Q3 2023 Sixth Street Specialty Lending Inc Earnings Call
Good morning, and welcome to sixth Street Specialty lending Inc. 's third quarter ended September 30th 2023 earnings Conference call. At this time all participants are in a listen only mode. As a reminder, this conference is being recorded on Friday November 3rd 2020.
Three I went out turn the call over to MS can't Kimi ban one head of Investor Relations.
Thank you before we begin today's call I would like to remind our listeners that remarks made during the call may contain forward looking statements.
Other than statements of historical facts made during this call may can constitute forward looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties actual results may differ materially from those in the forward looking statements as a result of a number of factors, including those described from time to time and sixth Street specialty lending Inc filings with the securities.
Exchange Commission the company assumes no obligation to update any such forward looking statements yesterday. After the market closed we issued our earnings press release for the third quarter ended September 32023, and posted a presentation to the Investor resources section of our website Www Dot sixth Street specialty lending dot com the presentation should be reviewed in can.
Johnson with our Form 10-Q filed yesterday with the SEC fixed or specialty lending Inc. Earnings release is also available on our website under the Investor resources section unless noted otherwise all performance figures mentioned in today's prepared remarks are adds up and for the third quarter ended September 32023. As a reminder, 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 Jimmy good morning, everyone and thank you for joining us with.
With us today is my partner and our President Bo Stanley and our CFO incentives for our call today I will provide highlights of this quarter's results and then pass it over to Bo to discuss activity levels in the portfolio.
Ian will review, our quarterly financial results in detail and I will conclude with final remarks before opening the call to Q&A.
After market closed yesterday, we reported strong third quarter financial results with adjusted net investment income per share of <unk> 60.
Corresponding to an annualized return on equity of 14, 4%.
And adjusted net income per share of <unk> 77.
Corresponding to an annualized return on equity of 18, 5% from a reporting perspective, our Q3 net investment income and net income per share inclusive of accrued capital gains incentive fee expenses were 50 774, respectively.
The <unk> <unk> per share difference between the adjusted and reported metrics is a noncash expense related to accrued fees on an unrealized gains from the valuation of our investments.
As a reminder, we excluded <unk> <unk> per share in the presentation of our adjusted results.
If this year were to have ended on September 30, we were to calculate the capital gains incentive fee is payable to the advisor and cash it would have been zero given the gains driving the fee accrual our unrealized.
Our net investment income this quarter continued to be a function of robust net interest margin attributable to the asset sensitivity of our floating rate portfolio and this higher rate environment.
Between this quarter's net investment income and net income of <unk> 17 per share was driven by <unk> 11 per share from unrealized gains largely from the impact of credit spread tightening on the value.
And <unk> <unk> per share from net realized gains.
As many of you will recall market volatility increased last year at the start of the rate hiking cycle.
During Q2, 2022, LCD first lien second lien credit spreads widened by 123, and 206 basis points, respectively, creating downward pressure on the fair value marks across our portfolio and resulted in a 40% decline in net asset value per share related spread movement alone.
Over the five quarters since that time net asset value per share has increased by 17 from $16 97 to $6 97.
And now is above our Q1 2022 net asset value per share of <unk> 88 for two primary reasons.
First the underground portfolio from Q2 2022 have experienced fair values have pulled towards par as first lien credit spreads have tightened 78 basis points. This has resulted in approximately 26 cents of uplift uplift to net asset value per share.
Second we have generated net investment income in excess in excess of our quarterly base and supplemental dividends, which has contributed 31 net asset value per share over the five quarter period.
This over this over earning is driven by our disciplined approach of deploying capital and investment opportunities that exceed our cost of capital inclusive of any credit losses with substantial levels of both capital and liquidity available we were able to deploy capital into a better environment in terms of both economics and underwriting standards.
Has led to successful deployment of nearly 1 billion of capital into new investments over the last five quarters, representing approximately 30%.
And the ground portfolio today.
Remaining increase is attributable largely to accretion of OID from new investments company specific valuation marks and net realized gains.
Shifting now to the macro landscape. The overwriting theme. This year has been the realization that we are in are higher for longer scenario and the potential impact that brings to the economy zooming in on this topic for Levered corporate credit the higher for longer backdrop as Q4, including one that is immediate and the other one is delayed over.
The last 12 months of the last 12 months to 18 months Bdcs for example have experienced higher portfolio yields from arising from horizon base rates contributing to elevated operating return on equity relative to historical averages.
This outperformance has been largely universal across the sector given the floating rate asset sensitivity of these vehicles.
The real differentiation will become evident when we start to see the lagged impact of higher rates play out across portfolios.
This will likely be in the form of increased defaults followed by losses, we believe that in the long run the strength of our asset selection and portfolio management capabilities with differentiated returns for shareholders.
These competencies are deep within our culture.
It's been built over decades and gives us confidence in our ability to continue to provide top tier results to shareholders for the foreseeable future.
At quarter end net asset value per share was $60 97 up 23 per share or one 4% from June 30.
The June 30, a figure of <unk> 74.
This growth was primarily driven by the continued overview of our base dividend and net realized and unrealized gains from investments as discussed earlier yesterday, our board approved a base quarterly dividend of <unk> 46.
Per share to shareholders of record as of December 15th payable on December 29th Our board also declared a supplemental dividend of <unk> <unk> per share related to our Q3 earnings to shareholders of record as of November 30th payable on December 20th our Q3 2023 net asset value per share.
Adjusted for the impact of the supplemental dividend at $60 90 with that I'll now pass over to Bo to discuss this quarter's investment activity.
Thanks, Josh I'd like to start by sharing some thoughts on activity levels in the public and private markets followed by observations on the competitive environment.
Activity levels have picked up in the back half of 2023, as we continue to see a steady trend of private credit taking share from the broadly syndicated loan market.
The total amount of outstanding in the leveraged loan index declined by 23 billion or one 6% over the last 12 months in 2023 is on track to be the first year to show year over year decline since the global financial crisis.
This shift has brought increased deal flow to the direct lending market, which we expect to continue as a broader reopening of the DSO market is largely dependent upon CLO creation, which remains challenged.
Until the CLO machine resumes, which represents the largest buyer base of leveraged loan market leverage loan markets at roughly 65% private credit is.
<unk> to continue to dominate.
As a leading credit provider to fund M&A transactions.
Notably approximately one third of Cielo is are now out of their investment periods.
With that the total increasing to approximately 40% by year end without substantial and unexpected new CLO volume. This amount of the vehicles and harvest would imply a potential decline in the participation for longer maturity credit financings.
That being said the return of the BSL market in the future is inevitable, but we do believe there has been a more permanent structural shift to direct lending that will persist under this one we expect of course to see a portion of the $130 billion of leveraged loans maturing by the end of 2025 to come to a private credit creating opportunities to put capital to work.
When interesting opportunities arise.
While activity levels have picked up in the pipeline is building we are in a much different investment environment today than we were 12 months ago.
At this time last year, our capital is generally constrained across the sector as funding activity in 2021 in the first half of 2022 peak post COVID-19 and repayment activity started to slow.
<unk> available capital has increased as a result of a lull in M&A activity through the first three quarters of the year combined with a significant amount of dry powder from fund raising efforts and the private credit space.
This dynamic has increased the amount of capital and number of players chasing and competing for new deals with competition generally higher today compared to a year ago deal terms are shifting as lenders are eager to eager to deploy capital as always we are remaining true to our core underwriting tenants and our focus on investment opportunities that present, the best risk.
Turn for our shareholders.
Despite the moderately more competitive backdrop, we continue to see borrower demand for financing partners with deep sector expertise in a broad range of underwriting capabilities.
For the third quarter, we had $206 million of commitments and $152 million of fundings. These fundings were across eight new and two upsides as two existing portfolio companies. Our new investments. This quarter were primarily first lien loans across six diversified user industries.
New investment opportunities represented 97% of total fundings for the quarter with just 3% of funding activities. According upsize it to existing portfolio companies.
Consistent with a moderate uptick of M&A activity in the third quarter. The majority of new investments were to support acquisitions to highlight one of the.
Largest funding sixth Street agent <unk>, a senior secured credit facility to support <unk> Capital's acquisition of smart linked solutions, our expertise in healthcare it space provided a competitive advantage through our ability to act with speed and certainty within a tight timeline to support the sponsors acquisition in a competitive process.
Consistent with many of our other investments in our software <unk> services space <unk> has a highly recurring revenue base combined with multi year contracts, providing long term visibility into revenues on.
On the repayment side, we had seven four and 11 partial investment realizations totaled a $159 million in Q3.
For our three largest payoffs one was driven by an acquisition while the other two were driven by refinancings for both refinancings. This vessel successful growth of bound relying portfolio companies allow them to access a lower cost of capital the bank market, therefore, thereby providing a positive outcome for both our borrowers and our shareholders.
Although the higher rate environment generally yields less portfolio turnover, we expect to continue to see opportunistic repayment activity in our portfolio, providing us with incremental capital for new deployment opportunities.
Shifting now to the health of our existing portfolio. The portfolio remains in good shape. Despite the higher for longer macro environment that Josh mentioned earlier management teams across our portfolio companies have shown an increased focus on liquidity management and are placing a much higher importance on capital allocation decisions today.
The last quarter, where we are continuing to see topline growth slowing as general slowdown and uncertainty in the economy has led to softness in bookings. However, we are still seeing revenue and EBITDA growth year over year and quarter over quarter across our portfolio.
Although we have yet to see the demand destruction that we might have expected by this stage and the rate hiking cycle, we're starting to see signs of the consumer weakening at the margin as wage growth has slowed and consumer confidence is on the decline.
Despite these developments our portfolio is generally insulated from consumer discretionary trends given the <unk> nature of the majority of our portfolio companies.
Moving on to portfolio composition in Q3, our portfolio's weighted average yield on debt and income producing securities at amortized cost increased from 14, 1%.
In the prior quarter to 14, 3%. This increase was driven by the impact of higher interest rates are.
Across our core borrowers who for whom these metrics are relevant we continue to have conservative weighted average attachment and detachment points on our loans of zero point in IMAX and was $4 seven X respectively and their weighted average interest coverage declined marginally from two one to 2.0 times driven by the impact of higher cost of funds for our bar.
As of Q3 2023, the weighted average revenue and EBIT of our core portfolio companies was $209 million and $69 million respectively.
In terms of portfolio 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 had approximately two financial covenants per loan agreement and had effective voting control on 91% of our debt investments in addition.
We have meaningful call protection across our debt portfolio.
From a credit quality standpoint, we continue to see stable deposit performance trends across a significant majority of our portfolio.
The performance rating of our portfolio remains strong with a weighted average rating of 107 on a scale of one to five with one being the strongest.
Non accruals are minimal at 0.7% of the portfolio at fair value with no new portfolio companies added to non accrual status from the prior quarter with that I'd like to turn it over to <unk> to cover our financial performance in more detail.
Thank you both for Q3, we generated adjusted net investment income per share of <unk> 60, and adjusted net income per share of <unk> 77.
Total investments were $3 1 billion up slightly from prior quarter total principal debt outstanding at quarter end was $1 7 billion and net assets were $1 5 billion or $16 97 per share prior to the impact of the supplemental dividend that was declared yesterday.
Our debt to equity ratio decreased slightly from $1. One six times as of June 30 to $1. One five times as of September 30, and our weighted average debt to equity ratio for Q3 was $1. One eight times, we continue to have significant liquidity for the size of our balance sheet with $952 million of unfunded revolver capacity.
At quarter end against the $197 million of unfunded portfolio company commitments eligible to be drawn.
At quarter end, our balance sheet and funding profile. We are in excellent shape. Shortly after our Q2 earnings call in August we capitalized on what proved to be a small execution window and raised unsecured debt in the investment grade capital markets, we price to $300 million five year bond offering at treasuries, plus 295 basis points.
Consistent with our overall risk management framework to have floating rate assets and liabilities, we used interest rate swaps matching the principal amount and maturity of the bonds and converted the effective cost of these new notes to safer plus $2 99 basis points we.
We were very pleased with the strong reception, we received from investors for our offering we continue to view the unsecured market as an important component of our debt capital stack irrespective of underlying base rates. The issuance also rebalanced, our funding mix to 56% unsecured debt.
In terms of our debt maturity profile the issuance of the 2028 notes essentially pre funded our nearest maturity, which does not occur until November of 2024 with nearly $1 billion of liquidity on our secured revolver, we have plenty of capacity to satisfy this maturity.
Moving to our presentation materials slide eight contains this quarter's NAV bridge walking through the main drivers of NAV growth. We added 60 per share from adjusted net investment income against a base dividend of <unk> 46 per share as Josh mentioned, there was <unk> <unk> per share of noncash accrued capital gains incentive fee expenses.
Related to this quarter's net realized and unrealized gains the impact of tightening credit spreads on the valuation of our portfolio had a positive <unk> 20 per share impact net realized gains added <unk> <unk> per share to NAV, primarily from the exit of our equity investment in clear company, which generated an unlevered 19, 7% IRR.
And two five times AUM upon payoff other.
Other changes represented <unk> <unk> per share NAV reduction, which includes <unk> <unk> per share as we reversed net unrealized gains on the balance sheet related to investment realizations and <unk> per share primarily from net unrealized losses on investments from company specific events.
Shifting to our operating results detailed on slide nine we generated a record level of total investment income for the second consecutive quarter of $114 4 million up 6% compared to $107 6 million in the prior quarter walking through the components of income interest and dividend income was <unk> seven 5 million.
Up from $102 6 million in the prior quarter, driven primarily by higher all in yields.
Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled Paydowns were also higher at $2 5 million compared to <unk> 9 million in Q2, given the slight increase in repayment activity we experienced in Q3.
Other income was $4 4 million compared to $4 1 million in the prior quarter overall fees remained relatively muted during Q3 relative to historical trends as many of our payoffs were older vintage investments, including our largest prepayment Cairo touch which was in the portfolio for over six years and generated in <unk>.
Unlevered 14, 9% IRR and one seven times mmm.
<unk> shareholders.
Net expenses, excluding the impact of the noncash accrual related to capital gains incentive fees was $61 4 million up from $57 2 million in the prior quarter. This was primarily due to the upward movement in reference rates, which increased our weighted average interest rate on average debt outstanding from seven 1% to seven 5%.
We estimate undistributed income of approximately $1 <unk> per share at quarter end as always we will continue to review the level of undistributed income as the taxi. It progresses to ensure we minimize potential return on equity drag from the excise taxes, while prioritizing returns to our shareholders.
Through the first three quarters of the year, we've generated an annualized return on equity on adjusted net investment income of 14, 2% and on adjusted net income of 17%. We are pleased with these strong results driven largely by higher underlying reference rates tighter credit spreads on the valuation of our portfolio and most importantly.
The avoidance of losses on our investments based on our performance through Q3, we expect to meaningfully outperform the top end of our previous guidance range of $2 17 of adjusted NII per share for full year 2023, and exceed the corresponding return on equity based on adjusted net investment income of 13, 2%.
With that I'll turn it back to Josh for concluding remarks.
Thank you, Ian and clothing, I could take a minute to discuss how we're thinking about the future of private credit.
It sounds like a big topic as Bill mentioned earlier, the massive shift towards private credit has significantly increased the dry powder and number of players in this space.
There are more firms in today's market, we continue to be one of a few who can drive structure and terms given our ability to write sizeable checks with speed and certainty of execution.
In addition to the significant capital base across the <unk> platform that provides attractive investment opportunities for <unk>. We believe their long term success and today its growing market will be a product of two key differentiators first ethos.
Benefits greatly from the shared resources of the fixed fee platform. We just returned from our annual General meeting of limited partners.
In San Francisco last week, where leaders from each of our business units across the franchise came together provide insights and updates on different segments of the market.
The broad range of sector expertise and cross combined with cross platform collaboration enhances the deployment opportunities available to <unk> as evidenced by higher all in returns net of losses relative to the sector and second is our continued focus on the shareholder experience since our first investment in 2011, we have worked out.
<unk> distinguished return profile for our investors by working to avoid credit losses, and being disciplined allocators of our shareholders' capital.
This has been our commitment to shareholders since inception.
As a final note and probably to end on a somewhat somber topic in our prepared remarks.
The world feels very much in a dark place right now.
There's a lot of pain, and suffering risks and instability or elevated both economically and from a geopolitical standpoint.
With this in mind, what we can do is focus on aspects that are within our control, including active portfolio management and optimal capital allocation with that thank you for your time today operator, Please open up the line for questions.
Okay.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby will be compile the Q&A roster.
Our first question comes from Finian O'shea with Wells Fargo Securities. Your line is open.
Hi, everyone. Good morning.
Sure Josh first question on the direct lending.
Platform it looks like your head count jumped up a bit this quarter so seeing if.
So you could double click on that particularly if it relates to adding a new strategy or if this is.
Part of your build out to larger market origination.
Hey, Thanks, Good morning first of all thanks. Thanks for the question look we always continue to add.
Our resources across the platform some of that spin in general.
Our coverage given the.
The opportunity in the direct lending market given.
The challenges of the broadly syndicated loan market.
In addition to that we've added other expertise for example in the health care side with.
With the senior hire.
That used to work with us at Goldman.
So we continue.
To add resources for our stakeholders and shareholders.
Great.
And just.
Just another.
<unk> level question.
You mentioned that you expect the lagged impact of rates to play through that sounded like it related more to the economy.
But obviously direct lending borrowers have already been feeling this sort of.
On the frontline of experiencing the higher.
<unk> rates as we know most hubs sort of treaded water, so far all that.
Very low interest coverage so.
Can you talk about this.
Sort of state of the Union on the sponsor side.
Dealing with this is there may be fatigue, setting in or is there.
My powder running off or anything that would say finally catalyze.
Wave of keys being handed over or is there still a lot of runway in your view.
Yeah, great. Thanks, Tim.
Look.
I think what's been a little shocking to us quite frankly, why we're in this higher for longer.
Moment is that the economy has been relatively robust. So if you look at the portfolio.
Quarter over quarter growth I think it's been about 6% and our portfolio earnings as being kind of in line with that quarter over quarter year over year revenue growth has been about 12% and so you've had this <unk> had obviously.
Fixed charges go up but <unk> had.
Given the strength of the economy and the strength of the U S consumer.
Which is showing on the margin some signs of weakening but still historically world is in a relatively good position.
<unk> had.
A decent backdrop for revenue growth and earnings growth that.
You haven't you haven't had a huge although <unk> had declining coverage you haven't had a huge hedge I think on the sponsor side and capitulation side I don't think we're seeing it.
For example, on lithium, which I think is kronos and on our schedule of investments.
As a as a software business that had some idiosyncratic challenges, but the sponsor put in a ton of capital to support the business for just a year a year extension.
And so I think we have that marked I get a 17% yield to maturity.
And the sponsor.
It's a capital to continue to support the business. So I think that was only wanted to kind of quote unquote credit amendment this quarter.
Feels like were.
This continues to support the business there continues to be fundamentals continue to be okay to good although coverages are declining.
Thanks, so much.
One moment for our next question.
Hey, fin just real quick the one.
One other thing I just wanted to address because I think you saw that uptick week comprehensive purposes, we've added the our European direct lending team.
A lot of opportunity there that's obviously part of the bad bucket, but we did we have done some European deals in the U S Fund and so that team was added to the to that disclosure.
Generally so I think that is a piece of your first question.
Yes that makes sense and just to clarify that.
That team existed at sixth Street previously or did yeah, Yeah got it.
Most have existed although we've added to it.
Awesome. Thanks, so much.
Thanks, guys.
Yes.
Our next question comes from Mark Hughes with <unk> Securities. Your line is open.
Yes, Thank you and good morning.
Related to the last question.
Any specific numbers you can share in terms of the percentage of the portfolio.
Maybe at or below one times in terms of interest coverage.
Kind of how you are modeling that progressing through 2024 reduce day.
Higher for longer.
Yeah, So look out for.
Part of the and you assume the math quickly outside the nonaccrual name, it's about 5%.
The non accrual name is American achievement.
And.
Although I would say.
Hi.
Two although.
Are really good businesses, just continue to make investments have a ton of liquidity. So.
So at a reasonably low level.
And.
Again, I think companies are really focus on.
Capital allocation and solving.
For cash flow.
I don't know if thats.
Peak number.
But it's surely.
Companies are very much focused on it the other thing I would say is interest coverage across the portfolio. So we just talked about the tale, but across the portfolio is about <unk>.
Two times and so ended up down.
Down slightly and I think thats, our QA annualize.
And.
Obviously, we're kind of peak ish rates.
That was basically flat down a 10th quarter over quarter.
I appreciate that and then you.
You mentioned only 3% upsize this.
<unk>.
Thanks.
Is that reflective of maybe pressure on the company.
We are.
We're not in a position to raise more capital or is that just.
Some normal variation perhaps.
Yes, I think it's really more driven by still a rather anemic M&A market. So when we see a lot of upside as the portfolio company that generally M&A related or it can be it investment related as Josh just mentioned I think companies have been focused on.
Capital allocation they are investing heavily.
Prior when interest rates were lower cost of capital is lower now folks just in terms of people investment in terms of the capital investments are really focused on areas that drive high ROIC, so you're seeing less of that and more focus on.
Getting super efficient driving more cash flows, but the big the big driver for this would be M&A.
Understood. Thank you.
One moment for our next question.
Our next question comes from Robert Dodd with Raymond James Your line is open.
Hi, guys. Good morning, so going back to <unk>.
One of your comments, Josh in Tim's question I mean, when when you look at.
What can be the differentiator.
Cloud cloud for private credit businesses, obviously, bdcs long term.
Normally boils down to credit.
Youll comment.
Is that.
The sponsors are stepping up the economies.
The weakening at the margin so yes.
What kind of timeframe do you think the credit differentiation between portfolios between manages between shareholder returns and what kind of tightened trade, we think thats kind of my past.
Yes, yes.
Thanks, I think let me repeat the question back burner stood at which was.
If there is differentiation.
In shareholder experience based on credit losses, when does that start up hearing is that the question question Robert Yes, Okay.
Let me, let me start off and say I think what.
What we should have said if it wasn't clear.
There will be more differentiation I think there is if you look at the data and the data better than I do there has been even in the benign.
Benign credit environment.
The last.
Eight to 10 years, there's been significant differentiation already across the space as it relates.
Investor experience most of that driven by credit losses, and so I would say that the differentiation already.
Exist I think since if you look at since our IPO for example, I think our ROE for the space.
Have been averaged about 7% top quartile has been about.
First point into the top quartile has been about 9% we have been.
13, three most of that spending on the credit line.
And so theres already been vast kind of experience already.
The funny thing about credit and losses and default they tend to lag the economy.
So I would suspect that it will happen in the next.
No.
12 to 15 months, if it does happen I would say the other.
The other factor I would think.
As I expect that private credit in general So I think theres going be dispersion and experience for private credit for people I also think on the margin private credit we will do better than broadly syndicated credit.
I think the big differentiator for private credit generally has been their ability to.
Built into industries, and historically, that's financed higher quality industries.
Put aside healthcare services for a second which we don't really have exposure to but.
They've got to pick better industries and they were they didn't have to be index huggers. So I would expect that private credit outperforms on the lifeline and on the total return line broadly syndicated credit and I would expect that there will be differentiation within private credit that.
Differentially more differentiation that differentiation already existed pre this moment in time.
Got it I appreciate it.
The second thing that kind of fits historically driven.
Performance has been the fee income you tend to get more call protection than the average.
Private credit Linda et cetera.
Look you did disclose the.
If I look at your core protection in the portfolio the potential co protection of the portfolio today for instance principle, it's the lowest level. It's been in there, yes, I mean thats been fee income was up this quarter, but what's left looks to be relatively potentially lower.
Is that just.
Is some aging out of the portfolio and Thats, just taking the ratio the two lines.
And some ATM portfolio such as <unk>.
Yes.
A random volatility.
I think.
Let's come back exactly but I think some of that if youre looking at the fair value as a percentage of core price.
I'm, taking the ratio.
Classes that fair value as a percentage of principal to get the fair value as a concern.
Yes, Thats fair advantage of.
On the fair value of percentage of coal prices, most definitely that that went up because fair value went up.
But the portfolio is most definitely stuck around longer than usual given spreads have been in a wider spread environment. Some repayments are slower and so.
There has been a slow I would call aging out, but theres been a roll down of <unk>.
Call price in the book and so I think if you look at them at fair value type of fair values are up a little bit in prepayments have slowed a little bit.
Got it thank you.
One moment for our next question.
Our next question comes from Melissa Wedel with JP Morgan Your line is open.
Good morning, Thanks for taking my questions today.
<unk> actually already been asked and answered.
So I thought it might be helpful to look at maybe a couple of the new investments made during the quarter.
There were a couple that were larger in size if I'm looking at this right, maybe skylark and Keira.
Those are listed as manufacturing and transportation.
Sectors, respectively. Just wondering if you could walk through sort of your thinking there.
Are those a bit more cyclical how do you get comfortable with that I appreciate it.
Yes.
<unk> is actually a.
Our software business.
Mostly for providing.
And software and outsourcing business, providing support solutions and cost management and payments.
To support the maritime and shipping industry.
So think of it as business services software in the shipping industry.
And so.
We don't we think we.
A little bit cyclical, but not cyclical, but very very high quality business.
The other named <unk>.
I think skylights in the ERP to ERP again.
Our European investment ERP.
ERP software ERP business.
Mostly.
End markets manufacturing, so not not cyclical.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone.
And our next question comes from the line of Ryan Lynch with <unk>. Your line is open.
Hey, good morning.
First question I had was just kind of.
Long may be convoluted question regarding your comments on what we're excited about that Ryan that's a good thing.
Well.
It's kind of has to do with just your comments on.
The broadly syndicated loan market a lot of deals maturing by the end of 2025 and that is a potential opportunity. There has already been a decent amount recently.
Lenders, taking out some broadly syndicated loans.
Okay I'll look at text that Highland fenestra I don't believe that date sixth Street has kind of been an active participant in that market, but please correct me if I'm wrong in that so I would just love to hear a couple of questions. One how do you view those.
I'm sure you've looked at those deals how do you view those current deals that had been refinanced out of the broadly syndicated loan market the quality of those deals.
Are those deals in the future that that potentially could come out with those big deals that would go into the BDC or would that go more youre perpetual private BDC that maybe has a little bit more of upper middle market focus and then wondering if critiques or the fears is that investors have is that.
I know the broadly syndicated loan market a challenge right now, but because that maybe changes a little bit that can open back up there's a fear of wire. These investors going to private credit versus sustained them if they're already in the broadly syndicated loan market why not stay on their when potentially you could get better terms. So why would they go to the private credit market on <unk>.
There are guys, who cannot finance in the broadly syndicated loan market, so kind of like adverse credit selection. So kind of go over some of that.
Let me, let me let me a.
Correct on the record we don't manage a perpetually non traded BDC. So.
I don't want to I want to I want to I want to make sure that is clear.
Clear for people, we have a institutionally back drawdown.
Private vehicle, but guided very that is very very different structurally.
So.
Thanks Syed.
Yes.
Look let me let me take your I don't want to talk about specific specific.
Credits, what I would say is is that the great thing about our business is that we get up every day, we get to make we get to underwrite and make decisions that we think are appropriate for our shareholders' capital and so the names you mentioned, we've looked at and we didn't participate.
And Thats a great thing about our marketplace people can have different views different views about required return its cost of capital documents.
Momentum.
All of those things and so.
<unk>.
And people have different risk tolerances and people have different incentives about putting money to work or not putting money to work it et cetera, So I don't I.
That's a great thing about our marketplace.
And that's what our investors pay us for it.
Yes.
The second thing I think you said is kind of what's happening in the broadly syndicated loan market look I think the broadly syndicated loan market is most definitely structurally more challenged.
That market has been 60% buyers had been closed 60% of those capital structures are triple A's.
<unk>.
Boys are difficult to find in place today outside of a unique buyer base, particularly in Japan.
And so that and that market is starting to amortize and the technip epic technical backdrop of that market and the fundamentals of that market. My guess are going to weekend downgrades are outpacing upgrades.
Recoveries have been low.
And.
So a lot of those a lot of existing CLO theyre going to start amortizing.
And people are going to have to find and they're subject to weighted average life test et cetera. So the fundamentals are weakening slightly the technicals are not great capital is going to have to find a new home.
And.
Some of it is going to flow as an opportunity set into the private market.
You'll recall I wouldn't necessarily think thats all adverse selection, although people are going to have different views on what that should be priced at.
And.
What are good credits and bad credits et cetera.
And by the way I'm, not suggesting that the deals that we passed on were bad credits.
So I know I don't I don't think Theres a behavior. All of these things are going to be adversely selected in addition to that sponsors and companies have different business models, and Mike might need new capital, which won't be available in my value certainly more which is not.
Available in the broadly syndicated loan market. So I don't think it's as linear as you know.
Things are going to roll.
All of the bad credits are going to roll into the private credit market.
At all so.
I think I think the one thing also should noted is that people will talk about our maturity wall in the broadly syndicated loan market.
In.
And the global financial crisis, which never really materialize.
The difference between.
Today and in 2009, and 10 is that policymakers.
Has the ability to lower rates and push people back into risk assets.
And.
Today, the policymakers don't have that so I think the maturity wall is going to have to be.
It's going to be harder to deal with.
Okay.
Okay.
That's helpful get good background.
For our stance on all of that.
The other question I had maybe for you Ian.
You guys talked about.
Some of the declines in NAV in 2022 from <unk>.
Spread widening you guys had have had and continued this quarter of some spread tightening.
Tightening and increase kind of an uplift.
From spreads I'm, just curious I know this is something we could probably calculate.
On our own by looking at your portfolio, but I'd just be curious if.
Have you had any sort of commentary on how much of that spread do you think has still add meaning uptake in loan values. Do you think it's still to be recovered or do you think.
We're kind of mostly done with that at this point.
So I think.
We're a little over halfway done Bryan so theres, a little bit more to come some of that will come back to us through.
Natural repayment activity.
But we're probably let's call it two thirds of the way on that particular pool.
All of assets that was in place back in June of 2022.
Yes, I mean, I think we've tried to do a pretty good job of bridging a bridge.
Which is some of the portfolio.
<unk>.
That we try to look at the portfolio on an apples to apples basis.
Before the fed.
Fed rate hiking cycle started.
And I think we did it on a per share basis, and how much of that has come back.
And then obviously the portfolio that we've put in the ground and the wire spread environment. Most definitely as spreads have tightened and got a lot of that benefit and so I.
I think <unk> I think.
We will go back to script as you described and then I think we are.
I think is as it is right and when I look at the fair value of like $98, five or something like that.
My guess is.
It's probably in the stages right.
Okay.
Understood I appreciate the time today, that's all from me.
Thanks.
And I'm showing no further questions at this time I would now like to turn the conference back to Josh for closing remarks.
Great well first of all thank you for your participation will keep working hard for you.
Obviously as I said in my final remarks, Phil it's dark out there in the world.
With elevated risk, we will keep working hard and I hope everybody enjoys.
Thanks, giving and holiday season.
They come and we will talk to people. After Q4 in Q1, if not sooner. Thank you. So much thanks, everyone.
This concludes today's conference call. Thank you for participating you may now lie.
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