Sixth Street Specialty Lending(US:TSLX)2023-11-03 15:00Financial Data and Key Metrics Changes - For Q3 2023, the adjusted net investment income per share was $0.60, corresponding to an annualized return on equity of 14.4%, while the adjusted net income per share was $0.77, corresponding to an annualized return on equity of 18.5% [48][69] - The net asset value per share increased to $16.97, up $0.23 or 1.4% from the previous quarter [10][63] - Total investments reached $3.1 billion, with total principal debt outstanding at $1.7 billion and net assets at $1.5 billion [63] Business Line Data and Key Metrics Changes - The portfolio's weighted average yield on debt income-producing securities increased from 14.1% to 14.3% due to higher interest rates [61] - New investment opportunities represented 97% of total fundings for the quarter, with only 3% supporting upsizes to existing portfolio companies [58] - The company had $206 million of commitments and $152 million of fundings across eight new and two upsizes to existing portfolio companies [26] Market Data and Key Metrics Changes - The total amount of outstanding in the leveraged loan index declined by $23 billion or 1.6% over the last 12 months, marking the first year of year-over-year decline since the global financial crisis [23] - Approximately one-third of CLOs are now out of their investment period, expected to increase to about 40% by year-end [12] Company Strategy and Development Direction - The company is focused on capital deployment in a higher-for-longer interest rate environment, emphasizing disciplined capital allocation and asset selection [20][21] - There is an expectation of a structural shift towards direct lending, with opportunities arising from the $130 billion of leverage loans maturing by the end of 2025 [24] - The company aims to differentiate returns for shareholders through strong asset selection and portfolio management capabilities [21] Management's Comments on Operating Environment and Future Outlook - Management noted that while there are signs of consumer weakening, the portfolio remains insulated from consumer discretionary trends due to its B2B focus [29] - The company anticipates that the lagged impact of higher rates may lead to increased defaults and losses in the next 12 to 15 months [52][105] - Management expressed confidence in the ability to navigate the current economic challenges and maintain strong performance [72] Other Important Information - The company declared a base quarterly dividend of $0.46 per share and a supplemental dividend of $0.07 per share related to Q3 earnings [53] - Non-accruals were minimal at 0.7% of the portfolio at fair value, with no new portfolio companies added to non-accrual status from the prior quarter [31] Q&A Session Summary Question: State of the Union on Sponsor Side - Management indicated that sponsors continue to support their businesses despite some signs of weakening in consumer demand [44][75] Question: Impact of Higher Rates on Credit Differentiation - Management expects differentiation in shareholder experience based on credit losses to manifest in the next 12 to 15 months, with private credit likely outperforming broadly syndicated credit [105][106] Question: Interest Coverage and Portfolio Upsizing - Interest coverage across the portfolio is about two times, with a slight decline noted [98] - The low upsizing activity was attributed to an anemic M&A market rather than pressure on companies [100] Question: Quality of Deals Refinanced from Broadly Syndicated Loan Market - Management clarified that not all deals moving to private credit are adverse selections, as different sponsors have varying needs for capital [129] Question: Recovery of Spread Tightening - Management estimated that the portfolio is about two-thirds of the way through recovering from spread widening experienced in 2022 [117]