Sixth Street Specialty Lending(TSLX) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's comprehensive financial statements and management's discussion and analysis of its financial performance and condition Item 1. Financial Statements This section presents Sixth Street Specialty Lending, Inc.'s unaudited consolidated financial statements, detailing its financial position and performance Consolidated Balance Sheets The Consolidated Balance Sheets present the company's financial position as of June 30, 2025, and December 31, 2024, detailing assets, liabilities, and net assets, with a slight increase in Net Asset Value Per Share Balance Sheet Summary | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (%) | | :-------------------------------- | :----------------------------- | :------------------------------- | :--------- | | Total Assets | $3,415,848 | $3,582,225 | -4.6% | | Total Liabilities | $1,798,202 | $1,974,696 | -8.9% | | Total Net Assets | $1,617,646 | $1,607,529 | +0.6% | | Net Asset Value Per Share | $17.17 | $17.16 | +0.1% | Consolidated Statements of Operations The Consolidated Statements of Operations detail the company's financial performance for the three and six months ended June 30, 2025, and 2024, showing increased net assets from operations driven by unrealized gains Statements of Operations Summary | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change (%) | | :------------------------------------------ | :------------------------------- | :------------------------------- | :--------- | | Total Investment Income | $115,015 | $121,815 | -5.6% | | Net Investment Income | $50,840 | $55,143 | -7.8% | | Total Net Change in Unrealized Gains (Losses) | $45,039 | $(9,493) | N/A (shift from loss to gain) | | Increase (Decrease) in Net Assets from Operations | $59,003 | $47,401 | +24.5% | | Earnings per common share—basic and diluted | $0.63 | $0.51 | +23.5% | Consolidated Schedules of Investments The Consolidated Schedules of Investments detail the company's debt and equity holdings by industry and type, primarily first-lien debt, as of June 30, 2025, and December 31, 2024 Investment Portfolio by Type | Investment Type | June 30, 2025 (Fair Value in thousands) | December 31, 2024 (Fair Value in thousands) | | :-------------------------- | :------------------------------------ | :-------------------------------------- | | Total Investments | $3,294,905 | $3,518,412 | | First-lien debt investments | $3,043,110 (92.4%) | $3,302,504 (93.9%) | | Second-lien debt investments | $29,640 (0.9%) | $19,844 (0.6%) | | Mezzanine debt investments | $53,567 (1.6%) | $39,091 (1.1%) | | Equity and other investments | $168,588 (5.1%) | $155,501 (4.4%) | Investment Portfolio by Industry | Industry (June 30, 2025) | Percentage of Total Portfolio (Fair Value) | | :----------------------- | :--------------------------------------- | | Internet Services | 17.9% | | Business Services | 14.9% | | Human Resource Support Services | 9.9% | | Retail and Consumer Products | 9.7% | | Healthcare | 8.5% | - Non-qualifying assets represented 17.5% of total assets as of June 30, 2025, within the 1940 Act limit of 30%[33] Consolidated Statements of Changes in Net Assets The Consolidated Statements of Changes in Net Assets illustrate movements in the company's net assets for the three and six months ended June 30, 2025, and 2024, showing an increase driven by net investment income and unrealized gains Changes in Net Assets Summary | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :---------------------------------------------------- | :----------------------------- | :----------------------------- | | Balance at December 31, prior year | $1,607,529 | $1,496,375 | | Net investment income | $108,818 | $107,506 | | Net change in unrealized gains (losses) | $23,179 | $(16,462) | | Net realized gains (losses) | $(36,040) | $3,875 | | Dividends declared from distributable earnings | $(98,503) | $(97,483) | | Balance at June 30, current year | $1,617,646 | $1,599,035 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows detail cash movements from operating, investing, and financing activities for the six months ended June 30, 2025, and 2024, showing a significant increase in net cash from operating activities Cash Flow Summary | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net Cash Provided by (Used in) Operating Activities | $343,118 | $59,729 | | Net Cash Provided by (Used in) Financing Activities | $(331,277) | $(50,276) | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | $11,841 | $9,453 | | Cash, Cash Equivalents, and Restricted Cash, End of Period | $39,169 | $34,649 | - Repayments on investments significantly increased by 78.4% from $374.3 million in H1 2024 to $667.9 million in H1 2025[53] Notes to Consolidated Financial Statements The Notes to Consolidated Financial Statements provide detailed explanations and disclosures supporting the financial statements, covering organization, accounting policies, related party transactions, and investment valuation 1. Organization and Basis of Presentation This section outlines Sixth Street Specialty Lending, Inc.'s formation as a Delaware corporation, its BDC and RIC election, IPO, and financial statement preparation in accordance with U.S. GAAP and ASC Topic 946 - The company was formed on July 21, 2010, as a Delaware corporation and elected to be regulated as a BDC under the 1940 Act and a RIC under the Code[56] - Its initial public offering (IPO) was completed on March 21, 2014, with shares trading on the NYSE under the symbol 'TSLX'[57] - Financial statements are prepared in accordance with U.S. GAAP and apply specialized accounting guidance for investment companies (ASC Topic 946)[57][59] 2. Significant Accounting Policies This section details key accounting policies, including fair value measurement for investments, derivative instruments, and income recognition, emphasizing the Board's role in valuing illiquid assets under ASC Topic 820 - Investments without readily available market prices are valued at fair value as determined in good faith by the Board of Directors, with input from the Adviser, Audit Committee, and independent third-party valuation firms[65] - The company applies ASC Topic 820, categorizing fair value measurements into Level 1 (active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[71][78] - Derivative instruments are recognized at fair value, with changes in fair value for hedge accounting relationships recorded in the same line item as the hedged item in the Consolidated Statements of Operations[74] - Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when management has reasonable doubt about full collectability[86] Income Tax Expense | Tax Expense (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income taxes, including excise taxes | $1,291 | $1,226 | $2,642 | $2,076 | 3. Agreements and Related Party Transactions This section details the company's agreements with its Adviser, including the Administration and Investment Advisory Agreements, outlining services, Management and Incentive Fee calculations, and Adviser's waivers like the Leverage Waiver - The Adviser provides administrative services under the Administration Agreement and investment advisory services under the Investment Advisory Agreement[105][112] - The Management Fee is calculated at an annual rate of 1.5% of the average value of the company's gross assets[113] - The Adviser waived Management Fees of $0.3 million and $0.7 million for the three and six months ended June 30, 2025, respectively, pursuant to the Leverage Waiver, which reduces fees on assets financed using leverage over 200% asset coverage[116] Adviser Fees | Fee Type (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Management Fees (gross of waivers) | $12,918 | $12,765 | $26,001 | $25,361 | | Incentive Fees (total) | $12,527 (sum of 11,089 + 1,438) | $10,079 (sum of 11,414 - 1,335) | $20,358 (sum of 22,606 - 2,248) | $20,163 (sum of 22,342 - 2,179) | 4. Investments at Fair Value This section breaks down the company's investments at fair value by type, industry, and geographic composition, distinguishing between non-controlled, affiliated, and controlled investments Investments by Type | Investment Type | June 30, 2025 (Fair Value in thousands) | December 31, 2024 (Fair Value in thousands) | | :-------------------------- | :------------------------------------ | :-------------------------------------- | | First-lien debt investments | $3,043,110 (92.4%) | $3,302,504 (93.9%) | | Second-lien debt investments | $29,640 (0.9%) | $19,844 (0.6%) | | Mezzanine debt investments | $53,567 (1.6%) | $39,091 (1.1%) | | Equity and other investments | $168,588 (5.1%) | $155,501 (4.4%) | | Total Investments | $3,294,905 | $3,518,412 | Investments by Industry | Industry (June 30, 2025) | Percentage of Total Portfolio (Fair Value) | | :----------------------- | :--------------------------------------- | | Internet Services | 17.9% | | Business Services | 14.9% | | Human Resource Support Services | 9.9% | | Retail and Consumer Products | 9.7% | | Healthcare | 8.5% | Investments by Geographic Region | Geographic Region (June 30, 2025) | Percentage of Total Portfolio (Fair Value) | | :-------------------------------- | :--------------------------------------- | | United States (Total) | 83.4% | | United Kingdom | 5.4% | | Norway | 3.4% | | Germany | 2.2% | | Canada | 1.6% | 5. Derivatives This section details the company's use of interest rate swaps to hedge fixed-rate debt and investments, summarizing related cash flows and fair value, noting they are centrally cleared and require collateral - The company uses interest rate swaps to hedge fixed rate debt obligations and certain fixed rate debt investments[128] Derivative Fair Value | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :---------------- | | Fair Value of Swaps | $4,922 | $(24,238) | | Cash Collateral | $35,256 | $46,601 | Swap Cash Flows | Swap Cash Flows (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------- | :----------------------------- | :----------------------------- | | Paid | $(38,665) | $(50,198) | | Received | $30,477 | $30,482 | | Net | $(8,188) | $(19,716) | - For the six months ended June 30, 2025, the company recognized $29.2 million in unrealized gains on interest rate swaps designated as hedging instruments[129] 6. Fair Value of Financial Instruments This section presents fair value measurements of investments and financial instruments using the ASC Topic 820 hierarchy, detailing changes in Level 3 investments and describing valuation techniques and unobservable inputs Fair Value Hierarchy of Investments | Fair Value Hierarchy (June 30, 2025, in thousands) | Level 1 | Level 2 | Level 3 | Total | | :------------------------------------------------ | :------ | :------ | :-------- | :-------- | | First-lien debt investments | $— | $29,039 | $3,014,071 | $3,043,110 | | Second-lien debt investments | $— | $905 | $28,735 | $29,640 | | Mezzanine debt investments | $— | $— | $53,567 | $53,567 | | Equity and other investments | $35,636 | $12,213 | $120,739 | $168,588 | | Total investments at fair value | $35,636 | $42,157 | $3,217,112 | $3,294,905 | - For the six months ended June 30, 2025, the net change in unrealized gains on Level 3 investments held by the company was $23.2 million[141] - Valuation techniques for Level 3 debt investments primarily use an income approach (discount rate), while equity investments use market multiples or discounted cash flow analysis[142][146][148] - Caris Life Sciences, Inc. was transferred out of Level 3 into Level 1 for fair value measurement during the six months ended June 30, 2025, due to changes in the observability of inputs[137] 7. Debt This section details the company's debt obligations, including the Revolving Credit Facility and unsecured notes, outlining terms, interest rates, maturities, covenant compliance, and the use of interest rate swaps Debt Outstanding | Debt Instrument | Aggregate Principal Committed (in thousands) | Outstanding Principal (in thousands) | Carrying Value (in thousands) | | :---------------------- | :--------------------------------------- | :--------------------------------- | :---------------------------- | | Revolving Credit Facility | $1,675,000 | $507,117 | $490,154 | | 2026 Notes | $300,000 | $300,000 | $287,307 | | 2028 Notes | $300,000 | $300,000 | $300,581 | | 2029 Notes | $350,000 | $350,000 | $346,873 | | 2030 Notes | $300,000 | $300,000 | $301,642 | | Total Debt | $2,925,000 | $1,757,117 | $1,726,557 | - The Revolving Credit Facility's revolving period for $1.525 billion of commitments was extended to March 2, 2029, with a stated maturity of March 4, 2030[155] - As of June 30, 2025, the company's asset coverage ratio was 192.5%, exceeding the 1940 Act requirement of 150%[180] Interest Expense | Interest Expense (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------ | :----------------------------- | :----------------------------- | | Total Interest Expense | $66,617 | $78,266 | | Weighted average interest rate | 6.4% | 7.7% | 8. Commitments and Contingencies This section outlines the company's commitments to fund investments in portfolio companies, primarily through senior secured revolving and delayed draw term loans, with no material legal proceedings or unfunded commitments to new borrowers Portfolio Company Commitments | Commitments (in millions) | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Total Portfolio Company Commitments | $341.0 | $356.3 | - The company's commitments include senior secured revolving loan and delayed draw term loan commitments, which are generally available on a borrower's demand[185] - As of June 30, 2025, management is not aware of any material pending or threatened litigation[190] 9. Net Assets This section details changes in net assets, including common stock issuances, the dividend reinvestment plan, and stock repurchase authorizations, noting new share issuances for dividends and no repurchases - In March 2024, the company issued 4,000,000 shares of common stock, generating $81.5 million in net proceeds, with an additional 600,000 shares issued in April 2024 for $11.9 million[191] Shares Issued via Dividend Reinvestment | Shares Issued via Dividend Reinvestment | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Total Shares Issued | 578,912 | 587,706 | | Proceeds (in millions) | $12.7 | $11.9 | - The Board authorized a stock repurchase program of up to $50 million, most recently refreshed on April 30, 2025; however, no shares were repurchased during the six months ended June 30, 2025, or 2024[196][197] - As of June 30, 2025, $100 million of common stock remained available for issuance under 'at the market' offerings[198] 10. Earnings per share This section presents the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2025, and 2024, showing varied performance across periods Earnings Per Share Summary | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Earnings per common share—basic and diluted | $0.63 | $0.51 | $1.02 | $1.04 | | Weighted average shares outstanding | 93,971,164 | 92,734,320 | 93,821,251 | 90,883,350 | 11. Dividends This section summarizes dividends declared for the six months ended June 30, 2025, and 2024, distinguishing between base and supplemental dividends, with total dividends per share remaining stable Dividends Declared | Dividend Type | Six Months Ended June 30, 2025 (per share) | Six Months Ended June 30, 2024 (per share) | | :-------------- | :--------------------------------------- | :--------------------------------------- | | Supplemental | $0.13 | $0.14 | | Base | $0.92 | $0.92 | | Total | $1.05 | $1.06 | - The company has a dividend framework that includes a quarterly base dividend and a variable supplemental dividend[200] - Dividends declared were derived from net investment income and long-term capital gains on a tax basis[201] 12. Financial Highlights This section provides key financial highlights, including per share data, total returns, and financial ratios for the six months ended June 30, 2025, and 2024, showing increased net asset value and strong market-based returns Financial Highlights Summary | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------------ | :----------------------------- | :----------------------------- | | Net asset value, beginning of period | $17.16 | $17.04 | | Net Asset Value, End of Period | $17.17 | $17.19 | | Total return based on market value with reinvestment of dividends | 17.23% | 4.10% | | Total return based on net asset value | 6.18% | 7.12% | | Ratio of net expenses to average net assets | 15.23% | 16.94% | | Portfolio turnover | 26.96% | 23.94% | - The ratio of net expenses to average net assets reflects the Adviser's waivers, which would have been 15.32% and 17.03% for the six months ended June 30, 2025 and 2024, respectively, without the waivers[206] 13. Subsequent Events Management evaluated subsequent events through the issuance date of the consolidated financial statements and reported no events requiring disclosure in this Form 10-Q - No subsequent events requiring disclosure in this Form 10-Q or recognition in the consolidated financial statements occurred during the period through the date of issuance[207] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, liquidity, capital resources, and results of operations, covering investment framework, economic conditions, and detailed analysis of financial metrics Overview Sixth Street Specialty Lending, Inc. is a Delaware corporation operating as a BDC and RIC, focused on direct lending to U.S. middle-market companies, with shares listed on the NYSE under 'TSLX' - The company is a Delaware corporation, regulated as a BDC and RIC, primarily lending to U.S. middle-market companies[209][210] - Since July 2011 through June 30, 2025, the company originated approximately $48.1 billion in investments, retaining over $11.2 billion on its balance sheet[210] - The company's shares are listed on the NYSE under the symbol 'TSLX'[210] Our Investment Framework The company employs a four-tiered investment framework, focusing on middle-market companies, prioritizing senior secured debt, and mitigating risk through call protection and floating-rate loans with interest rate floors - The company targets middle-market companies with annual EBITDA of $10 million to $250 million, seeking high marginal cash flow and recurring revenue streams[211][215] - As of June 30, 2025, 93.3% of the portfolio was invested in secured debt, with 92.4% in first-lien debt investments[218] - Risk mitigation strategies include call protection on 82.9% of debt investments and 96.5% of debt investments bearing floating rates with 100.0% subject to interest rate floors[220] - The average investment size per portfolio company was approximately $30.2 million as of June 30, 2025[215] Relationship with our Adviser and Sixth Street The company benefits from its relationship with Sixth Street through its Adviser, providing extensive investment resources, market expertise, and co-investment opportunities for U.S. middle-market loan originations - The Adviser, a registered investment adviser, sources and manages the company's portfolio through a dedicated Investment Team[221] - Sixth Street, a global investment business with over $115 billion of assets under management, provides extensive investment resources and market expertise[221] - An exemptive order from the SEC, granted May 6, 2025, allows co-investment with Sixth Street affiliates in U.S. middle-market loan originations, facilitating 'one-stop' financing for larger capital commitments[223][224] General Economic Conditions Global markets in 2025 are marked by uncertainty from inflation, elevated interest rates, political/regulatory shifts, and geopolitical instability, which the company actively monitors for potential impacts - Global markets in 2025 are marked by uncertainty from inflation, elevated interest rates, political/regulatory shifts, and geopolitical instability[227] - The current U.S. presidential administration's policy shifts, including new tariffs, could introduce additional market instability and reduce investor confidence[228] - The company is actively monitoring tariff developments and analyzing potential impacts on its business, portfolio companies, and the broader economic environment[228] Key Components of Our Results of Operations This section outlines the primary drivers of the company's financial performance, including investment activity, revenue generation, operating expenses, strategic leverage use, and favorable middle-market lending trends Investments The company's investment activity, focused on direct loan origination to U.S. middle-market companies, fluctuates with market conditions and M&A activity, with risk managed through partial sales or syndication - Investment activity, focused on direct origination of loans to U.S. middle-market companies, varies significantly based on debt/equity capital availability, M&A activity, and the economic/competitive environment[229][230] - The company may reduce investment levels through partial sales or syndication to manage risk[231] Revenues Revenues are primarily generated from interest income on floating-rate debt investments with interest rate floors, supplemented by dividends, capital gains, and various loan fees, which can fluctuate significantly - Primary revenues are from interest income on debt investments; as of June 30, 2025, 96.5% of these are floating rate with 100.0% subject to interest rate floors[232] PIK Interest Income | PIK Interest Income | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------ | :----------------------------- | :----------------------------- | | Percentage of Total Investment Income | 4.8% | 7.3% | - Net investment income is primarily driven by the spread between investment payments and funding costs, rather than direct changes in interest rates, due to the floating-rate nature of assets and liabilities (after swaps)[233] - Additional revenue sources include prepayment fees, loan origination fees, and various other fees, which can fluctuate significantly[234][235] Expenses The company's main operating expenses include Adviser fees (Management and Incentive Fees), administrative reimbursements, and other operational costs, with general and administrative expenses expected to stabilize or decline as a percentage of total assets during growth - Primary operating expenses include Management Fees, Incentive Fees, and expenses reimbursable under the Administration Agreement[238] - Other costs include those related to asset valuation, due diligence, public offerings, debt service, compliance, and various administrative and professional fees[238][244] - General and administrative expenses are expected to be relatively stable or decline as a percentage of total assets during periods of asset growth[239] Leverage The company uses leverage to enhance investment capacity, with amounts varying based on cash, financing costs, and market conditions, limited by the BDC requirement of at least a 150% asset coverage ratio - Leverage is used to increase investment capacity, with the amount depending on cash availability, financing costs, and market conditions[240] - As a BDC, total borrowings are limited to ensure an asset coverage ratio of at least 150% immediately after any borrowing, as defined in the 1940 Act[240] - Interest expense is expected to increase as leverage increases over time within the 1940 Act limits[240] Market Trends Favorable market trends in middle-market lending, driven by limited traditional capital and strong demand from private equity-backed companies, create attractive investment opportunities for BDCs like the company - Regulatory changes (e.g., Basel III, Volcker Rule) have tightened risk appetites and reduced traditional lenders' capacity for middle-market companies, creating opportunities for direct lenders[241][242] - Strong demand for debt capital from private equity-backed companies is expected to continue driving deal activity[242] - Middle-market lending is labor-intensive, requiring specialized due diligence and monitoring, which favors dedicated private lenders and results in attractive pricing and favorable terms[243][245] Portfolio and Investment Activity This section details the company's investment portfolio composition and activity, including investment types, portfolio companies, weighted average yields, and new investment/exit volumes, along with the Adviser's performance rating scale Investment Portfolio Composition | Investment Type (Fair Value) | June 30, 2025 | December 31, 2024 | | :--------------------------- | :------------ | :---------------- | | First-lien debt investments | 92.4% | 93.9% | | Second-lien debt investments | 0.9% | 0.6% | | Mezzanine debt investments | 1.6% | 1.1% | | Equity investments | 5.1% | 4.4% | Portfolio Metrics | Metric | June 30, 2025 | December 31, 2024 | | :---------------------------------------------------- | :------------ | :---------------- | | Weighted average total yield of debt and income producing securities (at fair value) | 11.7% | 12.3% | | Number of portfolio companies | 109 | 116 | | Non-accrual investments (fair value) | $21.4 million (0.6%) | $49.0 million (1.4%) | Investment Activity Summary | Investment Activity (in millions) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Principal amount of new investments funded | $208.6 | $163.6 | | Principal amount of investments sold or repaid | $388.7 | $290.3 | | Number of new investment commitments in new portfolio companies | 13 | 8 | | Weighted average interest rate of new investment commitments | 10.7% | 11.6% | Investment Performance Ratings | Investment Performance Rating (June 30, 2025, Fair Value in millions) | Percentage of Total Portfolio | | :---------------------------------------------------- | :---------------------------- | | Rating 1 (performing as agreed) | 92.5% ($3,045.8) | | Rating 2 (performing, but concerns) | 6.0% ($197.9) | | Rating 3 (paying, but material covenant violation expected) | 0.9% ($29.8) | | Rating 5 (in default) | 0.6% ($21.4) | Results of Operations This section provides a detailed analysis of the company's operating results, including investment income, expenses, net realized and unrealized gains/losses, and realized gross internal rate of return for the three and six months ended June 30, 2025, compared to 2024 Investment Income Total investment income decreased for both the three and six months ended June 30, 2025, compared to 2024, primarily due to lower interest from investments and reduced paid-in-kind interest and dividend income Investment Income Breakdown | Investment Income (in millions) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change (%) | | :------------------------------ | :------------------------------- | :------------------------------- | :--------- | | Total investment income | $115.0 | $121.8 | -5.6% | | Interest from investments | $101.2 | $105.0 | -3.7% | | Paid-in-kind interest income | $5.8 | $9.4 | -38.3% | | Dividend income | $0.4 | $1.8 | -77.8% | | Other income | $7.6 | $5.6 | +35.7% | - The decrease in interest from investments was primarily due to a decrease in reference rates for the three and six months ended June 30, 2025, compared to the same periods in 2024[261][262] Expenses Net expenses decreased for both the three and six months ended June 30, 2025, compared to 2024, primarily due to a significant reduction in interest expense from lower weighted average interest rates on outstanding debt Operating Expenses Breakdown | Expenses (in millions) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change (%) | | :----------------------------- | :------------------------------- | :------------------------------- | :--------- | | Net Expenses | $62.9 | $65.4 | -3.8% | | Interest | $33.6 | $39.2 | -14.3% | | Management fees (net of waivers) | $12.6 | $12.5 | +0.8% | | Incentive fees on net investment income | $11.1 | $11.4 | -2.6% | | Professional fees | $2.6 | $2.1 | +23.8% | - The decrease in interest expense was primarily due to a decrease in the weighted average interest rate on outstanding debt, from 7.7% in H1 2024 to 6.4% in H1 2025[264][265] - Management Fees (gross of waivers) increased slightly due to an increase in average assets[266][267] - Professional fees increased due to higher legal and audit-related fees[270][271] Net Realized and Unrealized Gains and Losses For the three and six months ended June 30, 2025, the company experienced net realized losses and significant net unrealized gains, driven by positive portfolio developments and tightening credit spreads, contrasting with the prior year Realized and Unrealized Gains/Losses | Gains/Losses (in millions) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | | Net Realized Gains (Losses) | $(36.9) | $1.8 | | Net Change in Unrealized Gains (Losses) | $45.0 | $(9.5) | - Unrealized gains for the three months ended June 30, 2025, were $94.6 million on 77 investments, driven by positive portfolio company developments, tightening credit spreads, and reversal of prior unrealized losses[278] - Unrealized losses on foreign currency borrowings for the three months ended June 30, 2025, were $25.8 million, primarily due to fluctuations in AUD, CAD, SEK, GBP, and EUR exchange rates[279] Realized Gross Internal Rate of Return Since 2011 through June 30, 2025, the company's exited investments generated an average realized gross internal rate of return (IRR) of 17.1%, with 92% achieving an IRR of 10% or greater - Since investing began in 2011 through June 30, 2025, exited investments generated an average realized gross internal rate of return (IRR) of 17.1%, weighted by capital invested[284] - 92% of these exited investments resulted in a realized gross IRR of 10% or greater[284] - Total capital invested in exited investments was $8.6 billion, with total proceeds of $11.0 billion[284] Interest Rate and Foreign Currency Hedging The company uses interest rate swaps to hedge fixed-rate debt and investments, aligning with its floating-rate portfolio, and hedges foreign currency exposure by borrowing in local currencies under the Revolving Credit Facility - Interest rate swaps are used to hedge fixed rate debt (2026, 2028, 2029, and 2030 Notes) and certain fixed rate investments, aligning with the predominantly floating rate investment portfolio[291] - Foreign currency exposure in non-U.S. dollar denominated investments is primarily hedged by borrowing the par amount in local currency under the Revolving Credit Facility[292] - For the six months ended June 30, 2025, the company had $36.8 million of unrealized losses on the translation of non-U.S. dollar denominated debt[292] Financial Condition, Liquidity and Capital Resources The company's liquidity is primarily derived from equity issuances, credit facilities, and operational cash flows, used for investments, operations, debt service, and dividends, maintaining sufficient borrowing capacity within regulatory limits - Liquidity and capital resources are primarily from equity issuances, credit facilities, and cash flows from operations[293] - Primary uses of cash include investments, operational costs, debt service, and dividends[298] - As of June 30, 2025, the company had $39.2 million in cash and cash equivalents, including $35.3 million of restricted cash, and approximately $1.1 billion of availability on its Revolving Credit Facility[295][294] - The company maintains an asset coverage ratio of 192.5% as of June 30, 2025, well above the 150% regulatory requirement[293] Equity The company's equity capital is sourced from common stock issuances and a dividend reinvestment plan, supplemented by an 'at the market' offering program and stock repurchase authorization, with no repurchases in reported periods - In March 2024, the company issued 4,000,000 shares of common stock for $81.5 million net proceeds, with an additional 600,000 shares issued in April 2024 for $11.9 million[297] - Through its dividend reinvestment plan, 578,912 shares ($12.7 million) were issued in H1 2025 and 587,706 shares ($11.9 million) in H1 2024[300] - A $50 million stock repurchase program is authorized, but no shares were repurchased in H1 2025 or H1 2024[301][302] - As of June 30, 2025, $100 million of common stock remained available for issuance under 'at the market' offerings[299] Debt The company's debt structure includes a Revolving Credit Facility and unsecured notes with varying maturities and interest rates, maintaining compliance with debt covenants and regulatory asset coverage ratios for investments and corporate purposes Debt Outstanding Summary | Debt Instrument | Aggregate Principal Committed (in millions) | Outstanding Principal (in millions) | | :---------------------- | :---------------------------------------- | :---------------------------------- | | Revolving Credit Facility | $1,675.0 | $507.1 | | 2026 Notes | $300.0 | $300.0 | | 2028 Notes | $300.0 | $300.0 | | 2029 Notes | $350.0 | $350.0 | | 2030 Notes | $300.0 | $300.0 | | Total Debt | $2,925.0 | $1,757.1 | - The Revolving Credit Facility's revolving period for $1.525 billion of commitments was extended to March 2, 2029, with a stated maturity of March 4, 2030[306] - As of June 30, 2025, the company had outstanding debt denominated in AUD, GBP, CAD, SEK, and EUR on its Revolving Credit Facility[307] - The company was in compliance with the terms of all its debt arrangements as of June 30, 2025[330] Off-Balance Sheet Arrangements The company has commitments to fund investments in existing portfolio companies, primarily through revolving and delayed draw term loans, which are incorporated into its liquidity assessment, with no unfunded commitments or material legal proceedings Off-Balance Sheet Commitments | Commitments (in millions) | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Total Portfolio Company Commitments | $341.0 | $356.3 | - These commitments, primarily senior secured revolving and delayed draw term loans, are incorporated into the company's liquidity assessment[331] - As of June 30, 2025, there were no unfunded commitments to new borrowers and no material pending or threatened litigation[336] Contractual Obligations The company's contractual payment obligations as of June 30, 2025, primarily consist of its Revolving Credit Facility and unsecured notes, with maturities ranging from 1-3 years to beyond 5 years Contractual Obligations Summary | Contractual Obligations (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | | :---------------------------------- | :---- | :--------------- | :-------- | :-------- | :------------ | | Revolving Credit Facility | $507.1 | $— | $— | $507.1 | $— | | 2026 Notes | $300.0 | $— | $300.0 | $— | $— | | 2028 Notes | $300.0 | $— | $— | $300.0 | $— | | 2029 Notes | $350.0 | $— | $— | $350.0 | $— | | 2030 Notes | $300.0 | $— | $— | $— | $300.0 | | Total Contractual Obligations | $1,757.1 | $— | $300.0 | $1,157.1 | $300.0 | - In addition to these, the company has commitments to fund investments and to pledge assets as collateral under derivative agreements[340] Distributions As a RIC, the company aims to distribute at least 90% of its taxable income annually to avoid corporate-level U.S. federal income tax, with quarterly dividends paid at the Board's discretion and an 'opt out' dividend reinvestment plan in place - To maintain RIC status, the company must distribute at least 90% of its investment company taxable income and net tax-exempt income annually[341] - A nondeductible 4% U.S. federal excise tax is payable on amounts not distributed in accordance with calendar year distribution requirements[343] - Quarterly dividends are paid at the discretion of the Board, based on earnings, financial condition, RIC status, and BDC regulations[344] - The company operates an 'opt out' dividend reinvestment plan, where cash dividends are automatically reinvested into common stock unless a stockholder elects cash[348] Related-Party Transactions The company has ongoing business relationships with affiliated or related parties, including the Investment Advisory Agreement, the Administration Agreement, and a trademark usage agreement with an affiliate of TPG Global, LLC - Key related-party transactions include the Investment Advisory Agreement, the Administration Agreement, and an agreement with an affiliate of TPG Global, LLC concerning 'Sixth Street' and 'TPG' trademarks[355] Critical Accounting Estimates The company's critical accounting policies and estimates, particularly for investment portfolio valuation, are detailed in its Annual Report on Form 10-K, involving significant judgment due to the illiquid nature of many investments - Critical accounting policies and estimates, especially for investment portfolio valuation, are detailed in the Annual Report on Form 10-K for December 31, 2024[349] - Determining fair value for illiquid debt and equity securities of private companies requires significant judgment[351] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to various financial market risks, including valuation, interest rate, and currency risks, and describes the strategies employed to manage these exposures Valuation Risk The company faces valuation risk from its primary investments in illiquid debt and equity securities of private companies, where fair values are determined by the Board using judgment, and actual liquidation amounts may differ materially - The company primarily invests in illiquid debt and equity securities of private companies, which do not have readily available market prices[351] - Fair value is determined in good faith by the Board, requiring judgment due to the lack of a single valuation standard[351] - Actual amounts realized from liquidating portfolio investments may differ materially from reported fair values[351] Interest Rate Risk The company is exposed to interest rate risk, affecting net investment income, and manages this through a predominantly floating-rate debt portfolio with interest rate floors and interest rate swaps to hedge fixed-rate liabilities - Net investment income is affected by the difference between investment rates and borrowing rates[352] - As of June 30, 2025, 96.5% of debt investments bore floating rates, with 100.0% subject to interest rate floors[354] - Interest rate swaps are used to hedge fixed-rate debt (2026, 2028, 2029, and 2030 Notes) to align with the floating-rate investment portfolio[354] Interest Rate Sensitivity | Hypothetical Basis Point Change | Annualized Impact on Net Interest Income (in millions) | | :------------------------------ | :--------------------------------------------------- | | Up 300 basis points | $37.6 | | Up 200 basis points | $25.1 | | Up 100 basis points | $12.5 | | Down 25 basis points | $(3.1) | | Down 50 basis points | $(6.2) | Currency Risk The company is exposed to currency risk from foreign currency-denominated investments, which it mitigates using hedging techniques like forward contracts or borrowing in local currencies under its Revolving Credit Facility - Investments denominated in foreign currencies expose the company to movements in foreign exchange rates upon translation to U.S. dollars[358] - Hedging techniques may include forward contracts or borrowing in local currencies under the Revolving Credit Facility to create natural hedges[358] - Interest rate derivatives may be used to hedge exposure to changes in associated rates if the loan or investment is based on a floating rate other than what can be borrowed under the Revolving Credit Facility[358] Item 4. Controls and Procedures As of June 30, 2025, the company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2025[359] - No changes in internal control over financial reporting occurred during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[360] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings The company is not currently subject to any material legal proceedings, nor are any threatened, beyond those incidental to the normal course of business - The company is not currently subject to any material legal proceedings, nor is any material legal proceeding threatened against it[361] Item 1A. Risk Factors This section directs readers to review risk factors in the Annual Report on Form 10-K for December 31, 2024, as these could materially affect the company's business, financial condition, and operating results - Readers should carefully consider the risk factors discussed in Part I, 'Item 1A. Risk Factors' in the Annual Report on Form 10-K for the fiscal year ended December 31, 2024[362] - These risks could materially affect the company's business, financial condition, and/or operating results[362] - Additional risks and uncertainties not currently known or deemed immaterial may also materially and adversely affect the company[362] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item states that there were no unregistered sales of equity securities or use of proceeds to report for the period - None[363] Item 3. Defaults Upon Senior Securities This item states that there were no defaults upon senior securities to report for the period - Not Applicable[364] Item 4. Mine Safety Disclosures This item states that there are no mine safety disclosures to report for the period - Not Applicable[365] Item 5. Other Information This section includes disclosures about Rule 10b5-1 Trading Plans, noting no adoption, modification, or termination by directors or officers during the three months ended June 30, 2025 Rule 10b5-1 Trading Plans No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by the company's directors or officers during the three months ended June 30, 2025 - None of the company's directors or officers adopted, modified, or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2025[366] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including organizational documents, CEO and CFO certifications, and XBRL-related documents - Exhibits include the Restated Certificate of Incorporation, Second Amended and Restated Bylaws, Certifications of Chief Executive Officer and Chief Financial Officer (pursuant to Sarbanes-Oxley Act), and Inline XBRL documents[367] SIGNATURES The report is duly signed on behalf of Sixth Street Specialty Lending, Inc. by Joshua Easterly, CEO, and Ian Simmonds, CFO, on July 30, 2025 - The report is signed by Joshua Easterly, Chief Executive Officer, and Ian Simmonds, Chief Financial Officer, on July 30, 2025[371]