Sixth Street Specialty Lending(US:TSLX)2022-08-03 18:59Financial Data and Key Metrics Changes - Adjusted net investment income per share for Q2 2022 was $0.42, with an annualized return on equity of 9.9% [10] - Adjusted net loss per share was $0.30, primarily due to unrealized losses from wider market spreads [11] - Net asset value per share decreased by approximately 3.4% from $16.84 to $16.27, driven by unrealized losses of $0.66 per share [17][60] - Total investments at quarter-end were $2.5 billion, slightly up from the previous quarter [53] Business Line Data and Key Metrics Changes - 93% of total investment income was generated through interest and dividend income, compared to 85% in 2021 and 79% in 2020 [14] - The weighted average yield on debt and income-producing securities at amortized cost increased to 10.9% from 10.3% quarter-over-quarter [47] - The company had $379 million of commitments and $325 million of fundings across 8 new investments and upsizes during the quarter [36] Market Data and Key Metrics Changes - The company noted a pause in repayments in the latter half of the quarter, with $212 million of paydowns across 6 full and 1 partial investment realization [42] - The repayment activity was in line with historical averages, with 65% occurring in April [44] Company Strategy and Development Direction - The company is focused on maintaining a defensive portfolio, with 90% of its investments in first lien loans [30] - The strategy includes a differentiated approach to underwriting, emphasizing businesses with variable cost structures and strong recurring revenue [28] - The company anticipates increased deal flow in the second half of 2022 while remaining selective in investment opportunities [35] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the potential for rising rates to lead to a default cycle, particularly in a stagflationary environment [92] - The overall health of borrowers remains strong, despite rising costs and inflationary pressures [23] - The company expects to exceed the top end of its target return on equity for the full year 2022 due to positive asset sensitivity [68] Other Important Information - The Board approved a third quarter base dividend of $0.42 per share, an increase of $0.01 from the previous quarter [24] - The company has significant liquidity, with $1.2 billion of undrawn capacity on its revolving credit facility [56] Q&A Session Summary Question: About the new BDC Sixth Street has on file - Management indicated that the new BDC has a completely different investment strategy than Sixth Street Specialty Lending, with limited overlap [74][75] Question: Thoughts on a peer lowering its base fee - Management noted that the peer has a history of performance issues and that their yield is lower compared to Sixth Street's [76][82] Question: Fee income expectations in a rising rate environment - Management clarified that their portfolio is spread-sensitive rather than rate-sensitive, and they expect M&A activity to increase over time [85][90] Question: Expectations for defaults in the current environment - Management acknowledged that defaults are likely to increase but expressed confidence in the defensive positioning of their portfolio [92][96] Question: Risks in certain verticals - Management highlighted low-margin businesses with commodity inputs as more at risk in the current environment [106] Question: CLO investments compared to traditional debt investments - Management explained that CLO investments offer greater loss-taking ability and are a more efficient use of capital compared to private loans [111] Question: Impact of valuation changes - Management stated that the majority of valuation changes were driven by spread movements rather than performance-based markdowns [113][115]