Sixth Street Specialty Lending(US:TSLX)2022-02-17 21:01Part I Business Sixth Street Specialty Lending, Inc. is a BDC focused on originating senior secured loans to U.S. middle-market companies, externally managed by Sixth Street - TSLX is a specialty finance company and BDC focused on lending to U.S. middle-market companies, having originated approximately $20.1 billion in investments since its inception in July 201117 Portfolio Composition by Investment Type (as of Dec 31, 2021) | Investment Type | Percentage of Portfolio (by Fair Value) | | :--- | :--- | | First-Lien Debt | 91.2% | | Second-Lien Debt | 1.7% | | Mezzanine Debt | 0.7% | | Equity and Other | 6.4% | - As of December 31, 2021, 98.9% of the company's debt investments bore interest at floating rates (including hedges), with 99.4% of these having interest rate floors, providing a hedge against inflation19 - The company is externally managed by Sixth Street Specialty Lending Advisers, LLC, which is part of the Sixth Street global investment platform with approximately $60 billion of assets under management24 - The company has an SEC exemptive order allowing it to co-invest with affiliates, which is particularly useful for larger capital commitments and providing "one-stop" financing solutions2627 Management and Incentive Fees | Fee Type | Calculation Basis | | :--- | :--- | | Management Fee | 1.5% annually on average gross assets. A waiver reduces the fee to 1.0% on assets financed with leverage over 1.0x debt-to-equity | | Incentive Fee (Income) | 17.5% of pre-incentive fee net investment income over a 1.5% quarterly hurdle rate, with a catch-up provision | | Incentive Fee (Capital Gains) | 17.5% of cumulative realized capital gains over cumulative realized and unrealized capital losses | Risk Factors The company faces significant risks from its BDC structure, economic conditions, illiquid portfolio investments, and securities market volatility - Business & Structure Risks: The company is dependent on key management personnel from its Adviser, Sixth Street, and their affiliates. It is also subject to significant BDC regulations that affect capital raising and operations, and its use of leverage magnifies potential gains and losses152157 - Economic Risks: The COVID-19 pandemic and general economic downturns could impair portfolio companies' ability to operate and repay debt, harming the company's operating results. Market volatility and uncertainty about financial stability also pose significant threats153229242 - Portfolio Investment Risks: Investments are primarily in risky, highly speculative, and illiquid securities of middle-market companies. The lack of a ready market for these investments complicates valuation and may adversely affect the business if positions need to be sold quickly155244255 - Securities Risks: The market price of the company's common stock (TSLX) may fluctuate significantly and has historically traded at a discount to its net asset value (NAV). Stockholders may also experience dilution from the conversion of the 2022 Convertible Notes or if they opt out of the dividend reinvestment plan156313315319 - LIBOR Transition Risk: The planned phase-out of LIBOR creates uncertainty for the interest rates on the company's floating-rate investments and its own indebtedness. This may require renegotiating credit agreements and could adversely affect returns and borrowing costs218219223 Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - As of the report date, there are no unresolved comments from the SEC staff336 Properties The company does not own any real estate; its principal executive office is located in Dallas, Texas - The company's principal executive office is in Dallas, TX, and it does not own any real estate337 Legal Proceedings The company is not currently subject to any material legal proceedings, nor is it aware of any material legal proceedings being threatened against it - There are no material pending or threatened legal proceedings against the company338 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities TSLX common stock trades on the NYSE, historically fluctuating relative to NAV, with senior securities maintaining strong asset coverage above regulatory requirements - The company's common stock (TSLX) is traded on the NYSE and has historically traded at prices both above and below its net asset value per share342 Senior Securities Outstanding (as of Dec 31, 2021) | Class | Total Amount Outstanding (in millions) | Asset Coverage Per Unit ($) | | :--- | :--- | :--- | | Revolving Credit Facilities | $316.4 | $2,053.6 | | Convertible Senior Notes due 2022 | $100.0 | $2,053.6 | | 2023 Notes | $150.0 | $2,053.6 | | 2024 Notes | $346.4 | $2,053.6 | | 2026 Notes | $298.1 | $2,053.6 | Selected Financial Data In 2021, the company reported increased net assets from operations and total assets, with a slight NAV per share decrease and significantly higher dividends declared Selected Financial Data (2020 vs. 2021) | Metric (in millions, except per share) | 2021 | 2020 | | :--- | :--- | :--- | | Total Investment Income | $278.6 | $270.0 | | Net Investment Income | $142.4 | $147.0 | | Increase in Net Assets from Operations | $211.8 | $178.1 | | Earnings per common share—basic | $2.93 | $2.65 | | Total Assets | $2,551.9 | $2,338.6 | | Total Debt | $1,186.0 | $1,110.4 | | Total Net Assets | $1,275.8 | $1,161.3 | | Net Asset Value Per Share | $16.84 | $17.16 | | Dividends declared per share | $3.59 | $2.30 | - The total return based on net asset value was 19.1% for 2021, an increase from 15.6% in 2020353 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, TSLX experienced portfolio growth, increased total investment income, improved credit quality, and maintained strong liquidity and asset coverage Investment Activity (Year Ended Dec 31) | Activity (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | New Investment Commitments | $1,117.4 | $1,184.7 | | Principal Amount Funded | $1,117.4 | $939.0 | | Principal Amount Sold/Repaid | $1,004.5 | $941.3 | Results of Operations Summary (Year Ended Dec 31) | Metric (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total investment income | $278.6 | $270.0 | | Net expenses | $135.8 | $117.3 | | Net investment income | $142.4 | $147.0 | | Net realized gains (losses) | $28.9 | $(2.6) | | Net change in unrealized gains | $40.5 | $33.7 | | Net increase in net assets | $211.8 | $178.1 | - The portfolio's credit quality improved, with investments rated '1' (performing as agreed with no concerns) increasing to 89.8% of the portfolio by fair value, up from 86.8% in 2020. Non-accrual investments decreased to 0.0% of the portfolio at fair value from 0.9% in the prior year405400 - As of December 31, 2021, the company had total debt of $1.21 billion and available liquidity of $1.19 billion under its Revolving Credit Facility, with an asset coverage ratio of 205.4%440441450 Quantitative and Qualitative Disclosures About Market Risk The company manages valuation, interest rate, and currency risks through active strategies, including hedging and natural offsets for its floating-rate assets and liabilities - The company's primary market risks are valuation risk for its illiquid portfolio, interest rate risk, and currency risk519 - Interest rate risk is managed by maintaining a portfolio of primarily floating-rate assets (98.9% of debt investments) and using interest rate swaps to hedge fixed-rate liabilities521523 Annualized Impact of Hypothetical Base Rate Changes on Net Income | Basis Point Change | Net Income Impact (in millions) | | :--- | :--- | | Up 300 basis points | $13.7 | | Up 200 basis points | $2.5 | | Up 100 basis points | $(7.2) | | Down 25 basis points | $2.7 | - Currency risk is primarily mitigated by borrowing in the same foreign currency as its investments, creating a natural hedge526 Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and KPMG's unqualified opinion, highlighting Level 3 investment valuation as a critical audit matter - The independent registered public accounting firm, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2021532 - The auditor identified the assessment of the fair value of Level 3 debt and equity investments as a critical audit matter due to the high degree of subjective judgment involved in evaluating the assumptions used, such as market yields and comparable multiples539540 Consolidated Balance Sheet Highlights (as of Dec 31) | Account (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total investments at fair value | $2,521,593 | $2,298,870 | | Total Assets | $2,551,857 | $2,338,593 | | Total Debt (net) | $1,185,964 | $1,110,363 | | Total Net Assets | $1,275,848 | $1,161,315 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Investment Income | $278,593 | $270,037 | | Net Expenses | $135,850 | $117,273 | | Net Investment Income | $142,359 | $147,004 | | Increase in Net Assets from Operations | $211,780 | $178,108 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - There were no disagreements with accountants on accounting and financial disclosure752 Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective, with KPMG attesting to the latter, and no material changes occurred - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report753 - Management assessed the company's internal control over financial reporting and concluded it was effective as of December 31, 2021. This assessment was audited and confirmed by KPMG LLP754756 - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter757 Part III Directors, Executive Officers, Corporate Governance, Compensation, and Related Transactions Information for Items 10-14, covering governance, compensation, and related transactions, is incorporated by reference from the company's 2022 Proxy Statement - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2022 Proxy Statement762764765766767 Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including governance documents, debt agreements, and management certifications - This section provides a list of all exhibits filed with the Form 10-K, including governance documents, debt indentures, and management agreements771772773