, have, we still control that. And tend to only play in situations where we believe the document still has the protections that we need as investors. So we have seen, you know, losing of terms, certainly from 18 to 24 months ago when docs got really tight, but they're still adequate to protect our capital.
spk20: Thanks. I appreciate the detailed commentary there. I guess just the only remaining question for me, and, you know, you just noted the ability to write large checks. And if I look at slide six and average investment size in your portfolio, if I look at it, you know, excluding the structured credit investments, it's actually down a little bit year over year. However, if you then include the structured credit, it's up year over year. So just curious about the kind of the divergence there and what's transpired on the structured credit side over the past year or so.
spk35: Yeah,
spk17: the divergence is, you know, we've increased diversity in our portfolio for sure over time. And our capital basis is also we fixed in SOX. And so it's participating in larger deals across the platform. But our capital basis relatively fixed in SOX and we've been focused on increasing diversity. So I hope I think I got that question.
spk19: Yes, thank you. That's all for me. Appreciate the answers. Thank you so much.
spk36: One moment for our next question. Our next question will be coming from Melissa Whittle of JPMorgan. Your line is open.
spk30: Good morning. Most of my questions have already been answered, but I wanted to follow up on your comment, Josh, about the opportunities that right now you're seeing it really with the larger companies and bigger capital structures. You know, based on Ian's comments, it seems in very detailed analysis of what the return threshold is for new investments and where you were able to source what you were able to source in the first quarter. Certainly it looks like you're able to that threshold by a couple hundred basis points, at least in the first quarter. But as competition increases, I guess the question is, do you see the opportunity set evolving more in the more complex field? And you talked about a couple of those that you got done in the first quarter. Is that where the economics are? Is that where we should think about you being involved, primarily in the next few quarters?
spk40: Let me tell you the power. I think this
spk17: is at the heart of our platform. I think this is in the heart of how we think about investing and how we build Sixth Street. So I mean, I may go down a rabbit hole and then you can pull me up for a second. So Sixth Street, I think people know $77 billion, so for $75 plus billion about the management, 600 plus employees. We have people sitting across industries and verticals and focus on the companies in all parts of their life cycle. And that includes by sector, by size, and then by where they are in their life cycle from growth restructuring. And the power of our platform is that we can go between on a relative value, go between all those sectors from size of company to where they are in their life cycle to what sectors we think are interesting. And at some point, sectors are thrown out for no reason and we think they're interesting. We can deploy capital there. Think of that as energy, which our returns have been very good. At one point it was retail and consumer. And in software we have a different view. And so we're really a relative value buyer across a big top of the funnel. That is our business model. And so the answer is I don't know the difficult part of capitalism and capitalism is working is when there's excess returns the capital will flow. And so you kind of have to keep chucking and jiving through the opportunities that that is the power of the business. And so it might be retail for six months or nine months. It might be software business services. It might be industrial. It might be energy. It might be small cap. It might be large cap. That power of the platform that what we're delivering to investors is our ability to cross those opportunities that where we have a culture and a platform where we can collaborate, where we can deliver that to people. And so that is what we've built for people. That's what we'll continue to lean on. And so I know across environments, across opportunities that we're just not a monoline business. And that is where the durability
spk15: of the returns come from.
spk30: Okay, I appreciate that overview. And reviewing of the opportunistic nature of what you guys are able to do. Maybe I should have rephrased my question a little bit just in terms of really sort of the pipeline on complicated investments and that idea of the good company, bad balance sheet in a higher for longer environment. Are you expecting more of that?
spk17: I would hope so. I mean, I look by my macro view of this difficult for the pivot. We've been saying this for a long time, the site hasn't pivoted. And that's going to cause stress in capital structures. And so my hope is that will be that, you know, like Equinox, that will be interesting. We did a def and Q1, which is public for 99 cents, which is a retail business. That liquidation is going very well. And so we like that opportunity. That is my hope that is kind of right into the strike zone of the platform.
spk23: Thanks, Josh.
spk16: You got me all excited about what the platform delivers for value add. So sorry, I had to go down the rabbit hole.
spk36: Okay. And one moment for our next question. And our next question will be coming from Bryce Rowe of B Riley. Your line is open.
spk07: Thanks. Thanks. Good morning. Wanted to maybe just continue on this theme of churn within the portfolio and just churn generally within the industry. You all have clearly focused on, you know, putting money to work in 22 and 23 ventures and addressing any kind of maturities that you have in 24 and 25. And those are now kind of more limited. So if you could kind of talk about or size up the opportunity from an origination perspective versus, you know, what we might see from a repayment perspective within the portfolio and, you know, what that might mean for kind of net portfolio growth as we look forward. Thanks.
spk17: On the margin, I would think net portfolio growth is, I guess, hard because we're very kind of opportunities that driven, but I would say on the margin payments will increase because of our business of 22 and 23. And I would say on the margin, I would expect our balance sheet to remain stable, you know, and not grow as significantly as it did in the last, you know, 18 months. That would be my guess. We want to lean in environments where there's really, really high risk adjusted returns. We can agree that with 22, 23 and grow the balance sheet. And not everybody can do that given their access to capital. We did that. And then, you know, which will mean that portfolio term will increase the growth basis. And that basis, the opportunity is going to be marginally less. And so I think that means that our balance sheet will be, you know, relatively stable, maybe slightly growing, but it's not going to grow to the extent it did only last a few months.
spk05: Okay. Okay. And
spk07: then maybe one more from me on the capital structure. I mean, you've been opportunistic in terms of raising both debt and equity. You know, as you and you've talked about kind of having free funded the 24 notes. Do you think about layering in, you know, another, I guess, another round of notes, given, you know, how open debt capital markets are today, just, you know, giving yourself that much more liquidity or available liquidity, you know, as we think about capital structure?
spk17: Yeah, I think we talked about this a little bit. I think it's a good question. I actually think on the margin, we hold too much liquidity today. So if you kind of think about, if you look at the post-refi of the 24 notes, we have about $750 million of liquidity. And we can't, given our, the constraint is debt equity, which our range is 0.9 to 1.25. We can't really use that liquidity if you don't think we're growing the net asset value of the business through new equity ranges. And so if we were to, our choices would be to give back unfunded commitments to banks, which I don't think we have more bonds. I don't see, we have, in that liquidity, I think it's very valuable and it's really good insurance, but it's limited given the constraint of our 1.25 debt to equity and how much our capital looks today. So I don't, I don't see us, and it has an economic cost to shareholders. So I don't see us doing a bond deal unless we think we can grow growth assets, which would require us to grow through an equity range because we just have a whole bunch of traffic when you add an economic cost to shareholders.
spk06: Got it. Okay. Appreciate the color.
spk36: And I'm sharing no further questions. I would now like to turn the conference back to Josh for closing remarks.
spk17: Thank you. Look, I appreciate the time as people are heading into summer and the weather's turning. I hope people get to spend that with their families and enjoy their summer. We'll obviously be back in, contact us on the floor in August. Please vote in our shareholder meeting. It's a democratic process, as well as the democratic processes are really, really important. But thank you for your time and we're always around to answer questions. And I thought today's questions were really, really good. So thanks for the, the analyst community for putting in the work.
spk36: And this concludes today's conference call. Thank you for participating. You may now disconnect.
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