Sixth Street Specialty Lending, Inc.

Good morning, and welcome to 6th Street Specialty Lending, Inc.' 's third quarter ended September 30th, 2024 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Wednesday, November 6th, 2024. I will now turn the call over to Ms. Kami Van Horn, Head of Investor Relations.

Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending Inc's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the third quarter ended September 30, 2024, and posted a presentation to the Investor Resources section of our website, www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending Inc.' 's earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the third quarter ended September 30th, 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 at Sixth Street Specialty Lending, Inc. Joshua Easterly, Chief Executive Officer at Sixth Street Specialty Lending, Inc. Joshua Easterly, Chief Executive Officer at Sixth Street Specialty Lending, Inc. Joshua Easterly, Chief Executive Officer at Sixth Street Specialty Lending, Inc.

Joshua Easterly, Chief Executive Officer at Sixth Street Specialty Lending, Inc. Joshua Easterly, Chief Executive Officer at Sixth Street Specialty Lending, Inc. Joshua Easterly, Chief Executive Officer at Sixth Street Specialty Lending, Inc. Joshua Easterly, Chief Executive Officer at Sixth Street Specialty Lending, Inc. Joshua Easterly, Chief Executive Officer at Sixth Street Specialty Lending, Inc. Joshua Easterly, Chief Executive Officer at Sixth Street Specialty of this quarter's results, then pass it over to Beau to discuss activity in the portfolio. Ian will review our quarterly financial results in detail, and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported third quarter financial results with adjusted net investment income per share of 57 cents, corresponding to an annualized return on equity of 13.2%, and adjusted net income per share of 41 cents, corresponding to an annualized return on equity of 9.6%. As presented in our financial statements, our Q3 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gain incentive fee expense, were $0.59 and $0.44, respectively. Our net investment income this quarter continues to reflect impacts on the higher interest rate environment combined with a small increase in activity-based fees. Adjusted net investment income of 57 cents per share exceeded our base quarterly dividend by 11 cents per share, or 23%. Five cents per share was specifically related to activity, which is up from the average of four cents per share that we've experienced since the start of the tightening cycle. Since our last earnings call, the shape of the forward interest rate curve has declined in the near term following the rate cut in September and now bottoms out at a slightly higher terminal rate in 20, in 2026. Based on the latest curve, our base dividend level remains well supported through that terminal rate. As a reminder, our dividend policy is based on the, on our through the cycle earnings power, inclusive of credit losses and absent any activity-based fee income. Rounding out the earnings summary, the 15 cents per share difference between this quarter's net investment income and net income was due to net unrealized losses, primarily from the markdown of our investment in lithium technologies. Consistent with our valuation policy, we have marked this name, taking into account a range of outcomes. We believe the distribution of outcomes has skewed lower since last quarter, and our fairer value mark as of 9-30 reflects the updated view. Given the continued underperformance of this name, we've also added a tonal full status at the beginning of Q3. As for the economic impact, the lithium technology position represents less than 1 percent of our total portfolio fair value. To illustrate the impact on earnings, we assume we were earning approximately 11 percent return on equity on the 30 million of unrealized losses we've recognized to date. This return on equity number is based on the cost of equity from Bloomberg of roughly 9% and our valuation on book value of 1.2 times. An 11% assumed return on equity on 30 million implies less than a penny per share of loss on income on a quarterly basis or 15 basis points annually of ROE. Credit losses are incorporated as part of our base case assumption in our unit economic model. To be clear, the capital we put to work will continue to earn in excess of our cost of equity, inclusive of the potential for losses. This requires discipline in our investment decisions despite the tireless spread environment that persists. According to data published by the LCD, the portion of BDC portfolios based on count was spread below 550 basis points, reached 24% as of Q2 2020. This compares with 7% of our portfolio by count and less than 5% of our portfolio on a weighted average basis as of 9-30, which we view as a more meaningful way to analyze the data. We believe the drastically lower percentage of sub-550 deals in our portfolio underscores our disciplined capital allocation approach. We are confident that our asset selection will continue to drive best-in-class returns for our investors. Our quarter end net asset value was $17.12, down seven cents per share compared to $17.19 per share as of June 30th. Over the last 12 months, reported NAV per share has grown from $16.97 to $17.12. Ian will walk through the net asset bridge in more detail. Yesterday, our board approved a base quarterly dividend of $0.46 per share to shareholders of record as of December 16th, payable on December 31st. Our board also declared a supplemental dividend of 5 cents per share related to our Q3 earnings that shareholders will record as of November 29th, payable on December 20th. Our Q3 2024 net asset value per share adjusted for the impact of the supplemental dividend is $1,707. With that, I'll pass it over to Bo to discuss this board's investment activities.

Thanks, Josh. I'd like to start by sharing some thoughts on the broader economic backdrop. followed by observations on the current deal environment. As rates continue to decline based on the shape of the forward interest rate curve, we generally expect corporate credit and activity levels to benefit from the shift in economic policy. On corporate credit, a lower cost of capital should improve the cash flow profile of borrowers after a prolonged period of slower growth and higher interest rates. We've started to see this play out across our own portfolio as the weighted average interest coverage on our core portfolio companies improved quarter over quarter. In terms of activity levels, we anticipate that rates unlocking will support a more active M&A environment, which we already started to see in Q3 as BSL volumes to finance LBOs reached the highest level in two and a half years. While it's encouraging to see this up to an activity, We believe a more significant increase in deal flow will take time as today's valuations generally remain below the purchase prices paid in the low interest rate or free money era prior to 2022. Turning now to our investment activity, during the third quarter, we closed on $269 million of commitments across eight new investments and upsizes to four existing portfolio companies. Consistent with our long-term approach of investing at the top of the capital structure, 100% of our Q3 fundings were in first lien positions, contributing to our 93% first lien asset mix across the entire portfolio. As for industry exposures, our eight new investments were diversified across seven different end-user industries. Our top industry exposure continues to be software and business services. Cyclical exposure, excluding our asset-based loan and retail, remains limited at 4.4% of our portfolio. During Q3, we continued to lean in on our capabilities across the Sixth Street platform to differentiate our capital. This includes focusing on sector themes that coincide with our platform's underwriting expertise and leveraging our deep relationships to source unique investment opportunities. To highlight one of the sector themes where we were active during the quarter, Sixth Street closed and funded a $400 million senior secure credit facility for Arrowhead Pharmaceuticals which is a clinical stage biotech company focused on the development of drugs for a wide range of conditions. We worked alongside our healthcare sector team to provide the company with long-term capital to fund R&D and platform development. The combination of Sixth Street scale, expertise, and flexibility contributed to the sourcing and execution of this attractive investment opportunity for SLX shareholders. We also added to our retail ABL portfolio during Q3 through our investment in Belk, which is our largest funding for the quarter. Belk is a regional department store retailer with a strong collateral base. The transaction was part of a balance sheet restructuring, ultimately allowing the company to delever and improve its financial positioning. Long-time followers of our business know that the track record in this theme spans over a decade and has contributed to the above-market asset-level yield profile for SLX. Our ability to create value for shareholders in this theme has been built over a number of years by investing in resources, team and relationships, which cannot be replicated overnight. We've been increasingly active in the opportunistic and non-sponsored channel to drive shareholder returns. Both of the investments I highlighted, Arrowhead and Belk, represent non-sponsored transactions, which comprise 43% of total new investments funded in Q3. The weighted average yield at fair value on these investments was 13.5% compared to 10.1% for other new investments during the quarter. On the repayment side, we had two full and five partial investment realizations totaling $90 million in Q3. Consistent with the increase in refinancing activity in the credit markets, our two largest repayments during the quarter, BestPass and IntelliPeer, were driven by refinancings. I'll spend a moment to highlight the exit of BestPass as this investment demonstrates a benefit to shareholders for our newer vintage portfolio, as well as our willingness to pass on new deals that do not present an appropriate risk return for our business. We made our initial investment in Best Pass in May of 2023 and continue to support the company through an upside in November. Over the short period of 1.2 years, we generated 20% unlevered IRR and 1.2x MOM, including two cents per share of activity-based fee income from the crystallization of call protection and the acceleration of amortization of upfront fees. Given our ability to deploy capital in the wider spread environment in 2022 and the first half of 2023, we expect to see an increase in activity fee-based income should our portfolio experience higher velocity in the declining interest rate environment. From a credit quality standpoint, the overall performance rating of our portfolio remains strong, with a weighted average rating of 1.14 on a scale of one to five, with one being the strongest, representing no change from prior quarter. Non-accruals represent 1.9% of the portfolio at fair value, with one new investment added to non-accrual status in Q3. Moving on to portfolio composition, In Q3, our portfolio's weighted average yield on debt and income-producing securities at amortized cost decreased from 13.9% in the prior quarter to 13.4%. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attached and detached points for our loans of 0.6 times and 5.0 times respectively, and their weighted average interest cover increased from 2.1 to 2.2 times quarter over quarter. As of Q3 2024, the weighted average revenue in EBITDA for our core portfolio companies was $327 million and $111 million, respectively. Beginning this quarter, we will also note going forward the median revenue in EBITDA for those same borrowers, which was $149 million and $52 million, respectively, for Q3. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Thank you, Beau. For Q3, we generated adjusted net investment income per share of $0.57 and adjusted net income per share of $0.41. Total investments were $3.4 billion, up 3.7% from $3.3 billion in the prior quarter, driven by net funding activity. Total principal debt outstanding at quarter end was $1.9 billion, and net assets were $1.6 billion, or $17.12 per share, prior to the impact of the supplemental dividend that was declared yesterday. Our debt to equity ratio increased from 1.12 times as of June 30 to 1.19 times as of September 30, and our weighted average debt to equity ratio for Q3 was 1.14 times. We continue to have significant liquidity for the size of our balance sheet with nearly 1.1 billion of unfunded revolver capacity at quarter end against 226 million of unfunded portfolio company commitments eligible to be drawn. As of September 30, our funding mix was represented by 68% unsecured debt. Post-quarter end, we satisfied the maturity of our 347.5 million November 1, 2024 unsecured notes through utilization of undrawn capacity on our revolving credit facility. The settlement had no impact on leverage and marginally decreases our prospective weighted average cost of debt, resulting in a positive economic impact of almost one penny per share quarterly in 2025. Pro forma for the maturity, our funding mix is represented by 50% unsecured debt. After satisfying this maturity, we continue to have approximately $743 million of unutilized revolver capacity, representing more than three times our unfunded portfolio company commitments eligible to be drawn. Moving to our presentation materials, slide eight contains this quarter's NAV bridge, Walking through the main drivers of NAV movement, we added 57 cents per share from adjusted net investment income against our base dividend of 46 cents per share. As Josh mentioned, there was 2 cents per share unwind of non-cash accrued capital gains incentive fee expenses. The reversal of net unrealized gains on the balance sheet related to investment realizations resulted in a 3 cents per share reduction to NAV. The impact of tightening credit spreads on the valuation of our portfolio increased net asset value by $0.03 per share, and finally, there were net unrealized losses on investments amounting to $0.13 per share. Shifting to our operating results detail on slide nine, we generated total investment income for the third quarter of $119.2 million down slightly compared to $121.8 million in the prior quarter. Walking through the components of income, interest and dividend income was $110.9 million, down from 112.2 million in the prior quarter. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were higher at 4.3 million compared to 4 million in Q2 given the slight increase in activity-based income we experienced this quarter. Other income was 4 million compared to 5.5 million in the prior quarter. Net expenses, excluding the impact of a non-cash accrual related to capital gains incentive fees, were $65.8 million, down from $66.8 million in the prior quarter. This was primarily due to seasonal expenses incurred last quarter for the annual and special shareholder meetings held in May. Our weighted average interest rate on average debt outstanding remained flat at 7.7%. As a reminder, our liability structure is entirely floating rate. which means we will experience a decrease in our cost of debt as interest rates are expected to decline. We did not see a decrease this quarter due to the roughly one quarter lagged impact of falling interest rates on the weighted average interest rate on average debt outstanding. We estimate undistributed income of approximately $1.19 per share at quarter end. As always, we will continue to review the level of undistributed income as the tax year progresses to ensure we comply with the RIC distribution requirements, minimize potential return on equity drag from the excise taxes, and prioritize returns to our shareholders. Before turning it back to Josh, I'd like to briefly provide an update on our ROEs. At the beginning of this year, we communicated an annualized ROE target range of 13.4 percent to 14.2 percent based on our expectations over the intermediate term for our net asset level yields, cost of funds, and financial leverage. Year-to-date, we've generated an annualized ROE on adjusted net investment income of 13.6%, consistent with that target range. Based on our performance this year through Q3, we continue to expect adjusted NII per share for the full year to be within the range previously stated of $2.27 to $2.41. With that, I'll turn it back to Josh for concluding remarks.

Thank you, Ian. I'd like to add on to your comments regarding As many of you heard me say in the past, shareholders can't eat net investment income. For that reason, we focus on earnings after net unrealized and realized gains and losses, or net income. On an LTN basis, we've generated net income return on equity of approximately 12%, inclusive of the unrealized losses we recognize this quarter. We earned a return for shareholders that significantly exceed our estimated cost of equity of 9%. This is all to invest in assets that generate a return greater than our cost of equity, inclusive of credit losses that we assume in our base case model. In closing, I'd like to take a moment to focus on what's most important to us, which is the shareholder experience. We are an investor firm first and have built the architecture of the Sixth Street platform to deliver the best risk-adjusted returns for our shareholders. We have invested in the talent and resources, including with 250 investment professionals across sector and capabilities, including direct lending. For SOX, we have access to the scale, resources, and intellectual capital across the entire platform while operating a constrained balance sheet of roughly $3.5 billion of total assets. This allows us to remain highly selective given the wide range of investment opportunities that we evaluate relative to the capital we have available to invest. We strongly believe that structuring our business in this way will allow us to continue to deliver top-tier results for our shareholders over the long term. With that, thank you for your time today. Operator, please open the line for questions.

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Brian McKenna with Citizens JMP. Your line is now open.

Okay, great. Thanks. Good morning, everyone. Uh, so a question on your non-sponsor business to start, uh, you know, it was great to see all the activity here during the quarter. I think it speaks to the broad capabilities of Sixth Street, as well as your ability to pivot across different parts of the market to deliver the best returns for shareholders. But, you know, it would be great just to get a little bit more detail on this business. You know, how big is the team? How do they collaborate with the rest of the Sixth Street platform? And then how do they cover the market from a sector and size perspective? And then just as we move forward here, the incremental yield you're getting from these types of deals is quite notable. So should we continue to expect you'll lean into these non-sponsored transactions over the next couple of quarters?

Yeah. Hey, Brian, thanks for the question. Really appreciate it. I'm sure people had an interesting night last night while we parked in front of the TV. So I appreciate you getting up early for a earnings call. Just real quick, just a level set. On the sponsor side, historically, our business has been 65% sponsored, 35% non-sponsor. This quarter, it was 50-50 approximately. I think two out of our three largest transactions this quarter were actually non-sponsor deals. I would throw Belkin in that category. Arrowhead, which is a publicly traded spec pharma business. So the platform today, and by the way, even our sponsored business is not the typical sponsored business. It's more thematic, tilted, which is we're not trying to do, you know, we're not trying to bid every sponsor deal based on a relationship. We focus on sponsors who have the same industry themes where we think we can add value and understand those business models with those industries. So even our sponsor business, I would say it's not a traditional kind of go-to-market sponsor business. We have approximately 250 investment professionals in our business, and they're grouped in both, for lack of a better word, kind of strategy teams, so call it like direct lending, ABF, and then they're also grouped in industry teams as well. And so healthcare, consumer, retail, Um, energy is a big is a big one for us. Uh, um, so, uh, software infrastructure, uh, and so those, uh, and then healthcare, for example, we have a big focus on spec pharma. Those typically go direct to company, uh, given that you're not sponsored driven. Uh, and we, we like that model. We like the model of being able to toggle between risk return. and allocating our capital in the most efficient way. And, you know, that's been a historical big driver of our shareholder returns. So hopefully that gives you a little flavor, but it is. And I think in a world, quite frankly, where there's probably more volatility, maybe there's higher rates and there's going to be in a world where you're going to have to navigate complexity and that opportunities that we think the platform is built for that.

Okay, that's great. Thanks, Josh. And then just to follow up on that a little bit in sponsor M&A, you know, there's clearly been a lot of focus on the election. And I think some sponsors have been waiting for clarity here before moving forward on transacting. So just looking across your network of sponsors, as well as your deal pipelines, is there any way to quantify how many sponsors and related companies were in fact on the sidelines waiting until they had more clarity on the election and You know, I'm just trying to get a sense of the magnitude and the acceleration we could see in deal flow post-election here.

Yeah. So I think it's tricky, to be honest with you, and I'll turn this over to Beau. What I would say is the traditional thinking is that as rates come down and they have visibility on rates, by the way, which may not come down as much now, given kind of that the change in administration, you know, the conventional wisdom is I think that the economic policies of the new administration are probably slightly more inflationary, which might keep rates higher, although it's probably better for growth. And you see that in equity markets or at least equity market futures today. So I think it's hard to tell that the traditional thinking was that as rates come down, the M&A pipeline gets unlocked. I would say, you know, what we've seen, and I think you've seen a little bit of that. I think the bigger issue is a lot of assets were purchased in a zero rate environment at high valuations that need time to work through and generate a return. And so those vintages are, you know, 2020 to middle of 2022 is a large portion of the NAB sitting in private equity. And the sponsor-to-sponsor transactions They just need time because that's slower money given you got to work your way through high valuations. So I think you'll see a little bit of it unlock. I don't know if you'll see all of it unlock given the change in valuations on the private side, given the rate environment and the amount of leverage you can put on businesses given the structural change in rates. Bo, do you have anything to add there?

I think that's spot on. It's really hard to calibrate. You know, there was a cautious tone coming into an election cycle, which is typical of every election cycle. And what you generally see there, Q4 is the busiest time of year from an M&A perspective. But in election years, it's a little bit more smoothed out in Q4 and Q1. I would expect that this year. Anecdotally, I think there's some folks that were waiting to see the results. But overall, I think it's more, it's going to be driven more by interest rates and the valuation on loss that Josh alluded to earlier.

Yeah, I mean, the simple math is if you bought something, you know, for 14 or 15 times earnings, that now the market's 10 times and there's limited free cash flow given that's going to creditors. it's going to take you longer to kind of, you know, you're going to have to hold that asset longer. And I think that's the offsetting dynamic.

All right. I'll leave it there. Thank you, guys.

Thank you.

Thank you.

Our next question comes from the line of Mark Hughes with Truist Securities. Your line is now open.

Yeah, thank you. Good morning. You mentioned that the interest coverage, I think it improves sequentially. I don't know if you gave those specific numbers, but any sense of how much improvement and then how much of that might have been just lower base rates or growth and EBITDA?

Yeah. So it went from 2.1 to 2.2. And I think it's both base rates, which take a little bit longer to reset because if you're on 90-day SOFR election, you don't get that benefit immediately. You obviously saw that in our cost of interest given the delay. And then there was earnings growth in the portfolio. So I think it's mostly earnings growth with a little bit of help from rates.

Yeah. And then how about the amendment activity in the court or anything noteworthy there and then just a broader comment on your credit outlook coming up?

Yeah, cool. So, amendment activity was actually very, very, very low. Most of the amendments were positive credit amendments. I think there were eight total amendments, seven up sizes, all positive, repricing slightly, some repricings, spread compression, but like they were all real positive credit amendments. So, the leading indicator of credit activity in the book. The credit outlook is, you know, really amendment activity. And that, you know, was at a kind of an all-time low. I think it was, you know, zero, one in the quarter. So that should be a leading indicator in credit quality. On credit, generally what I would say is, you know, we've been talking about dispersion and tails. It feels like we've kind of worked through that. there's, you know, I think no credit names in our book below 90. I think the only thing below 90, that's not a non-accrual. The only thing below 90 is an equity name in our book or a small second lien at like 400 grand or something like that. So I think, you know, I think we're pretty constructive and positive on credit. And again, you know, from my vantage point, you know, the fundamentals are, you know, intact on the business. Like, you know, if you believe we're kind of through the, the, the, the tail names and the dispersion, the, you know, core NII X activity-based fees, at least from the spot interest rate curve is probably like 50 cents to $2 annualized. Then you have activity fees. This, quarter, you know, I've got you kind of five plus other stuff. So I've got the 57 cents of NII. And so, and it feels pretty good on the, on the fundamentals of the, of the business.

Yeah. Appreciate that detail. One other question, the, if I'm seeing it properly, the new investments in the quarter, about 24% of those were fixed rate. Is that a function of the mix sponsor, non-sponsor what's driving that?

That was just the one, which was Arrowhead, which was a fixed rate security.

Okay. 50 out of the 180, I think. Yeah. Okay.

Thank you very much. Thank you.

As a reminder, to ask a question at this time, please press star 11 on your touchstone telephone. Our next question comes from the line of Robert Dodd with Raymond James. Your line is now open.

Hi, guys. A couple of questions. On the interest coverage, obviously the 2.1 to 2.2, but as always for you and every other BDC, there's the caveat for companies where it's relevant, i.e. those underwritten on a straight traditional cash flow basis. What percentage of the portfolio does that interest coverage metric actually apply to?

Yeah, Robert, we might have to come back to you on that, but it's, I think, in, I think it's most of the portfolio, Robert. So, I think, look, on the software names where there's a lot of growth, we normalize, to normalize growth, like we've talked about this before, just to be, which is on software, Software is one of the only kind of, on a gap basis, is kind of one of the only industries where you don't capitalize your customer acquisition costs. You expense all of it. So the faster you grow, the worse the gap earnings. But on a steady state basis, the earnings are at cash flows if you were to capitalize your customer acquisition costs. And so that is the adjustment on some of the software names. But outside of that, I think it's all of them are based on that.

Okay, thank you on the going to the sponsor non sponsor mix on the non sponsor. I mean, it's only 35%. I mean, even that's not traditional non sponsor, right? I mean, it's not not necessarily just a cash flow loan to to a company buyout with a sponsor behind things like Belk, right? So how much of the non sponsor mix is to, you know, what would pass to non-sponsor and kind of the rest of the industry, i.e., it's cash flow loan, but there isn't a sponsor, versus it's something else?

I think there are, well, this quarter, they were all something else. Like, Belk is an ABL deal, and Arrowhead is more or less an ABL deal, too, because the value of that is on the collateral of IP and and on a spec form of portfolio. And so, I mean, what we, you know, it's all kind of off the run. You know, for this quarter, there was no kind of traditional non-sponsored cash flow. It's all, you know, we're kind of, in my mind, asset-based, where there's a collateral that we can, A, get to and that we can underwrite.

Got it, Ryan. The one thing I'd note is that retail ABO is underwritten to collateral coverage regardless of whether it's cash flowing or not. So, you know, that's how we underwrite it. We think about collateral coverage and liquidation values for asset recoveries and, you know, oftentimes they're cash flowing, sometimes they're not.

Because it's assets that can be turned into cash on a liquidation basis. Hey, one correction I need to make because I said on the previous call on the fixed rate, I said 50 out of 180. It was actually 30 out of 180, which is Arrowhead was a $32 million funding versus $180 million funding, 180 total. So I said 50. I needed to correct that. Sorry about that. That was not your question, Robert. That was a question.

That was Mark. Yep. One last one. Just kind of generally, I mean, you talk, the election results are in now. There is a valuation gap still. What's the risk if rates stay high? Like some of these non-equal events in the industry, obviously for you with lithium have been kind of surprises, right? You know, it's a business that, been doing okay, sponsor had been supportive during a high rate environment and then pulled the plug. And it's not just lithium, there's multiple others in that situation. What's the risk of more surprises that are hard to identify in advance, obviously, if rates stay higher for longer?

Yeah, look, I think when you look at this, it's a great question. So lithium, and you're right about that, the sponsor had been supportive, actually put in, you know, I don't know, $50 to $70 million a year ago or months before. But I think lithium had really tough fundamentals, had kind of negative revenue growth and earnings pressure. And I think we've talked about this on previous phone calls. If we got one thing wrong, it was In COVID, we thought about names that were negatively impacted as an opportunity set, but there were also names that the fundamentals got improved, and lithium was one of them because it kind of sat in between social media, et cetera. And so, but lithium was, you know, fundamentally challenged or is fundamentally challenged. When you look at our book, I think we just went through this. The names that are fundamentally challenged, i.e., have, like, negative revenue growth, are, I think, basically have 100% overlap with the names that are non-accrual. So it doesn't feel like there are more fundamentally challenged names. Now, some are growing slower. Some are growing faster. But, like, I think, you know, it feels like we're kind of through that. Got it.

Thank you. Thank you. Our next question comes from the line of Bryce Rowe with B. Reilly. Your line is now open. Thank you.

Thanks. Good morning. Appreciate you taking the question here. Wanted to ask, I mean, you've made some comments here about portfolio velocity and what we might see post-election, and obviously there's some puts and takes, but Josh, how do you square that up with maybe your outlook from a net portfolio growth perspective? And I'm trying to think about you know, the, the, the, the prospects for repayments relative to originations was spread where they are today.

Yeah, it's, it's hard. Look, I think there are some really good, so I would say a couple of things. One is we invested a lot of the book and like we were the, one of the few people in the industry that had capital was able to invest capital post 22 rate hike cycle. And so 61% of that portfolio is invested past 331. My guess is some of that will turn just by the nature of those were good investments and the markets got better, et cetera. And we'll have the option to keep them because incumbency usually provides you that option, but we'll decide what to do. I it's hard to gauge. And then there's some idiosyncratic things in the book that, you know, I think are, you know, will come off because they performed really well and they're being sold. But it's really hard to gauge, you know, kind of the net portfolio or churn. It feels like we're at the bottom of our activity level fees. you saw a pickup of 20% on activity level fees quarter over quarter from 4 cents to 5 cents per share. Do I know that for sure? No, but it feels like, you know, on the margin, that's true because rates are coming, the curve's coming down. And as things get long in their tooth, people have to start moving assets and selling stuff and the velocity of money has to increase. But, you know, it's hard to, you know, tell for sure, you know, So it's, you know, do I have exact numbers? No. You know, every day we get up trying to think about put good assets on, you know, risk manage, get our underwriting right. I think we've done that through the lack of credit losses in the business. We probably set the bar slightly too high for ourselves on that front. And, you know, everything else will take care of itself. I think the one other thing that we hit on the on that theme is like you got a price. We price. new loans, not to perfection, but then include credit losses. And so, you know, we will continue to do that. But that's that's how we kind of think about the world. We don't it's hard to tell gauge velocity because that's often by the macro, which we don't control.

Yeah. Okay. One more for me is we as we think about kind of the forward curve and you noted the terminal rate might end up being a bit higher. That's certainly a good thing, I think, from a dividend coverage perspective, at least for you all, if credit kind of continues to hold. You've had the base dividend set here at 46 cents per seven quarters, give or take. What gets you to the point where you can increase the base dividend again?

Yeah, look, I think the way we think about the world is Where do we, by the way, we're aligned and that we want to get capital back to shareholders. We think that's valuable, uh, for a lot of different reasons. The least obvious is that they have the option to reinvest that back in the business at a discount for the reinvestment plan. So that, that, that option is super valuable to people. Uh, but, uh, we want to get capital back. We want to re make sure we continue to reduce the excise tax, but we want to set the base dividend. we think about the base dividend as a liability, which is, you know, post credit losses, post, you know, on the curve, low activity fees, where do we feel comfortable that will always be covered, you know, and, you know, I think our view is that's 46 cents and we have a really good mechanism to get capital back to shareholders through the supplemental, which is quarterly, which was five cents this quarter, which was half of the over-earning and through specials, which we use really to reduce the excise tax, which is a real economic drag on the business.

Okay.

All right. That's it for me. Appreciate it. Thanks. Thank you.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Joshua Easterly for closing remarks.

Great. Well, first of all, thank you for everybody's participation. We really appreciate it. We hope everybody has a great Thanksgiving, a great holiday season with their family. If we don't talk to you, we'll talk to you after our Q4 earnings. Thanks, everyone.

This concludes today's conference call. Thank you for your participation. You may now leave.