Q2 2020 Sixth Street Specialty Lending Inc Earnings Call

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Ladies and gentlemen, today's conference scheduled to begin shortly please continue Sam I think you pretty pace.

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Good morning, and want to see streak specialty lending June Thirtyth 2020 quarterly earnings conference call.

Before we begin today's call I'd like to remind our listeners several mark made during the call may contain forward looking statements.

They Miss I'll doesn't statements of historical tax made during this call may constitute forward looking statements and are not guarantees of future performance article.

And the ball the number of is concerned piece.

Actual results may differ materially from doping for statements as a boat with a number of factors, including those described from time to time.

Specialty lending Incs filings can change commission.

The company assumes no obligation to update any such forward looking statement.

Yesterday after market close the company issued its earnings press release, [laughter], where it ended June Thirtyth 2020.

This is a presentation today investor resources section of its website www dot extreme specialty lending dotcom.

The presentation should be reviewed in conjunction with the company's form 10-Q filed yesterday with the FCC.

Extreme, especially in many Inc.'s earnings release is also available on the company's website under the Investor Resources section.

Unless noted otherwise older phones figures mentioned in todays prepared remarks or it is and for the second quarter ended June 32020. As a reminder, this call is being recorded for replay purposes.

I'll now turn the call Overdoes, Josh where easterly Chief Executive officer in fixed refreshed Hickman, Inc.

Thank you good morning, everyone. Thank you for joining with.

With me today my partner present, both family our CFO.

We and everyone here Sixthree hope you and your loved ones variable stay safe and healthy.

Third environment, we spoken me I hope, it's been that by August they would been.

There would be more clarity in the past I might have returned to full business activity.

However, the current health crisis continues to take a toll on human lives.

Was the economic health of households, and businesses around the world.

Okay, and U.S. government provide rapid extraordinary fiscal and monetary support remains to be seen how long a return to normalcy will take and what's the long term impact of cold water and we'd be.

I share your stakeholder letter left in two weeks ago, we've always believed any business model, including the BDC model has inherent constrain constraints in risks. These risks make it from these risks make it fragile and particularly vulnerable to market shocks and uncertainty that is why.

Over the last years, we've taken steps across our business not only to mitigate the on desired outcomes of inherent for Jody, but also to allow us to create value in periods of volatility.

These elements we've introduced in terms of small include are focused on high quality underwriting cycle, probably a portfolio construction.

Match funding.

Match funding the nature of our liabilities with her assets proactively meeting journal liquidity in liability role with setting of his financial policy that preserves our reinvestment option and finding the optimal business model to provide both the benefits of scale and outsize returns for stakeholders, while still early and then unfolding.

This code induced downturn, we believe that the strength or Q2 results as an early indication of the value.

We can create for stakeholders in the period ahead.

With that let me turn this quarter's highlights.

<unk>, which are consistent with the preliminary earnings results. We provided on July 20 Threerd.

After market close yesterday, we reported second quarter net investment income of 59 cents against for Q2 be stepping up 41 cents net income per share of Q2 was $1.43.

The results of course of onto an annualized return of equity on net investment income and net income of 15.6, 30% respectively in annualized year to date return on equity.

On a net investment income and net income of 13.17, 0.6% respectively.

Net investment income this quarter was reported.

Sported well supported by elevated prepayment other fee activity in our portfolio, most notably our realized investment barrel gas.

Our strong student or a strong on income this quarter was primarily due to the unrealized gains related to the impact of market spread tightening during this quarter as was a robust net investment income.

Over the course of Q2, LCD first lien secondly, spreads retraced 60, 71% of the respective Q1 spread widening.

Consistent with their broadly syndicated market the impact of this on valuation or portfolio. This quarter result, any reversal of approximately 60% over Q1.

Spread related unrealized losses, which was reflected as an Android unrealized gain for Q2.

Net asset value per share was 16 zero eight increasing by 6.7% more pro forma.

March 31st net asset value per share 15, O seven which account for the impact of the 50 cents aggregate special dividends per share that was paid during Q2.

He will walk you walk through the quarters net asset value bridge in more detail.

Taking a step back or net asset value per share quarter, and if we would add back or 50 cents per share of special dividends paid to shareholders in Q2 would be 16 58.

I agree with almost entirely back to our starting level of 16 77 at the beginning of the year, even though are spread related unrealized losses have only been we've reversed by 60%.

This is because we've been able to rebuild net asset value in other ways, including through the over Univer B seven it outperformance and with some of our small equity positions and unrealized mark to market gains or interest rate swaps.

Yesterday, our board declared a third quarter be stepping up 41 cents per share to shareholders of record as of September 15th payable on October 15.

Consistent with what we said last quarter.

Based on a view the core earnings power of our portfolio, we do not anticipate making any changes to our base different level in the near and medium term.

There were no supplemental dividends declared relating to Q2 earnings as a result at the net asset value testing our framework.

With specifies that no simple, but several no difference or declared a pro forma net asset value per share adjusted for the impact of any supplemental dividends over the current and preceding quarter declined by more than 15 cents per share.

Any downward impact of net asset value as a result of special dividends.

Not supplemental dividends are added back for the purpose of the net asset value test.

If we compare this quarter's net asset value per share, adding back or 50 cents per share of special dividends.

16, 58 against her Q4 2009 pro forma net asset value of 16 77, there was 19 cents of NAV per share decline against limit or 15 cents. Therefore, we were four cents short of being able to declare a supplemental dividend of 50 cents of the scores over you based on a current.

Outlook Im presuming no material that clients are net asset value pressure as a result as it.

Exone Juris events like the market volatility observed in March we would expect to we resumed declaring supplemental difference on overseas. In Q3 provided that are reported net asset value per share at September Thirtyth is greater 14 92.

With that like to turn the call over two Boe to walk through activity in health of our portfolio in more detail.

Thanks, Josh I'll begin with a quick overview our market backdrop during the quarter.

Amid economic uncertainty M&A activity continued to be significantly muted as buyers and sellers struggled to agree on valuations.

Meanwhile, in the second quarter, there was significant tightening and risk premiums in the broader credit markets.

A disconnect emerged between asset prices and economic reality, which we believe was primarily fueled by extensive sad and government intervention driving investor demand back into risk assets.

As a result secondary prices across credit rose sharply in Q2, and there was an abundant liquidity in the investment grade and high yield markets for a broad variety of issuers, including those in sectors most impacted by cold.

In light of these market dynamics, given our focus on maintaining strong risk adjusted returns across our portfolio Q2 originations activity was relatively light at $89 million some commitments.

And $77 million a fundings.

These findings were across six new.

And six existing portfolio companies the majority of our fundings on a dollar basis. This quarter was providing a new financing in connection with the recapitalization of Moran foods replaced our existing it'd be alone with a new one at a higher spread and refreshed call protection.

Other new investments include small opportunistic purchases of triple B yellow liabilities and limited junior debt co investments alongside our affiliated funds in growth businesses with attractive risk adjusted returns.

As a result, our portfolios first lien exposure decreased slightly from 97% to 96% quarter over quarter on a fair value basis.

Repayments during Q2 totaled $211 million across three full two partial pay downs.

Sure, Okay, Nexstar, which where our two largest portfolio names at the end of Q1.

We're both fully repaid early in the quarter as a result, net repayment activity for the quarter was $134 million.

During the quarter as M&A activity slowed in the immediate opportunity set for secondary market purchases and rescue financings became less actionable given that intervention arching continued to work hard to build a pipeline of opportunities, where we can create value through our core competencies beat sector expertise and the ability to underwrite complex.

Okay.

As we previewed in our letter on July 20 Threerd.

We've been active in capital going post quarter Rod as of today Q2, fundings total approximately $135 million, primarily led by two new investments.

In broad strokes, a reputation as creative solutions providers, particularly amongst participants within our sector themes, but important role in sourcing of these investments are due diligence and underwriting capabilities along with the skilled solutions were able to offer as part of the 34 billion dollar sixth Street platform a lot of to structure.

Investments with attractive spreads strong call protection and other fees that enhances the overall risk adjusted return profile of our portfolio.

Today, we continue to have a robust pipeline, which were constantly working to build through our direct sourcing channels. Looking ahead, we believe the competitive advantage of our human capital will become increasingly evident as a financing solutions sought by companies management teams and sponsors will only grow and complexity in this uncertain environment.

As it relates to our portfolio court around the overall performance of our portfolio continues to be solved with approximately 98% rated one or two.

On a performance rating scale of one to five with one being the highest.

And minimum non accruals at approximately 0.4% of the portfolio on a fair value basis, representing three investments.

To revisit Josh the exact career remarks, we have long recognized the inherent projected the of the left hand side of the balance sheet.

Our assets are callable loans, which means that the investments where we are over earning due to borrow performance, particularly the ones that get called away in periods of volatility when credit spreads widen the value of our assets tend to decline.

In order to combat the fragile elements of left side of our balance sheet. We have over the years focus on strong underwriting discipline in defense and portfolio construction, which includes sector business model and management team selection.

We believe these efforts have played a role and the performance of our portfolio. Today, However, we'd be remiss not the highly at our portfolio companies high quality management teams, who took quick action at the onset of coal but.

Optimize cost structures and protect their liquidity positions.

Albeit still early our portfolios performed above our expectations given the macro backdrop.

The slight increase in this quarter's nonaccruals from approximately 0.1% to 0.4% or the portfolio by fair value at quarter end was driven by our Neiman Marcus first lien term loan.

Not really be I'll follow term loan.

And the residual non dept roll up portions.

Of our JC Penney first lien term loan unsecured notes.

Given what we believe me be less than par recovery, we have applied the regularly scheduled cash interest payments, we received during the quarter to be amortized cost of our positions all of which were acquired a price is less than <unk>.

As we covered in our preliminary release in July a retail he'd be all exposure at quarter end stable from prior quarter at 9.4% of the portfolio at fair value.

99 cents, Ryan foods, and Staples businesses that were generally deemed a central doron cold shutdown continues to benefit from Tailwinds, the current environment and together represent 44.5% of our retail Hebei all exposure at quarter end.

Our largest retail ego exposure as a follow term loan of Neiman, Marcus which was 3.6% of our portfolio at fair value at quarter end.

Our current expectation based on the company's plan of reorganization in case milestones is that we'll be refinance upon neiman Marcus exit from bankruptcy, which is expected to occur in the fall of 20 Twond.

With strict street as lenders of size in each of Niemann M. JC penney's pre petition capital structures, we were able to have meaningful role in driving the dip financing process in terms.

As a result, we believe our $11.5 million par value dip loan for Niemann, and our 6 million dollar par value dip loan for JC Penney at quarter end offer attractive risk adjusted returns given the structural protection of dip loans in combination with our contractual economics.

Our portfolios energy exposure quarter runs is 3.9% at fair value.

This fall into 2.8% on a pro forma basis, given partial pay downs on her dad and energy alloys post quarter end.

We expect to be fully repaid on energy alloys. During Q4 2020, as a company can cleats and out of court wind down to be a liquidation of its assets.

Our portfolio composition and credit stats for Q2 remained relatively stable from prior quarter top industry exposures continue to be business services, a 22% portfolio at fair value followed by financial services in health care and approximately 17, 11% respectively.

Based on the financial information through March 31st our core portfolio companies. The average net attachment point at last dollar average was 0.4 times and 4.3 times compared to 0.3 times and 4.1 times respectively.

Our average interest cover ratio was 3.3 times compared to 3.2 times in the prior corridor.

We would caveat that these figures given the timing lag and trailing nature do not fully reflect the impact of economic shutdown that persisted through most of Q2. However, based on an ongoing engagement with borrowers we do not expect a material deterioration of credit metrics across our portfolio in the near term.

This quarter out of our portfolio of 65 names.

We had only one investment Oh center, the retail sector ones. We discussed earlier complete an amendment with Covance cited as a direct costs.

To the extent state reopening a pause or reversed.

We would expect that this figure the increase in order to provide our volumes and additional flexibility on covenants as of today, we do not expect any defaults on debt service obligations in the near term.

Now onto our portfolio yields.

The weighted average total yield on our debt in income producing securities at amortized cost increased by approximately 10 basis points quarter over quarter to 10%.

Breaking this down there were 15 basis points of yield uplift from the impact that new and exited investments this quarter and 10 basis points uplift from the impact of amendments.

These were partially offset by 15 basis points of downward yield impact from the movement in my bore prior to it reaching our average floors of 115 basis points across our floating rate assets.

Quarter over quarter, the weighted average spread over the three month LIBOR floating rate investments increased by 100 basis points almost entirely due to the benefit of our LIBOR floors.

With that I'd like to turn it over to Ian.

Thank you got.

I'll begin with an overview of our balance sheet total investments at fair value decreased slightly from 2.05 billion to 1.98 <unk> quarter over quarter, primarily due to net repayment activity in our portfolio, partially offset by the positive valuation impact of tightening credit spreads on the fair value of our investment.

Total principal amount of debt outstanding with 875 million and mid assets with 1.0 billion or 16 don't make sense to shed.

Average debt equity ratio was 0.87 times and our ending debt to equity ratio was 0.81 times down from 0.96 times in the prior quarter.

Quarter end, we had 1.0 billion of liquidity under our revolver against 73 million or on the portfolio company commitments available to be drawn.

Given the net funding activity thus far in Q3, a leverage today is approximately 0.91 times and liquidity stands at 975 million with an estimated not 75 million of unfunded portfolio company commitments available to be drawn.

You know recent led it to stay told US we discussed at length is the structural limitations that make the BDC model innately fragile to review. These include the requirement to be long only the need to be fully invested in order to generate a dividend level that the market expense.

And the fact that they're out limitless alpha generating direct middle market lending opportunities.

This is further complicated by strict regulatory requirements and the mark to market valuation framework.

I will discuss the elements, we introduced to the left hand side about balance sheet to address the inherent fragility of our business model and I will now cover our assets on the right hand side of the balance sheet.

As risk managers and capital solutions providers, we believe paying for the option on liquidity during periods of low volatility is critical in our ability to upright and create value for both stakeholders and clients in periods of high volatility.

At quarter end.

Liquidity represented approximately 54% about total assets and we had nearly 15 times coverage on our unfunded commitments available to be drawn by a borrow was based on contractual requirements in the underlying loan agreements.

This compares to key a median of approximately five times at much then first.

How robust liquidity combined without financial leverage of 0.91 to that times today.

Means that we have substantial investment capacity and flexibility during these uncertain times.

To put some numbers around the cost of our option on liquidity.

It's our revolver with size to have only five times coverage of our unfunded commitments at quarter end similar to the median of LP is we would have picked up approximately 25 basis points are we on an annualized basis or approximately $2.6 million.

However, through our ability to be opportunistic in both new portfolio investments and investments in L. in capital structure in the past few months. We believe we have already realized over time on this in Boston.

During the quarter, given our strong liquidity position, we were able to opportunistically purchase 29.7 million principal amount about 2022 convertible notes and 2.5 million principal amount about 2024 nodes at prices below par.

Concurrent with these purchases we permanent sized a portion of the unrealized mark to market gains on the interest rate swaps corresponding to those notes by effectively canceling pro rata portions of our swaps.

Taking these gains into account now weighted average purchase price on the combined 32.2 million of notes was approximately 94%.

To put this into perspective, the benefits of these purchases alone, namely how gains on the swaps and the reduction to our blended blended cost of debt covered the majority of our cost of the option for liquidity on the entire year.

Moving on to address the size and access constraints that bdcs face in the funding markets. We've also been paying for insurance to mitigate a refinancing risk.

We extended the maturity of our five year revolver every 12 to 15 months and Opportunistically issued notes in the unsecured markets to create a diverse funding profile with staggered long term maturities.

Our next maturity is approximately two years away at only 143 million <unk> principal amount.

Funding mix at quarter end was comprised of 73% unsecured and 27% secured debt.

The average remaining lots of their investments funded with debt was 2.2 years compared to a weighted average remaining maturity on out that commitments of 4.2 use at the end of Q2.

With respect to a fixed rate liabilities, we continue to use interest rate swaps to match, our liabilities with the predominantly floating rate nature of their assets.

In periods of economic uncertainty, which typically can coincide with falling right environments. These swaps have enhanced our capital liquidity and earnings profile.

At quarter end, we had approximately $34 million of unrealized mark to market gains on that interest rate swaps of which 50 million was embedded in our navy.

The remainder was reflected in the carrying value of that 2024 unsecured notes at quarter end given the application of hedge accounting on now swaps associated with those notes.

Turning to our presentation materials slide eight is the end Ivy bridge for the quarter.

As Josh mentioned the impact of credit spread tightening on the valuation of our portfolio was a significant driver of in a big movement. This quarter with unrealized gains of 72 cents per share.

Walking through the other drivers of anything movement. This quarter, we added 59 cents per share from net investment income against a base dividend of 41 cents per se.

There was a 15 cents per share reduction in <unk> as we go to list net unrealized gains on the balance sheet related to investment realizations and recognize these games into these code is net investment income.

Other changes resulted in a positive 25 cents pushing the impacted this quarter and I'd. This was primarily driven by unrealized gains related to some of our equity position.

Moving to the income statement on slide nine total investment income.

<unk> point 2 million compared to 66.3 million in the prior quarter.

This was driven by other fees, which consists of prepayment fees and accelerated amortization of upfront already amortization of upfront fees from unscheduled pay downs of 14.3 million compared to 7.6 million in the prior quarter.

The largest driver of this quarter's fees was federal gas.

Other income increased to 6.5 million compared to 2.8 million in the prior quarter.

Interest and dividend income was 49.5 million down 6.4 million from the prior quarter due to the decrease in the average size of that portfolio.

It was also due to the impact of a falling libel, which was mitigated by the average floors across our floating rate debt.

Net expenses.

Decreased by 1.8 million quarter over quarter to 29.8 million, primarily driven by lower interest expense from a lower effective libel and a decrease in our average debt outstanding.

This quarter's weighted average cost of debt outstanding decreased by approximately 60 basis points, 3.3%, reflecting the decrease in the effective modeling out debt outstanding as well as a small accretive impact of our opportunistic notes repurchases.

Given the one quota timing lag on the libel reset date for our interest rate swaps, we have relatively good visibility into cost of debt for the quarter ahead.

As we think about on net interest margin for Q3 and beyond so long as libel remains below the average floors on our assets any incremental declines in libel will benefit our cost of debt and flow directly to our net interest margin for any given level of asset yields and leverage.

Assuming an average leverage for Q3 inline with our current low level of <unk> 0.91 times and based on our Q2 asset level yield we would expect net interest margin expansion for Q3 of approximately 90 basis points.

This would imply a year over year net interest expansion in EM business of approximately 115 basis points.

Unlike most of the LP is with unsecured fixed rate liabilities that a likely experiencing net interest margin compression in this low rate environment, we have been able to enhance the in its power about portfolio in this period of economic uncertainty.

On this note, let me wrap up with an update on our earnings guidance for the remainder of the year.

Given our results the first half of 2020 and our current outlook, we would expect a full year net investment income per share to be on the upper end about previously communicated range of $1.84 to $2 than one.

Given the strength of our pipeline and the prospects the higher asset level yields given now capabilities as a <unk> solutions provider in this environment, we feel good about our ability to continue generating attractive aro lease for the period ahead.

With that I'd like to turn it back to Josh for concluding remarks.

Thank you and what we're pleased with their Q2 results Im proud of all the team has been able to accomplish a date and these challenging times, we're operating with the mindset that there will be prolong economic challenges ahead of us.

However, our deliberate effort and created business that not only survives volatility and uncertainty, but thrives on that continues to result in small one.

Hindsight is always 2020.

And therefore, we are continuing to continually learning along the way we will continue to evolve and refine your thinking you know processes to create differentiated business model experience for our stakeholders in our clients.

Before moving acuity like to spend a moment to reflecting the impact of cobot when our communities.

Well, we take a step back it's evident that the economic fourth of this pandemic has had a disproportional impact of people with lower incomes last job security those lacking caregiver flexibility.

I agree aggressive impactive covert was magnified by the inherent inequalities racial gender socioeconomic didn't even if you haven't built into our situtions overtime.

As a result in a business that strives to be leaders in their communities. We can't help fill an imperative that sport change that helps create a better and more inclusive society.

Over the past few months in addition to trying to facilitate often honest conversations with our team for these topics.

<unk> sixthree as been contributing resources to organizations addressing inequality as well those directly counteracting cobas economic impact [noise].

We've also been for sometime now exploring ways to addressing Underrepresentation finance through recruiting in business partnership efforts.

We think a silver lining of Cowen <unk> is that these issues of inequality are being brought to the forefront.

We'll continue doing our part as an organization to be nature to change.

With that I'd like to thank you for your continued to address and your support today operator. Please open the fine for questions.

As a reminder to ask the question. Please press Star then one are you touched on telephone to withdraw your question press the pound key.

Symbolically composites you any roster.

Our first question comes from Rick Shane with JP Morgan Your line is open.

Good morning, guys and thanks for taking my questions I'm glad everybody's doing well.

I wanted to talk to you little bit about.

Youre relative cost of capital versus peers and your relative multiple.

I know the in general you think of cost of capital on absolute basis.

In terms of your investment strategy, but right now youre relative advantages are so significant I'm wondering how are you thinking about monetizing is there through the possibility that position it through growth in a period.

Here's a can't necessarily grow off that's capital in the same way.

Okay.

Hey, Rick Good morning, Thanks for the question.

So look I don't think we get caught up in moment at moment in a moment looking at our cost of capital.

We kind of have a view of the world which is.

The market will tell you our cost of the Mark will tell us or cost of capital, but that will fluctuate during times of the so we try to look at our cost of capital Cross cycle.

On the M&A front.

I think it's very hard here or are you know at this moment in time, they get any accretive it made gun.

Historically, the only kind of M&A. This isn't the BDC space has either been very very small.

Externally managed bdcs that have.

Really really deep credit problems.

Where we're at the time, we have done work or we don't feel that the that that.

The kind of the valuation or we think the market valuation is kind of reasonable to reflect those credit problems or on internally managed bdcs.

Well, it's easier to get something done quite frankly, there's not that many scaled internally managed bdcs left.

So I think as we think about the path forward to create value for stakeholders.

On a go forward basis, you know my view is continuing to find high risk adjusted return opportunities to put our balance sheet to work.

And you know.

Well see if you know and I think that is ultimately the path for value creation, and that's kind of in our north star since inception, and you know I think it's worked pretty well for stakeholders. So I think what will most definitely in the latter camp.

There's a former camp as it relates to.

The value creation path going forward.

Got it Mike had a spending between latter hormone because there.

He does it organically the organic growth.

Putting capital work in high risk adjusted opportunities.

There are where our competitors are more capital constrained and we're not capital constrained versus.

Versus the interview Panic acquisition path.

Got it okay I appreciate that.

To some extent.

You know obviously your financial problems, but he thinks about it in context of being a manufacturing business you can make low and right now and it's been persisting, but I think right now is more disparate than it's been a data point a in a lot higher your cost of goods sold.

Yeah, so advantageous versus your peers I'm just wondering if there.

You know more aggressive ways to take advantage of.

Yeah, I mean, I just to be used to be honest like if it's a little bit circular I think I think our cost.

Good sold so our cost of capital.

Is low on a relative basis because.

The market Phoenix, we are a very prudent allocators of capital.

And that we that we try to build in a large margin of safety.

As it relates to the assets were creating versus our cost of goods sold I have high gross margin and when things go get go wrong, we still able to create high returns on capital I think the the more you lean into the Hey, I'm Super well on the cost curve.

The more you will probably end up eroding that that relative advantage.

If that makes sense.

It absolutely does.

You know again.

Understanding what.

Motivates you Guy.

And then since you are helps us understand sort of where you're going on exotic losses. So thick.

Okay.

Correct.

Our next question comes online Lynch with KBW Your line is something.

Hey, good morning, Thanks for taking my questions.

First off I really appreciate the shareholder letter that you guys provided a though that was very thoughtful in informative. So thank you for that.

[noise], though some of your comments earlier, you mentioned that that M&A has has been really muted and then the market, which is pressured a you know market activity as.

Buyers and sellers struggled to a degree on valuation, but then you also mentioned that.

Your you you have a robust pipeline today and so I'm just wondering.

What has really changed in the marketplace, Ted Ted Ted to grow your your pipeline has there been more market activity generally speaking or you guys, just just getting better hit rates on on.

I think that you guys are upper or are you know searching for as well as can you kind of clarify when you're talking about a robust pipeline are you talking about just you know the potential for deal activity to pick up from the debt.

You're talking about the pipeline returning to levels more seen in 29 gene.

Sure Thanks and.

Yeah as I mentioned I think were.

Urged by both the depth and quality of the pipeline.

Recently, and it did really well channel.

We focused on so direct the company he be at all and now we're starting to see some sponsor led to opportunistic M&A activity. So were encouraged to see that.

I will say you know.

Compared to Q2, we are there there was a pipeline the quality is getting better.

So we're we're continuing to be selective in will always be selective and really focus our capital on opportunities that we think our best for our shareholders, but it is across each of those channels. We're not seeing yet is a lot of new platform M&A from from sponsors rather more opportunity.

Eric you know M&A from existing client portfolio companies, but still again I think the quality is from what we saw.

Q2, but really throughout the United team.

Mhm.

You guys had a are you guys have a preference or do you guys aber and missing buyer Nan more deep value sort of rescue financing deals a given just the tumultuous market backdrop and I would assume that the those opportunities are probably going out.

I'm not quite a bit and you can get obviously extremely good good pricing and terms or would you guys wanted more lenient Ah Ah more secular grower stories or companies that are don't haven't really bad affected by by the colder downturn, but obviously that structures in terms of those aren't marketing space.

Mobile you guys have a preference.

We really don't have a preference I think the beauty of the platform is that the the expertise of our people and.

It goes across each of those each of those channels.

So very active it must be financings from time to time, when we see opportunity set is this is good.

And we also like to pursue growth opportunities for businesses growing a closer than GDP secular tailwinds and two other downturns no economic downturns better. So we really focus the opportunity set based on like core copies of our team which is very diverse.

Okay Fair enough and then just just one last one.

You mentioned, you know really owning one investment outside of the two retail once you talked about asking playing in and our net net you don't expect any.

New defaults in the near term I mean, that's that's surprising, but obviously in a very positive way.

You know that you guys have.

A lot of talking to your portfolio going forward can you just talk about you know with with the that assertion you guys made what is the economic backdrop you guys are using as a base case to terminate that assertion a and now from a higher level.

Why do you think that your portfolio has held up so well and perform so much better than other bdcs thus far.

<unk>.

Hey.

Let me have let me hit some of that and you can sort been of Michigan Joanne.

I think I think when you look at a portfolio.

We didn't have you had very.

To come out of cyclical exposure.

And cyclical business models typically have high fixed cost.

And so.

That we avoided kind of the typical cyclical business model generally when you look at our top three industries, which include business services.

ER financial services, but really Fintech, ER and health care, which is really either form a world he finance teams or a or a or.

Or health care I T. You just had <unk> those typically had variable cost structures and a strong kinda less cyclical exposure as strong strong secular tailwinds and so to me it was just a it.

Most of the you know.

Outside of retail, which obviously has been impacted.

We were just set up to have a.

Cycle, we would call late cycle minded portfolio construction or cycle appropriate portfolio construction be that might change over time.

And so what do we look at our portfolio, it's really a bottoms up view versus a top down view I.E. slow recovery V shape U shape, it's really how these companies doing what are the <unk> what are their forecasts or are those realistic forecast and so our.

He was really a bottoms up view on a boe or or fish fishy or any of anything to add but is it was really just business model and sector exposure.

But I think that's exactly right I don't have a lot that every time you know that we also had as we mentioned in the script.

As you know we had a lot of really high quality management teams, that's focused on liquidity and appropriate cost structure here early in cycle.

That does have treated to it to whatever benefit as well.

Okay understood I appreciate the time today those are all my questions.

Thanks Ryan.

Thank you. Our next question comes from Finian O'shea with Wells Fargo Securities. Your line is open.

Hi, good morning, guys.

Korea, Oh, So first question on new deals this quarter a there were a couple that are picked paying.

Service Channel Sprinkler I believe.

You historically shied away from that you know reasonably so for the BDC structure, but.

What makes these more suitable are safer than then opportunities that might be.

He very attractive if it weren't for their pick structure.

Yes, so look Ts helocs and affiliated funds that are growth platform, Oh originators investments and quite frankly, you hit it on the they own the head.

Given that the underlying business models that were growing at.

A significant rates and that the the capital requirements where that growth.

We you know we did a we did structures that allowed the pack that we're route will really bullish on the company's really bullish in the markets. They serve a really bullish on the management teams. Unfortunately that the BD that that six, especially Wendy only could take small amounts given we.

Have a policy about how much pet we're willing to have in the book and so if if if those structures, where we're not pick structures. We would have had a you know we would have had significantly more appetite.

For those in the BDC.

But you know given our financial policy and given our risks limitations around pack.

Yes, there were relatively small size in what was the well I think there each like you know kind of five or 7 million bucks or something like that.

That's right.

So then at that.

So do you have anything bad there.

No you hit it on the Huh.

I think sprinkler was 3.75 million and it was a convertible note.

ER and service channel was a 5 million dollar.

Investment at 12% Peck again, those those those were much larger deals we have but we thought they were very very high risk adjusted returns.

Quite frankly, those both companies might need.

More capital in the future.

That have a that you know that or they're not pick nature, when they when growth slows and they become more mature.

And quite frankly, one of the reasons why we actually made the co invest even small size is if if if they if if you. If we were in those capital structures, we would not be able to provide those financings on a go forward basis, when they become appropriate for the BDC given that the the.

Rules around.

Joint transactions in Philly transactions.

With affiliated funds.

And so well there.

We love them as a standalone or investment. We also you know think there's gonna be opportunities, but more capital in that or that are more appropriate for the BDC going forward.

Okay. Thank you and I.

Another portfolio name.

[laughter] avid exchange you've had that for awhile and they think the growth platform also took part in a in an equity round or.

You know I'm not sure if there's a few capital structures there.

But the the BDC you've got to a very small piece of that just to it looks like can you give us some color on the nature of that capital reason and why the very small BDC allocation.

Thanks, So there was a bow quickly run through I think there were two pieces. There was a <unk> there was a staple financing between a senior secured senior secured facility and a.

Redeemable prep with warrants crack though.

Right and in you and they were a strep and so the receivable pref with Warren.

It was much larger than the senior secured facility so again.

The exact same considerations.

Or the exact same considerations.

That we discussed before I have exchange is actually a kind of a more mature business.

It's an a or b to B Panda space.

But much more mature business, but.

Again, it it came down to a having the right you know heavy being appropriate for the BDC, which has a cash paid dividends as a liability that we're always thoughtful about.

That's right the only thing that I would add as you know that's it doesn't business nurown.

Well since 2015, we think its excellent risk reward, but again sized appropriately given the pik component.

Okay. That's all for me thanks, so much.

Thanks.

Thank you. Our next question comes from Robert Dodd Raymond James Your line is open.

Hi, Good morning, Good morning, guys I'm, just it's kind of general question I mean, obviously in the prepared remarks, you brought up will be the amount of steam yes. That's that's been put in and that's one of the contributing factors to spreads retracing. So much of the widening they went to before.

So there's.

Obviously, the spend a bit twittering me on that.

What do you think the Miss Sal given how much private capital, but still is out there hasn't moved back right. As it was also of the scope. It issue that those spreads continue to meet face to any benefit but potentially to the opportunity.

He sets getting.

Excessively competitive again, that's what was yeah.

Last year, but before we had.

Ah. This this this coping event.

Yeah. So you you hit it right as you always do the good news is a bad is the good news is.

The the with the spread retracing that there's been a benefit to NAV a benefit of the capital in the BDC space a benefit to people not getting closed out you know.

Stakeholders, not getting close other option I am having issues with from a regulatory framework or from from Winders space. That's a good news. The bad news is is the question of how the truncated.

That coupled with the amount of private credit dry powder ASIC truncated that go forward opportunity I think is that the question, yes, yep. So I would look I I would say, it's it's it's surely you know if it's if most definitely yeah I want to say.

We're competitive is a lot less competitive than <unk> than a year ago. We actually saw when you look at the data you actually saw yields absolute yields not only on a spread basis, but actually come up quarter over quarter I think in our book and so you know I think in <unk>.

So I think last <unk> yield amortized cost last quarter was nine nine is that 10, if at 10% on a spread basis I guess livewatch is much wider the new investors, we put ending Q.

We've put in Q3 to date have been much wider and so you know its is surely not you know if it I don't think it's been you know as surely not what it would have been if the fed haven't step Dan.

It would have been I'd kind of issues across you know the BDC space, I think and across generally across risk assets. If the fed Dennis step in I think we would have been very well positioned to take advantage of that but you know we would have had less investment capacity, we would have been more concerned about liquidity.

So I you know I think you know if it you know if it is what it is I don't think that there is the opic the gulfport opportunities that at least what we're seeing today has been completely truncated and you know we feel like there's probably some good operations. There. There is some good opportunity out there and you know weve.

We've executed on that in Q3.

Got it.

You might have anything that fishy, Oh, I wish I feel fishing in the mix just to keep it on that topic he's on the west coast.

Now I am nothing.

Hi, Thanks, nice value add carriage [laughter] like in that kind of my take that a little bit maybe because steel point spreads widen in Q3, but the biggest investment in Q2. The was the extension of Oh. It was a new all if you will.

Of the ideal with who stay my buttoned down somewhat that misplace that so is that well is is the opportunity set given <unk> financing is a much more specialized labor intensive business. I mean is that's where the spreads Amelia staying wide buses in the today.

No cash gross lending.

Such that it is given give them use activity is the is there going to be an increased divergence between.

Valuable that turns in collateral, but specialized <unk> book of business is a commodity lending book and should we expect maybe be a b L book to grow faster.

<unk>, Yeah, I think I think that's that's a a good question. So what I would say is is that we made two large investments in Q3, one was a b L deal receivables financing a and one was a which quite frankly had had a very much.

Widespread.

It was complicated have very much wider spreads historically available and then one was a you know you know we don't call. If it's a cash for alone. Although it's that company that has you know high recurring revenue embedded ERP like embedded in their customer base. So we think there's a second way out and so it's not it.

And so we don't think about we're not pure cash flow winters in that sense that that that will we had oh, we got warrants I think bow correct me, if I'm wrong, 7% accompanying struck at the money ER and so and.

It was done at you know probably 200 150 to 200 basis points wider with more call protection. There what would have done been done pretty coated.

And so you know Oh, I look I think you're gonna see.

Why wider spreads across credit asset classes and quite frankly, if if if if lenders are not pricing itself with wider spreads.

There there are effectively telling their investor base and telling their stake holders that they see no uncertainty in the world.

There's no like wider spreads or to compensate us they come to compensate investors for uncertainty and I can't imagine anybody in the world after being disciplined as it relates allocating capital doesn't think that insert uncertainty has increased significantly.

The over the last six months.

And so I I expect that you'll see wider spreads are you should see wider spreads if people are doing their jobs and being fiduciaries.

Two there to their stakeholders across across the the opportunities that my guess is on the margin you're going to see wider spreads.

I see wider spreads for specialized.

And for specialized have lending opportunities or where there is complexity, you'll see more drastic.

Because people when they already have problems and their book don't want to take on more kind of problems through complexity.

But you know I I it would be.

No. It would it would it would be shocking to me if people order or you know trying not to or pricing. The same things enters its competitive if there were a year ago a year ago. There was a lot less.

Uncertainty and again you got it you got to get you got you got to get paid for the first to world where in.

Oh I appreciate the color Josh Thank you yeah.

Thank you. Our next question comes from Mickey Schleien Ladenburg. Your line is open.

Yes, good morning, everyone I'm glad to hear is you're doing well like I sort of want a follow up on Robert's question and asking about the market stone Josh.

We're we're obviously in a yield hungry world and there's a lot of capital which is for him to invest in private debt and disintermediate the banks and when we look at the forward LIBOR curve, which has been wrong. Many times. Nevertheless, it implies that very low interest rates will persist for years.

But like we've all talked about this morning loan spreads are tightening again.

GDP looks like it'll bounce back a lot in the third quarter.

With the economies were opening obviously from very poor results in the first half a year, but but after that the forecast looks pretty weak, which could keep the fed from tightening again. So this scenario to me it seems to point to continued pressure on portfolio and yields.

A lot of that has been in place for awhile, but as you pointed out you generally maintained excellent portfolio yields. So I'd just like to step back for a moment and ask what factors in your origination process and perhaps your relationships provide you the ability to generate the loan.

Terms that we see particularly the fee structures that have helped to mitigate that pressure you know like we saw with Faro gas this quarter.

Yeah. So look I think a what we're willing to I think there's a couple different pieces where business is good question Mickey.

The first one is is like we have really deep accurate expertise in some sectors and we're involved in those sectors were involved in those ecosystems.

And so I think as it relates to those as it relates that piece of our business.

We <unk>. The you know our Counterparties don't think where commodity lender. They think thinking you know its speed uncertainty because we have deep knowledge and other nuances of how those industries and how does ecosystems work.

So I think that's most definitely been helpful. On a response for business.

The second thing is is that what we're we're not any you know we're not in the asset gathering game like were and the creating returns you know serving our clients and returns and creating returns for our stakeholders game and so you know I think part of part of the.

Part of the spread widening and as far as spread tightening over time as people or or competitors or the industry.

Growing much faster than that then then they actual true demand for capital from GDP and you've seen this and when you see when you look out frankly over time right. The corporate sector has as as as massively levered that corporate debt.

Has grown faster than GDP and so you know asset managers have you know leaned into growing assets.

And they have traded growing assets for you know, creating high Stakes stakeholder returns.

And so we truly have a different model on that front and just if people haven't looked at it.

Corporate sector had its can be really interesting and actually this is why I think that's why I'm quite bullish on the opportunities that if you look up through.

2007, pre global financial crisis.

The corporate sector had a lot less GDP than it did a at the corporate corporate as a percentage of GDP was a lot less than it did pre covered.

So the corporate sector started the cycle much more levered and quite frankly and has issued much more debt.

And post Cove. It then possible financial crisis, and so you're going to end up with a massively over levered corporate sector when things settle while with what I would expect to be relatively anemic growth, especially if you look at the LIBOR curve and you know wish three.

He will create an opportunity for providing creative financing is a whether its complexity.

And then <unk> outside the sector expertise outside of our desire not to go the business, but Ah you know kind of shade creative stakeholder returns and serving our clients. We're willing to deal with complexity, you know and other way that that is that is really a a.

Not a great investment from the investment manager standpoint, because those assets tend to turn more you can't build you can't you can't stack, you know assets because of the book Churns and therefore, you can't grow fees, but they tend to be great return for shareholders.

You know we've been willing to do that we'll continue to do that for stakeholders.

I I appreciate Tetra <unk>, it's a it's a great a philosophy and I really appreciate it in light of what you just said Ah Josh how do you see LIBOR four floors are trending on new deals over time in other words, you know for the most part.

Everyone's deals or or no benefiting from you know its LIBOR floors that were negotiated two or three years ago, but can you elaborate crashed is the market.

I couldn't be more accommodative or or lenders, you know sort of sticking to their guns on LIBOR floors.

Look I look I think the if you look at or you know the vintages across or or LIBOR floors to 2020 vintage is for LIBOR floors were really no different than 2019.

And post Cove. It is that still the case yeah. Okay. That's good that's good and <unk> and quite frankly again like I actually think today.

Rick Shane point as we sit the lowest from the cost curve right in this and effectively we have lower fees, we have lower cost like given our floating rate.

Liability structure, where the lowest in the cost curve. So I would I would exist I would if things work led the way they should work people should be more focus than we are and we should have there should be less pressure.

On on keeping in maintaining net interest margin.

Which we should benefit from because were well within the cost curve I understand.

Josh in terms of your particular expertise obviously, one area is taking advantage of the tail spend in the brick and mortar retail space and and we've seen a number of bankruptcies in the and the last few days and you've been very adept there how do you see competition developing in that segment.

Or are there new entrants coming in to try to take advantage and Dislocating deal terms or are you still feel in a position. We think you can get comfortable risk adjusted returns there.

Yes, so the good the most definitely more competition. The the good news is more supply of opportunity as well yeah. [laughter]. So you know a and that face. If you know quite frankly, that's not good news right. It's obviously very fast as as being a little bit fluff.

It's obviously very you know if it's when you take a big step back and you look at communities and you know there's a lot of hourly workers that are being affected but you know from an opportunity that there was a lot more opportunities.

As slightly more capital formation, but it feels like you know there's piece of risk adjuster continues to be disk de risk adjusted returns there as well.

I understand that's really helpful. Those are all my questions for the this morning I appreciate your time and I wish everyone well there.

Great. Thank you. Thanks.

Thank you. Our next question, yes, annoying Keno Delphi capital your line is open.

Oh, yes. Thank you very much product presentation I, how about two questions.

First question they eat that.

How many how many loan modifications adult total blog.

You may last quota and how.

Are you going to deal we loan modification liquid I did my last question.

And I think on the question eat that I'd like to know that I eat the I'm in long.

Jason not quota.

And if you have a alone domain.

I'd like to help them use de expected to be comedy.

Those loan impairment.

Thank you.

Let me answer the second question first so.

The the I would refer you to our schedule investment.

The schedule of investments have.

And Bdcs you have to mark about more mark assets, a fair value and so those would incorporate a recoveries and timelines those fair values. So you you you and on level three assets those are mark the model, but again they.

Incorporate time and recoveries in the fair value and then on on level two assets that incorporates you know effectively the markets collective view on timelines and recoveries that to the fair value I.

If a loan trades at 40 cents.

You know that recovery the market view that the recovery if something above 40 cents based on whatever that what the ultimate recovery.

Based on it you know and as some timeline. So I would refer you to schedule investment that you can look at fair value on the first question was there were effectively three you know there was no really uptick and you know we constantly are doing amendments or waivers for companies given.

The structure of our loan agreements.

That relate to you know quite frankly, if they opened I you know typically if they open up new checking account. The you know they need to come to us So and get a amendment or waiver, we need to get a a control agreement in place and so they generally there was not a material uptick and amendments or waivers.

The there was three covert related you know kind of or you know kind of what I would say non normal amendments or waivers two of those war or a name is the JC penney's.

Which is obviously retail related and had filed a bankruptcy or that were involved in and the third one was a consumer company.

Thank you.

Thank you I don't I'm showing no further questions at this time I'll turn the call back over to definitely eastern for closing remarks, great well look we really appreciate People's time, and and we hope everybody has got to be made or the summer in a good labor day and.

Clearly, it's going to continue to be interesting for anybody who is apparent.

The figure out what's happening with their kids going to school not going to school and obviously the investment environment continues to remain tricky, but we'll continue worked very hard for stakeholders and for our clients in providing.

It will create a solutions that they can create.

Create value for their stakeholders and and and we'll continue to work for our stakeholders I. Thank you very much.

Thanks, everyone.

[laughter].

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

[music].

[music].

Good morning, I want to fixed Street specialty lending June Thirtyth 2020 quarterly earnings conference call.

Before we begin today's call all I can remind our listeners so mark made during the call may contain forward looking statements.

Statements other than they had some historical facts made during this call may constitute forward looking statements are not guarantees of future performance Oracle.

And of all the number of the school starting piece.

Actual results may differ materially from building one state. That's a couple of the number factors, including those described from time to tighten sixth Street specialty lending inks problems here in Exchange Commission.

The company assumes no obligation to update any such forward looking statement.

Yesterday after market close the comedy issued its earnings press release, [laughter], where it ended June Thirtyth 2020, and posted a presentation. It's an investor resources section of its website Www Dot sixth Street specialty lending dotcom.

<unk> should be reviewed in conjunction with the company's form 10-Q filed yesterday with the FCC.

Extreme, especially when the Inc.'s earnings releases also build on the company's website under the Investor Resources section.

Unless noted otherwise Oprah folks figures mentioned that today's prepared remarks or is it for the second quarter ended June 32020, as a reminder to call. This they recorded for replay purposes.

I'll now turn the call Overdubs, Josh easterly Chief Executive Officer, and Sixthree specialty lending Inc.

Thank you good morning, everyone and thank you for joining up.

With me today, it's my partner present, both family our CFO incident.

We and everyone here at Sixthree Hope you in your loved ones are able to stay safe and healthy.

Uncertain environment, we spoken May I hope, it's been that by August they would been.

There would be more clarity in the past and timeline of returned to full business activity.

However, the current health crisis continues to take a toll on human lives as was the economic health of households, and businesses around the world well, the sad and U.S. government and provide a rapid extraordinary fiscal and monetary support remains to be seeing how long a return to normalcy will take and what the long term impact of cold.

Good will ultimately be.

Sure stakeholder letter left in two weeks ago.

Always believed that any business model, including the BDC model has inherent constrain constraints in risks. These risks may get fried. Please rest make it fragile and particularly vulnerable to market shocks certainty that is why.

Over the last years, we've taken steps across our business not only to mitigate the on desired outcomes are then here for Jody, but also to allow us to create value in periods of volatility.

These elements we've introduced into our business model include a focus on high quality underwriting.

Cycle, probably a portfolio construction.

Matched funding.

Match funding the nature of our liabilities with our assets proactively, meaning journal liquidity and liability will risk setting up the financial policy that preserves our reinvestment option and finding the optimal business small to provide both the benefits of scale and outsize returns for our stakeholders, while still early unfolding.

This covenant is downturn, we believe that the strength or Q2 as old as an early indication of the value.

We can create for stakeholders in the period ahead.

With that let me turn this quarter's highlights.

<unk>, which are consistent with the preliminary earnings results. We provided on July 20 Threerd.

After market closed yesterday, we reported second quarter net investment income of 59 cents against for Q2 based seven net 41 cents.

Net income per share of Q2 was $1.43.

These results correspond to an annualized return of equity on net investment income and net income of 15.6, 38% respectively.

Annualized year to date return on equity.

On the net investment income and net income of 13.17, 0.6% respectively.

Net investment income this quarter was reported.

Sported well supported by elevated prepayment other fee activity in our portfolio, most notably our realized investment apparel gas.

Our strong two extra are strong and income this quarter was primarily due to the unrealized gains related to the impact of market spreads tightening during this quarter as was a robust net investment income.

Over the course of Q2, LCD first lien and secondly spreads retraced 60, 71% of the respective Q1 spread widening.

Consistent with that broadly syndicated market the impact of this on valuation or portfolio. This quarter result, any reversal of approximately 60% over Q1.

Spread related unrealized losses, which was reflected as an unrealized unrealized gain for Q2.

Net asset value per share with 16 zero eight increasing by 6.7% more pro forma.

March 31st net asset value per share 15 of seven which accounts for the impact of the 50 cents aggregate special dividends per share that was paid during Q2.

I will walk you walk through the quarters net asset value bridge in more detail.

Taking a step back our net asset value per share at quarter end, if we would add back or 50 cents per share of special dividends paid to shareholders in Q2 would be 16 58.

Great with almost entirely back to our starting level of 16 77 at the beginning the year, even though our spread related unrealized losses have only been with.

Reversed by 60%.

This is because we've been able to rebuild net asset value in other ways, including through the over earning of our base eminent outperformance of the some of our small equity positions and unrealized mark to market gains on our interest rate swaps.

Yesterday, our board declared a third quarter based stepping up 41 cents per share to shareholders of record as of September 15th payable on October 15.

Consistent with what we said last quarter.

Based on a view the core earnings power of our portfolio, we do not anticipate making any changes to our base different level in the near and medium term.

There are no supplemental dividends declared relating to Q2 earnings as a result at the net asset value tests in our framework.

With specifies that no several of the supplemental difference or declared a pro forma net asset value per share adjusted for the impact of any supplemental dividends over the current and preceding quarter declined by more than 15 cents per share.

Any downward impact and net asset value as a result of special dividends.

Not supplemental dividends are added back for the purpose of the net asset value test.

If we compare this quarters net asset value per share, adding back or 50 cents per share of special dividends.

16, 58 against Q4 2009 pro forma net asset value of 16 77, there was 19 cents of NAV per share decline against limit or a 15 cents. Therefore, we are four cents short of being able to declare a supplemental dividend 50 cents of the scores over earnings based on our current.

Outlook in pursuing no material that clients are net asset value pressure as a result.

The Andreas.

Vince.

Like the market volatility we observed in March we would expect the reason we assume declaring supplemental dividends on over earnings in Q3 provided that are reported net asset value per share at September Thirtyth is greater 14 92.

With that like the turn the call over to both to walk through activity in health of our portfolio in more detail.

Thanks, Josh I'll begin with a quick overview our market backdrop during the quarter.

Amid economic uncertainty M&A activity continued to be significantly muted as buyers and sellers struggled to agree on valuations.

Meanwhile, in the second quarter, there was significant tightening of risk premiums on a broader credit markets.

A disconnect Americas between asset prices and economic reality, which we believe was primarily fueled by extensive sat and government intervention driving investor demand back into risk assets.

As a result secondary prices across credit rose sharply in Q2, and then an abundant liquidity and investment grade and high yield markets for a broad variety of issuers, including those in sectors most impacted by cold.

In light of these market dynamics, given our focus on maintaining strong risk adjusted returns across our portfolio Q2 originations activity.

Relatively light and $89 million them commitments and $77 million a fundings.

These findings were across six new.

Six existing portfolio companies.

The majority of our fundings on a dollar basis. This quarter was providing a new financing in connection with the recapitalization of Moran foods replaced our existing JBL loan with a new one at a higher spread and refreshed call protection.

Other new investments, including small opportunistic purchases of triple B yellow liabilities and limited junior debt co investments alongside our affiliated funds and growth businesses with attractive risk adjusted returns.

As a result, our portfolios first lien exposure decreased slightly from 97% to 96% quarter over quarter on a fair value basis.

Repayments during Q2 total $211 million across three full and two partial pay downs.

Okay, So nexstar, which were our two largest portfolio names at the end of Q1.

We're both fully repaid early in the quarter as a result, net repayment activity for the quarter was $134 million.

During the quarter as M&A activity slowed in the immediate opportunity set for our secondary market purchases and rescue financings became less actionable given fed intervention. Our team continued to work hard to build a pipeline of opportunities, where we can create value through our core competencies deep sector expertise and the ability to underwrite complex.

Okay.

As we previewed in our wetter on July 20 Threerd.

We've been active in capital going up post quarter on as of today Q2, fundings total approximately $135 million, primarily led by two new investments.

In broad strokes, our reputation of creative solutions providers, particularly amongst participants within our sector themes, but important role and sourcing of these investments are due diligence and underwriting capabilities along with the skilled solutions were able to offer as part of the 34 billion dollar sixth Street platform allowed us to structure.

Investments with attractive spreads strong call protection and other fees that enhances the overall risk adjusted return profile of our portfolio.

Today, we continue to have a robust pipeline, which were constantly working to build through our direct sourcing channels. Looking ahead, we believe the competitive advantage of our human capital will become increasingly evident as a financing solutions Soundbite company management teams and sponsors will only grow and complexity in this uncertain environment.

As it relates to our portfolio quarter on the overall performance of our portfolio continues to be saw with approximately 98% rated one or two on a performance rating scale of one to five with one being the highest.

And minimal non accruals at approximately 0.4% of the portfolio on a fair value basis, representing three investments.

To revisit Josh his introductory remarks, we have long recognized the inherent trajectory of the left hand side over the balance sheet.

Our assets are callable loans, which means that the investments where we are over earning due to borrow outperformance or check what are the ones to get called away in periods of volatility when credit spreads widen the value of our assets tend to decline.

In order to combat the fragile elements are left side of our balance sheet. We have over the years focus on strong underwriting discipline in defense and portfolio construction, which includes sector business model and management team selection.

We believe these efforts have played a role in the performance of our portfolio. Today, However may be remiss not the highlight our portfolio companies high quality management teams, who took quick action at the onset of cobot.

Optimized cost structures and protect their liquidity positions.

Albeit still early our portfolios performed above our expectations given the macro backdrop.

The slight increase in this quarter's nonaccruals from approximately 0.1% to your 0.4% of the portfolio by fair value at quarter end was driven by our Neiman Marcus first new term loan not already be I'll follow term loan.

And the residual non debt roll up portions.

Of our JC Penney first lien term loans unsecured notes.

Given what we believe may be less than par recovery, we have applied the regularly scheduled cash interest payments, we received during the quarter to be amortized cost of our positions all of which were acquired at prices less than <unk>.

As we covered in our preliminary release in July our retail exposure corner on stable from prior quarter at 9.4% loan portfolio at fair value.

99%, Ryan Foods, and Staples businesses that were generally deemed as essential Doron Covance shutdown continued to benefit from Tailwinds My current environment and together represent 44.5% of our retail ABL exposure at quarter end.

Our largest retail exposure as a follow term loan of Neiman, Marcus which was 3.6% of our portfolio at fair value at quarter end.

Our current expectation based on the company's plan of reorganization and case milestones is that we'll be refinance upon neiman Marcus exit from bankruptcy, which is expected to occur in the fall of 2020.

With six street as lenders of size in each of Niemann and JC penney's pre petition capital structures, we are able to have meaningful roles and driving the dip financing process in terms.

As a result, we believe our 11.5 million dollar par value dip loan for Niemann, our 6 million dollar par value dip loan for JC Penney at quarter end offer attractive risk adjusted returns given the structural protection of dip loans in combination with our contractual economics.

Our portfolios energy exposure at quarter end was 3.9% at fair value.

It's fall into 2.8% on a pro forma basis, given partial pay downs onboard at an energy alloys post quarter end.

We expect to be fully repaid on energy alloys. During Q4 2020, as a company can cleats and out of court wind down to be a liquidation of its assets.

Our portfolio composition and credit stats for Q2 remained relatively stable from prior quarter top industry exposures continue to be business services, a 22% portfolio at fair value, followed by financial services and health care and approximately 17, 11% respectively.

Based on the financial information through March 31st our core portfolio companies. The average net attachment point at last dollar average.

4.4 times, and 4.3 times compared to 0.3 times and 4.1 times respectively.

Our average interest cover ratio was 3.3 times compared to 3.2 times in the prior quarter.

We would caveat that these figures given the timing lag and trailing nature do not fully reflect the impact of economic shutdown that persisted through most of Q2. However, based on an ongoing engagement with borrowers we do not expect a material deterioration of credit metrics across our portfolio in the near term.

This quarter, our out of our portfolio of 65 names.

We had only one investment outstanding or the retail sector. Once we discussed earlier.

An amendment with Covance cited as a direct costs.

To the extent state Reopenings, our path or reversed.

I'd expect that this figure is the increase in order to provide our borrowings with additional flexibility on covenants as of today, we do not expect any defaults on debt service obligations in the near term.

Now onto our portfolio yields.

The weighted average total yield on our debt and income producing securities at amortized cost increased by approximately 10 basis points quarter over quarter to 10%.

Breaking this down there were 15 basis points of yield up lift from the impact of new and exited investments this quarter and 10 basis points uplift from the impact of amendments.

These were partially offset by 15 basis points downward yield impact from the movement in LIBOR prior to it reaching our average floors of 115 basis points across our floating rate assets.

Quarter over quarter with a weighted average spread over the three month LIBOR floating rate investments increased by 100 basis points almost entirely due to the benefit of our LIBOR floors.

With that I'd like to turn it over to Ian.

Thank you got.

I'll begin with an overview of our balance sheet total investments at fair value decreased slightly from 2.05 billion to one quite nice quarter over quarter, primarily due to net repayment activity in our portfolio, partially offset by the positive valuation impact of tightening credit spreads on the fair value of our investment.

It'll principal amount of debt outstanding 875 million and net assets 1.0 billion or 16 cents per share.

Average debt equity ratio was 0.87 times and our ending debt to equity ratio was 0.81 times down from 0.96 times in the prior quarter.

Quarter end, we had 1.0 billion of liquidity under our revolver against 73 million of unfunded portfolio company commitments available to be drawn.

Given the net funding activity thus far in Q3, a leverage today is approximately <unk> 0.91 times and liquidity stands at 975 million with an estimated not 75 million of unfunded portfolio company commitments available to be drawn.

In our recent led to stay told US we discussed at length is the structural limitations that make the BDC model innately fragile to review. These include the requirement to be locally the need to be fully invested in order to generate a dividend level that the market expects.

And the fact that there are limitless alpha generating direct middle market lending opportunities.

This is further complicated by strict regulatory requirements and the mark to market valuation framework.

I will discuss the elements we've introduced to the left hand side of our balance sheet to address the inherent fragility of out business model and I will now cover our assets on the right hand side of the balance sheet.

As risk managers and capital solutions providers, we believe paying for the option on liquidity during periods of low volatility is critical in our ability to operate and create value for both stakeholders and clients in periods of high volatility.

At quarter end.

Liquidity represented approximately 54% about total assets and we had nearly 15 times coverage on our unfunded commitments available to be drawn by a bar was based on contractual requirements in the underlying loan agreements.

This compares to a peer median of approximately five times at March 31st.

How robust liquidity combined without financial leverage of 0.91 to that tons. Today means that we have substantial investment capacity and flexibility during these uncertain times.

To put some numbers around the cost of our option on liquidity.

Our revolver was sized to have only five times coverage of our unfunded commitments at quarter end similar to the median of LP is we would have picked up approximately 25 basis points of our OE on an annualized basis or approximately $2.6 million.

However, through our ability to be opportunistic in both new portfolio investments and investments in our own capital structure in the past few months. We believe we have already realized a return on this investment.

During the quarter, given our strong liquidity position, we were able to opportunistically purchase 29.7 million principal amount about 2022 convertible notes and 2.5 million principal amount about 2024 nodes at prices below par.

Concurrent with these purchases we permanent sized a portion of the unrealized mark to market gains on the interest rate swaps corresponding to those notes by effectively canceling pro rata portions of our swaps.

Taking these gains into account now weighted average purchase price on the combined 32.2 million of notes was approximately 94%.

To put this into perspective, the benefits of these purchases alone, namely our gains on the swaps and the reduction to our blended blended cost of debt covered the majority of our cost of the option for liquidity on the entire year.

Moving on to address the size and access constraints that bdcs face in the funding markets. We've also been paying for insurance to mitigate our refinancing risk.

We extended the maturity of our five year revolver every 12 to 15 months and Opportunistically issued notes in the unsecured markets to create a diverse funding profile with staggered long term maturities.

Our next maturity as approximately two years away at only 143 million principal amount.

Now funding mix at quarter end was comprised of 73% unsecured and 27% secured debt.

The average remaining lots of their investments funded with debt was 2.2 years compared to a weighted average remaining maturity on our debt commitments of 4.2 years at the end of Q2.

With respect to out fixed rate liabilities, we continue to use interest rate swaps to match, our liabilities with the predominantly floating rate nature of our assets.

In periods of economic uncertainty, which typically can coincide with falling rate environments. These swaps have enhanced our capital liquidity and earnings profile.

At quarter end, we had approximately $34 million of unrealized.

Gains on that interest rate swaps.

Of which 50 million was embedded in our Navy.

The remainder was reflected in the carrying value of that 2024 unsecured notes at quarter end, given the application of hedge accounting on swaps associated with those notes.

Turning to our presentation materials slide eight is the end Ivy bridge for the quarter.

As Josh mentioned the impact of credit spread tightening on the valuation of our portfolio was a significant driver of and Navy movement. This quarter with unrealized gains of 72 cents per share.

Walking through the other drivers of anything movement. This quarter, we added 59 cents per share from net investment income against the base dividend of 41 cents per se.

There was a 15 cents per share reduction to in AG as we reversed net unrealized gains on the balance sheet related to investment realizations and recognize these games into this quarter net investment income.

Other changes resulted in a positive 25 cents machine that impacted this code is in a beat this was primarily driven by unrealized gains related to some of our equity position.

Moving to the income statement on slide nine total investment income.

<unk> point 2 million compared to 66.3 million in the prior quarter.

This was driven by other fees, which consists of prepayment fees and accelerated amortization of upfront already amortization of upfront fees from unscheduled pay downs of 14.3 million compared to 7.6 million in the prior quarter.

The largest driver of this quarter's fees was federal gas.

Other income increased to 6.5 million compared to 2.8 million in the prior quarter.

Interest and dividend income was 49.5 million down 6.4 million from the prior quarter due to the decrease in the average size of that portfolio.

It was also due to the impact of a falling libel, which was mitigated by the average flows across our floating rate debt.

Net expenses decreased by 1.8 million quarter over quarter to 29.8 million, primarily driven by lower interest expense from a lower effective libel and a decrease in our average debt outstanding.

This quarter is weighted average cost of debt outstanding decreased by approximately 60 basis points to 3.3%.

Acting the decrease in the effective landlord out debt outstanding as well as a small accretive impact of our opportunistic notes repurchases.

Given the one quota timing lag on the libel reset date for our interest rate swaps, we have relatively good visibility into cost of debt for the quarter ahead.

As we think about on net interest margin for Q3 and beyond so long as libel remains below the average floors on our assets any incremental declines in libel will benefit our cost of debt and flow directly to our net interest margin for any given level of asset yields and leverage.

Assuming an average leverage for Q3 inline with our current level of <unk> 0.91 times and based on that Q2 asset level yields we would expect net interest margin expansion for Q3 of approximately 90 basis points.

This would imply a year over year net interest expansion in EM business of approximately 115 basis points.

Unlike most of the LP is with and swapped fixed rate liabilities that a likely experiencing net interest margin compression in this low rate environment, we have being able to enhance the in its power about portfolio in this period of economic uncertainty.

On this node, let me wrap up with an update on our earnings guidance for the remainder of the year.

Given our results the first half of 2020 and our current outlook, we would expect a full year net investment income per share to be on the upper end about previously communicated range of $1.84 to $2 anymore.

Given the strength of our pipeline and the prospects the higher asset level yields given now capabilities of some solutions provider in this environment, we feel good about our ability to continue generating attractive our lease for the period ahead.

With that I'd like to turn it back to Josh for concluding remarks.

Thank you and while we're pleased with our Q2 results Im proud of what the team has been able to accomplish that date in these challenging times, we're operating with the mindset that there will be prolong economic challenges ahead of.

However, our deliberate effort and creative business now is survives volatility and uncertainty, but thrives on that continues to result in small wins.

Hindsight is always 2020.

Therefore, we are continuing to continually learning along the way we will continue to evolve and refine are thinking in our processes to create differentiated business model experience for our stakeholders in our clients.

Before moving to Q nay like to spend a moment to reflect the impact of cobot our communities.

When we take a setback it's evident the economic fought the pandemic has had a disproportional impact or people with lower incomes less job security those lacking caregiver flexibility.

I agree aggressive impact of Cove. It was magnified by the inherent in a qualities racial gender socioeconomic didn't even if you haven't built into our situtions overtime.

As a result.

In a business that strives to be leaders and our communities. We can't help fill an imperative that sport change help create a better and more inclusive society.

Over the past few months in addition to China facilitate honest conversations with our teams on these topics.

Fixed rate has been contributing resources to organizations addressing inequality as well those directly counteracting cope with economic impact.

We've also been for sometime now exploring ways to addressing underrepresentation unfinanced recruiting in business partnership efforts.

We think a silver lining of code is that these issues of inequality are being brought to the forefront and we will continue doing our part as an organization to be nature to change with that I'd like to thank you for your continued to address and your support today operator, Please open the lines for questions.

As a reminder to ask a question. Please press Star then one are you touched on telephone to withdraw your question press the pound key piece Dunbar will need composites you any roster.

Our first question comes from Rick Shane with Jpmorgan. Your line is open.

Good morning, guys and thanks for taking my questions I'm glad everybody's doing well.

I want to talk to you little bit about your relative cost capital versus peers and your relative multiple.

In general you think of cost of capital on absolute basis.

In terms of your investment strategy.

But right now youre relative advantages are so significant I'm wondering how you.

You think about monetizing is it through the possibility of acquisition is it through growth in a period when you're here can't necessarily grower offsets capital in the same way.

Okay.

Hey, Rick Good morning, Thanks for the question.

So look I don't think we get caught up in moment, a moment in a moment looking at our cost of capital.

We have a view of the world which is.

The market will tell you our cost of the Mark will tell us or cost of capital, but that will fluctuate during times of so we try to look at our cost of capital across cycles.

On the M&A front.

I think it's very hard or.

At this moment in time to get any accretive it made done.

Historically, the only kind of M&A. This in the BDC space has either been very very small.

Externally managed bdcs that have.

Really really deep credit problems.

Where we're at the time, we have done work.

We don't feel that the that the that kind of the valuation.

We think the market valuation is kind of reasonable to reflect those credit problems or on internally managed bdcs.

Where it's easier to get something done quite frankly, there's not that many scaled internally managed bdcs left.

So I think as we think about the path forward to create value for stakeholders.

On a go forward basis.

You is continuing to buying high risk adjusted return.

Opportunities to put our balance sheet to work.

And you know.

We'll see if and I think that ultimately the path for value creation, and that's kind of in our north star since inception, and I think it's worked pretty well for stakeholders. So I think what were most definitely in the latter camp.

This is a former cam.

That the value creation path going forward.

Got it had a spending between latter former because there.

Yeah, but organically the organic growth putting capital work in high risk adjusted opportunities.

Where are where our competitors are more capital constrained and we're not capital constrained versus.

Versus.

The integration Ache acquisition path.

Got it okay I appreciate that.

To some extent.

Obviously your financial problems, but if you think about it in context of being a manufacturing business you will make loans and right now.

It's been persisting, but I think right now is more disparate than it's been a data point.

A lot higher your cost of goods sold so advantageous versus your peers I'm just wondering a bill.

More aggressive ways to take advantage of.

Yeah, I mean, just to be on like if it's a little bit circular I think I think our cost.

Of goods sold so our cost of capital.

As low on a relative basis because.

The market Phoenix, we are a very prudent allocators of capital.

And that we that we try to build in a large margin of safety.

As it relates to the assets for creating versus our cost of goods sold I have high gross margin and when things go get go wrong, we saw able to create high returns on capital I think the the more you lean into the Hey, I'm Super low on the cost curve.

The more you will probably end up eroding that that relative advantage.

If that makes sense.

It absolutely does.

Again.

Understanding what.

Motivates you guys.

And then sense you.

Helps us understand sort of where you're going on exotic losses. So thank you.

Right.

Thanks, Rick.

Our next question has a line Lynch with KBW. Your line is open.

Hey, good morning, Thanks for taking my questions.

First off I really appreciate that the shareholder letter that you guys provided that was very thoughtful in informative. So thank you for that.

So some of your comments earlier, you mentioned that that M&A has has been really muted and then the market, which is pressured market activity as.

Buyers and sellers Chicago until a Korean on valuation, but then you also mentioned that.

Your you have a robust pipeline today and so I'm just wondering.

What has really changed in the marketplace to grow your your pipeline.

Has there been more market activity generally speaking.

Are you guys, just just getting better hit rates on on on some of that you guys are up or are.

Searching for as well as can you kind of clarify when you talk about a robust tight why are you talking about just you know the potential for deal activity to pick out from that that.

You talking about the pipeline returning to levels more seen in 2019.

Sure Thanks and.

Yeah as I mentioned I think were.

Urged by both the GAAP and call it the pipeline.

Recently and it really is.

Channel.

Let me focus on so direct the company.

And now we're starting to see some sponsor led opportunistic M&A activity. So were encouraged to see that.

I will say.

You know as compared to Q2, where there was a pipeline the quality is getting better.

So we're we're continuing to be selective in will always be selective and really focused our capital on the opportunities that we think our best for our shareholders, but it is across each of those channels, we're not seeing yet as a lot of you platform M&A from from sponsors rather more opportunity.

Dick.

M&A from existing clat portfolio companies, but still again I think the quality from what we saw.

Q2, but really throughout the United team.

Mhm.

Do you guys had a are you guys have a preference or do you guys aber in this environment.

More deep value sort of rescue financing deals.

Given just the tumultuous market backdrop, and I would assume that those opportunities are probably going out.

From a quite a bit and you can get obviously extremely good good pricing and terms or would you guys wanted more of the names.

A more secular grower stories coming.

Companies that are don't haven't really bad affected by by the coal that downturn, but obviously the structures in terms in those aren't marketing.

Favorable you guys had a preference.

We really don't have a preference I think the beauty of the platform is that the the expertise of our people and.

It goes across each of those each of those channels. We're obviously very active.

Rescue financings were kind of a time when we think the opportunity set is this is good.

We also like to pursue growth opportunities for businesses growing.

The GDP secular tailwinds and tend to another downturns.

Economic downturns better so.

We really focus the opportunities.

Based on like core comp phases of our team which is very diverse.

Okay Fair enough and then just just one last one.

You mentioned, you know really owning one investment outside of the two retail once you talked about asking.

And our net net.

Don't expect any.

New defaults.

In the near term I mean, that's that's surprising, but obviously in a very positive way.

You guys have.

A lot of confidence in your portfolio going forward can you just talk about what the that assertion you guys made what is the economic backdrop.

Do you guys are using as a base case to terminate that assertion.

And from a higher level.

Why do you think that your portfolio has held up so well and perform so much better than other bdcs, thus far in this.

Hey, Paul Let me have let me hit some of that and you can start benefits you can Joanne look I think I think when you look at our portfolio. We didnt have we had very we had a fair amount of cyclical exposure.

And cyclical business models typically have high fixed cost.

And so.

That we avoided kind of the typical cyclical business model generally when you look at our top three industries, which include business services.

Financial services, but really fantastic.

And health care, which is really either form a royalty financing or or.

For.

Or health care I T. You just had you those typically had variable cost structures and.

Strong kind of less cyclical exposure on strong strong secular tailwinds and so to me it was just.

Most of the.

Outside of retail, which obviously has been impacted.

We were just set up to have a.

Cycle, we would call late cycle minded portfolio construction or cycle appropriate portfolio construction be that might change over time.

And so what do we look at our portfolio, it's really a bottoms up view birth of a top down view I.E. slow recovery V shape U shape, it's really how these companies doing what are the footwear what are their forecasts.

Are those realistic forecast and so our view is really a bottoms up view I don't know bow or or fish fishy or any of anything to add but if it was really just business model and sector exposure.

That's exactly right I don't have a lot that I think you know that we also had an as we mentioned during the script.

As you know we had a lot of.

Really high quality management teams, that's focused on liquidity and appropriate cost structure here early in the cycle.

That does it created to 200 benefit as well.

Okay understood I appreciate the time, so that those are all my questions.

Thanks Ryan.

Thank you. Our next question comes from Finian O'shea with Wells Fargo Securities. Your line is open.

Hi, good morning, guys.

[music].

Korea.

So first question on new deals this quarter.

There were a couple that are picked paying.

Service Channel Sprinkler I believe.

You historically shied away from that.

Reasonably so for the BDC structure, but.

What makes these more suitable are safer than than opportunities that might.

Very attractive if it weren't for their picked structure.

Yes, so look yes, all acts and affiliated funds that are growth platform.

Originals investments and quite frankly, you hit it on the they own the ahead.

Given that the underlying business models that were growing at.

Significant rates and that the the capital requirements where that growth.

We we did a we did structures that allowed the pack.

We're route will really bullish on the company's really bullish in the markets they serve.

Really bullish on the management teams. Unfortunately that the BD that that fixed rate specialty lending only can take small amounts given we have a policy about.

How much have we're willing to have in the book and so if if if those structures, where we're not pick structures. We would have had a you know we would've had significantly more appetite.

For those in the BDC.

But you know given our financial policy and given our risks limitations around pack.

Yes, there were relatively small size in what was the well I think there each like you know kind of five or 7 million bucks or something like that.

That's right.

So then that bad.

So do you have anything to add there.

No you hit it on ahead.

I think sprinkler was 3.75 million and it was a convertible note.

And service channel was a 5 million dollar.

Investment at 12% Peck again, those those those were much larger deals we have but we thought they were very very high risk adjusted returns.

Quite frankly, those both companies might need.

More capital in the future.

That have a that that or they're not pick nature when they when growth slows and then become more mature.

And quite frankly, one of the reasons why we actually made the co invest even small size is if if if they if if you. If we were in those capital structures, we would not be able to provide those financings on a go forward basis, when they become appropriate for the BDC given that the the.

Rolls around.

Any transactions and avoid transactions.

With affiliated funds.

And so there.

We love them as a standalone.

Investment, we also think thats going to be opportunities, but more capital in that or that are more appropriate for the BDC going forward.

Okay. Thank you and I.

Another portfolio name.

[music].

Average exchange you've had that for a while they think the growth platform also took part in a in an equity round or.

You know I'm not sure if there's a few capital structures there.

But the BDC you got to a very small piece of that this too it looks like can you give us some color on the nature of that capital raise and and why the very small BDC allocation.

Thanks, So there was a BOE quickly run through I think are two pieces there was a.

It was a staple financing between a senior secured senior secured facility and a.

Redeemable craft with warrants cracked though.

Correct.

New and they were a stress and so the redeemable pref with Warren.

That was much larger than the senior secured facility. So again that the exact same considerations.

The exact same considerations.

That we discussed before I have exchange is actually a kind of a more mature business.

B to B payment space.

But much more mature business, but.

Again, it came down to a having the right having being appropriate.

For the BDC, which has a cash pay dividend as a liability that we're always thoughtful about.

That's right the only thing that I would add as you know that's that's a business that nurown.

Since 2015, because excellent risk reward, but again sized appropriately given the pik component.

Okay. That's all for me thanks, so much.

Thanks.

Thank you. Our next question comes from Robert Dodd Raymond James Your line is open.

Hi, Good morning, Good morning, guys I'm, just kind of general question I mean, obviously in the prepared remarks, you brought up or at least for the amount of steam near US. That's that's been put in.

That's one of the contributing factors to to spreads retracing. So much of the widening they went to before so it is.

Obviously, the spend a bit 20 be on that.

What do you think the Miss Sal given how much private capital, but still is out there has been a little baptism of is also the scope that issue that those spreads continue to meet face two two and a benefit but potentially to the opportunity.

He sets getting.

Excessively competitive again, that's what was yeah.

Last year, but before we had.

This this cope with that.

Yeah. So you you hit it right as you always do the good news of the Bad news the good news is.

The the with the spread retracing, the there's been a benefit to NAV benefit of.

The capital in the BDC space, a benefit to people not getting closed out you know.

Stakeholders that getting close other option I am having issues with from a regulatory framework or from from lenders. The space. That's a good news. The bad news is is a question of how the truncated.

That coupled with the amount of private credit dry powder ASIC truncated. They go forward opportunity I think is that the question.

Yes Yep.

I I would look I I would say, it's if it surely you know if it is most definitely you know I want to say, we're competitive as a lot less competitive than though is in a year ago.

We actually saw when you look at the data you actually saw yields absolute yields not only on a spread basis, but actually come up quarter over quarter I think in our book and so you know I think in new so I think last yield amortized cost last quarter was nine nine.

Is that 10, if at 10% on a spread basis a against Livewatch is much wider the new investors we put in in Q.

We've put in Q3 to date have been much wider and so you know it.

Surely not you know if it I don't think it's been.

Surely not what it would have been if the fed hadn't step Dan.

No would have been I'd kind of issues across you know the BDC space I think and across.

Generally across risk assets at the fed Dennis that Ben.

I think we would have been very well positioned to take advantage of that but you know we would have had less investment capacity, we would have been more concerned about liquidity.

So I you know I think you know if it.

If it is what it is I don't think that there is the opic. The go forward opportunities that at least what we're seeing today has been completely truncated and we feel like there's probably some good operators. There is some good opportunity out there and you know we've we've executed on that in Q3.

Got it.

You might have anything that fishy, Oh, I wish I felt fishing in the mix just thinking about.

He is on the West Coast, Oh, I am nothing.

Thanks, Matt value added fish.

[laughter] like in that kind of life. It takes a little bit maybe because to your point spreads widened in Q3, but the biggest investment in Q2. The was the extension of Oh, the new all if you will have the out with Hussein.

So that misplaced.

So is that well is is the opportunity set given ABS financing is a much more specialized labor intensive business I mean is that.

Well, the spreads and yields staying wide buses in the traditional cashcall lending.

Such that it is given given you. The activity is that is that going to be an increased divergence between.

Valuable that turns in color, but especially the book of business a commodity lending book and should we expect maybe the A.B.L. book to grow faster.

Result.

I think I think that's that's a effect.

Good question. So what I would say is is that we made two large investments in Q3 one was.

ABL deal.

We will financing.

And one was a which quite frankly had had a.

Very much widespread.

It was complicated have very much wider spreads historically available and then one was a you know.

We don't call if the cash flow own although it's that company that has high recurring revenue embedded.

Your p. like embedded in their customer base. So we think are the second way out and so it's not it you know and so we don't think about we're not pure cash flow lenders in that sense that that that loan we had.

We got warrants I think both quickly if I'm wrong, 7% accompanying struck at the money.

And so and.

It was done at probably 200 150 to 200 basis points wider with more call protection than what would have done been done pre coated.

And so you know Oh, I look I think you're going to see.

Why wider spreads across credit asset classes and quite frankly, if if if if lenders are not pricing itself with wider spreads.

There there are effectively telling their investor base and telling their stake holders that they see no uncertainty in the world.

There is no like wider spreads are to compensate us they come to compensate investors for uncertainty and I can't imagine anybody in the world if they're being disciplined as it relates allocating capital doesn't think that insert uncertainty has increased significantly.

The over the last six months.

And so I I expect that you'll see wider spreads are you should see wider spreads if people are doing their jobs and being fiduciary.

Two there to their stakeholders across across the opportunities that my guess is on the margin you're going to see wider spreads.

With the wider spreads for specialized.

And it for specialized have lending opportunities or where there is complexity, you'll see more drastic.

Because people when they already have problems in their book don't want to take on more kind of problems through complexity.

But you know I I it would be.

It would it would it would be shocking to me if people order or you know trying not to the our pricing the same things as competitive as there were a year ago a year ago. There was a lot less.

Uncertainty and again you got it you got to get you got you got to get paid for the second World War and.

Oh I appreciate the color Josh Thank you yeah.

Thank you. Our next question comes from Mickey Schleien Ladenburg. Your line is open.

Yes, good morning, everyone I'm glad to hear you are doing well like I sort of want to follow up on Robert's question and ask you about the market stone Josh.

We're we're obviously in a yield hungry world and there's a lot of capital, which is form to invest in private debt and disintermediate the banks and when we look at the forward LIBOR curve, which has been wrong. Many times. Nevertheless, it implies that very low interest rates will persist for years.

But like we've all talked about this morning loan spreads are tightening again.

GDP looks like it'll bounce back a lot into third quarter.

With the economies were opening obviously from very poor results in the first half of the year, but but after that the forecast looks pretty weak, which could keep the fed from tightening again. So this scenario to me it seems to point to continued pressure on portfolio and yields.

A lot of that has been in place for awhile, but as you pointed out you generally maintained excellent portfolio yields. So I just like to step back for a moment and ask what factors in your origination process and perhaps your relationships provide use the ability to generate the loan.

Terms that we see particularly the fee structures that have helped to mitigate that pressure like we saw with feral gas this quarter.

Yeah. So look I think a what will willing to I think there's a couple different pieces of our business. Good question Mickey.

First one is is like we have really deep accurate expertise in some sectors.

And we're involved in those sectors were involved in those ecosystems.

And so I think as it relates to those as it relates that piece of our business.

We will.

You know our Counterparties I don't think where commodity lender. They think thinking you know as speed is or did the because we have deep knowledge and other nuances of how those industries and how those ecosystems work.

And so I think that's most definitely been helpful on our sponsor business.

The second thing is is that we're not any you know we're not in the asset gathering game like war and the creating returns.

Serving our clients and return and creating returns for our stakeholders game and so I think part of part of the.

Part of the spread widening I mean as far as spread tightening over time as people.

Or or competitors or the industry.

Growing much faster than that then then they actual true demand for capital from GDP and you've seen this and when you see we look at historically over time right. The corporate sector has as as as massively levered.

That corporate debt has grown faster than GDP and so you know.

Asset managers have you know leaned into growing assets.

And they have traded growing assets for.

Creating high Stakes stockholder returns.

And so we truly have a different model on that front and just if people haven't looked at at the corporate sector had.

It can be really interesting and actually this is why I think that's why I'm quite bullish on the opportunities that if you look up through 2007 pretty well financially crisis that the corporate sector had a lot less GDP than it did a at the corporate corporate as a percentage of GDP was a lot less than it did pre cove it.

So the corporate sector started the cycle much more levered and quite frankly as it has issued much more debt.

And post Cove, Ed then possible financial crisis, and so you're going to end up with a massively over levered corporate sector when things settle allow with what I would expect to be relatively anemic growth, especially if you look at the LIBOR curve.

And you know, which to me will create an opportunity for providing creative financings.

Whether its complexity.

And then outside the sector expertise outside of our desire not to grow the business, but you know kind of shade creative stakeholder returns and serving our clients we're willing to deal with complexity.

And other way that is that is really.

A.

Not a great investment from the investment manager standpoint, because those assets tend to turn more you can't build you can you can't stacked.

Assets because of the book Churns, and therefore, you can't grow fees, but they tend to be a great return for shareholders.

We've been willing to do that we'll continue to do that for our stakeholders.

I appreciate that your thought those and so it's a great a philosophy and I.

I really appreciate it in light of what you just said Josh how do you see LIBOR four floors are trending on new deals over time in other words for the most part.

Everyone's deals or or no benefiting from.

Five were floors that were negotiated two or three years ago, but can you elaborate crashed.

Is the market.

Okay, I'll be more accommodative or or lenders, you know sort of sticking to their guns on LIBOR floors.

Look I look I think the if you look at or you know the vintages across or or LIBOR floors to 2020 vintages for LIBOR floors are really no different than 2019.

And post Cove. It is that still the case yeah. Okay. That's good that's good and and quite frankly again like I actually think to.

Rick Shane point as we sit the lowest from the cost curve right in this and effectively we have lower fees, we have lower cost given our floating rate liability structure, where the lowest and the cost curve. So I would I would expect our if things work like the way they should work people should be more phone.

Okay. Then we are and we should have there should be less pressure on on keeping in maintaining net interest margin.

Which we should benefit from because were lower than the cost curve I understand.

Josh in terms of your particular expertise obviously, one area is taking advantage of the tail spend in the brick and mortar retail space and we've seen a number of bankruptcies in the in the last few days and you've been very adept there how do you see competition developing in that segment.

Are there new entrants coming in to try to take advantage and Dislocating deal terms or are you still feel in a position. We think you can get comfortable risk adjusted returns there.

Yes, so the good most definitely more competition. The good news is more supply of opportunity as well yeah [laughter]. So.

In that space.

Quite frankly, that's not good news right. It's obviously very asked me a little bit flip.

It's obviously very you know if it's when you take a big step back and you look at communities and you know there's a lot of hourly workers that are being affected but you know from an opportunity that there's a lot more opportunities.

With slightly more capital formation, but it feels like you know there's pizza risk adjuster continues to be disk de risk adjusted returns are as well.

I understand that's really helpful. Those are all my questions for the this morning I appreciate your time and I wish everyone oil there.

Great. Thank you. Thanks.

Thank you. Our next question comes from Nielsen or you Tito with Delphi capital. Your line is open.

Hi, Yes, I give as much product presentation.

How about two questions.

Last question eat that how many how many loan modification to adopt total blog.

You may last quota and how.

Are you going to deal we loan modification secret I did my a Haas question.

And I think on the question to eat that I'd like to no doubt.

Yeah Man long.

Yes, I'm not quota.

And if you hop.

Loan domain.

I'd like to he ethanol mute the expected to be kabaddi.

Those loans.

Thank you let me answer the second question first so.

The the I would refer you to our schedule investment.

The schedule investments have.

And in BT feed you have to mark about more mark assets, a fair value and so those would incorporate.

Recoveries and timelines those fair values so.

You you.

And on level three assets those are mark the model.