Q1 2021 Sixth Street Specialty Lending Inc Earnings Call
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Ladies and gentlemen of today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
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Good morning, and welcome to the six suites of specialty lending and cooperating.
First quarter ended March 31, 2021 earnings conference call before we begin today's call I would like to remind our listeners that remarks made during this call may contain forward looking statements statements other than statements of historical facts made during this call may constitute forward looking statements and.
Not guarantees of future performance or results and involve a number of risks and uncertainties.
Actual results may differ materially from those and the forward looking statements as a result of a number of factors, including those described from time to time and sixth Street specialty lending incorporated filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward looking statements yes.
It's your day after the market closed the company issued its earnings press release for the first quarter ended March 31, 2021, and posted a presentation to the Investor resource section of its website Www Dot sixth Street specialty lending dotcom and the presentation should be reviewed in conjunction with the company.
Form 10-Q filed yesterday with the SEC.
Six years, especially the lending Incorporated's earnings release is also available on the company's website under the Investor resource section of.
Unless noted otherwise all performance figures mentioned in today's prepared remarks.
Or as of and for the first quarter ended March 31st 2021, as a reminder of this call is being recorded for replay purposes I would now turn the call over to Joshua easterly Chief Executive Officer of sixth Street specialty lending Inc.
Thank you good morning, everyone and thank you for joining us with me.
And my partner and our President.
And both family.
And our CFO.
Okay.
Good day I'll provide highlights of this quarter and the pass.
Discuss this quarters.
The activity and portfolio.
And the metrics.
Yeah.
The financial results.
And for detail.
Yeah.
Before opening the call of the Q&A.
After market close yesterday.
We reported strong first quarter financial results with adjusted net investment income per share of <unk>.
53 cents corresponding to an annualized return of equity of 13.
And adjusted net income per share of 88 cents of corresponding to an annualized return on equity of $22 one per cent.
This quarter, we continued accrued capital gains incentive fee expense related changes and net realized and underway.
The gains and losses.
This noncash expense, which was not paid for is not payable.
Proximately seven cents per share for the quarter.
Our Q1 net investment income and net income per share inclusive of the accrued capital gains.
And the fee expense.
And 46 cents and 81 cents respectively.
Part of it on the impact of these adjustments for a moment as an illustration. If we were the and if we were in.
Of the year as of March 31 of the eight cents per share of cumulative of accrued capital gains incentive fee expenses that we have.
At quarter and would not be paid or payable of since the games and must be realized in order for us to be eligible to receive the fees.
In addition.
It's also worth noting that a portion of these unrealized gains today are weighted to the impact of call protection in the valley.
And of our debt investments, which if realized would be ultimately flow through net investment income and therefore trigger of reversal of associated accrued capital gains incentive fee.
Now back to our results.
The strong net investment income this quarter continues to be a function robust net.
This margin attributable to a floating rate liability structure and this low rate environment and connection with LIBOR floors on our debt investments net investment income.
And also supported by higher interest and dividend income from the increase in the average size of our portfolio as well of fee income from portfolio repayments prepayment activity the.
The difference between this quarter's net investment income and the net income.
Net realized and unrealized gains primarily from the small portion of our portfolio represented by equity investments as well the net unrealized gains from the impact of credit spread tightening and the valuation of our debt investments.
At quarter, and net asset value per share was <unk> 47.
The three 8% from pro forma net asset value per share at year end of 15 to 86 that we discussed on our last earnings call.
As mentioned net realized and unrealized gains from our investments were meaningful contributors to this quarter's net asset value.
Per share growth other contributors included accretion from our follow on equity raise in February and the continued over and you know of our base dividend.
And we'll discuss our net asset value bridge and more detail later on this call.
Yesterday, our board approved the base quarterly dividend of 41 cents per share fish shareholders of record as of June 15th payable on July 15th.
Board also declared of <unk>.
And then all of a dividend of six cents per share based on Q1, adjusted net investment income to shareholders of record as of May 28 payable on June 30th.
Pro forma for the impact of the Q1 and supplemental dividend per quarter, and net asset value per share with <unk>.
The $16 41.
If we were to take a step back and think about how our business has performed through the pandemic one way to do this if you look at the total economic return, which measures the change of net asset value per share plus.
Plus cumulative dividends per share.
Since January and since the year end 2019.
Which which is just part of the onset of the pandemic.
Generated a total economic return of 21, 8% and.
Other lenses to look at.
Total net asset value per share per.
Our share of growth, which in our case should incorporate our of special and supplemental dividends per share.
Since year end 2019, we grew our net asset value per share adjusted for the impact of the special and supplemental dividends by the 95%.
We're pleased that our ongoing focus and building the business model for not not only performance, but thrive and periods of market uncertainty deliver such strong results for our stakeholders.
Importantly over the past share our business model allowed us to provide capital to our portfolio of companies and their management teams and sponsors when many of our competitors weren't able to do so.
In order for them to create value for their their own and respective stakeholders.
Having an enduring business model as part of the regulatory and other constraints of.
For Bdcs and all of it provides value for shareholders, but also allows us to be stable.
Stable and sort of can provider of capital from our portfolio of companies with that and I'll pass it over to Bo and discuss our portfolio activity and metrics.
Thanks, Josh.
Let me start with some observations on the competitive environment and Q1, we continued with continued accommodative of fiscal and monetary policies from the fed and the U S government investor appetite for risk assets remained elevated bolstered by the search for yield and prospects for strong near term growth.
This sentiment was evident and the leveraged loan market where strong demand pushed.
Pushed pricing and terms in favor of borrowers.
During Q1, LCD spreads tightened across the securities and rating spectrum.
All in yields for new issuers, reaching post financial crisis lows.
Liquidity premiums as measured by the spread differential between large corporate and syndicated middle market loans fell to seven year lows.
And the covenant light as the percentage of new loans issued reached a record high of 89%.
And the direct lending market elevated competition from BDC peers, and private funds and with record levels of dry powder of meant that we continued to skew originations activities towards opportunities, where we have clear competitive advantages as the capital provider.
Despite the competitive backdrop, we continued to see borrower demand.
For the financing partners with deep sector expertise and a broad range of underwriting capabilities.
For this quarter, we had $145 million of commitments and $130 million of fundings and these fundings were across two new six upside of those to existing portfolio of companies.
Our new investments this quarter were both first lien loans for mission critical software providers, where the traffic revenue characteristics.
We were also active during the quarter by supporting our existing portfolio companies on their strategic growth and capital needs with nearly 45 per cent of this quarters fundings and serving our existing borrowers.
Our repayments in Q1 and slowed after a busy 2020 of totaling $85 million across four full and three partial investment realizations and sell downs.
This resulted in net funding activity in Q1 of $45 million.
The larger repayments this quarter were predominantly M&A, driven with the exception of our $17 million par value of and even exit term loan.
With a strong market backdrop and late March Neiman issued notes and the high yield market to refinance its ex the term loan which had call protection of one town at the time of repayment.
This call protection. In addition to the acceleration of unamortized OID on our loan contributed meaningfully to our fees this quarter.
Recall on our Q3 2020 earnings call, we disclosed that approximately $4 million of backstop fees related to our exit term loan commitment were booked as OID and that these fees were payable and common stock of.
The reward company.
Post quarter, and we sold our entire Neiman.
Equity position out of price above our 331, mark, thereby fully exiting all of our name and investment.
Looking back we've been a provider of liquidity and transitional capital for the retailers.
For the retailer as its management team navigated through a pandemic and the chapter 11 process.
We believe this has been a fruitful partnership that has a lot of both parties to create value for our respective stakeholders based.
Based on our total capital invested and Neiman and since 2019, we've generated a gross unlevered IRR of approximately 25% on a fully exited investments, which includes the post quarter and sale of T. S. L X the equity position.
Turning now to a quick update on J C. Penney recall that in December upon the company's emergence from chapter 11 of pre petition debt and dip loan positions were converted to non interest paying instruments, but was the rights to immediate and future distributions and cash and all the securities.
During the quarter, our $13 $3 million fair value dip loan position.
Extinguishing connection with the closing of the Propco and recently, we received a small cash distribution along with equity interest and the propco.
At quarter end of Propco equity interest had a level two fair value mark of $18 $1 million.
Across Q1, our J C. Penney investments drove $5 $4 million of net realized and unrealized gains were a positive eight cents per share impact toward and out of this quarter.
At quarter end, our portfolio of retail and consumer exposure was 11, 4% net fair value.
And Neil nearly 80% of this consisted of asset based loans cyclical names, which exclude our asset based retail loans and energy investments continued to be limited at four per cent of the portfolio.
And our energy exposure at quarter and was one seven per cent.
During Q1, our portfolio of first lien composition decreased slightly from 96 per cent to 95% on of fair value basis, and our equity investments increased slightly on a fair value basis due to the combination of our J C. Penney propco.
The interest as well as valuation tier ones and from a robust equity market and M&A environment at quarter and our equity investments represented four three per cent of the portfolio at fair value compared to three 7% and the prior quarter.
And Q1 of our portfolio's weighted average yield on debt and income producing securities of the amortized cost was 10, 1% compared to 10, 2% from the prior quarter.
The slight decrease was primarily driven by the impact of new versus exited investments.
The weighted average yield at amortized cost on new investments were 10, 6% this quarter compared to a yield of 12, 8% on exited investments.
Shifting now to the portfolio and underwriting and credit quality, we continue to be thoughtful about our loan structuring process with the utmost focus on protecting our principal against losses from credit risk and other market factors.
At quarter end.
The average approximately two financial covenants per loan and.
And I had in fact, the effective voting control on 87 per cent of the of our debt investments.
In addition, we continue to have meaningful call protection and LIBOR floors across our debt portfolio.
We believe our financial results over the past 12 months underscore our disciplined underwriting and its importance and driving differentiated outcomes.
From a credit quality standpoint, we continue to see stable to positive performance trends across the the significant majority of our portfolio.
Quarter over quarter non accruals decreased from 0.9%.
Two zero point of view of 2% of the portfolio at fair value.
Following the completion of Americans achievements out of court restructuring.
As previous previewed on our last earnings call. Our first lien loan for American achievement remained outstanding post re org.
And the interest that we received while alone was on non accrual status was applied to our loan principal.
As part of the restructuring of the lender group received the majority stake of the common equity and subordinated notes.
And the restructure of business at quarter and the subordinated notes accounted for all of our outstanding investments on non accrual status at fair value.
This quarter of our portfolio's weighted average performance rating on a scale of one to five with one being the strongest was 1.1 and four improving from 1.18 and the prior quarter.
And credit metrics across our core borrowers remained relatively stable quarter over quarter.
And with weighted average attach and detach points of 0.4 times and $4 three times respectively.
The weighted average interest coverage on our core borrowers with the stable at three two times at quarter end.
With that I'd like to turn it over to Ian.
Thanks, Bob and Q1, we reported adjusted net investment income per share of <unk> 53, and adjusted net income per share of 88 cents.
And just mentioned we have approximately seven cents per share of accrued capital gains incentive fee expense for this quarter.
Of this noncash expense and net investment income and net income per share were <unk> 46, and 81, respectively.
At March 31, we had total investments I'd say the value of two point of whole billion up from $2 3 billion and the prior quarter as a result of net portfolio fundings as well as the positive impact of valuations on the fair value of our investments.
It'll principal debt outstanding was $1 1 billion and net assets were $1 2 billion or $16 47 per share which is prior to the impact of the supplemental dividend that was declared yesterday.
Average debt to equity during the quarter was <unk> 93 times up from <unk>, 87 times and the prior quarter and the quarter and debt to equity ratio was <unk> 92 times.
Note that shortly after quarter and we drew on our revolving credit facility to facilitate the payment of a $1 25 per share of special dividend, which had a record date of March 25.
Pro forma for this from a revolver draw of <unk>.
And debt to equity ratio would have been approximately one times and at quarter and liquidity would have been $1 2 billion against 93 million of unfunded portfolio of company commitments eligible to be drawn.
And as you May know, we did a small equity raise in February almost immediately on the heels of declaring a special dividend.
And the leveraging impact of the dividend payment in combination with the healthy investment pipeline and visibility on limited near term repayments implied that our pro forma leverage would be on the higher and about target leverage range of <unk> nine to 125 times in the.
All of us to preserve our reinvestment option amid of building pipeline of opportunities. We did a small equity issuance sized at less than 6% of our pro forma market cap with net proceeds approximating the size of the special dividend payment.
Well when you get essentially was swap out capital, but had excise tax associated with it and replaced it with new capital without the burden of excise tax and this.
Allowed us to create NAV and ROE accretion for our shareholders, while remaining leverage neutral.
Turning now to our presentation materials slide eight is the NAV bridge for the quarter.
Walking through the notable drivers of this quarters of NAV growth. We added 46 cents per share from net investment income against the base dividend of <unk> 41 per share.
And the equity raise provided <unk> 23 per share of Standalone accretion to NAV, which when we take into account the impact of dividends on the newly issued shares net of and actual N V accretion of approximately <unk> 13 per share.
There was a 21 cents per share reduction to niv as we reversed net unrealized gains on the balance sheet related to investment realizations and recognize these gains into this quarters income.
The impact of tightening credit spreads on the valuation of our portfolio had a positive <unk> <unk> per share impact and there was a positive 42 cents per share impact from all the changes primarily driven by net realized gains on investments of 21 per share and other net unrealized gains from portfolio of company specific events.
The realization of a small equity investment and capsule technologies upon itself to Philips drove the bulk of out of realized gains this quarter.
Moving onto our operating results detailed on slide nine total investment income for the quarter was $66 2 million compared to $62 2 million and the prior quarter.
Taking down the components of income interest and dividend income was $55 9 million up $3 2 million from the prior quarter, primarily due to the increase and the average size of our portfolio.
All of the fees the majority of which consisted of prepayment fees and accelerated amortization of upfront fees from the NEMA and exit term loan prepayment were <unk> 8 million compared to $4 3 million and the prior quarter.
Other income was lower of $2 3 million compared to $5 2 million and the prior quarter.
Net of expenses, excluding the impact of non cash accrual related to capital gains incentive fees were $29 million up $2 7 million from the prior quarter.
This was primarily led by led by higher other operating expenses compared to the lower seasonally adjusted other operating expenses that we had in Q4.
Note that our annualized Q1 operating expenses as a percentage of total investments at fair value was 58 basis points in line with our trailing four quarter average of 60 basis points the <unk>.
Average interest rate on average debt outstanding decreased slightly this quarter by three basis points, primarily due to the shift and funding mix as a result of an increase and the average size of our portfolio.
Shifting to Yesterdays 10-Q filing you may have noticed that we reported for the first time the calculation of diluted EPS on our income statement and in the notes are now financial statements. This accounting disclosures was triggered by the fact that the average share price of our stock exceeded the adjusted conversion price on the 2020.
Two convertible notes during the Q1 reporting period.
To satisfy this disclosure requirement, we've chosen to early adopt ASU 2026, which requires among other things the calculation of diluted earnings per share using the if converted method.
This method of assumes conversion of that can be convertible securities at the beginning of the reporting period and is intended to show of the maximum dilution effect common stockholders, regardless of how the conversion can actually occur.
And as mentioned on our last earnings call. We have the flexibility under our 22 convertible notes indenture to settle in cash and stock or a combination thereof.
These notes and not eligible for conversion today, but when it comes time to make a determination on settlement method the <unk>.
Asian and will be one that among other considerations optimizes the impact on our NAV per share <unk> financial leverage and liquidity position.
At quarter end up balance sheet and funding profile. We're in excellent shape. Following several liability management actions taken during the quarter.
And as mentioned on our prior earnings call. This January we capitalize some of the attractive issuance environment and the investment grade capital markets and issued $300 million of 2.5% five and a half year unsecured notes and in February with the ongoing support of our lending partners, we increased the commitments under our revolving credit facility.
And from 133 5 billion to $1 48, 5 billion and extended the final maturity on 139 billion of these commitments to February 2026.
Subsequent to quarter and the maturity on an additional $17 million of existing revolver commitments was also extended to February 2026.
Pro forma for the impact of the special dividend payment post quarter, and our total liquidity at quarter and represented 51% of our total assets and unsecured debt represented 79% of our quarter and funding mix further the weighted average remaining life of our debt funding was four three years compared to a weighted average remaining life of and.
And that's been funded by debt at quarter end of only two four years.
And as we look ahead to the year, we continue to target a return on equity of 11, 5% to 12 per se corresponding to a range of $1 82 to $1 90 for full year 2021, adjusted net investment income per share.
Most of this target range excludes the impact of any accrued capital gains incentive fee expenses.
With that I'd like to turn it back to Josh for concluding remarks.
Thank you and.
I'd like to close our prepared remarks here, but I encourage you and her and shareholders of record for of of record for upcoming annual meeting of the special meetings on May 26 to participate and vote.
Consistent with the past four years, we're seeking shareholder approval to issue shares below net asset value.
Factor for the upcoming 12 months.
To be clear to date, we've never issued shares below net asset value under under the prior stockholder authorization granted two of three each of the past four years, we have no current plans to do so we merely view of the authorization of an important tool for value creation and financial stability and periods of market volatility.
The the earlier days of the pandemic, where a case that in the on and how periods of volatility often provide highly attractive return on equity opportunities.
And it is more likely that our stock would trade below net asset value.
As you know as.
As we were well positioned heading into the pandemic with ample liquidity and capital cushion.
And therefore, we were able to opportunistically deploy capital accretion share holder value without needing to.
The access tool from a financial facility.
Looking ahead the who.
And know us.
And those who know us know that our bar for raising equity is high and the only raise equity when trading above net asset value and a very disciplined basis.
The only exercise of the authorization of issue shares below net asset value and there was the sufficiently high risk adjusted return opportunities that would ultimately be accretive to our shareholders through over earning our cost of capital.
And any associated dilution.
If anyone has questions on this topic, please don't hesitate to reach out to us.
We've also provided a presentation, which walks through the analysis and the Investor resources section of our website.
Turning now to our sector and the broader private credit markets and it's hard not to take the opportunity to be a little reflective post the shocks of the global economy, which the pandemic provided cup.
Coupled with the fact that the private credit asset classes of grown and a meaningful pace.
And our humble opinion much of the sector and filter and its cost of capital and provide value to shareholders.
With the return on equity on the net income over the last year of approximately $2 one per cent and five 5% of on average since our March 2014 IPO.
We think this reflects the failure to understand what the cost of capital price credit spreads, which includes the one fees and expenses and to incorporate credit losses into one of the economic model.
This clearly shows and our sector as net asset value per share of degradation of the L. P and period of approximately six 5% and it.
Cumulative net asset value per share of degradation of approximately 15, 5% since March 2014 of IPO.
We spent a lot of time thinking about the key the key to a successful business model. Ultimately we believe is one of them.
How's your to provide value across the market environments to the investors as well as portfolio companies.
Management teams and sponsors even though these two goals may seem at times.
At odds with each other.
That he was the one seat to the left hand left and right hand sides of our balance sheet through among other things and focusing on sector selection proactive liability management, and maintaining appropriate liquidity and capital cushions and we'd be able to the source of stability of source of stable stability and capital for our clients, including portfolio of companies management teams.
And the sponsors during periods of uncertainty, while providing that the returns to our shareholders.
Critical to this has been our focus and finding a balance of scale.
That is and ensure that we bring deep sector expertise and capital to help and the issuer and achieve its schools also create sustainable value for it.
Nick holders and environment, where theres not whether it's finite alpha direct lending assets.
To date, we've achieved this by the sizing of B C strategically based on our view of the market opportunity set and being part of the $50 billion 60 platform, which has significant resources to benefit portfolio of companies management teams and sponsors.
Finally, one more topic related to really the devoting our broader sixth street business over the past year has joined other organizations and pursuing efforts the strength and access to voting and the United States. These include the Civic Alliance, which is a coalition of business of supporting the safety and ethics and festival.
Actions and.
The last month, we joined the group of a group of growing list of corporate General Counsels and law from managing partners and the statement of announcing that for the restrict the constitutional right for eligible Americans and vote.
<unk> signed by fixed rates General counsel corporate leadership from our elected officials and take a stand and I guess the election laws of disenfranchise underrepresented groups across the country.
Proud of the standby, our core Democratic values and join our peers the disc.
And the business community and these initiatives with that thank you for your time today operator, please open the line for questions.
Thank you as a reminder, ladies and gentlemen to ask the question you will need to press Star then one on your telephone.
The Joy of your question press the pound key.
Again, Thats star one to ask the question.
Please stand by while we compile the Q&A roster.
Yeah.
The first question comes from the line of Melissa.
With J P. Morgan your line is open.
Thanks, everyone I appreciate you taking my questions today.
It provided a lot of information and this quarter and and it's much appreciated.
And here he is quite helpful and.
I guess just to start off given the elevated prepayment income that you saw and in the first quarter and.
And you certainly every time he talks about how that can be pretty lumpy, we have and that's going to ebb and flow.
Based on individual development with portfolio of companies, but I'm wondering how your what your line of sight and into any other developments within the portfolio.
And we should be thinking about that could drive.
And any volatility on that line item.
To the extent that you have any line of sight on it.
Hey, good morning, Melissa. Thank you. So I think actually this quarter was actually relatively muted.
As it relates to our payoffs and I think.
And the payoffs this quarter were 85 million and the correlation between payoffs and accelerated OID and other investment income is relatively high compared to the average quarter, which is probably two times greater so around 200 million and.
So I think when you look at the attribution and or the income statement.
I think it was also so it was also relatively low so.
Typically when you look at of the per share basis.
Just from investments of and interest income of been 81 cents.
And it was 83 six this quarter.
And interest from investments in the fees have been there.
And the teen fan.
And so that's the prepayment fees and and this quarter was about 12 cents. So I would say it was probably slightly on the on the on the lower side I think and then when you look at other income.
<unk> was about three cents per share compared to historically about six cents per share.
So all I'll say I think are relatively low.
The other activity based fees were relatively low this quarter or and you know I think there was a it was because of the kind of quite frankly, a little bit of a quiet quarter of.
And both on the origination side and and and on the net on.
And on the payoff side.
And any anything anything to add there I think the the other thing is and from a and there was obviously Q4 tends to be a large quarter and there's you know pull forward of Q4.
And from activity Q1, and so you saw.
Pay offs elevated in Q4, and you saw funding of elevated in Q4, So Q1 was kind of a.
A little bit of a quiet quarter on both the origination and payoff side and a little bit of a quite quiet quarter on the activity base. Therefore, it and the activity based income side and anything that there yeah.
Yeah, I would just add and Melissa we look at the amortization of upfront fees from unscheduled payments in tandem with the prepayment fees. If there are any on a particular payout. So when Josh was quoting the the 12 cents per share from that category. That's because we combine those two particular line items, but as he says.
And actually relatively in line with what we've experienced over the last channel So kudos.
And and just a little more detail that was specifically driven.
Naeem and.
I think and right, which was the unamortized portion of it was related to when we when we did the neiman and exit turmoil, we got the facts upbeat and he was the equity the fair value of that equity on the balance sheet of our costs are the cost basis and.
Therefore was the OID against the term loan and the term loan paid off.
The prepayment of the accelerated OID, which was the value of the equity through the.
Our income statement.
Alright, I appreciate that one quick follow up then.
And then sort of the outperformance and one kilo and adjusted NII versus the early turn it.
And that list and it.
And the beginning of the year wondering.
You didn't take up the the target and I was just wondering how youre looking at half of the rest of the year. Thank you yeah, yeah. So fix I mean look we try to.
And we try to create a you know and hopefully we can keep this up but our history of.
Beating our guidance.
And you know, which as you know kind of looking at the base of earnings record ease of where we have of highly confident.
You know a highly confident of the number on return on equity and NII per share and you know when you when you sit out and very high confidence of <unk> 95 per cent E. Oftentimes exceed it. So if you see if you kind of confidence level of <unk> 50 per cent you know half the time you feed it and half the time you you.
And so we would we when we give our guidance earnings per share were really trying to set a confidence level of 95 per cent.
Thanks, guys.
Thank you.
Our next question comes from the line of Devin Ryan with JMP Securities. Your line is open.
Great Good morning, everyone and thanks for the overview.
First question just.
On kind of the investing landscape so the spread on new investments.
It's come down clearly relative to kind of the peak levels and that's kind of a piece of it.
And that makes you still meaningfully above pre pandemic level and so just lots of little maybe more color on whether that the types of deals you guys are putting into the portfolio or are.
Or are you still seeing.
The deal is probably pricing and I'm at a premium play.
Yeah, I mean, I'll turn of about I mean look the.
The challenge with looking at any one quarter is it kind of it kind of moves.
Moves around because of the sample sizes, it's pretty it's pretty low I would say this quarter was probably.
Kind of reflective of the things, we're trying to focus on and do and we'll just you know things tighter and I will just.
And things wider and.
But I think it's probably reflect of I think on the on the generally on the investing environment.
The.
The big theme and you see this across risk premiums across asset classes and most asset classes and there are some industries that that the.
Doesn't exist for it and you know for example of real estate, but you know the that the the cycle of kind of skipped.
And so when you when you look at and people are pricing and underwriting standards or or are kind of assuming that which I think is probably right.
And so things that competitor of license from the Tiger.
And then.
And we and the.
The good and the cycles get consumers are and.
And has it has extra savings are and the greatest health and they've ever been and now there's obviously a distribution of the process consumers, but broadly speaking and that's the case corporates are in relatively good shape of special given low interest rates and the financials or range.
And.
Most of the the pandemic pain was felt and felt on government.
And the government's balance sheet.
And so.
I think broadly speaking you know we were kind of back into the first the second inning.
And I do not think we're and the.
The 10th and 11th and even over time of a of a.
And of a cycle.
We're we're kind of back of at the beginning the.
And the cycle of skipped and the only.
People are pricing risk premiums that way, which is expected low defaults.
And.
And the false COVID-19 recoveries we.
Recoveries, given the false will probably be pretty high.
Well you know for the.
The next couple of years.
Okay.
I appreciate it and that's great color.
Maybe a bigger picture of what Josh if he can.
Just I'll always appreciate your view on the industry more broadly and.
Clearly here, we sit today roughly a year of past.
More than a year of past the start of the pandemic and Youre looking at your portfolio is in terrific shape non accruals are down to your 0.1 per cent of the portfolio of cost.
The overall.
And the portfolio has performed incredibly well and obviously the very strong quarter. So as we think about just kind of the business models and we've just kind of gone through a real life stress test how do you think about kind of the case for may.
Maybe if some of the re rating and.
And the stock or maybe in the space more broadly and and kind of distinguish between.
And the leading firms that really kind of showcased how well they can perform in an environment like the last year versus maybe firms that didn't fare as well.
And we can kind of look back a little bit and retrospect them up a little color from you. Yeah. I'll give you a couple a couple of of upswing thoughts first of all of I think it's it's if we didnt really experienced the cycle I'm now there was mostly dispersed.
Very significant dispersion around managers, but quite frankly, you didnt really for the full weight of the cycle, given the fiscal and monetary stimulus and so you know I.
And I don't know if people can share their thinking about expecting that every day, you know going forward given that return on equity and the space with an average I think it was 2% now that that will come up a little bit because nabs of increase this quarter, but you know quite.
Quite frankly relatively you know not not rate, although there were people who had great performance I think our return on equity for the year last year was 15 eight per cent and some of our peers you know areas had a great year. Some of it you know people.
And the most definitely people outperformed.
And generally what youre seeing and valuations I think the space has we weighted.
Thank you.
You're seeing the the space trade at.
At a closer to the net asset value.
Which.
Which I don't think of since we've been public has been really the case and I think you're seeing greater dispersion and and and you know on both of the left tail and the right tale of based on performance and so I think it's the most definitely.
I think it's I think it's kind of get into a healthy spot ware.
You know, where the asset class or where the sector was when we were when we were first of this post global financial crisis was.
And I looked at it pretty negatively.
And by a lot of institutional investors and that now now I think people can see the dispersion and that dispersion is based on the skill sets and.
Of and talented management teams and business models, and how they approach and and how how they approach the market. So I.
I think I like it.
And I think you know.
I think hopefully sponsors and issuers and uses of capital.
Put that in their own model, which is and there had which is the they they hopefully they value a stable source of capital.
And for four as and the partnerships and for for their portfolio of companies and and people who understand the sector and that they and the value that stable source of capital will be value to their own.
And their own endeavors and.
So I IV for action.
Section and I don't know, but.
Anything to add or fishermen and fish was always the guest speaker on this because he has the most with amount of everybody but.
Anybody any anybody don't let you and don't laugh at me when I said Fishman of lives and we actually does but and.
And if any are any anything to add though.
No I think that was well said, Josh and I think.
You know the dispersion of managers was it wasn't fully tested and giving them the the.
The unprecedented fifth.
Oh and monetary stimulus.
The stimulus but.
You know we will have regular cycles again at some point.
And that'll be reflected and the results, but I agree largely with your thoughts.
Okay terrific well I'll leave it there and thank you guys.
Great and thank you so much.
Thank you.
Our next question comes from the line of Ryan Lynch with the K B W. Your line is open.
Hey, good morning, Thanks for taking my questions.
The first one is are you guys are clearly a very big linger into the software space.
And as the market continues to evolve and as software becomes a more desirable sector of the went to and it seems like.
The annual recurring revenue, Randy and it's becoming more and more prevalent so from your standpoint since you guys track and the software space a lot how do you think about lending on a RR.
<unk> versus cash flow to the software companies and then just a high level ballpark.
And what percentage of your portfolio and your software names or of those initial loan darn on an IRR versus the cash flow lending basis.
Yeah.
And I will come back to you in the latter part of the question I don't I don't know if we have off the top of ever had but we'll come back to you on.
On the first part of your question look I would say where investors and.
And not every dollar of cash flow is created equal and not every dollar of subscription revenue a are created equal.
And so I think unfortunately, given that the buoyancy of the software space, which which is kind of raising all boats that those business models haven't been tested and so we're extremely focused on quality of it.
It's the models are and and and and business models that are robust.
And so it really is and you know we we there are some businesses that we think that have good return on capital or investing a ton of best in class unit economics, and we want them to grow and switching costs are high and we want to support those the those companies.
And the growth endeavors, and so a our structure works and you know there are some cash flow of companies that we think is the software space the cash flow of deals and the software space at.
For example that our.
EBITDA is not burdened by R&D capitalized R&D.
And that churn is high that a the there's a whole bunch of technical debt and margins are all of our state and are not sustainable given the technical debt and that we won't lend to one of the cash flow basis, and so what we're where we're where we're at where investors.
And so what I would say is not every dollar of Ey are created equal and not every dollar of EBITDA is created equal and you really got to look at business models and how robust those business models are Bo or fish do you have anything to add.
Yeah. The only thing I would add is we've been lending broadly to the technology sector, which includes software for over 20 years and have developed a lot of pattern recognition along the way on how various end markets within the technology you know performed.
And through cycles.
And we're very nuanced and our approach we're focused the mattikalli and Subsectors, we don't think of software as a sector.
Omnipresent and it's you know.
Obviously, the digitization of the economy is happening before us and it has probably accelerated through COVID-19 and so you're feeling a lot of tailwind from that but we get very nuanced within you know within the subsectors and and figure out areas that we feel like there's going to be ongoing strong unit economics and the return on.
The capital in the space.
So the battle, but to Josh as point, we we don't look at we look at investments as investors and we don't we don't look at it and they are.
The alone you know or a cash flow alone.
At it differently.
We're pressure testing and.
How do we think the you know those revenue streams are going to perform and what what our margin of safety is and if things don't go to the plan.
And I would just add and we also look through to the end markets you know lending.
Two a software business going through the pandemic and the restaurant industry of the cruise industry.
And a lot different than if we were lending to you know like the grocery.
The retail or different parts of the retail industry. So we pay attention.
There's no shortcut you have to pay attention to a lot of factors and market being one of them because of as both said.
Technology is ubiquitous and you've got to dig deeper and in your analysis.
And as always fits she comes in with the wisdom rounding out and not every dollar of EBITDA or record revenue is created equal and markets matter and the fishy. Thank you for the.
Net on.
Great and I appreciate that.
Is that helpful. Ryan Yeah, Yeah. That's helpful. I got in the gut response from the 14th so [laughter].
The other question I did have and you mentioned that you guys brought it up on the call you know the the can.
Invertible bonds you guys are now doing different you know Joe showing from different reporting metrics on that and so you know I know that's still a little bit over a year away of when you know that that will actually becomes due and you guys happy and make a decision on how to repay that.
But as we sit here today I guess preliminarily you know if you guys had and convert that to a day.
What would you guys look to do because it looks like if you guys pay that off with issuing shares and it looks like that could be accretive to NAV.
And would be of deleveraging event.
We paid it off and cash and it looks like it would probably be dilutive to NAV, but it wouldn't be a deleveraging of that and you know based on you know right right from you.
Youre dead on so the good news is we get the it's not binary we could we could we could we have.
Blacks on how we settle and how much cash and stock.
And you know you you hit the book and is exactly right and so it's gonna be a function of the framework is.
Where we are that the equity.
And.
How dilutive is it on a row and NAV or how accretive it is an ROE ease of NAV and we have the flexibility of federally.
Ah the flexibility of settling.
And how we settle that and and so I think the book and then.
Are we settle all and and again, it's not binary so we could we were and between these bookends, but if we set of long cash it's dilutive and it doesn't go through the P&L go through APEC, but it is dilutive per share of <unk>.
36, and if we settle all and stock it.
And it's accretive by the 16th.
So that that that that that is that will be a function of where we're sitting how much capital we have.
And you know we're obviously the good news is we have we have time and we can manage it and it's we have the ability of flux settle up but you you hit it.
Okay.
Got you.
And I appreciate the time today, and and really nice quarter guys.
Thanks, I appreciate it the way that was the heart of financing we've ever done and it had the most value and and you know of.
But that was literally the heart of financing note you know we ever.
You know out of Roundup.
Obviously, when it and in.
In hindsight, I think and what we bought back.
I've got 2700 $27 million of those notes at a cost to us of about 90 cents.
You know, which was a helpful investment and our own capital structure of doing COVID-19.
And so.
And how is that we wish we could then more of.
But we were not only making and COVID-19 and now we're making investments that support the portfolio companies, but making the investments and capital structure.
No.
And those two and combination create a lot of value for our shareholders.
Mhm.
Gotcha.
Thanks, guys.
Thank you.
Our next question comes from the line of Finian O'shea with Wells Fargo. Your line is open.
Hi, guys good morning of.
Well the question's been asked and answered just one here on the of.
The dial transaction that that looks to be moving along the.
Does does that lead you to pursue any any potential ownership change or have your concern has been and subdued by by this time.
Yeah look I would say are our concerns haven't been the subdued.
We're obviously and and we're obviously very disappointed and the vice chancellors initial decision.
I think she got the facts wrong and.
Of our wrong and that's why we appealed.
And as we said, we honor our deals of weak backdrop of parties on are there deals too.
We have again, we have no print.
We've known the principles of our out for many years and a great deal of respect for them as a competitor to our firm.
The Delaware Supreme Court yesterday as decided the here our appeal and the expedited basis.
So that.
And that is being heard on May 12.
And so they granted and of doing it on a on the box basis. So all five of the justices versus the panels, we will hear the appeal on May 12.
And it's also the.
Obviously ongoing litigation and so that's the.
All I can say.
Okay. That's helpful. That's all for me. Thank you.
Yeah.
Thank you and as a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the lot of Robert Dodd with Raymond James Your line is open.
Hi, guys and <unk>.
And graduations on the.
The the quarter a question on on kind of <unk>.
Repayment expectations kind of it.
Maybe more long term I mean, I realize the gains comment limited near term repayments expected, but if I look at your book, you've got a little over 50% of the debt book marked above one and two cost and my presumption is that factories and Copel would you structure very well. So the question is all all of you.
The concerns elevated about maybe not in the near term, but as from code to ditch. The divested this year, given how competitive and the bulk is is the elevated risk of of the.
Risk is.
And the issue right because you get paid if you get if you get the pay dearly, but elevated risk of of maybe portfolio.
Couldn't traction with the repayments or do you think the pipeline is going to be sufficient even and a very competitive market, where you'll very picky on the credit side too to grow the book this year or is the elevated level what appears to be an elevated level of repayment expectations of headwind.
Yeah actually look our expectation is that.
That and the near term, we're going to grow the book.
And so.
When we look at what's out there Theres a couple, but you know the pipeline more than offsets it and.
So given.
As you know the interaction between repayments, which typically create you know some from some income and but also the deleverage the business and given the breadth.
And depth of our sourcing and how we go to market I felt pretty confident that we're actually on a net basis are going to you know are going to grow the book.
And the you know.
And the near term.
Nice thing about being part of a of a very large platform as you know we're involved and a whole bunch of factors and.
You know and look I think again.
And M&A drives repaint.
Repayments and but also drives the deal flow and you know I I feel I actually feel more bullish and our ability to grow the book today.
And then and then.
Historically.
Idaho or.
Fishy and anything to add there.
No I think you're spot on I think historically when you look at our repayment activity. It's it's largely been driven not all the time, but largely been driven by M&A activity, which also when there's elevated M&A activity. There's also the elevated opportunities I would expect 2021 to have.
Elevated M&A activity of M&A activity, we're seeing that and the formation of the pipeline of it.
You know currently but with the backdrop of strong asset valuations and expected tax changes I think youre going to see elevated M&A activity, which will drive both new opportunities and repayments, but I'm I'm with Josh I'm more bullish on on growing the book and then there'll be you know shrinkage.
Got it got it appreciate that I mean the.
And that follows obviously, the interacts with the kind of lines of question on the convert.
How high I mean, obviously, we know the the.
The target range would you be willing to operate.
And essentially at the high end of that target range for a non.
I wanted to say a prolonged period, but obviously one of the options with the convert it would be left with you that's not until August Beck's and <unk>.
22, that's the long time out.
What's the balance day of on how high you'd be willing to go because you can always just not do deals if we get too high but once the balance versus the potential of something that's accretive to NAV.
If you if it's not to deleveraging.
It's a really good outcome on multiple fronts.
And what's the view there.
Yeah look I look like as you know and it's the summer of next year and.
And so I like it's it's hard to make a call about your capital Inc.
18 months from now and again you have you you have the ability to flex that all of which I think is helpful. So it's not binary.
And so I just you know it's hard to make a call. It the months, we obviously understand those levers very well.
<unk>, which is all things being equal you'd rather do something with the with the converse of its accretive to net asset value than the than dilute of and so yeah.
If you had perfect visibility would you like to run a little bit hot and knowing that you can settle and you know and and and stock.
And you know the answer would be yes, but again I think that's you know that's some time off we're going to have a lot of what we'll have more visibility and the good news with with with time and nature of time is as time passes you get more clarity and so but we most definitely understanding those levers and.
As of as we do with everything will be thoughtful as it relates to our shareholders.
Got it thank you.
Yeah.
Thank you. Our next question comes from the line of Derek Hewett with Bank of America. Your line is open.
Good morning, everyone and congrats on another strong quarter.
So, maybe josh or Bo or even Michael and it's.
The sixth Street has been one of the top performing bdcs since inception.
Back in 2013, so how should we think about the the size of the portfolio of kind of given your investment strategy plus just the overall growth and private credit or kind of in other words are there enough opportunities to potentially double or even triple the size of the portfolio and the either the inc.
The immediate or longer term.
Yeah, and Eric it's good to hear from you look I I don't I don't think we're actually like.
The the hallmark of of how we've always run.
The BDC is where we're focused on shareholder returns and not growing assets.
And so if we can find assets that provide that earn or exceed our cost of capital and provide shareholder returns.
We will grow if we can't we will not and size of the book.
To be fully invested and you know and and the trough of opportunity set so I we have a.
Growth and we I think we tried to hit this a little bit which is you know and.
Growth is not a and let me put this way one of the reasons why we think we've had the performance we have for shareholders is the way we think about.
How we don't grow the book just to grow the book and.
And we think of shareholders first and.
And we will continue we will continue to think about the world that way.
And.
Work, we work for shareholders. The the funny thing is is that and.
The I know the space kind of thinks about the.
The you know the asset management space thinks about the himself as having permanent capital and the way the way we think about the world is a little bit differently, which is we don't have permanent capital our shareholders have permanent capital. We just happened to manage it on a year to year basis and will continue the work hard for shareholders and so that our board and our shareholder.
As you know.
And if I just back to manage that those assets.
Yeah.
Okay, great. Thank you.
Thank you.
I'm showing no further questions in the queue.
And I'd like to turn the call back over to Joshua for closing remarks.
Great. Thank you so much for everybody's a participation.
And we'll speak to you at the end of the summer if not sooner and then obviously a mother's day is coming out of so obviously, you know and tell the mothers out there.
Thank you for supporting a.
Your families and during the very difficult time, and obviously with the pandemic of most definitely been hard and my guess and some of that of.
And what are some of that burden has fallen and fallen and shoulder. So thank you and we'll talk soon.
But.
Ladies and gentlemen.
This conference call. Thank you for your participation you may now disconnect.
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And then.
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Yeah.
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Adjusted EBITDA.
The timing.
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Good morning, and welcome to the fifth street to lending and corporate.
First quarter ended March 31st 2021 earnings Conference call before we begin today's call I would like to remind our listeners that remarks made during this call may contain forward looking statements statements other than statements of historical Fad and <unk>.
<unk> made during this call may constitute forward looking statements and are not guarantees of future performance all of adults and if all the number of risks and uncertainties.
Actual results may differ materially from those and the forward looking statements as a result of the number of factors, including those described from time to time and sixth streets, especially lending and incorporated filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward looking statements.
Yesterday after the market closed the company issued its earnings press release for the first quarter ended March 31st 2021, and posted a presentation to the investor was sort of section of its website Www Dot sixth street specialty lending dot com the.
Presentation should be reviewed in conjunction with the company's form 10-Q filed yesterday with the SEC.
The next year, especially the lending and incorporate its earnings release is also available on the company's website under the Investor resource section.
Unless noted otherwise all performance figures mentioned in today's prepared remarks.
Or as of and for the first quarter ended March 31st 2021, as a reminder of this call is being recorded for replay purposes I will now turn the call over to Joshua easterly Chief Executive Officer of sixth Street specialty lending Inc.
Thank you good morning, everyone and thank you for joining us with me and my partner and our President and Bo Stanley and.
So the incentives.
That one as well for our call today I will provide highlights for this quarters results and the pass it over to Bo discussed of course origination activity and portfolio of metrics.
And with the review of quarterly financial results in more detail and I will conclude with final remarks before opening the call of the Q&A.
After market closed yesterday.
We reported strong first quarter financial results with adjusted net investment income per share of 53 cents corresponding to an annualized return on equity of $13 three per cent and adjusted net income per share of <unk> 88 cents of corresponding to an annualized return on equity of $22 one per cent.
This quarter, we continued accrued capital gains incentive fee expense related changes and net realized and unrealized gains and losses.
This non cash expense, which was not paid or is not payable was approximately seven cents per share for the quarter.
Our Q1 net investment income and net income per share inclusive of the accrued capital gains incentive fee expense was 46 cents and 81 cents respectively.
Policy and on the impact of these adjustments for a moment as an illustration, if we were to and if it were and.
Of the year as of March 31 of the eight cents per share of cumulative of accrued capital gains incentive fee expenses, and we had at quarter and would not be paid or payable of since the games and must be realizing in order for us to be eligible to receive the fees.
In addition.
It's also worth noting that a portion of these unrealized gains of today are related to the impact of call protection on the valuation of our debt investments, which if realized would be ultimately flow through net investment income and therefore trigger a reversal of associated accrued capital gains incentive fee expenses.
Now back to our results.
Our strong net investment income this quarter continues to be of function robust net interest margin attributable to a floating rate liability structure and the slow rate environment and connection with LIBOR floors on our debt investments net investment income.
And also supported by higher interest and dividend income from the increase and the average size of our portfolio.
The fee income from the portfolio repayment of prepayment activity.
The difference between this quarter's net investment income and the net income was the result of net realized and unrealized gains primarily from the small portion of our portfolio represented by equity investments as well of net unrealized gains from the impact of credit spread tightening and the valuation of our debt investments.
At quarter, and net asset value per share was 60, and 47 up three 8% from pro forma net asset value per share at year end of 15 to 86 that we discussed on our last earnings call.
As mentioned net realized and unrealized gains from our investments were meaningful contributors to this of course net asset value.
Per share growth other contributors included accretion from our follow on equity raise in February and the continued over and you know of our base dividend.
And we'll discuss our net asset value bridge and more detail later on this call.
Yesterday, our board approved the base quarterly dividend of 41 cents per share fish shareholders of record as of June 15th payable on July 15th our board off of declared a supplemental dividend of six cents per share based on Q1, adjusted net investment income to shareholders.
And of record as of May 28 payable on June 30th.
So from her for the impact of the Q1 and supplemental dividend per quarter and net asset value per share was was 16 and 41.
If we were to take a step back and think about her business has performed through the pandemic one way to do this is to look at the total economic returns, which measures the change of net asset value per share plus cumulative dividends per share since January and since the year end 2019.
Which which was just prior to the onset of the pandemic.
We generated a total economic return of 21 point of 8% and.
The lenses to look at the.
Total net asset value per share per share growth, which in our case should incorporate our of special and supplemental dividends per share.
Since year end 2019, we grew our net asset value per share adjusted for the impact of the special and stuff, where millennials evidenced by the 9.5%.
We're pleased that our ongoing focus and building a business model for not not only performance, but thrive and periods of market uncertainty deliver such strong results for the stakeholders.
And as important over the past share our business model allowed us to provide capital to our portfolio of companies and their management teams and the sponsors when many of our competitors weren't able to do so.
In order for them to create value for their their own in respect of stakeholders.
Having an enduring business model as part of the regulatory and other constraints of for Bdcs and now it provides value for shareholders, but it also allows us to be stable is stable and sort of from provider of capital to our portfolio of companies with that and I'll pass it over to Bo and discuss our portfolio activity and.
Metrics.
Thanks, Josh.
Let me start with some observations on the competitive environment and Q1, we continued with the continued accommodative of fiscal and monetary policies from the fed and the U S government investor appetite for risk assets remained elevated bolstered by the search for yield and prospects for strong near term growth.
The sentiment was evident and the leverage loan market, where strong demand pushed.
Pushed pricing and terms in favor of borrowers.
During Q1, LCD spreads tightened across the securities and rating spectrum.
With all and yields for new issuers, reaching post financial crisis lows.
The liquidity premiums as measured by the spread differential between large corporate and syndicated middle market loans fell to seven year lows.
And covenant light as the percentage of new loans issued reached a record high of 89%.
And the direct lending market elevated competition from BDC peers, and private funds and with record levels of dry powder and meant that we continued the SKU originations of activities towards the opportunities, where we had clear competitive advantages as the capital provider.
Despite the competitive backdrop, we continued to see borrower demand for funds for financing partners with deep sector expertise and a broad range of underwriting capabilities.
For this quarter, we had $145 million of commitments and $130 million of fundings. These fundings of across two new and six upsize of two existing portfolio companies.
Our new investments this quarter were both first lien loans from mission critical software providers, where the traffic revenue characteristics.
We were also active during the quarter by supporting our existing portfolio of companies on their strategic growth and capital needs with nearly 45 per cent of this quarters fundings and serving our existing borrowers.
Our repayments in Q1 and slowed after a busy 2020 of totaling $85 million across four full and three partial investment realizations and sell downs.
This resulted in net funding activity in Q1 of $45 million.
The larger repayments this quarter were predominantly M&A, driven with the exception of our $17 million par value of and even exit term loan.
With a strong market backdrop, and late March and Neiman issued notes and the high yield market to refinance its ex of term loan which had call protection of one town at the time of repayment.
This call protection. In addition to the acceleration of unamortized OID on our loan contributed meaningfully to our fees this quarter.
Recall on our Q3, 2020 earnings call, we disclosed that approximately $4 million of backstop fees related to our exit term loan commitment were booked as OID and that these fees were payable and common stock of the reward company.
Post quarter, and we sold our entire Neiman.
Equity position out of price above our 331, mark, thereby fully exiting all of our name and investment.
Looking back we've been a provider of liquidity and transitional capital for the retailers.
For the retailer as its management team navigated through a pandemic and the chapter 11 process.
We believe this has been a fruitful partnership that has a lot of both parties to create value for our respective stakeholders based.
Based on our total capital invested and Neiman and since 2019, we've generated a gross unlevered IRR of approximately 25% on a fully exited investments, which includes the post quarter and sale of T. F. L X the equity position.
Turning now to a quick update on J C. Penney recall that in December upon the company. The emergence from chapter 11, and a pre petition debt and dip loan positions were converted to non interest paying and instruments, but was the rights to immediate and future distributions and cash and all of the securities.
During the quarter of $13 $3 million fair value dip loan position.
Extinguishing the connection with the closing of the Propco and.
And we see we received a small castro distribution, along with equity interest and the propco.
At quarter end of Propco equity interest at a level two fair value mark of $18 $1 million.
Across Q1, our JC Penney investments drove $5 $4 million of net realized and unrealized gains were a positive eight cents per share impact to our NAV this quarter.
At quarter end, our portfolio of retail and consumer exposure was 11, 4% net fair value.
And the other nearly 80% of this consisted of asset based loans cyclical names, which exclude our asset base of retail loans and energy investments continued to be limited at four per cent of the portfolio.
And our energy exposure at quarter and was one seven per cent.
During Q1, our portfolio of first lien composition decreased slightly from 96% to 95 per cent on of fair value basis, and our equity investments increased slightly on a fair value basis due to the combination of our J C Penney's propco and.
The interest as well as valuation of tier ones from a robust equity market and M&A environment at quarter, and our equity investments represented and four three per cent of the portfolio at fair value compared to three 7% and the prior quarter.
And Q1, our portfolio's weighted average yield on debt and income producing securities of the amortized cost was $10 one per cent compared to 10, 2% and the prior quarter.
The slight decrease was primarily driven by the impact of new versus exited investments the weighted average yield at amortized cost on new investments were 10, 6% this quarter.
Per to a yield of 12, 8% on exited investments.
Shifting now to the portfolio and underwriting and credit quality, we continue to be thoughtful about our loan structuring process with utmost focus on protecting our principal against losses from credit risk and other market factors.
At quarter end.
We averaged approximately two financial covenants per loan and.
The effective voting control on 87 per cent of our debt investments.
In addition, we continue to have meaningful call protection and LIBOR floors across our debt portfolio.
We believe our financial results over the past 12 months underscore our disciplined underwriting and its importance and driving differentiated outcomes.
From a credit quality standpoint, we continued to see stable to positive performance trends across the city.
Majority of our portfolio.
Quarter over quarter non accruals decreased from 0.9%.
Two 0.02 per cent of the portfolio at fair value.
Following the completion of Americans achievements out of court restructuring.
As previous previewed on our last earnings call. Our first lien loan for American achievement remained outstanding post re org.
And the interest that we received while the alone was on non accrual status was applied to our loan principal.
As part of the restructuring of the lender group received a majority stake of the common equity and subordinated notes.
And the restructure of business at quarter and the subordinated notes accounted for all of our outstanding investments on non accrual status at fair value.
This quarter of our portfolio's weighted average performance rating on a scale of one to five with one being the strongest was 1.14, improving from 1.18 and the prior quarter.
And credit metrics across our core borrowers remained relatively stable quarter over quarter with weighted average attach and detach points of 0.4 times and $4 three times respectively.
The weighted average interest coverage on our core borrowers with the stable at three two times at quarter end.
With that I'd like to turn it over to Ian.
Thanks, Bob and Q1, we reported adjusted net investment income per share of <unk> 53, and adjusted net income per share of 88 cents.
As just mentioned we have the approximately seven cents per share of accrued capital gains incentive fee expense for this quarter and.
Inclusive of this non cash expense, our net investment income and net income per share was <unk> 46 cents and 81 cents respectively.
At March 31, we had total investments I'd say the value of two point of whole billion up from $2 3 billion and the prior quarter as a result of net portfolio of fundings as well as the positive impact of valuations on the state of value of our investments.
Total principal debt outstanding was $1 1 billion and net assets were $1 2 billion or $16 47 per share which is prior to the impact of the supplemental dividend that was declared yesterday.
Average debt to equity during the COVID-19 was nine three times up from <unk>, eight seven times and the prior quarter and the quarter and debt to equity ratio was <unk> 92 times the.
Shortly after quarter and we drew on our revolving credit facility to facilitate the payment of about $1 25 per share special dividend, which had a record date of March 25.
Pro forma for this revolver draw a corner and debt to equity ratio would have been approximately one times and at quarter and liquidity would've been $1 2 billion against 93 million of unfunded portfolio of company commitments eligible to be drawn.
And as you May know, we did a small equity raise in February almost immediately on the heels of declaring a special dividend the law.
Leveraging impact of the dividend payment and combination with a healthy investment pipeline and visibility of limited near term repayments implied that our pro forma leverage would be on the higher end of our target leverage range of point of nine to 125 times.
In order to preserve our reinvestment option and made a building pipeline of opportunities. We did a small equity issuance sized at less than 6% of our pro forma market cap with net proceeds approximating the size of the special dividend payment.
Well when the data essentially was swap out the capital that had excise tax associated with it and replace it with new capital without the burden of excise tax.
And it's allowed us to create and a day and ROE accretion for our shareholders, while remaining leverage neutral.
Turning now to our presentation materials slide eight is the NAV the bridge for the quarter.
Walking through the notable drivers of this quarters NAV growth. We added 46 cents per share from net investment income against the base dividend of <unk> 41 per share.
The equity raise provided 23 cents per share of Standalone accretion to NAV, which when we take into account the impact of dividends on the newly issued shares net.
And actual N a the accretion of approximately <unk> 13 cents per share.
It was of 21 cents per share reduction to and IV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognize these gains into this quarters income.
The impact of tightening credit spreads and the valuation of our portfolio had a positive 15 cents per share impact.
And there was a positive 42 cents per share impact from all the changes primarily driven by net realized gains on investments of 21 per share and all of a net unrealized gains from portfolio of company specific events.
The realization of a small equity investment and capsule technologies upon itself to Philips drove the bulk of out of realized gains this quarter.
Moving onto our operating results detailed on slide nine total investment income for the quarter was $66 2 million compared to $62 2 million and the prior quarter.
Breaking down the components of income interest and dividend income was $55 9 million up $3 2 million from the prior quarter, primarily due to the increase and the average size of our portfolio.
Although the fees the majority of which consisted of prepayment fees and accelerated amortization of upfront fees from the neiman exit toll and prepayment for 8 million compared to $4 3 million and the prior quarter.
Other income was lower of $2 3 million compared to $5 2 million and the prior quarter.
Net of expenses, excluding the impact of noncash accrual related to capital gains incentive fees were 29 million up $2 7 million from the prior quarter.
This was primarily led by led by higher other operating expenses compared to the lower seasonally adjusted the other operating expenses that we had in Q4.
Note that our annualized Q1 operating expenses as the percentage of total investments at fair value was 58 basis points in line with our trailing four quarter average of 60 basis points.
The weighted average interest rate on our average debt outstanding decreased slightly this quarter by three basis points, primarily due to the shift and funding mix as a result of an increase and the average size of our portfolio.
Shifting to yesterday 10-Q filing you may have noticed that we reported for the first time the calculation of diluted EPS on the income statement and in the notes on our financial statements. This accounting disclosures was triggered by the fact that the average share price of our stock exceeded the adjusted conversion price of 2002.
The two convertible notes during the Q1 reporting period.
To satisfy this disclosure requirement, we've chosen to early adopt ASU 2020.
Six of which requires among other things the calculation of diluted earnings per share using the if converted method.
This method of Funes conversion of that can be convertible securities at the beginning of the reporting period and is intended to show of the maximum dilution effect common stockholders, regardless of how the conversion can actually occur.
And as mentioned on our last earnings call. We have the flexibility under out of 22 convertible notes indenture to settle in cash and stock or a combination thereof.
These notes and not eligible for conversion today, but when it comes time to make a determination on settlement method and the city.
And it will be one that among other considerations optimizes the impact on our NAV per share.
These financial leverage and liquidity position.
At quarter end up the balance sheet and funding profile and we're in excellent shape. Following several liability management actions taken during the quarter.
Mentioned on our prior earnings call. This January we capitalize some of the attractive issuance environment and the investment grade capital markets and issued $300 million of two and a half per cent five and a half year unsecured notes and <unk>.
In February with the ongoing support of our lending partners, we increased the commitments under our revolving credit facility from $1 335 billion to 148 5 billion and extended the final maturity of $1. Three 9 billion of these commitments the February 2026.
Subsequent to quarter and the maturity on an additional 17 million of existing revolver commitments was also extended to February 2026.
Pro forma from the impact of the special dividend payment and post quarter and our total liquidity of colder and represented 51% of our total assets and unsecured debt represented 79% of our quarter and funding mix.
Further the weighted average remaining life of our debt funding was four three years compared to a weighted average remaining life of investments funded by debt at quarter end of only two four years.
And as we look ahead to the year, we continue to target a return on equity of 11 and are off the fence to 12 per se corresponding to a range of $1 82 to $1 90 for full year 2021, adjusted net investment income per share.
Notice of this target range excludes the impact of any accrued capital gains incentive fee expenses.
With that I'd like to turn it back to Josh for concluding remarks.
Thank you and I.
And I'd like to close our prepared remarks here, but I encourage you and or and shareholders of record for of of record for upcoming annual meeting of the special meetings on May 26 to participate and vote.
Consistent with the past four years, we're seeking shareholder approval to issue shares below net asset value.
<unk> for the upcoming 12 months.
To be clear to date, we've never issued shares below net asset value under our under the prior stockholder authorization granted to us for each of the past four years and we have no current plans to do so the merely view of the authorization of an important tool for value creation and financial stability and periods of market volatility.
The <unk> the earlier days of the pandemic, where a case study on the on and how periods of volatility often provide highly attractive return on equity opportunities.
And it is more likely that our stock would trade below net asset value.
As you know as we were well positioned heading into the pandemic with ample liquidity and capital cushion.
And therefore, we were able to opportunistically deploy capital creation shareholder value without needing to.
Access tool for financial facility.
Looking ahead, the who know us.
Those who know us know that our bar from raising equity is high and the only raise equity when trading above net asset value and a very disciplined basis.
The only exercise of the authorization to issue shares below net asset value and if there was of sufficiently high risk adjusted return opportunities that would ultimately be accretive to our shareholders through over earning our cost of capital.
And and the associated dilution.
If anyone has questions on this topic, please don't hesitate to reach out to us.
We've also provided a presentation, which walk through of this analysis and the Investor resources section of our website.
Turning now to our sector and the broader price.
The credit markets, it's hard not to take the opportunity to be a little reflective post the shocks and the global economy, which of the pandemic provided.
Coupled with the fact that the private credit asset classes of grown and a meaningful pace.
And our humble opinion much of the sector and fail to earn its cost of capital and provide value to shareholders.
With the return on equity on a net income over the last year of approximately $2 one per cent and five 5% on the average since our March 2014 IPO.
We think this reflects the failure to understand what is the cost of capital price.
The credit spreads, which includes the one fees and expenses and to incorporate credit losses into one of the economic model.
This clearly shows and our sector as net asset value per share of degradation of the L. T and period of approximately six 5% the cumulative net asset value per share of degradation of approximately 15, 5% since our March 2014 of IPO.
We spent a lot of time thinking about the key the key sort of successful business model and ultimately we believe that's what allows you to provide value across the market environments to your investors as waters portfolio of companies management teams and sponsors even though these two goals may seem at times.
With each other.
By adding resiliency to the left hand left and right hand sides of our balance sheet through among other things focusing on sector selection proactive liability management, and maintaining appropriate liquidity and capital cushions and we'd be able to the source of stability of source of stable of stability and capital for our clients, including portfolio of companies manage them.
The teams and sponsors during periods of uncertainty.
All of providing that but returns to our shareholders.
Critical to this has been our focus and finding a balance of scale.
That is and ensure that we bring deep sector expertise and capital to help and the issuer and achieve its schools basso creates sustainable value for stakeholders and environment, where theres, not where there is finite and alpha direct lending and asset.
To date, we've achieved this by the sizing of B C strategically based on our view of the market opportunity set and being part of the $50 billion six feet of platform, which has significant resources to benefit portfolio of companies management teams and sponsors.
Finally, one more topic related to really the devoting a broader sixth street business over the past year has joined other organizations and pursuing efforts the strength and access to voting and the United States. These include the Civic Alliance, which is a coalition of business of supporting the safety and ethics and festival.
Actions and the last one so he joined the group of a group of growing list of corporate General counsel and loss of our managing partners and the statement of announcing efforts to restrict the constitutional right for eligible Americans to vote the.
Statements and by fixed rates General counsel corporate leadership from our elected officials to take a stand of guesses election laws and disenfranchise underrepresented groups across the country. We're proud of the standby our core democratic values and join our peers the disc.
And the business community and these initiatives with that thank you for your time today operator, please open the lines of questions.
Thank you as a reminder, ladies and gentlemen to ask the question you will need to press Star then one on your telephone.
And your question press the pound key.
And again that star one to ask the question. Please.
Please stand by while we compile the Q&A roster.
Okay.
Our first question comes from the line of Melissa Wedel with Jpmorgan. Your line is open.
Thanks, everyone I appreciate you taking my questions today.
And you provided a lot of information of this quarter and and it's much appreciated and.
And he is quite helpful and I guess just to start off given the elevated.
The payment income that you saw in the first quarter.
And certainly over time and talk about how that can be pretty lumpy.
Moving to ebb and flow.
Just on the individual development portfolio of companies.
I'm wondering.
What are your line of sight and he.
Any other developments within the portfolio.
And what we should be thinking about that could drive.
Any color on that line item.
To the extent that you have.
Line of sight on it.
Hey, good morning, Melissa. Thank you. So I think actually this quarter was actually relatively muted.
And as it relates to.
Pay offs and I think.
And the payoffs this quarter were 85 million and the correlation between payoffs and accelerated OID and other investment income is relatively high compared to the average quarter, which is probably two times greater so around 200 million and.
So I think when you look at the attribution and our income statement.
I think it was also so it was also relatively low so typically when you look at and the per share basis.
From investments and interest income of been 81 cents.
And it was 83 six this quarter.
The interest from investments in the fees have been there.
The teens and.
Ah so that's the prepayment fees and and this quarter was about 12 cents. So I would say it was probably slightly on the on the on the lower side I think and then when you look at other income of.
Was about three cents per share compared to historically about six cents per share.
So all I'll say I think are relatively low.
The other activity based fees were relatively low this quarter of.
And you know I think there was a it was because of kind of quite frankly, a little bit of a quiet quarter.
And both on the origination side, and and and and the net on the payoff side E anything anything to add there I think the the other thing is and from a and there was obviously Q4 tends to be of a large quarter and there's you know pull forward of Q4.
The from activity Q1, and so you saw the you know.
Pay offs elevated in Q4, and you saw plenty of the elevated in Q4. So Q1 was kind of you know a little bit of a quiet quarter on both the origination and payoff side and the little bit of a quite quiet quarter and the activity base, therefore, and the activity based income side anything to add there.
Yeah, I would just add and Melissa we we look at the amortization of upfront fees from unscheduled payments in tandem with the prepay and it seems that they're already on a particular payout. So when Josh was quoting the the 12 cents per share from that category. That's because we combine those two particular line items, but as he says that.
It's actually relatively in line with what we've experienced over the last channel so kudos.
And just a little more detail.
And that was specifically driven.
Through the Neiman.
I think he and rate, which was the unamortized portion of it was related to when we when we did the neiman the exit turmoil, we got the facts upbeat and he was the equity the fair value of that equity weighted on the balance sheet of our costs are as of cost basis and.
And therefore was the OID against the term loan and when the terminal and paid off.
Both the prepayment of the accelerated OID, which was the value of the equity of all through that.
Our income statement.
Alright, I appreciate that and one quick follow up and.
Kevin.
The outperformance and why he on adjusted NII first of the ROE Eternity the ear.
Fabless and Inc.
At the beginning of the year wondering.
You know you you didn't take up the the terror event and.
Wondering how youre looking at half of the rest of the year. Thank you.
Yeah, So fakes I mean look we try to.
And we tried to create a you know and hopefully we can keep this at the history of.
Beating our guidance.
And you know, which as you know kind of looking at the base of earnings record is and where we have of highly confident.
You know a highly confident of the number on return on equity and and.
The high per share and you know when you when you set out very high confidence of 95 per cent E. Oftentime exceed it. So if you see if you kind of confidence level of 50 per cent you know half of the tabular exceeded and half the time you won't exceed as we when we when we give our guidance and as per share we're really trying to set a.
The confidence level of 95 per cent.
Okay.
Thank you.
Our next question comes from the line of Devin Ryan with JMP Securities. Your line is open.
Great Good morning, everyone and thanks for the overview.
First question just.
On kind of the investment landscape and the spread on new investments.
Come down clearly relative to kind of the peak levels and its kind of.
Okay and that make the right youre still meaningfully above pre pandemic levels. So just love a little maybe more color on whether that the types of deals you guys are putting into the portfolio or.
Or are you still.
The deals probably pricing and I met a premium today.
Yeah, I mean, I alternative of about I mean look the.
The challenge with looking at any one quarter is and kind of it kind of moves.
Moves around because of the sample sizes, it's pretty it's pretty low I would say this quarter was probably kind of reflective of the things we're trying to focus on and do them well just you know things tighter.
We'll just and southern things wider but I think it's probably reflect of I think on the on the generally on the investing environment.
The big theme and you see this across risk premiums across asset classes and most asset classes and there are some industries that that you know that this doesn't exist for it and you know for example of real estate, but.
The that the the cycle is kind of skipped.
And so when you when you look at and people are pricing and underwriting standards or.
Or are kind of assuming that which I think is probably right.
And so things are competitor of <unk>.
Prices from the Tiger and the.
And the with the.
The getting the cycle of forget you know consumers are and.
And has it has excess savings are and the greatest health and they've ever been and.
Now, there's obviously a distribution of the process consumers, but broadly speaking that's the case corporates are in relatively good shape of special given low interest rates and the financials are in great shape.
Most of the the pin down and pain was felt it felt on government spending.
The government the balance sheet and so you.
I think broadly speaking you know we were kind of back into the first and second any and I do not think we're and the.
Hence the 11th inning overtime of our of our.
And of a cycle.
We're we're kind of back of at the beginning the.
And the cycle of skipped and you know what.
And people are pricing risk premiums that way, which is expected low defaults.
And defaults, the recoveries and recoveries given the false would probably be pretty high mm for the.
The next couple of years.
And.
Okay.
Per I appreciate it and that's great color.
And maybe a bigger picture of one Josh if he can.
Just just I'll always appreciate your view on the industry more broadly and you know clearly you know here, we sit today roughly a year of past.
More than a year of pass the start of the pandemic and Youre looking at your portfolio is in terrific shape non accruals are down to 1% of of the portfolio of cost.
The the overall.
And the portfolios performed incredibly well and obviously the very strong quarter. So as we think about just kind of the business models with just kind of gone through a real life stress test how do you think about kind of the case for maybe of further re rating.
And the stock or maybe in the space more broadly and and kind of distinguish between.
The leading firms that really kind of showcase how well they can perform in an environment like last year versus and maybe firms that didn't fare as well given all of that we can kind of look back a little bit in retrospect.
I'll call. It from you Yeah, I'll give you a couple of a couple of of upswing thoughts first of all I think it's it's it's as we didn't really experience the cycle I'm now there was mostly dispersed there was there was very significant dispersion around managers, but quite frankly, you didnt really for the full weight of the cycle, given the fiscal and monetary stimulus and so.
And I don't know if people can and should or thinking about expecting that every day.
Going forward given that return on equity and the space was on average I think it was 2% now that that will come up a little bit because nabs of increase this quarter, but it was quite.
Quite frankly relatively not not rate, although there were people who had a great performance I think our return on equity for the year last year was 15 eight per cent and you know some of our peers you know areas had a great year. Some of it you know people you know the or.
The most definitely people outperformed I think generally what youre seeing and valuations I think the space has the weighted I think you you're seeing the the space trade you know at of closer and net asset value.
Which I don't think of since we've been public it's been really of the case.
And I think you're seeing greater dispersion and and and you know on both of the left tail and the right tale of based on performance and so I think it's the most definitely you know I think I think it's I think it's kind of get into a healthy spot ware.
You know, where the asset class or where the sector was when we were when we were first of this post global financial crisis was.
And it looked at pretty negatively and buy a lot of institutional investors and that now and now I think people can see the dispersion and that dispersion is based on the skill sets and of and talented management teams and business models and how they approach and it has.
How they approach the market so I E.
I think I like it.
And I think you know.
I think hopefully sponsors and issuers and uses of capital.
Put that in their own model, which is and there had which is the they they hopefully they value a stable source of capital.
And for four as and the partnerships and four for the portfolio companies and and people who understand the sector and that they you know and that value stable source of capital will be value to their own.
And their own endeavors and.
So I think for action.
Got you and I don't know, but.
Anything to add or fishermen and fish was always the guest speaker on this because he has the most with the amount of everybody but.
Anybody any of anybody don't like and don't laugh at me when I said Fishman of lift I mean actually does but and.
And if any are any anything to add though.
No I think that was what wealth of Josh I think.
You know the dispersion of managers was it wasn't fully tested given and the the you know.
Unprecedented fiscal and monetary stimulus.
The stimulus but.
You know we will have regular cycles again at some point.
And that'll be reflected and the results, but I agree largely with your thoughts.
Okay terrific well I'll leave it there. Thank you guys.
Great and thank you so much.
Thank you.
Our next question comes from the line of Ryan Lynch with the K B W. Your line is open.
Hey, good morning, Thanks for taking my questions.
First one is you guys are clearly a very big linger into the software space.
And as the market continues to evolve and as software becomes a more desirable sector of the went to it seems like.
The annual recurring revenue Whangee, and it's becoming more and more prevalent so from your standpoint, and you guys tracking and the software space a lot how do you think about lending on.
<unk> versus cash flow to the software companies and then just a high level of ballpark what percentage of your portfolio and your software names or those initial loan Don on an IRR versus out of cash flow lending basis.
Yeah, Thanks, and we'll come back to you in the latter part of the question I don't I don't know if we have off the top of ever had but we'll come back to you on.
On the first part of your question look I would say where investors and.
And not every dollar of cash flow is created equal and not every dollar of subscription revenue a are created equal.
And so I think unfortunately, given that the buoyancy of the software space, which which is kind of raising all boats that those business models haven't been tested and so we're extremely focused on.
On quality of business models are and and and and business models that are robust.
And so it really is and you know we we there are some businesses that we think that have good return on capital or investing a ton of best in class unit economics, and we want them to grow and switching costs are high and we want to support those the.
The company's and their growth endeavors, and so a our structure works and you know there are some cash flow of companies that we think and the software space the cash flow of deals and the software space at.
For example that our.
EBITDA is not burdened by a R&D capitalized R&D.
And that churn is high that a the theres a whole bunch of technical debt and margins or are the state are not sustainable given the technical debt and that we won't lend too and the cash flow basis, and so what we're where we're where we're at.
And our investors and so what I would say is not every dollar of Ey are created equal and not every dollar of EBITDA is created equal and you really got to look at business models and how robust the business models are Bo or fish do you have anything to add.
You know yeah, I think the only thing I would add is we've been lending broadly to the technology sector, which includes software for over 20 years and have developed a lot of pattern recognition along the way on how various end markets within the technology.
And perform through cycles and you know, we're we're very nuanced and our approach we're focused lemmatically and Subsectors, we don't think of software as a sector, it's omnipresent and it's.
Obviously, the digitization of the economy is happening before us and it was probably accelerated through COVID-19 and so you're feeling a lot of tailwind from that but we get very nuanced within within the subsectors and and figure out areas that we feel like there's going to be ongoing strong unit economics and a return on.
The capital in the space.
So the that'll but to Josh is point, we we don't look at.
And we look at investments as investors and we don't we don't look at it and they are alone you know or a cash flow alone.
It differently, you know where we're at.
Sure.
Pressure testing and.
And how we think the those revenue streams are going to perform and what what our margin of safety is if things don't go to the plan.
And I would just add and we also look through to the end markets you know lending.
Two a software business going through the pandemic and the restaurant industry of the cruise industry and.
A lot different than if we were lending to you know of like the grocery.
The retail or different parts of the retail industry. So we pay attention and there's no shortcut you have to pay attention to a lot of factors and market being one of them because it is both said.
Technology is ubiquitous and you got to dig deeper and in your analysis.
And as always fits she comes in with the wisdom rounding out and not every dollar of EBITDA or record revenue is created equal and markets matter and the fishy. Thank you for the.
And you're dead on.
Thanks, I appreciate and I hope that helpful. Ryan Yeah, Yeah. That's helpful. I got in the gut response from the 14th so [laughter].
The other question I did have and you mentioned the you guys brought it up on the call you know the convertible bonds. You guys are now doing different showing from different reporting metrics on that and so you know I know that's still you know a little bit over a year away out of whack and that that will actually becomes due and you guys have been made the decision on how to.
We paid out.
But as we sit here today I guess preliminarily you know if you guys had the convert that day.
What would you guys look to do because it looks like if you guy pay that off with issuing shares and it looked like that can be accretive to NAV.
Be of deleveraging event, and you paid it off and cash it looks like.
It would be dilutive to NAV, but it wouldn't be a deleveraging of that and you know based on you know Ryan right, you're you're dead on so the good news is we get the it's not binary we can we could we get we have the flex on how we settle and how much cash and stock and.
And you know.
And you you hit the book and is exactly right and so it's gonna be a function of the framework is.
Where we are that the equity.
You know how dilutive is it on a row ease of NAV or how accretive it is an ROE of NAV and we have the flexibility of settling.
And the flexibility of settling on.
And how we set all of that and so I think the book and then of.
Or we settle all and and again we.
It's not binary so we could we were and between these bookends, but if we set of long cash it's the.
And it doesn't go through the P&L goes through APEC, but it is dilutive per share of what in.
So the sixth sense, and if we settle all and stocking.
The accretive by <unk> 16 cents.
So that that that that that is that will be a function of where we're sitting how much capital we have.
And you know we're obviously the good news is we have we have time and we can manage it and it's we have the ability of flux settle up but you you hit it.
Okay.
Got you I.
And I appreciate the time today, and and really nice quarter guys.
Thanks I appreciate it.
And that was the hardest financing we've ever done and it had the most value and and you know.
But that was literally the heart of financing note you know.
True.
You know how to round up.
Obviously, when it way and in.
In hindsight I think Ian what we bought back.
I've got 2730, yeah $27 million of those notes at a cost to us of about 90 cents.
You know, which was a helpful investment and our own capital structure of doing COVID-19.
And so.
And in hindsight, we wish we could've done more but we were not only making and COVID-19 and now we're making the investments to support portfolio companies, but making investments and capital structure.
No.
Those two and combination create a lot of value for our shareholders.
Mhm.
Gotcha.
Thanks, guys.
Thank you.
Our next question comes from the line of Finian O'shea with Wells Fargo. Your line is open.
Hi, guys good morning of.
Well the question's been asked and answered just one here on the of the dialed transaction that that looks to be moving along the.
Does that lead you to pursue any any potential ownership change or have your concern has been been subdued by by this time.
Yeah look I would say or concerns haven't been the subdued.
We're obviously.
And and we're obviously very disappointed and the vice chancellors initial decision.
She thinks she got the facts wrong and the law wrong and that's why we appealed.
And as we said we honor our of deals a week back that part of it was on are there deals too.
We have again, we have no.
And we've done the principles that are out for many years and a great deal of respect for them as a competitor to our firm the Delaware Supreme Court yesterday as besides of the hear our appeal and the expedited basis.
So.
That has been heard on May 12.
And so they granted Ah and they're doing it on a bulk basis. So all five of the justices versus the panels, we will hear the appeal on May 12.
That's all true.
Obviously ongoing litigation and so.
And that's all I can say.
Okay. That's helpful. That's all from me. Thank you.
Thank you as a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the lot of Robert Dodd with Raymond James Your line is open.
Hi, guys and congratulations on the quarter a question on on kind of repayment expectations kind of maybe more long term I mean, I realize he and his comment limited near term repayments expected, but if I look at your book you've got a little over.
Off of 50% of the debt book of marked above one and two cost of that my presumption is that factories, and Cooper, which you structure very well so the.
Question is all of your concerns elevated about maybe not in the near term, but as from code to the.
And the rest of this year, given how competitive the bulk of it is that and.
Elevated risk of of.
The risk is and the.
And she left because you get paid if you get.
And we paid early but elevated risk of of maybe portfolio.
Couldn't traction with repayments or do you think the pipeline is gonna be sufficient even and a very competitive market, where you'll very picky on the credit side too to grow the book this year or is the elevated level of what appears to be an elevated level of repayment expectations of headwind.
Yeah actually look of our expectation is.
And that and the near term and we're gonna grow the book.
And so.
When we look at what's out there.
A couple but.
The pipeline more than offsets it and so.
So given as you know the interaction between repayments, which typically create.
Some from some income and but also deleveraged the business and give.
And the breadth.
And depth of our sourcing and how we go to market.
And I felt pretty confident that we're actually on a net basis are going to you know are going to grow the book.
And the you know and the near term.
And that's the nice thing about being part of a of a very large platform. As you know we're involved and a whole bunch of factors and.
Hum.
And look I think again, you know our M&A drives repayments.
Repayments and.
And you know, but also drives the deal flow and you know I I feel I actually feel more bullish and our ability to grow the book today.
And then you know and then I.
We have historically.
Idaho or.
Fishy and anything to add there.
No I think you're spot on I think historically when you look at our repayment activity. It's it's largely been driven not all the time, but largely been driven by M&A activity, which also when there's elevated M&A activity. There's also the elevated opportunities I would expect 2021 to have.
Elevated M&A activity of M&A activity, we're seeing that and the formation of the pipeline.
You know currently but with the backdrop of strong asset valuations and expected tax changes I think you're going to see elevated M&A activity, which will drive both new opportunities and repayments, but I'm I'm with Josh I'm more bullish on on growing the book and then there'd be a shrinkage.
Got it got it appreciate that I mean the.
Question, the photos almost all of it.
She interacts with kind of widens question on on the convert.
And how high I mean, obviously, we know the talk that the the target range would you be willing to walk away.
And essentially at the high end of that target range for a while.
And I want to say a prolonged period, but obviously one of the options with the convert it would be left with you that's not until August 20.
<unk> 22 for a long time out.
What's the balance day of on how.
All of you'd be willing to go because you can always just not get new deals if we get too high but what's the balance versus the potential of something that's accretive to NAV.
If you if it's not two deleveraging, it's a really good outcome on multiple flow so.
And what's the view there.
Yeah look I I look like as you know it's in the summer of next year and.
And so I like it's it's hard to make a call about.
How about your capital and you know.
18 months from now and again you have you have the ability to flex that all of which I think is helpful. So it's not binary.
And so I just you know it's hard to make a call. It the months, we obviously understand those levers very well.
Which is all things being equal you'd rather do something with the with the converse is accretive the net asset value and then didn't delude of and so yeah.
If you had perfect visibility would you like to run a little bit hot and knowing that you can settle and you know and and and stock and <unk>.
The answer would be yes, but again I think that's you know that's some time off we're going to have a lot of work.
I'll have more visibility.
The good news with with with time and nature of time is as time passes you get more clarity and so but we most definitely understand those levers and well as of as we do with everything will be thoughtful as it relates to our shareholders.
Got it thank you.
Yeah.
Thank you. Our next question comes from the line of Derek Hewett with Bank of America. Your line is open.
Good morning, everyone and congrats on another strong quarter.
So, maybe josh or Bo or even Michael and it's.
Sixth Street has been one of the top performing bdcs since inception.
And back in 2013, so how should we think about the the size of the portfolio kind of given your investment strategy plus just the overall growth and private credit or kind of in other words are there enough opportunities to potentially double or even triple the size of the portfolio and the either the.
Intermediate or longer term.
Yeah, and Eric it's good to hear from you look I I don't I don't think we're actually like you know how as the.
The the hallmark of of how we've always run the.
D C is where we're focused on shareholder returns and not growing assets.
And so if we can find assets that provide that earn or exceed our cost of capital and provide shareholder returns.
We will grow if we can't we will not and size of the book.
To be fully invested and and and the trough of opportunity set and so I we have a.
Growth and we I think we tried to hit this a little bit which is you know and.
Growth is not a and let me put it this way one of the reasons why we think we've had the performance we have for shareholders is the way we think about.
How we don't grow the book just to grow the book and.
And we think of shareholders first and.
And we will continue we will continue to think about that the world that way.
And and we work.
And we work for shareholders. The the funny thing is is that.
I know the I know the space kind of thinks about the the you know the asset management space thinks about themselves as having permanent capital and the way the way we think about the world is a little bit differently, which is we don't have permanent capital our shareholders have permanent capital and we just happened to manage it on a year to year basis, and we will continue the work.
Card for shareholders and so.
So that our board and our shareholders.
And by adding this back to manage that those assets.
Yes.
Okay, great. Thank you.
Thank you I'm.
I'm showing no further questions and the queue I will now.
And I'd like to turn the call back over to Joshua for closing remarks.
Thank you so much for everybody's a participation.
And.
And we'll speak to you at the end of the summer if not sooner.
And then obviously a mother's day is coming out.
So obviously, you know and tell the mothers out there. Thank you for supporting a yeah.
And your families and during the very difficult time, and obviously the pandemic of most definitely been hard and my guess is some of the.
And what are some of that burden has fallen and fallen and shoulder. So thank you and we'll talk soon.
Right.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.