Sixth Street Specialty Lending, Inc.

Good day. Thank you for standing by. Welcome to the 6th Street Specialty Lending, Inc. First Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After this previous presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising 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'll now hand the conference over to your first speaker today, Kami Van Hoerden, Head of Investor Relations. Please go ahead.

Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending Inc. filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the first quarter ended March 31, 2025, and posted a presentation to the investor resources section of our website www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our form 10Q filed yesterday with the SEC. Sixth Street Specialty Lending Inc.' 's earnings release is also available on our website under the investor resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the first quarter ended March 31st, 2025. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Good morning, everyone, and thank you for joining us. With me today are President Bo Stanley and our CFO, Ian Simmons. For 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 up the call and Q&A. In addition to today's earnings call and public filings, we also published a letter to our stakeholders. We may currently be one of the most pivotal periods for the U.S. in global markets since the global financial crisis. We believe we're operating under a new world order, and it's our job as investors to embrace this reality and proactively position our business based on probabilistic assessments to navigate the evolving environment. We encourage and welcome your feedback. While we recognize that the world has changed since March 31st, we believe our business remains well protected on the asset side with limited direct exposure to tariffs and well positioned on the liability side. We already said a mouthful on these topics in our letter, so I'll limit my opening remarks today to briefly covering our first quarter results and framing how we think about the future earnings potential of our business. After the market closed yesterday, we reported first quarter adjusted net investment income of 58 cents per share, or an annualized return on equity of 13.5%, an adjusted net income of 36 cents per share, or an annualized return on equity of 8.3%. As presented in our financial statements, our Q1 net investment income and net income per share, inclusive of the unwind of non-cash accrued capital gains incentive fee expense, was $0.62 and $0.39, respectively. Of the $0.22 per share difference between net investment income and net income, only $0.05 per share was credit-related. This was primarily marked down on our existing non-accrual loans, and therefore, there was no impact in net investment income. The remaining $0.17 per share was in two buckets. In the first bucket, which we characterized as geography-related, There was 11 cents per share of prior period unrealized gains that moved out of last quarter's net income and into this quarter's net investment income, primarily related to investment realizations. And the second bucket, characterized as market-related, there was 6 cents per share impact from widening credit spreads, which, assuming no credit losses, will be reversed as investments are paid off or reach maturity. Looking ahead, we estimate that the quarterly earnings power of the business, assuming a base case of no additional non-incrual investments and no spread impact on investment valuations, is approximately 50 cents per share. This includes interest income generated by the in-the-ground portfolio today plus limited activity-based fee income. This translates to a return of equity of approximately 11.7% above the floor of the calendar year 2025 guidance we provided on our last earnings call of 11.5% to 12.5%. Given increases in repayment activity, there's potential upside to that figure if activity-based fees return to our average prior to the start of the rate hiking cycle. We believe our asset quality today supports this forward earnings profile, which we anticipate will differentiate returns from the public BDC sector for three important reasons. First, we've continued to be a very disciplined capital allocator. Our portfolio yields are meaningfully higher than the sector average with the weighted average yield and amortized cost of 12.5% in Q4 compared to 11.6% for our peers. We also have a significant small of our portion of our portfolio invested in loans with spreads below 550 basis points, which Bo will discuss later. We believe our discipline approach will allow us to outperform as the sector experiences a more significant decline in portfolio yields. This leads to the second point, which is that our patience and discipline over the past several quarters, combined with increased repayment activity, have provided us with significant capacity to invest in what we expect to be a more interesting investment environment. As we have seen in the past, periods of heightened volatility often present the most attractive investment opportunities. We are well positioned with the level of capital and significant amount of liquidity we have for the period ahead. And finally, we believe our returns will continue to be differentiated given our track record of lower credit losses relative to the sector. Yesterday, our board approved a base quarterly dividend of 46 cents per share to shareholders of record as of June 16th, payable on June 30th. Our board also declared a supplemental dividend of six cents per share relating to our Q1 earnings to shareholders of record as of May 30th, payable on June 20th. Our net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday, 1698. We estimate that our spillover income per share is approximately $1.31. With that, I'll now pass it over to Beau to discuss his quarterly investment activity.

Thanks, Josh. I'd like to start by sharing some perspectives on the market, beginning with a look at the underlying supply and demand dynamics that have shaped the current investment environment. Specifically, as it relates to the U.S. direct lending market and focusing on BDCs as a proxy for direct lending vehicles, the supply and demand dynamics over the past several years have been characterized by an imbalance in the supply of capital outpacing demand. demand. This has largely been fueled by the growth of the retail investor-oriented perpetual non-traded BDC structure, which accounted for roughly 80% of asset growth within the BDC sector in 2024. This inflow of capital has exerted downward pressure on new investment spreads, leading to instances of suboptimal capital allocation. We anticipate that the current Uncertainty and volatility will moderate the supply and demand imbalance by slowing inflows into the non-traded vehicles and shifting the pendulum towards direct lending from the broadly syndicated loan market. While these factors may contribute to a more balanced supply and demand environment over time, we continue to believe that a meaningful resurgence in M&A activity remains a longer-term prospect. However, our through-the-cycle business model and diverse originations channel enable us to deploy capital into attractive investments across market cycles. In Q1, we provided total commitments of $154 million and total funding of $137 million across six new portfolio companies and upsizes to four existing investments. We experienced 270 million repayments from seven full and four partial investment realizations, resulting in $133 million of net repayment activity. As Josh highlighted, market dynamics have changed significantly since Q1. That said, our new investments during the quarter underscore our firm commitment to remaining highly selective and disciplined in our capital allocation in all market environments. This is demonstrated in two ways, including lower levels of new investments funded during the quarter relative to our longer-term average and the percentage of our new investments that were thematically driven non-sponsored deals. On this first point, New investment spreads remain historically tight through the first quarter. We are an investor-first firm, which means we prioritize shareholder returns and will not put capital to work for the sake of growing assets. And second is our ability to originate opportunities in the non-sponsored channel where we're able to differentiate our capital to earn an appropriate risk-adjusted return for our business. In Q1, 84% of new fundings were originated outside the sponsored channels. This includes new investments in our retail ABL theme, our energy portfolio, and an investment driven by longstanding relationships within the Sixth Street platform with a founder. I'll spend a moment highlighting our largest investment during the quarter, Bork Logistics, which is a provider of logistics software and services for the rail and trucking industry. It is a founder-owned business where our direct-to-company relationship led to an investment opportunity. As agent and sole lender, 6th Street structured a bespoke solution that enabled the company to execute on its growth initiatives. This flexible approach reflects our ability to meet specific needs of our borrower while ensuring we earn appropriate risk-adjusted return. On a blended basis across our securities, the weighted average yield and amortized cost for this investment was 13.9%. Our investment in Arrowhead Pharmaceuticals is another example of our differentiated investment capability. As a reminder from our last earnings call, we expected to receive a prepayment fee in Q1 driven by the previously announced agreement with Surrupta Therapeutics. Arrowhead repaid a portion of the loan and we received a prepayment fee which contributed 5 cents per share to net investment income in Q1. This resulted in a reversal of a portion of the unrealized gain on the balance sheet of December 31st as the impact moved out of last quarter's net investment income this quarter. From an overall perspective, 89% of total funding this quarter were into new investments, with 11% supporting upsides to existing portfolio companies. This quarter's funding has contributed to our diversified exposure to select industries, with six new investments across six different industries. In terms of asset mix, we remain focused on investing at the top of the capital structure, with total first-link exposure of 93% across the entire portfolio. As part of our new investment in Bork Logistics, we structured the investment to include a first lien term loan and senior secured notice, along with a small equity portion. All other new investments in Q1 were first lien, consistent with our long-term approach. Moving on to repayment activity, Q1 was the second consecutive quarter of elevated churn related to the new to payoff period we experienced beginning in early 2022. LPM portfolio churn through Q1 was 28%, based on the beginning of period investment at fair value, which is the highest level in nine quarters. The increase in repayment activity contributed to the highest level of activity-based fee income, excluding other income we've had since Q4 2021, totaling 16 cents per share in Q1 relative to our three-year historical average of five cents per share. The biggest driver of this increase in Q1 was the Arrowhead prepayment fee as previously mentioned. Five of our six full payoffs were given by refinancings. Of the five, four were refinanced by other direct lenders at spreads ranging from 450 to 550 basis points and did not present an appropriate return profile for our shareholders. The other was refinanced in the broadly syndicated loan market at a spread of 325 basis points. As we have reiterated, we will continue to pass on participating in deals where the economics do not align with where BDCs of any format sit on the cost curve. To highlight the differentiated nature of our portfolio, only 5.4% of our portfolio by fair value is in senior secured loans with spreads below 550 basis points. Further, less than 1% of our portfolio by fair value carries a spread below 500 basis points. Outside of the five refinancings, we had one additional payoff in Q1, which was in our energy portfolio. In February, Mock Natural Resources repaid its outstanding term loan. After a whole period of 1.2 years, we received call protection on the payoff and generated an unlevered IRR and MLM of approximately 16% and 1.2x respectively for SLX shareholders. Our dedicated energy team and expertise in this sector continue to be a differentiator for our business, demonstrated by our weighted average unlevered IRR and MLM on realized investments of 22% and 1.2x respectively. Moving on to our portfolio yields, our weighted average yield on debt and income-producing securities at amortized cost decreased slightly quarter over quarter from 12.5% to 12.3%. The decline reflects approximately 15 basis points from the decline in reference rates and five basis points from the spread of compression on new investments. The weighted average spread over reference rate of new investment commitments in Q1 was 700 basis points, which compares to the spread of 541 basis points on new issue first lien loans for the public BDC peers in Q4. Our ability to earn wider spreads is largely driven by 84% of our new fundings in Q1 falling into what we call our lane two and lane three buckets, characterized by non-sponsor originated investments. In Q1, this included our investments in Hudson Bay Company, Northwind Midstream, and Bork Logistics. Moving on to our portfolio composition and key credit stats, across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points of 0.5 times and 5.1 times, respectively. And their weighted average interest coverage remains constant at 2.1x. As of Q1 2025, the weighted average revenue in EBITDA of our portfolio companies was $383 million and $112 million, respectively. Median revenue in EBITDA was $139 million and $52 million. Finally, the performance rating of our portfolio continues to be strong, with an average rating of 1.11 on a scale of 1 to 5, with 1 being the strongest. Non-accruals represent 1.2% of our portfolio fair value, with no new investments added to non-accrual status in Q1. Before passing it over to Ian, I'd like to address the potential impact of the recent tariff announcements on our portfolio companies. While the situation continues to evolve and uncertainty across the broader economic landscape remains elevated, we believe there is limited direct risk from these tariff policies on our portfolio. The majority of our exposure is across software and services economies, which we believe will experience limited direct risk from these policy shifts. While we maintain a small exposure to our energy sector, which we expect will have derivative impact, Our commodity price exposure is typically hedged on the front end of the curve, mitigating short-term price volatility. To date, the back end of the curve has not moved materially. We believe the potential derivative impacts on the real economy growth and valuations are the bigger risk. However, these impacts are likely to take a number of quarters to flow through and hence are more difficult to quantify at this stage. That being said, we feel good about where we sit in the capital structure of our borrowers and an average loan to value across our portfolio of 41%. To assess potential risk, we completed a comprehensive name-by-name care-related analysis of our entire portfolio. Excluding our retail ABL investments, this review identified three out of 115 portfolio companies that could be directly affected. These investments represent 2% of our overall portfolio by fair value. And based on our current understanding, we anticipate only a mild impact on their top line and EBITDA performance. Regarding our retail ABL portfolio, which comprises 3.4% of our portfolio at fair value at quarter end, we acknowledge the potential for the impact on these consumer and retail businesses through higher cost of goods, lower margins, and demand destruction. However, Our investment thesis on these companies remains intact as it's predicated on the value of the underlying collateral, not the cash flow related performance of the businesses themselves. We will continue to maintain close communications with management teams and sponsors during this period of heightened uncertainty to understand their strategies for navigating these potential headwinds. We will continue to monitor the situation closely, but remain confident in our underwriting standards and asset selections. With that, I'd like to turn it over to my partner, Ian, to cover the financial performance in more detail.

Thank you, Beau. For Q1, we generated adjusted net investment income per share of 58 cents and adjusted net income per share of 36 cents. Total investments were $3.4 billion, down slightly from $3.5 billion in the prior quarter as a result of net repayment activity. Total principal debt outstanding at quarter end was $1.9 billion. and net assets were $1.6 billion or $17.04 per share prior to the impact of the supplemental dividend that was declared yesterday. Josh noted the strength of our balance sheet positioning earlier today, reflecting what has been a busy start to the year as we completed two capital market transactions during the first quarter. In February, we issued $300 million of long five-year notes at a spread of Treasuries plus 150 basis points. which at the time matched the tightest spread level for BDC in the five-year part of the curve. As we do with all our issuances, we swapped these six straight notes to floating at a spread of SOFA plus 152.5 basis points. While the execution level stands out in its own right, and particularly so in the face of widening BDC credit spreads that we have seen since mid-February, this issuance illustrates execution on our underlying philosophy of proactively managing our liquidity needs and our commitment to enhancing the depth of our investor base with each issuance. In March, 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 $1.675 billion secured credit facility, including extending the final maturity of $1.525 billion of these commitments through March 2030. We are pleased with the outcome of this transaction as we successfully converted a legacy non-extending lender to extending status, marginally decreased the drawn spread through the introduction of a new pricing grid, and lowered the undrawn fee on the facility. The combination of the February bond issuance and the closing of the amendment to our credit facility extended the weighted average maturity on our liabilities to 4.2 years. which compares to an average remaining life of investments funded by debt of approximately 2.3 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. Following both these transactions, we believe our balance sheet is in excellent shape. As of March 31, we had approximately $1 billion of unfunded revolver capacity against $175 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 1.18 times to 1.15 times. The decrease was driven by the elevated repayment activity experienced in Q1. We have no near-term maturities with our nearest maturity obligation not occurring until August 2026. As you may have seen through an 8 filing in February, we entered an ATM program to expand our capital raising toolkit. We have not issued shares through the program to date and have no plans of doing so with capital coming back to us through repayments. We believe the ATM program is beneficial for shareholders given the cost of issuing equity in this format is lower relative to the follow-on offerings we have done in the past. Consistent with our disciplined approach to raising equity capital, we will look to utilize the ATM program when we have confidence that the new shares issued will be accretive to net asset value and return on equity. Pivoting to our presentation materials, slide eight contains this quarter's NAV bridge, which Josh walked through earlier. Moving on to our operating results detail on slide nine, we generated $116.3 million of total investment income for the quarter compared to $123.7 million in the prior quarter. Interest and dividend income was $98.9 million down from prior quarter, primarily driven by the decline in interest rates. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were higher at $14 million compared to $5.1 million in Q4 driven by the Arrowhead prepayment fee, coal protection, and accelerated amortization of OID on other investment realizations. Other income was $3.5 million compared to $4.8 million in the prior quarter. Net expenses, excluding the impact of the non-cash reversal related to unwind of capital gains incentive fees, was $60.7 million, down from $65.9 million in the prior quarter, primarily driven by the decline in base rates and a benefit from a lower weighted average cost of debt following the maturity of our 2024 notes in November and the subsequent issuance of our 2030 notes in February. This contributed to our weighted average interest rate on average debt outstanding decreasing approximately 60 basis points from 7% to 6.4%. Returning to our ROE metrics before handing it back to Josh, We're reaffirming our target return on equity on adjusted net investment income of 11.5% to 12.5% for the full year, consistent with the assessment of our earnings potential outlined earlier on this call. To the extent we see widening of credit spreads, we would expect some downward pressure on net income and potential diversion between net investment income and net income metrics, given the spread movement is incorporated into the discount rate we utilize in determining fair value of our investments each quarter. That impact would unwind as investments approach maturity or are repaid. With that, I'll turn it back to Josh for concluding remarks.

Thank you, Wayne. I'll keep my conclusion brief today in hopes that people will take the time to read our letter, which is available on the investor resources section of the Sixth Street Specialty Lending website. In closing, I'd like to encourage our shareholders to participate and vote for our upcoming annual and special meetings on May 22nd. 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 eight years. We have no current plans to do so. merely view this authorization as an important tool for value creation and financial flexibility in periods of market volatility. As evidenced by the last 11 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 the authorization to issue shares below net asset value if there were sufficient high risk adjusted return opportunities that will ultimately be accretive to our shareholders through over-earning 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 the analysis in the investor resource section of our website. We hope you find that supplemental information helpful as a way of providing a clear rationale for providing the company with access to this important tool. With that, thank you for your time today. Operator, please open up the lines for questions.

Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from the line of Finnegan O'Shea of Wells Fargo. Your line is now open.

Hey, everyone. Good morning. So, Josh, we enjoyed your shareholder letter and wanted to ask about the downward pressure on spreads with the ongoing non-traded BDC fundraising headwind. Can you talk about your resilience to that and how far it goes, just imagining that more capital is making its way into the complex, non-sponsor, so forth, styled origination opportunities?

Let me start with saying I have no idea what retail flows are. I would suspect, given the volatility in the market, that retail flows have slowed. Time will tell. I think that the data is dated, and I don't think there's good data post Liberation Day. Also, as you know, with those vehicles, they're called semi-liquid for a reason, which is, The problems of liquidity. So in terms of volatility, if the analog is non-traded re-sector, they've been a sucking sound of liquidity out of the system, not a net flow, but time will tell. So that's one piece of it. The second piece of it is we've managed, the way we've built our business is we've managed a relatively small amount of capital for the opportunity set. And we have a big top of the funnel, including the non-sponsors and more complex transactions. That has made our business more resilient to the spread tightening movement because we're just not purely in the sponsor business. And then we've been really disciplined allocators of capital. And I think we deeply understand where we fit in the cost curve and our cost of equity. And so we're not going to allocate capital, just allocate capital and to grow assets and therefore grow revenues. We believe that we have two basically important people in our ecosystem. First being the capital providers who provided capital to us and entrusted that capital to earn an acceptable risk adjusted return with capital and cost of equity. The second being our counterparty community and we can't be a good lender and a good counterparty unless we have capital. So we need to do both well and we plan to keep doing both well.

Just to zero in, the top of the funnel, you haven't seen a material impact there from all the direct lending and private credit capital, which seems to be converging in style. Is there just less that meet the standards in terms of spread and structure, for example, even if it's something that would more traditionally fall into your wheelhouse?

Well, again, maybe we're saying the same thing, maybe we're not. The top of the funnel, the very, very top of the funnel has no impact. Now, we quickly might decide that is not for us. The top of the funnel is really, I think, the impact on top of the funnel is broad-based, which is the M&A cycle, which is obviously we've been very negative on that returning, and that is, you know, systematic across the industry. But yeah, we decide more things are not for us early on. But because we have a big top of the funnel and other channels, we find places to put our shareholders' capital in a responsible way that generates the required returns. That's been the business model. That business model worked out. We also think we're going into a world where there will be more opportunity for complexity. And we're excited about that, given the macro. So I feel really confident on our ability to continue to earn returns across cycles. If you look at historically, we put this in the letter, and I don't think people get this, but we've actually done better in moments like this. than we've done better in kind of regular way markets. So market volatility has provided an ability because how we manage our balance sheet and the top of the funnel and the culture of fixed rate, we've been able to generate outside returns. I think in like volatile years, we generate almost 200 basis points of excess returns compared to non-volatile years. and our performance in the industry actually grows significantly. So we could be more excited about the forward for our business. And that is from a design, how we've designed the business and how we put shareholders and capital on that list as a priority and the capabilities we have given the market opportunity.

When you say, like, very negative on M&A returning, do you just mean, you know, a couple quarters from what was supposed to be more like now, or do you think more protracted and anything you can unpack there for us?

Yeah. So, look, the industry has been beating the drum on M&A returning partly to justify, I and we've been negative on that that that the constraint is not the amount that the issue is not that there isn't dry powder in in for private equity deals to get done there's a ton of drug power the problem is that people pay too much for assets between 2019 and 2022 and time Those assets, nobody wants to sell those assets without an acceptable return because it's not in their economic interest. And so people need time. And growth, there is a headwind in growth, which we think will extend the time. So do I know, do I think it's, do I think there's going to be a whole bunch of non-investment grade M&A in 2025 from now? Do I think maybe in 2026? Possibly, but the uncertainty in the macro And the drawdown on growth expectations is going to make non-investment M&A harder.

Awesome. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Brian McKenna of Citizens. Your line is now open.

Thanks. Good morning, everyone. So, Josh, you've been very clear the last several quarters. about how the firm has been focused on finding attractive risk-reward opportunities and making sure you're getting paid the right economics for the risk you're taking. The environment has clearly shifted here, but I'm curious, how are your teams able to price risk when there's a meaningful pickup in uncertainty and volatility, and then there's clearly been a healthy reset in valuations here? So where are you seeing the most attractive deployment opportunities today?

Yeah. Hey, Brian. Good morning. I appreciate that question. It's a loaded question. Look, I think the way we're able to price risk, by the way, I don't think the private markets, at least what we're seeing today, are doing a very good job of pricing risk. which is you know somebody showed me a slide this morning that said middle market spreads haven't moved but probably syndicated spreads have moved and i don't know where the data came from but that feels pretty consistent and that seems like a technical issue in the middle market which is Previous flows, people need to put the previous flows to work. But how we think about the world is we're deep fundamental investors. We look at where we sell the cost curve, what's our required equity, the illiquidity premium that we need, which is I can't change my mind when I'm making an investment. And we look at what we think that asset is worth and the value on that asset. And what do we think that asset is worth in kind of a normalized interest rate environment and normalized growth environment? And so having kind of that deep fundamental view of the world and doing real work allows us to price risk in moments of volatility In addition to that, you know, 6G is a big place. We have, you know, $100 billion of assets under management. We have large platforms in APS, healthcare, sports media, telecom, energy, retail consumer, et cetera, et cetera, growth, et cetera, et cetera. So we're able to see relative value. Not only are we able to see the top of the funnel and a lot of different things, but where we'll see relative value across asset classes and what people are pricing in for growth and what discount rates they're using, that's super helpful to keep a steady head on our shoulders and be able to make capital when other people don't.

Okay, great. That's helpful. And then you touched on this a little bit, but You look at TSLX and even the broader Sixth Street platform, you've really delivered impressive returns through cycles, looking back over your history. I think some of the market actually forget volatility is a great thing for your business. Can you just remind us again, why does TSLX and really the broader Sixth Street model work so well in all parts of the cycle? Then why do periods of volatility ultimately drive value for all your stakeholders longer term?

Yeah, so this is, by the way, I was shocked when we looked at it. I was in shock for us. I was shocked at the industry. The industry has actually done a decent job, which is in moments of volatility, the industry returns are robust compared to moments of not volatility, which is they don't go down. I think they're basically flat at about 20 basis points. which was a little bit shocking. And that's structural in the sense that the capital is decently permanent. So they're not a forced sell. This is on the traded side. I think on the non-traded side, time will tell because there will be a liquidity pool. But the structure of the industry, which is that they have permanent capital and they're not that levered so they don't get close to other options, and the financing is robust, that they're able to withstand volatility. And so the industry itself, and the capital structure of the industry and the permanency of the capital allows robustness i think sox i think the real we actually have this idea of anti-fragility which we actually do better when there's stress i think that's because we manage we're we've done a good job of allocating capital which means that we have capital to allocate and move the volatility not only are we not a force seller but we actually grow And our investments during that time when the rest of the world is risk off and that is a function of a being good allocated capital and be understanding. that we need to reserve for unfunding commitments, we need to reserve for investment capacity during those times, both capital and liquidity. And so that allows us to actually be on the front of our feet, balls of our feet during those times and really capture that opportunity. So I was shocked when I looked at the data for the industry um and but it makes sense because what their industry is never forced should be never a for seller given the permitting of the capital again the non-traded space will be interesting because there will be capital stop flowing and there will be my guess is some type of liquidity pool uh total liquidity that happens which is that you know the the dialogue being again the non-trading lead space Capital came out of the system during that moment of volatility. Capital did not come in for people to be aggressive as opposed to investment opportunities outside their capital structure or inside their capital structure.

Appreciate it, Josh. I'll leave it there, and congrats on the strong quarter.

Thanks. Thank you. One moment for our next question. Our next question comes from the line of Mickey Schleen of Leidenberg. Your line is now open.

Yes, good morning, everyone. Josh, as usual, your prepared remarks were excellent and answer all of my top-down questions. So I just have one modeling question. In the first row of slide nine, which is your interest in dividend income excluding fees, looks a little light relative to the 3% decline in the portfolio at cost and considering movements and spreads and so forth. And that could be due to things like the cadence of investments or some sort of a reversal, or was there something else in there that we should be aware of?

I'll turn that to Ian. We might have to come back to you. I don't, I do not, we'll have to come back to you exactly on the There was, sorry, in 2000, and now it was 1231, that quarter of 24, there was a large dividend income payment that is included, that was like not a non-recurrent spread item. Right, Ian? Yeah, that's right. So that probably creates a little bit of noise. That creates a noise. A better way to look at it is a little bit of spread compression, a little portfolio shrinkage compared to September 30th, 2024. But there was a one-time dividend payment related to an energy name, right, Ian? Yeah, that's right. Mickey, you almost had me.

Sorry?

You almost had me, but I think I got you the answer. There was a one-time dividend payment. What was that payment? We'll come back to you with the exact number. But that's what... There's a dividend payment, non-recurring dividend payment, with a $5.1 million in the prior quarter. So apples to apples, it's pretty consistent with a little bit of yield compression and the portfolio shrinkage. If you look at dividend... interest and dividend income in pro forma that is 1231, 2024, line out of $113 million minus $5 million. That would be more consistent with your modeling.

Yeah, dividend income went from 5.8 in Q4 to 0.9 in Q1.

Okay, I appreciate that. Thank you. That's it for me.

Thank you. One moment for our next question. Our next question comes from the line of Kenneth Lee of RBC Capital Markets. Your line is now open.

Hey, good morning, and thanks for taking my question. Just given the prepared remarks around some of the newer investments, including, I guess, one in the retail ABL side, Could you further flesh out your outlook for lane two and lane three investments? Would it be fair to say that you're starting to see a lot more of these opportunities materializing right now, or do we still have to wait a little bit more to see more stress across the sectors there? Thanks.

You know, I think before we've committed uh one last quarter or this quarter that's cool fun here before you're in a size that we think is very interesting uh um and that is public um the i think there will be needs a little bit more stress a little bit more time uh uh But we're kind of, we're excited. We're starting to see stuff, you know, obviously the broad-indicated loan market is down. My guess is, if you look at the data, I think that Moody's have revised their LME kind of distress, which has been distressing, going the broad-indicated loan market up 2x, I think, or something like that. So I think those opportunities are coming our way.

Great. Very helpful there. And just one follow-up, if I may, and this is just on the ATM equity program. And it sounds like the general approach towards any kind of potential capital raises is still very consistent with your previous approach. But just wondering whether you could be raising capital a little bit more frequently than in the past. I believe that TSLX had a very infrequently raised capital in the past. We just wanted to see if the frequency could potentially change there. Thanks.

No change in how we raise capital, the frequency we raise capital, and when we look through. I think Ian hit it perfectly, which is it has to be both accretive on an RE basis as related to our cost of equity and an asset value basis. And it is, you know, we were pretty, I would say we were pretty stubborn about the ATM. But, you know, it quite frankly is better for shareholders because the cost is lower. But there is zero change in how we do it and zero lens. And it needs to only really make sense for shareholders. Anything out there?

I think that's spot on. We were very deliberate about making the comment about no new shares issued this quarter because we didn't want people to assume that just because we have the tool, we would use it. It's more about making sure that we can be as effective as possible for shareholders. I mean, let's put it this way.

We let the balance sheet roll down, and therefore revenues... to the manager get smaller because we don't think the opportunities that in this past quarter was good for our shareholders. We're surely not going to issue new capital when we let an existing balance sheet roll down.

Gotcha. That's very helpful there. Thanks again.

Thank you. One moment for our next question. Our next question comes from the line of Sean Paul Adams of B-Value Securities. Your line is now open.

Hey, guys. Good morning. Obviously, your non-accruals are quite low. Credit quality-wise, you've been doing really well. Your letter made an excellent point on the deployment of capital to take advantage of non-standard opportunities during volatile periods. However, that's based on an assessment of not having any trouble at home. On the impact of, you know, risk ratings and have you guys seen any material migrations in internal risk ratings assigned within the portfolio?

No, not really. And I would say the one thing we did not do, just put, just FY, do a great job in our letter. I'll take the criticism for it. I'll give you a little more detail on, I think you're asking a question about credit quality at home. So let me hit the tariffs real quick. We outlined exposure, direct exposure to tariffs in our letter, which is about 2%. The reality of it is, that 60 basis points of that is already on non-goal. That's American achievement. There's another $4 million position that we think has limited impact. And so there's really only one name, which is 1.3%. That name is not very levered today. That name is less than nine and a half times levered. 60% of its manufacturing is here in the US. It does source from overseas. We estimate that there might be a 20% impact on EBITDA if things ultimately roll through and if they can't pass along costs. And so that brings the credit to 6.5 times lower, which is still acceptable for that credit and the scale of that credit. I feel really good about the portfolio and our ability to pay offense. And you hit exactly right, the insight's exactly right, which is for you to be able to play offense, not only do you need capital and liquidity, you need bandwidth. And the bandwidth means that you don't have any problems at home. So we have capital, we have liquidity, and we have bandwidth.

Got it. Thank you for the color. I appreciate it.

Thank you. One moment for our next question. Our next question comes from the line of Maxwell Frister of Trues. Your line is now open.

Hi, good morning. I'm one from Mark Hughes. We've heard that banks are going a little more risk-off. Do you anticipate any impact on the liability side of your balance sheet from this? Ian's comments. on the facility and the note issuance suggest that answer is probably no, but any comments there?

No, I mean, I think the answer is no. We just got our amendment done, an extension. We do that every 12 to 15 months. We effectively took one non-extender, made an extender, tightened pricing a little bit, and then we opportunistically issued financing. Like, if you would have asked us when we were going to do our next bond deal six months ago, we would have said in September. You know, we did it early, so we pre-funded that maturity, and so we feel, like, really, really good. In addition to that, like, we have, you know, a lot of... In a downward-sloping rate environment, we have liability sensitivity, so we swapped out all of our liabilities. So we should not have net interest margin compression, all things being equal in the environment going forward. So we're, you know, we managed the balance sheet. Ian's done a great job. We managed the balance sheet, you know, and Ian and Christy, we managed the balance sheet exactly, you know, in the right way. And so we're excited. Shout out to the team, to Ian and Christy on the team.

Thank you very much.

Thank you. One moment for our next question. Our next question comes from the line of Melissa Witte of JP Morgan. Your line is now open.

Good morning. Thanks for taking my questions. I wanted to follow up on a point that you made. It was a brief point made in the shareholder letter, and it's really, it is a bit more of a modeling question. But I think you referenced sort of making more space in terms of allowing more repayments rather than deploying capital so far in the second quarter. I want to make sure I was, one, understanding that right, and then, two, just wanted to understand maybe the scale of that compared to some pretty sizable repayment activity in the last two reported quarters.

Yeah. Look, I would say my guess is we'll be at the end of Q2 somewhere between, flat and slightly down. I don't think it impacts modeling. I think it's like, balance sheet might be down 30 million to 40 million bucks or something like that. We are going to, it's obviously part of the economics of the system is keeping financial leverage which drives, you know, capital efficiency and interest income, et cetera. And I think that's reflected in our guidance. So I don't think it's a – I think it's on the margin.

Okay. I appreciate that. And to your point about, you know, volatility historically creating good opportunities to deploy capital and generate higher returns versus sort of regular way markets, We know that there tends to be a bit of a lag between, you know, what's happening in the broadly syndicated market and what's happening in sort of the private credit area. You know, we've obviously seen a lot of spread volatility, but it's only been remarkably one month that we've really seen that. So it sounds like you're not really seeing that volatility create more volatility

interesting opportunities in the private credit space quite yet am i reading you're reading that right yeah what i'm saying is like the great thing about our platform is we don't hunt elsewhere and so like you know we we will capture some of that spread so a you're right there's a technical thing happening in the private credit market uh uh um so A, you're right about that, and there's a lag, that pricing lag, but we don't need it to happen just in the private credit market because we've been able to capture it elsewhere. And so if you look at any moments of time, we will go to more liquid markets to capture the spread volatility.

Okay. Appreciate that, Keller. Thanks, Josh.

Thank you. One moment for our next question. Our next question comes from the line of Robert Todd of Raymond James. Your line is now open.

Hi, everyone. Two questions. First, on the, it really comes down to your capital. Spillover is now $1.31, right? I mean, from an ROE perspective, with the excise tax friction, et cetera. And if you, you know, isn't this the point in the cycle, to your point that you're, you might be down a little bit in Q2 or flat, is this the point of the capital, the point of the cycle to shrink the capital base slightly, be accretive to ROE just on excise tax reduction alone potentially going forward? And maybe, you know, you, as you say in the letter, there's not an infinite number of opportunities that are appropriate for BDCs. Again, is this kind of the point of the cycle where you want to be more selective, so shrinking the capital base and distributing some of that spillover might make sense?

Yeah, so look, we're not at that point, right? We're not at that point where we need to return capital. That is obviously a lever. You save the excise tax, but remember to fund that distribution you're borrowing. You know, the excise tax costs you 4% annually. The borrow costs you, on a marginal basis, $150 over SOFR. And so it is... A creative on a leverage standpoint is diluted by them standpoint. And so, but we're not close to that point we actually think having capital and time to volatility is is good. So it is it is it is effectively making you more capital efficient, but it is a negative arm as it relates to the cost of the excise tax and your borrow to fund the excise tax.

On NIM, yes, not on NIR or CAPA, the way you necessarily, right? I understand. On to the second question, it goes to your letter. one of the underlying themes in that letter seems to to be correct me if i'm wrong here that you think um global or globalization of trade may have peaked and be on a a down cycle um obviously that is not something that happens usually for like a couple years i mean the the increase there's one of the charts in here i mean it was a multi-generational uh trend upwards in global trade as a percentage which obviously made a ton of sense then to go into services businesses because Anything that was physical as globalization was rising and offshoring was rising made sense to stay away from. So if that is the core thesis in the letter and the outlook for 6th Street, how does that change over the next, not a year or two, but the next 10 years, which is only really two iterations of owning an asset given the repayment cycles? How does this view on global trade and essentially on-shorting, potentially, change how you might allocate capital over a longer period of time? Or does it just not make any difference?

No, look, I think that... So, look, most of our business is in services. And... Well, I would say that the de-globalization started to happen in 2010. Now, there was a peak up in COVID, et cetera. But if you look at this, there's two things to look at that chart. One is the trip post-2010, which was declining, and then picked up, and then most recently declining. And what I would say is the impacts, we're mostly services businesses, but the impacts, I think, are more... The way I think about it is it probably slows velocity of capital, which will slow growth. It leads to inflationary, which will affect discount rates on assets. And so the super cycle of return on equities, I think, and the value is going from you know, and by the way, there are great private equity sponsors and great hedge fund managers and great equity managers that will pick up the idiosyncratic, but the broad-based tailwinds to equities, I think that's changing, which is deglobalization, the way I think about it is, it's inflationary, It is, one, increased discount rates on assets and slow growth and what made for a very accommodative equity return environment, which is low discount rates and high growth, those conditions no longer exist. And so I think as it relates to our underwriting, you have to be clear-minded about yesterday's valuations and yesterday's LTVs are different. They're going to be different. Just run a DCF, cut your growth by half, increase your discount rate by two. It's going to come out with a different value. And so that is where I think where this generation of investors are going to have a little bit of challenges. They're going to look at yesterday's news, yesterday's comps, yesterday's multiples, and think those are a real thing. Guess what? The environment's changed.

To that point, would that mean you would expect even... I mean, this quarter, I think it was 11% sponsor-backed. No, it was 11% follow-ons. It was 16, 15% sponsored back, I think. Would you expect that? That's obviously significantly below your long-term average. Is that kind of, do you think, going to be more of the new norm going forward?

No, I mean, I think the sponsors are super smart. We love them. They're sophisticated users of capital. They're great investors, but they're sophisticated users of capital. And I think that technical with the private credit space, which was a lot of close and a lot of money putting stuff, needing to put money to work in that channel, you know had a shift this quarter but we we we love them and we're going to be right you know right there with them when they need capital and scale and size and so i but we're going to go where there's the best you know risk return and you know the technicals in the private credit market were not accommodated uh uh uh yeah i i i i'll follow up with that one thank you

Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of Paul Johnson of KVW. Your line is now open.

Yeah, good morning. Thanks for taking my questions. Just one on credit, if I may, IRG Sports and Entertainment, I believe that loan is maturing in this quarter. How is that company performing? We've obviously seen a lot of interest in professional sports facilities, but it was marked down just a little bit, slightly in the quarter. Are you expecting to exit that?

Yeah, I mean, so IRG is a name that there's a whole bunch of assets that we're working to sell, including a significant, I think it's about 160 acres or something like that. A little bit more. A little bit more outside of White Palm Beach. And so that's more to resolve that.

Got it. Thank you for that. And then... Real quick, just on the cost of debt that you guys have, I believe it's down a little over 130 basis points or so over the last few quarters, which is a little bit more than what base rates have done over that time. Is there anything, I guess, that's benefiting the hedges or anything that's driving the cost of debt lower, I guess?

I'll take a shot at it and I'll give it to Ian. One is mixed probably. The other one is hedges or hedges lagged maybe. But one is mixed, funny mix. The new price in the revolver wouldn't have an impact on the LTM period. So it's probably a little bit of mix.

Yeah, Paul, if you look at the last two quarters in particular we had one maturity of an unsecured note, so that rolled off, and we funded that with the Revolver drawdown, so that was a positive benefit, so lowering overall weighted average cost of debt. And then the new bond that was issued was only in the second half of February, so it doesn't have as much of an issue, but that was also lower spread. Got it. And then the impact of base rates, so don't forget 100% of our debt, yeah.

Got it. Okay. Thanks for that. That was helpful. Excuse me. And then last one, Josh, Ian, I'd love to get your thoughts on a relatively new development in the BDC space, but structured risk transfers, does that have any potential, I guess, to change funding costs at all within the BDC space? Do you see that as a positive development or just a signal of peak risk.

I saw this yesterday. I think you're referring to the SRT done on a group of some risk transfer from banks to the asset managers. Is that what you're referring to? Yes. It was done not for capacity issues, which is it allows banks to effectively get capital relief and expand more lending relationships. So on the margin, I think it's helpful. I don't think it reduces pricing, but I do think it's helpful as it relates to expansion of capacity. You know, the bank's model of balance sheets you know, into the space and then hopefully drive fees. And if they can put more balance sheet to the space from a capital relief trade, they get to, you know, get more fees and turn over that capital. So my guess is that on the margin, it expands capacity or it keeps capacity but doesn't do anything to pricing.

Thank you. That's all for me.

Thank you. We'll move it for our next question. Again, as a reminder to ask a question, you'll need to press star 1-1 on your telephone. And our next question comes from the line of Finian Ocea of Wells Fargo. Your line is now open.

Hey, everyone. Thanks for the follow-on. I just wanted to go back to the question on the ATM. I think, Beau, you said no changes whatsoever sort of to the ATM. you know, the historical approach, which has been something like, you know, every couple years, something like 5% of NAV. Does that mean you'll do that sort of same thing with perhaps an institutional direct, or will it be more of a dribble-out type ATM program? Thanks.

Hey, thanks. Sorry, that was Josh. That's a very good nuanced question. I meant no changes philosophically or a framework of how we raise capital. The ATM does allow you to take capital just in time. Historically, what we've done, we've kind of actually pre-funded the exercise of balance sheet. so people didn't fill the J curve or drag and then raise capital and got it kind of back and normalize. The ATM will give us the flexibility to dribble stuff out, we'll use that flexibility, but so possibly we're not changing how we raise capital. In the sense that, you know, we're going to raise capital and we want to create as a map and where we think that capital will earn a return in excess of a return equity. But, you know, will we, you know, does it give you more flexibility to do smaller size stuff and do just in time? Yes, versus what we have historically done is we've kind of taken the leverage up and then brought it back down, which is, I want to say, risky because we know where we're trading, but this is probably slightly more efficient in that way.

It's really a change in the execution, but the philosophy hasn't changed.

When you see you've done it historically very judiciously and prudent, the dribble seems a bit more of an asset-gathering approach, which I know you'd be against. So can you do it fast enough as you historically have when the deal flow is big?

Your question is the right question. We're not saying we're exclusively using the ATMs. What we're saying is it's a tool that is lower cost for shareholders to exercise. There might be a time where there's opportunity to grow the balance sheet step function, and we think it's really good, and the 18 is not going to allow us to do that. And when we go to the public markets, yes, 100%. So it's just another tool. It's not a exclusive tool.

Thanks for the color. It's all for me.

Thank you. I'm showing no further questions at this time. I'll now turn it back to Josh Easterly for closing remarks.

My hope was, I'm kind of joking, and this is probably not going to land, my hope was that the letter would have made the question and answer section shorter. It might have had the opposite impact. Shame on us and shame on me, but I really appreciate all the good questions, super thoughtful. We're excited about the lives ahead. This is what makes our job interesting, changing environments. Obviously, the environment keeps changing. As lifelong learners, this is what we kind of get up every day to do, and the platform's here to execute. We hope people enjoy their summer. We hope that we'll catch up with people after Q2. or if not sooner, please feel free to reach out. Thank you so much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.