Q4 2023 Sixth Street Specialty Lending Inc Earnings Call
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Good morning, and welcome to sixth Street Specialty lending, Inc. 's fourth quarter and fiscal year ended December 31st 2023 earnings Conference call. At this time, all participants are in a listen only mode.
Operator: Good morning, and welcome to 6th Street Specialty Lending Inc.'s fourth quarter and fiscal year ended December 31st, 2023 earnings conference call. At this time, all participants are in a listen-only mode.
Operator: As a reminder, this conference is being recorded on Friday, February 16, 2024. I will now turn the call over to Ms. Cammie Van Horn, Head of Investor Relations. Thank you.
As a reminder, this conference is being recorded on Friday February 16, 2024, I will now turn the call over to MS. Tammy Van Horne 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 statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties actual results may.
Cammie Van Horn: Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may 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 in Sixth Street Specialty Lending Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.
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 and 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 fourth quarter and fiscal year ended December.
Cammie Van Horn: Yesterday, after the market closed, we issued our earnings press release for the fourth quarter and fiscal year ended December 31, 2023 and posted a presentation to the Investor Resources section of our website, www.sixthreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-K filed yesterday with the SEC. Sixth Street Specialty Lending Inc.'s 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 for the fourth quarter and fiscal year ended December 31, 2023. 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, Kimmy. Good morning, everyone.
31, 2023, and posted a presentation to the Investor resources section of our website Www Dot fifth Street specialty lending dot com. The presentation should be reviewed in conjunction with our Form 10-K filed yesterday with the SEC fixed Street specialty lending Inc. 's 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 as of and for the fourth quarter and fiscal year ended December 31, 2023. 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 Tony Good morning, everyone and thank you for joining us with US today is our president Bo Stanley and our CFO Ian Simmonds.
Joshua Easterly: And thank you for joining us today as our President Bo Stanley and our CFO Ian Simpson. For our call today, I will review our full year and fourth quarter highs and take a little bow to discuss activity in the portfolio. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening up the call to Q&A. After the market closed yesterday, we reported fourth-quarter adjusted net investment income of $0.62 per share, or an annualized return on equity of 14.5%, and adjusted net income of $0.58 per share, or an annualized return on equity of $13.6. As presented in our financial statements, our Q4 net investment income and net income per share, inclusive of the unwarranted and non-cash accrued capital gain instead of fee expense, were less than a penny per share. The difference between this quarter's net investment income and net income per share was primarily driven by the reversal of prior period unrealized gains related to investment realization.
For our call today, I will review, our full year and fourth quarter highs and pass it over to Bo discussed activity in the portfolio and we will review our financial performance in more detail and I will conclude with final remarks before opening up the call for Q&A.
After the market closed yesterday, we reported fourth quarter adjusted net investment income of $62 per share or an annualized return on equity of 14, 5% and adjusted net income of 58 cents per share or an annualized return on equity of 13, 6%.
As presented in our financial statements. Our Q4 net investment income and net income per share inclusive of the unwind of the noncash accrued capital gains incentive fee expense, we're less than a penny per share with.
The difference between this quarter's net investment income and net income per share was primarily driven by the reversal of prior period unrealized gains related to investment realizations other.
Other drivers included unrealized losses from portfolio company specific events, which were largely offset by realized and unrealized gains.
Largely from the impact of tightening credit spreads on the valuation of our investments.
Joshua Easterly: Other drivers include unrealized losses from portfolio company-specific events, which were largely offset by realized and unrealized gains, largely from the impact of tightening credit spreads on the valuation of our investors. For the full year 2023, we generated adjusted net investment income per share of $2.36, representing a return on equity of 14.4%, and a full year adjusted net income per share of $2.66, a return on equity of 16.2%. Long-term followers of our business, we know that we measure success based on returns, and 2020 and 2023 were a strong year for charitable returns, excluding the post COVID year rebound in 2021. While this partially reflects the round-tripping of 2022 results reviewed on a combined basis over the last two years, we remain pleased with our performance relative to the sector and in the context of a complex macroeconomic environment. Over the last two years, we have experienced the fastest rate hiking cycle in history, contributing to increased volatility and economic uncertainty.
For the full year 2023, we generated adjusted net investment income per share of $2 36.
Representing a return on equity of 14, 4% and a full year adjusted net income per share of $2 <unk> a return on equity of 16, 2%.
Long time followers of our business, we know that we measure success based on returns and $2 20, and 2023 was a strong year for shareholder returns excluding the post COVID-19 year rebound in 2021 full year return on equity on adjusted net income of 16, 2%.
Reflects our highest calendar annual return on equity since our IPO in 2014.
While this partially reflects around tripping of 2022 results reviewed on a combined basis over the last few years, we remain pleased with our performance relative to the sector and in context of a complex macroeconomic environment over.
Over the last two years, we experienced the fastest rate hiking cycle history contributing to increased volatility and economic uncertainty.
<unk> headwinds, we generated an average annualized return on equity on an adjusted net income of approximately 12% for fiscal years 2022 and 2023 while.
While we don't have a complete set of pure data available yet we believe if returns are nearly double that of our peers over the same two year period that is supported by two year return on equity on a net income of six 5% for our peers to September 32023.
We believe that the return profile. We delivered was largely a result of our disciplined approach to capital allocation. During 2023, we capitalized on attractive opportunities by growing the balance sheet and issuing equity in may while operating at the upper end of our target leverage range throughout the year.
Joshua Easterly: Despite these headwinds, we generated an average annualized return on equity on adjusted net income of approximately 12% for fiscal years 2022 and 2023. While we don't have a complete set of peer data available yet, we believe these returns are nearly double that of our peers over the same two-year period. That is supported by a two-year return on equity on a net income of 6.5% for our peers through September 30, 2020. We believe that the return profile we delivered is largely the result of our disciplined approach to capital allocation.
Read into an investment environment, where the deployment opportunities generated earnings in excess of our marginal cost of capital our track record for efficiently allocating shareholder capital through rewarded as evidenced by our stock trading above book value as a result, our shareholders benefit from access to the more recent asset vintage.
We believe this exposure will continue to drive differentiation and our returns relative to the industry.
By what we've achieved in the past I would like to spend time on how we are positioned in the future starting with the health of the portfolio. Despite the challenging operating environment over the last two years from the elevated interest rates higher inflation and uncertain geopolitical events. The portfolio has shown resilience remains in good shape.
The weighted average revenue and EBITDA of our core portfolio companies, both increased 6% quarter over quarter. We continue to have one portfolio company on nonaccrual, which represents less than 1% of the total portfolio by cost and fair value interest coverage remains stable on a weighted average basis, a two point, though.
Joshua Easterly: During 2023, we capitalized on attractive opportunities by growing the balance sheet and issuing equity in May, while operating at the upper end of our target leverage range throughout the year. We leaned into an investment environment where the deployment opportunity is generated with earnings in excess of our marginal cost of capital. Our track record for efficiently allocating shareholding capital has been rewarded, as evidenced by our stock trading above book value.
Based on interest rates as of quarter end.
Given the shape of the forward interest rate curve, we expected to be the trough for interest coverage of our portfolio companies.
While we highlight the overall health of the portfolio the tails are getting bigger.
We anticipate this will be a theme for 2024 for the sector as idiosyncratic credit issues arise and portfolios and losses drive divergence in returns, which I'll discuss further in a moment the reality for private credit managers is the illiquid nature of the investment assets and and the requirement to be long only makes it challenging to read.
Position existing portfolio with any level of speed as macroeconomic conditions change we.
Joshua Easterly: As a result, our shareholders benefit from access to the more recent asset class. We believe this exposure will continue to drive differentiation in our returns relative to the industry. You're humbled by what we've achieved in the past, but I'd like to spend time on how we're positioned for the future, starting with the health of the portfolio. Despite the challenging operating environment over the last two years, from elevated interest rates, higher inflation, and uncertain geopolitical events, the portfolio has shown resilience and remains in good shape. The weighted average revenue and EBITDA of our core portfolio companies both increased 6% quarter over quarter. We continue to have only one portfolio company on a non-equal basis, which represents less than 1% of the total portfolio by cost and fair value.
So confident about the strength of our in the ground portfolio today for two key reasons first is the deliberate asset allocation in our portfolio characterized by 91% first lien senior secured loans to businesses with strong underlying unit economics and second is the significant exposure we have to recent vintage assets, which makes them there.
Only 40% of our debt investments by fair value as of quarter end.
These investments were underwriting after the start of the rate hiking cycle and for higher quality companies with lower Ltvs.
Yesterday, our board approved a base quarterly dividend of <unk> 46 per share to shareholders of record as of March 15th payable on March 28, Our board also declared a supplemental dividend of <unk> per share relating to our Q4 earnings to shareholders of record as of February 29 payable on March 20th.
Our quarter end net asset value per share pro forma for the impact of the supplemental dividend that was declared yesterday $60 96, and we estimate that our spillover income per share is approximately $1 four.
We would like to reiterate our supplemental dividend policy is motivated by careful consideration of a number of factors, including the Ric distribution requirement.
Joshua Easterly: Interest coverage remains stable on a weighted average basis of 2.0 based on interest rates as of quarter end. Given the shape of the forward interest rate curve, we expect this to be the trough for interest coverage in our portfolio. While we highlight the overall health of the portfolio, the stories are getting bigger. We anticipate this will be a theme for 2024 for the sector as idiosyncratic credit issues arise and portfolios and losses drive divergence in returns, which I'll discuss further in a moment. The reality for private credit managers is the illiquid nature of the investment assets and the requirement to be long-only makes it challenging to reposition an existing portfolio with any level of speed as macroeconomic conditions change.
Not burdening, our returns with excess friction costs incurred through excise tax and our growth steadily building net asset value per share over time.
In connection with the board, we annualize this framework on an ongoing basis.
Before passing it to bow I'll spend a moment on how we're thinking about the broader macroeconomic environment and the impact for the sector.
As we said on our last two earnings calls, we believe Bdcs, where our peak earnings and we reiterate that for you based on the shape of the forward interest rate curve.
More broadly our outlook for the sector remains cautious as we know from the know from history that credit deterioration takes time.
And therefore losses lag this was evidenced during the global financial crisis, which began in 2007.
And defaults to that peak until 2009.
As the credit cycle continues to evolve in 2024, we expect to see three impact for the sector. First is the decline in net investment income driven by the downward shape of the forward interest rate curve.
Second is an uptick in non accruals from credit deterioration, resulting in further declines in net investment income and third is the downward pressure on net asset value driven by the potential for lower fair values from credit weakness and dividend policy is in excess of earnings resulted in a return of capital. The good news for our business. So that we feel confident in our app.
Joshua Easterly: We feel confident about the strength of our in-place portfolio today for two key reasons. First, there's a deliberate asset allocation in our portfolio characterized by 91% personally and senior secure loans to businesses with strong underlying human economics. And second, the significant exposure we have to recent vintage assets, which makes up nearly 40% of our debt investments by fair value as of quarter end. These investments were underwritten after the start of the rate hiking cycle and for higher quality companies with lower LTVs. Yesterday, our board approved a base quarterly dividend of $0.46 per share for shareholders of record as of March 15th, payable on March 28th.
Reflection.
Quality, given our approach for being highly selective in our ability to lead and attractive investment environment.
Additionally, we view the potential for lower interest rates and tighter spreads will likely increase portfolio turnover. Therefore result in potential for incremental economics through activity based fees to offset the decline in net investment income from lower base rates and finally, we are highly confident in our ongoing ability to over earn our base data.
Which Ian will discuss in more detail with that I'll pass it over to Bo to discuss this quarter's investment activity.
Thanks, Josh I'd like to start by laying on some additional thoughts on the direct lending environment and more specifically how it relates to the positioning of our portfolio and the way we're thinking about current opportunities in the market.
2023 was another productive year for private credit asset class continued to grow in terms of both supply and demand.
On the supply side private debt fundraising continue to outpace most private asset classes as investors allocate more capital to the sector.
Joshua Easterly: Our board also declared a supplemental dividend of $0.08 per share relating to our Q4 earnings to shareholders of record as of February 29th, payable on March 20th. A quarter's net asset value per share proforma for the impact of the supplemental dividend that was declared yesterday is $16.96, and we estimate that our spillover income per share is approximately $1.04. We would like to reiterate that our supplemental dividend policy is motivated by careful consideration of a number of factors, including the RIC distribution requirements, not burdening our returns with excess friction costs incurred through excise tax, and our goal of steadily building net asset value per share over time. In connection with the board, we analyze this framework on an ongoing basis.
As for demand the number of LBO is financed in the private credit market with more than six times the number of homes in the broadly syndicated market in 2023, highlighting a clear preference for the private credit product.
While the private credit market share was up significantly in 2023, we expect to see a more balanced more balanced in 2024 is a syndicated market becomes more active again.
In terms of activity levels transaction volumes are meaningfully lower in 2020 story for context total U S. LBO transaction volume reached its lowest level in over 10 years and was down 37% from the trailing 10 year average despite a general slowdown in M&A transactions, we benefited from the large market share shift from the broadly syndicated.
Joshua Easterly: Before passing it to Beau, I'll spend a moment on how we think about the broader macroeconomic environment and its impact on the sector. As we said in our last two earnings calls, we believe BDCs are at peak earnings, and we reiterate this view based on the shape of the forward interest rate curve. More broadly, our outlook for the sector remains cautious, as we know from history that credit deterioration takes time and losses last. This was evidenced during the global financial crisis which began in 2007, and defaults didn't peak until 2009.
<unk> to the private credit market.
As the BSL market regain share in the future we feel confident in our ability to find deployment opportunities driven by the all cycle business model that we've created.
This means that even when the transaction volumes are lower.
Share shifts we remain active through our omnichannel sourcing approach that does not layered solely to M&A sponsor activity or specific sectors. Further we're not reliant upon certain credit market conditions to prudently put capital to work while remaining highly selective.
In Q4, we provide a total commitments of $316 million in total fundings of $278 million across nine new portfolio companies and upsize to five existing investments.
Bo Stanley: As the credit cycle continues to evolve in 2024, we expect to see three impacts on the sector. First, is a decline in net investment income driven by the downward shape of the forward interest rate. Second, is an uptick in non-accruals from credit deterioration resulting in further declines in net investment income. And third, is a downward pressure on net asset value driven by the potential for lower fair values from credit weakness and dividend policies and excessive earnings that result in a return of capital. The good news for our business is that we feel confident in our asset selection and credit quality, given our approach to being highly selective in our ability to lead an attractive investment environment. Additionally, we believe the potential for lower interest rates and tighter spreads will likely increase portfolio turnover. This will result in the potential for incremental economics through activity-based fees to offset the decline in net investment income from lower base rates. And finally, we are highly confident in our ongoing ability to exceed our base dividends, which Ian will discuss in more detail. With that, I'll pass it over to Beau to discuss this quarter's investment activity. Thanks, Josh.
We experienced a $145 million of repayments.
Four 4% and four partial investment realizations.
For the full year 2023, we provided $959 million of commitments and close 808 million appendix.
New investments represented 94% of total fundings in 2023 with only 6% supporting upside the two existing portfolio companies.
Total repayments for $469 million for the year, resulting in net portfolio growth of $339 million.
In 2023 portfolio churn was 15%, which is less than half of our long term average of 41% since IPO.
This slowdown in portfolio turnover contributed to our second highest net deployment year, resulting in year over year portfolio growth of 18%.
Given the tightening cycle and spreads we expect to see increased level of repayment activity in 2020 for creating incremental capacity for new investment opportunities.
On funding trends in Q4, 97% of our new investments were in first lien loans reinforcing our long term focus on investing at the top of the capital structure.
All nine new investments for cross platform deals, where we leverage the size of <unk> capital base to lead and participate in transactions that presented attractive risk adjusted return opportunities for high quality credits.
Our sector selection remain largely consistent with the broader software theme across the portfolio, including several new investments in Fintech companies.
Bo Stanley: I'd like to start by laying out some additional thoughts on the direct lending environment and more specifically how it relates to the positioning of our portfolio and the way we're thinking about current opportunities in the market. 2023 was another productive year for private credit as the asset class continued to grow in terms of both supply and demand. On the supply side, private debt fundraising continues to outpace most private asset classes, and investors allocate more capital to the sector. As for demand, the number of LBOs financed in the private credit market was more than six times the number financed in the broadly syndicated market in 2023, highlighting a clear preference for the private credit product. While private credit market share was up significantly in 2023, we expect to see more balance in 2024 as the syndicated market becomes more active again. In terms of activity levels, transaction volumes were meaningfully lower in 2023. For context, total US LBO transaction volume reached its lowest level in over 10 years and was down 37% from the trailing 10-year average.
As we've said in the past we are more focused on the resilience of the underlying business models, rather than a specific sectors or industries.
Exposure in our portfolio to software businesses.
The attractive fundamental characteristics, we see in these companies, including variable cost structures mission critical solutions recurring subscription based revenues and high switching cost.
To highlight one of the largest transactions during the quarter sixth Street agent and closed on our senior secured credit facility to existing borrower hi, Reba as part of a refinancing transaction.
Over the life of the initial <unk> investment in 2019, <unk> showed strong growth, resulting in deleveraging.
Come a leader in cloud Native Treasury management software.
Our long term relationship with a company coupled with the <unk> ability to commit to the entire facility provided an opportunity to continue to grow with a company, we like and know well.
We exited the original facility generated a gross unlevered asset level IRR of.
13% at $1 seven respectively for our shareholders.
We'd like to now take a moment to provide a quick update on one of our retail ABL investments bed Bath and beyond since our <unk>.
Last update we've continued to receive.
Periodic principal payments through the liquidation process at quarter end outstanding par balance represents only one 3% of our total assets.
Moving on to repayment activity the majority of the payoffs experienced during the quarter were older vintage names that were driven by refinancings.
<unk> tightened in the back half of the year, we started to see borrowers take advantage of the opportunity to lower their cost of financing. This has continued into 2024 is January marked the highest level of repricing activity in the leveraged loan market and for years. We expect this may drive an increase in opportunistic refinancings, which have the potential to lead to incremental.
Bo Stanley: Despite a general slowdown in M&A transactions, we benefited from the large market share shift from the broadly syndicated to the private credit market. As the BSL market regains share in the future, we feel confident in our ability to find deployment opportunities driven by the all-cycle business model that we have created. This means that even when transaction volumes are lower or market share shifts, we remain active through our omni-channel sourcing approach that is not layered solely on M&A, sponsor activity, or specific sectors. Furthermore, we are not reliant upon certain credit market conditions to prudently put capital to work while remaining highly selective.
Rental activity based fees and <unk>.
Q4, two of our largest payoffs price chopper and call Center.
Which were 2021 and 'twenty two 'twenty two investments respectively included call protection.
<unk> capitalized on the ability to access lower cost of capital.
These investments each resulted in gross unlevered asset level IRR of 16%.
From a portfolio yield perspective, our weighted average yield on debt and income producing securities at amortized costs decreased slightly quarter over quarter from 14, 3% to 14, 2%.
The weighted average yield at amortized cost on new investments, including upside is for Q4 was 13, 6% compared to a yield of 13, 8% on exited investments.
Bo Stanley: In Q4, we provided total commitments of $316 million and total funding of $278 million across nine new portfolio companies and upsizes to five existing investors. We experienced 145 million repayments from four full and four partial investment realizations. For the full year 2023, we provided $959 million of commitments and close $808 million of funding. New investments represented 94% of total funding in 2023, with only 6% supporting upsizes to existing portfolios.
Looking at the year over year trends, our weighted average yield on debt and income producing securities at amortized cost is up about 90 basis points from a year ago.
A significant increase in our yields in 2023 illustrates the positive asset sensitivity of our business from increased base rates. In addition to our selective origination approach across the teams and sectors.
Moving on to the portfolio composition and credit stats across our core borrowers for whom these metrics are relevant and we continue to have a conservative weighted average attach and detach point of 0.9 times and four seven times, respectively, and the weighted average interest coverage remained constant at 2.0 acts.
As a reminder, interest coverage assumes we apply reference rates at.
At the end of the quarter to run rate borrower EBITDA as.
Bo Stanley: Total repayments were $469 million for the year, resulting in net portfolio growth of $339 million. In 2023, portfolio churn was 15%, which is less than half of our long-term average of 41% since IPO. This slowdown in portfolio turnover contributed to our second-highest net deployment year, resulting in year-over-year portfolio growth of 18 percent. Given the tightening cycle and spreads, we expect to see an increased level of repayment activity in 2024, creating incremental capacity for new investment opportunities. On funding trends in Q4, 97% of our new investments were in first lien loans, reinforcing our long-term focus on investing at the top of the capital structure. All nine new investments were cross-platform views, where we leveraged the size of Six Reefs' Capital Base to lead and participate in transactions that presented attractive risk-adjusted return opportunities for high-quality credit. Our sector selection remained largely consistent with a broader software theme across the portfolio, including several new investments in FinTech.
As of Q4 2023, the weighted average revenue and EBITDA for our core portfolio companies was $230 million and $79 million respectively.
Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of one six on a scale of one to five with one being the strongest representing an improvement from last quarters rating of one 7% driven by growth in the portfolio from new investments.
Continue to have minimal non accruals with only one portfolio company, representing less than 1% of the portfolio at fair value and no new names added to non accrual status during Q4.
With that I'd like to turn it over to my partner and to cover our financial performance in more detail.
Thank you Bob we finished the year with a strong quarter from an earnings and investment activity perspective in Q4, we generated net investment income per share of <unk> 60 to.
Resulting in full year net investment income per share of $2 31, a Q4 net income per share was <unk> 58 <unk>.
Resulting in full year net income per share of $2 61, we accrued <unk> per share of capital gains incentive fees. In 2023. However, none of this amount was payable at year end, excluding the <unk> <unk> per share that was accrued this year, our adjusted net investment income and adjusted net income per share for the year with $2 30.
Six and $2 66, respectively at year end, we had total investments of $3 3 billion total principal debt outstanding of $1 8 billion and net assets of $1 5 billion or $17 four per share which is prior to the impact of the supplemental dividend that was declared yesterday.
Our ending debt to equity ratio was 123 times up from $1, one five times in the prior quarter and our average debt to equity ratio also increased slightly from $1. One eight times to one to two times quarter over quarter for full year 2023, our average debt to equity ratio was one two times.
Bo Stanley: As we've said in the past, we are more focused on the resilience of the underlying business models rather than the specific sectors or industries. Exposure in our portfolio to software businesses is driven by the attractive fundamental characteristics we see in these companies, including variable cost structures, Mission Critical Solutions, Returning Subscription-Based Revenues, and High Switching Costs.
103 times in 2022.
We operated at the upper end of our previously stated target leverage range during the year and issued equity to take advantage of an attractive investment environment, Despite lower portfolio Chad.
Bo Stanley: To highlight one of the largest transactions during the quarter, Sixth Street aged and enclosed a senior secured credit facility to existing borrower Kyriba as part of a refinancing transaction. Over the life of the initial Sixth Street investment in 2019, Tyreba has shown strong growth resulting in de-leveraging, and has become a leader in cloud-native treasury management software. Our long-term relationship with the company, coupled with Six Roots' ability to commit to the entire facility, provided an opportunity to continue to grow with a company we like and know well. The exit of the original facility generated a gross unleavored asset level IRR and MOM of 13% and 1.7X, respectively, for our shareholders. We'd like to now take a moment to provide a quick update on one of our retail AVL investments, Bad Bath & Beyond.
We have started to see repayment activity pick up in 2024, which we expect will continue.
In terms of our balance sheet positioning at year end, we had $820 million of unfunded revolver capacity against $226 million of unfunded portfolio company commitments eligible to be drawn.
Our funding mix was represented by 52% unsecured debt post.
Post quarter end, we further enhanced our funding mix and liquidity profile through a $350 million a long five year bond offering in early January adjust.
Adjusted for the issuance our funding mix reached approximately 70% unsecured increased our unfunded revolver capacity to approximately $1 1 billion and further improved our debt maturity profile.
As discussed on last quarter's call. Following the issuance of unsecured notes in August 2023, we've effectively pre funded our nearest maturity of $347 $5 million of 2024 notes, which occurred in November with over $1 billion of liquidity on our secured revolver. Following the January offering.
We have plenty of capacity to satisfy this maturity as a result, we feel that our balance sheet is in excellent shape.
Moving to our presentation materials Slide 10 contains this quarter's NAV bridge walking through the main drivers of NAV growth. We added 62 per share from adjusted net investment income against a base dividend of 46 per share the.
The impact of tightening credit spreads on the valuation of our portfolio had a positive <unk> 13 per share impact to net asset value.
Was <unk> 15 per share decline in NAV.
From net unrealized losses, driven by portfolio company specific events.
The changes included <unk> <unk> per share reduction to niv as we reversed net unrealized gains on the balance sheet related to investment realizations and a penny per share uplift from net realized gains on investments.
Bo Stanley: Since our last update, we've continued to receive... Periodic principal payments through the liquidation process. At Coderun, the outstanding power balance represents only 1.3% of our total assets. Moving on to repayment activity, the majority of the payoffs experienced on the corridor were older vintage names that were driven by refinance.
Pivoting to our operating results detailed on slide 12, we generated a record level of total investment income for the third consecutive quarter of $119 $5 million up 4% compared to $114 4 million in the prior quarter.
Walking through the components of income interest and dividend income was $112 1 million up from $107 5 million in the prior quarter, driven primarily by higher OLED yields.
Bo Stanley: As threats tighten in the back half of the year, we've started to see borrowers take advantage of the opportunity to lower their cost of finance. This has continued into 2024, as January marked the highest level of repricing activity in the leveraged loan market in four years. We expect this may drive an increase in opportunistic refinancings, which have the potential to lead to incremental activity-based fees. In Q4, two of our largest payoffs, Price Chopper and Carl Starr, which were 2021 and 2022 investments respectively, included call protection as the borrowers capitalized on the ability to access lower costs of capital. These investments each resulted in gross unlevered asset level IRRs of 16%. From a portfolio yield perspective, our weighted average yield on debt and income-producing securities at amortized costs decreased slightly quarter over quarter from 14.3 to 14.2%. The weighted average yield at amortized costs on new investments, including upsizes, for Q4 was 13.6% compared to a yield of 13.8% on exited investments.
Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled Paydowns were also higher at $3 5 million compared to $2 5 million in Q3, driven by call protection on two of our largest payoffs.
Other income was $3 9 million compared to $4 4 million in the prior quarter.
Net expenses, excluding the impact of a noncash reversal related to unwind of capital gains incentive fees was $65 million up from $61 4 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 5% to seven.
8% and higher incentive fees as a result of this quarter's over any.
During 2023 higher interest rates provided an earnings tailwind for Bdcs.
As interest rates increased the floating rate assets that comprise the majority of BDC portfolios contributed to higher all in yields for the sector. We earned $2 36 per share of adjusted net investment income, which reflects our highest annual operating earnings since inception.
While we believe that operating earnings for Bdcs likely peaked in 2023, we feel that our business is positively positioned to continue to outperform the sector in 2024, driven impart by our liability structure.
As a reminder, 100% of our liabilities are floating rate as we use interest rate swaps on our fixed rate unsecured bonds to swap them to floating.
Given the shape of the forward interest rate curve today, and the expectation that rates will decline in 2020 for our cost of funding will also decrease.
As a result, the earnings profile of our business will show less sensitivity to falling rates relative to our peers that being said, we recognize that being levered at approximately 1% to one times debt to equity minimizes the impact from liability sensitivity for us and the industry.
Bo Stanley: Looking at the year over year trends, our weighted average yield on debt and income-producing securities at amortized cost is up about 90 basis points from a year ago. A significant increase in our yields in 2023 illustrates the positive asset sensitivity of our business from increased base rates in addition to our selective origination approach across themes and sectors. Moving on to the portfolio composition and credit stats across our core borrowers from whom these metrics are relevant, we continue to have a conservative weighted average attach and detach points of 0.9 times and 4.7 times, respectively, and the weighted average interest coverage remains constant at 2.0x. As a reminder, interest coverage assumes we apply reference rates at the end of the quarter to run rate borrower EBITDA.
Ultimately we believe it is all about the left hand side of the balance sheet is asset selection has greater impact.
Before passing it back to Josh I wanted to provide a framework for how we are thinking about guidance for this year. We are mindful that the movement of spreads will be a key variable to NII in 2024, including the impact it has on the level of activity based fees we expect.
Based on our financial model, which incorporates the forward curve and assume spreads and leverage remained constant we expect to target a return on equity on net investment income for 2024, a 13, 4% to 14, 2%.
The lower end of this range reflects muted activity based fees similar to what we experienced in 2023, while the upper end reflects a more normalized level of activity based fees.
Our year end book value per share of <unk> 96, which is adjusted to include the impact of our Q4 supplemental dividend. This corresponds to a range of $2 27 to $2 41 for full year 2024, adjusted net investment income per share.
Ian Simpson: As of Q4 2023, the weighted average revenue in EBITDA for our core portfolio companies was $230 million and $79 million, respectively. Finally, the performance rating of our portfolio continues to be strong, with a weighted average rating of 1.16 on a scale of 1 to 5, with 1 being the strongest, representing an improvement from last quarter's rating of 1.17, driven by growth in the portfolio from new investors. We continue to have minimal non-accruals, with only one portfolio company representing less than 1% of the portfolio fair value and no new names added to non-accrual status during Q4. With that, I'd like to turn it over to my partner, Ian, to cover our financial performance in more detail. Thank you, Boa.
Given our belief that the sector has reached peak earnings we are mindful of the earnings power of the business as interest rates declined with with respect to our dividend level.
Assuming our balance sheet remains constant as of quarter end, we expect every 25 basis points decline in reference rates to lower net investment income by <unk> <unk> per share on an annualized basis.
Based on the forward curve. This framework illustrates that our base dividend of $1 84 per share remained well protected through 2026.
Back to you Josh.
Thank you Ian there's a lot to be excited about for the year ahead.
As you heard from Boeing in the pipeline continues to build and the balance sheet is in excellent shape.
More importantly.
We believe we have the right team and resources to differentiate our business to benefit shareholders going forward beyond the dedicated direct lending team, we leverage the knowledge and sector expertise across the sixth street platform, including our energy healthcare.
Retail asset based lending teams.
This broad range of sector expertise not only widened the top of our origination funnel, but also allows us to provide financing solutions for more complex and unique investment opportunities as.
Ian Simpson: We finished the year with a strong quarter from an earnings and investment activity perspective. In Q4, we generated net investment income per share of $0.62, resulting in full-year net investment income per share of $2.31. Our Q4 net income per share was $0.58, resulting in full-year net income per share of $2.61. We accrued $0.05 per share of capital gains incentive fees in 2023. However, none of this amount was payable at year
As one of a few lenders with these capabilities, we can generate alpha from these transactions we remain focused on finding the best risk adjusted return opportunities for our stakeholders and photo fill ups is well positioned to do so.
In closing I wanted to take a moment to thank each and every shareholder of our business.
For your continued support over the last decade next month, Mark for 10 year anniversary since our initial public offering in March 2014.
Over this period through the end of 2023, we have generated an annualized return on adjusted net income of 13, 5% and a total return for shareholders of 276% on a dividend reinvested basis.
We have achieved these results by protecting our stakeholders capital through sound capital allocation and minimizing credit losses.
Ian Simpson: Excluding the $0.05 per share that was accrued this year, our adjusted net investment income and adjusted net income per share for the year were $2.36 and $2.66, respectively. At year-end, we had total investments of $3.3 billion, total principal debt outstanding of $1.8 billion, and net assets of $1.5 billion, or $17.04 per share, which is prior to the impact of the supplemental dividend that was declared yesterday. Our ending debt-to-equity ratio was 1.23 times, up from 1.15 times in the prior quarter, and our average debt-to-equity ratio also increased slightly from 1.18 times to 1.22 times, quarter over quarter. For full year 2023, our average debt-to-equity ratio was 1.2 times, up from 1.03 times in 2022. We operated at the upper end of our previously stated target leverage range during the year and issued equity to take advantage of an attractive investment environment despite lower portfolio churn. We have started to see repayment activity pick up in 2024, which we expect will continue. In terms of our balance sheet positioning at year end, we had $820 million of unfunded revolver capacity against $226 million of unfunded portfolio company commitments eligible to be drawn. Additionally, our funding mix was represented by 52% unsecured debt.
We are proud of the track record we've delivered over the period of time and believe we are well positioned to continue building upon what we have achieved thus far.
With that thank you for your time today operator, please open the line for your questions.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Withdraw your question. Please press star one one again.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Mickey Schlein from Ladenburg Thalmann.
Yes, good morning, everyone, Josh there's a lot of demand as you mentioned for private debt capital some larger borrowers.
See the portfolio's average EBITDA has about doubled over the last couple of years.
Im assuming some of that is just organic growth of your borrowers but.
Some of it is probably going up market and I'm curious how you are viewing the terms available in the upper middle market versus the middle market, where you've had excellent results historically.
Hey, Thank you. Good morning. Thank you look I think what we've seen is the best risk adjusted return.
And quite frankly, the most activity levels.
That market.
Maybe that changes.
But we haven't seen.
From our perspective.
Lower middle market middle market, not as active as the big market and our capital a bit more valuable in the upper middle market given up until now the broadly syndicated loan market was shut down.
My guess is that ebbs and flows over time.
And with.
I think our shareholders get both that we can go up market.
Even though we have a big platform and big pools of capital so.
Shareholders can participate in the upmarket deal and then given that mid market deals, where we still raised 50 Beale at $30 million to $50 million of physicians are also important in that.
Ian Simpson: Post-quarter end, we further enhanced our funding mix and liquidity profile through a $350 million long five-year bond offering in early January. Adjusted for the issuance, our funding mix reached approximately 70% unsecured, increased our unfunded revolver capacity to approximately $1.1 billion, and further improved our debt maturity profile. As discussed on last quarter's call, following the issuance of unsecured notes in August 2023, we have effectively pre-funded our nearest maturity of $347.5 million of 2024 notes, which occurs in November. With over $1 billion of liquidity on our secured revolver following the January offering, we have plenty of capacity to satisfy this maturity. As a result, we feel that our balance sheet is in excellent shape.
I think we can we're uniquely positioned where we can toggle.
Between market and we can participate in both not many players can do that some are so large that they don't care about the middle market and some are small, but they don't have the balance sheet to participate up market.
But we've gone where the risk adjusted returns and activity levels have been but my guess is that changes.
Thanks for that Josh that's that's helpful and just one follow up Ian.
Ian could you repeat how much accelerated OID and prepayment fee income was accrued in the quarter.
Sure Mickey.
Accelerated OID and prepayment it was about <unk> <unk> per share.
That was recognized.
Yes, that's actually.
Okay. Thank you for that those are all my questions.
Thank you.
Thank you one moment for our next question.
Our next question comes from the line of Brian Mckenna from citizens JMP.
Ian Simpson: Moving to our presentation materials, slide 10 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added 62 cents per share from adjusted net investment income against our base dividend of 46 cents per share. The impact of tightening credit spreads on the valuation of our portfolio had a positive $0.13 per share impact on net asset value. Additionally, there was a $0.15 per share decline in NAV from net unrealized losses driven by portfolio company specific events.
Great. Thanks, Good morning, everyone. So I believe last year was a record year of deployment for the broader sixth Street platform and Josh I think you said in the past you prefer investing environments, where there is a lack of capital and liquidity broadly in the market, so which sentiment in the capital markets recovering here to start the year, how should we think about deployment.
Throughout 2024 for the firm relative to 2023.
It's a great question.
Thank you.
The direct lending side no doubt last year was our largest deployment year across the <unk> platform and funds.
I would suspect that.
Ian Simpson: Other changes included a four cents per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and a penny per share uplift from net realized gains on investments. Pivoting to our operating results detail on slide 12, we generated a record level of total investment income for the third consecutive quarter of $119.5 million, up 4% compared to $114.4 million in the prior quarter. Going through the components of income, interest, and dividend income was $112.1 million, up from $107.5 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 $3.5 million compared to $2.5 million in Q3, driven by call protection on two of our largest payoffs. Other income was $3.9 million, compared to $4.4 million in the prior quarter. Net expenses, excluding the impact of a non-cash reversal related to the unwind of capital gains incentive fees, were $65 million, up from $61.4 million in the prior quarter.
Matt.
I would suspect.
Same slightly down maybe I think activity levels general activity levels in the environment are going to be better but market share is going to be down and so last year activity levels were really really muted I think as Bo mentioned it was like 25%.
All of the statistics, you mentioned about M&A volumes at.
At 10 year historic lows down 37%.
<unk>.
Think thats most definitely for a variety of reasons, one is less volatility in interest rate curve for people.
Private equity dry powder pressure on DPI for.
Private equity sponsors to get money back to Lps Theres a lot of reasons why that's going to change.
On the activity level front.
Private credit market share will go down.
And I think sixth street market share.
In the private credit will probably stay the same.
We go up given our capability.
I would say, it's probably similar same last.
Last year was a really unique opportunity to deploy capital.
And look I don't know if this is clear in the transcript.
I think there is.
Circle for sixth Street shareholders, which is.
We deploy capital well, we protect the balance sheet stock trades above book value.
Those shareholders, who are actually able to participate.
And in times like last year, because we were able to raise capital fewer able to raise capital.
That environment in <unk>.
40% of the assets today, where assets in a post rate from a post rate hiking cycle.
A more interesting vintage to be honest, so most of that vintage we're not.
Ian Simpson: This was primarily due to the upward movement in reference rates, which increased our weighted average interest rate on average debt outstanding from 7.5% to 7.8%, and higher incentive fees as a result of this quarter's over-earning. During 2023, higher interest rates will provide an earnings tailwind for BDC. As interest rates increased, the floating rate assets that comprise the majority of BDC portfolios contributed to higher all-in yields for the sector. We earned $2.36 per share of adjusted net investment income, which reflects our highest annual operating earnings since inception.
It did not end up in the current publicly traded BDC shareholder base and so on.
I'm very proud.
What we've been able to do very well.
Thankful for the shareholder support.
And ultimately they got access to that message of last year.
Got it Super helpful. And then just the follow up ABS is another area of focus across the broader alternatives industry. So how are you thinking about this opportunity at <unk> are you looking to expand capabilities here.
There is a potential to add some of these assets to <unk> portfolio over time, and then could you maybe just walk through how these yields on these types of deals compare to the relatives.
Ian Simpson: While we believe that operating earnings for BDCs are likely to peak in 2023, we feel that our business is positively positioned to continue to outperform the sector in 2024, driven in part by our liability structure. As a reminder, 100% of our liabilities are floating rate, as we use interest rate swaps on our fixed-rate unsecured bonds to swap them to floating. Given the shape of the forward interest rate curve today and the expectation that rates will decline in 2024, our cost of funding will also decrease. As a result, the earnings profile of our business will show less sensitivity to falling rates relative to our peers. That being said, we recognize that being levered at approximately one-to-one times debt-to-equity minimizes the impact from liability sensitivity for us and the industry. Ultimately, we believe it is all about the left-hand side of the balance sheet as asset selection has a greater impact.
China regular way direct lending deals that youre doing.
Or maybe it's three quarters I think we added one last quarter for ABF.
As a large focus for us.
We have.
A.
A spectacular partner.
We always had the capability of business, we added a tactical partner named Michael <unk>, who ran that business at credit Suisse.
We hired before.
The issues at credit Suisse.
And we've built out a team and expertise across.
That deferred idiosyncratic asset classes in the avs.
We actually closed.
It's called I think it shows up as CLO GF holdings.
On November seven and 325 million.
Million secured term loan a.
Ah.
And for a bar, that's basically ABS collateral.
So that shows up in those yields.
I think.
One second.
I will come back to you, but I think my.
My guess is mid teen.
Yes.
A mix of senior and junior capital.
Yes.
Perfect.
So look we have those capabilities. We're excited about it we're excited about the team at <unk>.
Ian Simpson: Before passing it back to Josh, I want to provide a framework for how we are thinking about guidance for this year. We are mindful that the movement of spreads will be a key variable for NII in 2024, including the impact it has on the level of activity-based fees we expect to earn. Based on our financial model, which incorporates the forward curve and assumes spreads and leverage remain constant, we expect to target a return on equity on net investment income for 2024 of 13.4% to 14.2%. The lower end of this range reflects muted activity-based fees, similar to what we experienced in 2023, while the upper end reflects a more normalized level of activity-based fees, using our year-end book value per share of $16.
That's part of the benefit for <unk> shareholders shareholders as they get the benefit of this.
Rod based platform.
Is that a.
Quite frankly, a mono line Standalone manager.
We have two three.
$3 billion BDC kind of provide shareholders.
Got it I'll leave it there thank you guys.
Thanks, so much.
One moment for our next question.
Our next question comes from the line of Finian O'shea from Wells Fargo.
Good morning.
Hey, good morning, how are you.
So.
First question with with SSL P.
BDC up and running now can you touch on the degree of overlap.
<unk> had an origination.
So far and then maybe.
How different the deals look like how far apart are they in say enterprise value.
Ian Simpson: This corresponds to a range of $2.27 to $2.41 for full-year 2024 adjusted net investment income per share. Given our belief that the sector has reached peak earnings, we are mindful of the earnings power of the business as interest rates decline with respect to our dividend level. Assuming our balance sheet remains constant as of quarter end, we expect every 25 basis points decline in reference rates to lower net investment income by three cents per share on an annualized basis. Based on the forward curve, this framework illustrates that our base dividend of $1.84 per share remains well protected through 2026. Back to you, Joe.
I'll leave it there.
Yeah. So.
People are now.
Fixed rate lending partners.
<unk>.
As a private BDC.
Nominally institutionally back just I guess I'll focus on the large.
Cap space and so how we define kind of.
Thoughtfully to these offer is.
Above $200 million of credit facilities at <unk>.
It has a first look.
Hello, 200 <unk>.
Given the size of the relative balance sheets, given the co investment order.
I'm going to answer your question, specifically given the co investment order.
Required.
Once a.
Public funds, so those would be <unk> invested in a company.
Hum.
Have to invest to continue to make follow on investments.
Joshua Easterly: Thank you, Ian. There's a lot to be excited about for the year ahead. As you heard from Boney, the pipeline continues to build, and the balance sheet is in excellent shape. More importantly, we believe we have the right team and resources to differentiate our business to benefit shareholders going forward. Beyond the dedicated direct lending team, we leverage the knowledge and sector expertise across the six feet platform, including our energy, health care, and retail asset-based lending.
The degree of overlap is high in that by name of a portfolio company. So you will see some small toehold positions.
And if there is a duty effectively judy to offer an SSL.
$200 million.
So I will take a small piece of that.
They might be able to participate in future transactions.
It's below $200 million those credit facilities typically grow <unk> will take a very small position.
So.
So the degree by number is high degree of portfolio overlap pilot efficient side.
Joshua Easterly: This broad range of sector expertise not only widens the top of our origination funnel but also allows us to provide financial solutions for more complex and unique investment opportunities. As one of a few lenders with these capabilities, we can generate alpha from these transactions. We remain focused on finding the best risk-adjusted return opportunities for our stakeholders and feel that SLOPS is well positioned to do so. In closing, I want to take a moment to thank each and every shareholder of our business for your continued support over the last decade. Next month marks our 10-year anniversary since our initial public offering in March 2014. Over this period, through the end of 2023, we have generated an annualized return on adjusted net income of 13.5% and a total return for shareholders of 276% on a dividend reinvested basis.
Awesome.
That's very good color just a small follow up on on bed Bath and beyond you seem to flag that as a bit of a special case here, maybe but it's still pretty well.
Well Mark So I guess can you give us.
Some color on what what the remaining collateral looks like what kind of timeline.
Sure.
My guess, so today, we see probably about 56% responses back.
On our original investment.
The collateral pools or a whole bunch of pool from ranging from.
Receiving.
These back from an <unk>.
Vendor program with banks.
From.
Insurance and Workers' comp LTE is coming back to litigation pools, and so there are varying handheld and timelines.
Joshua Easterly: We have achieved these results by protecting our stakeholders' capital through sound capital allocation and minimizing credit. We are proud of the track record we've delivered over this period of time and believe we are well positioned to continue building upon what we have achieved thus far. With that, thank you for your time today. Operator, please open the line for me. Thank you.
As of now we think that is totally wrong.
Great. Thanks, so much.
Thank you one moment far next question.
Our next question comes from the line of Kenneth Lee from RBC capital markets.
Hey, good morning, Thanks for taking my question.
In terms of the originations this year.
Operator: As a reminder, to ask a question, please press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mickey Schlein from Lattinburg, Salmon. Yes, good morning, everyone.
Last year, there was a considerable mix with the new investments versus upsized or add on financing wondering for this year, whether you would expect a similar mix or could it be a little bit more balanced.
Yes so.
I think our funding this year most of it was new IP like 94% of it was new.
Joshua Easterly: Josh, there's a lot of demand, as you mentioned, for private debt capital from larger borrowers. And I see that the portfolio's average EBITDA has about doubled over the last couple of years. I'm assuming some of that is just organic growth from your borrowers, but some of it is probably due to going up market. And I'm curious how you view the terms available in the upper middle market versus the middle market, where you've had excellent results historically. Good morning.
We were the agent on.
The majority of that.
I E.
I don't have a call my guess is is.
That it will probably be more balanced.
Portfolio company is becoming more active in doing add on.
Starting to see a little bit of that I think we're talking about name later today, whether it's theirs.
I guess two names that are upside or opportunities.
But.
I don't I don't really have a crystal ball.
The reality is last year.
Anything that was new or change of control new buyout financing.
Joshua Easterly: Thank you. Look, I think what we've seen is the best risk-adjusted return and, quite frankly, the highest activity level. There's been a Maybe that changes. But we have seen, at least from our perspective, that the lower middle market, the middle market, not as active as the big more, and our capital fits more valuable in the Upper Middle Market. Up until now, the Brawley Syndicate will. My guess is that it ebbs and flows over time. And with, you know, SOX, I think our shareholders get both, and we can go up market, and given that we have a big platform. Chapel S.O.B.
<unk> had to be done in the private credit market.
And so we took advantage of that for sure.
Got you very helpful. There.
And then just in terms of a follow.
A follow up any updated outlook on potential opportunities from banks optimizing their balance sheets due to the changing regulatory framework. Thanks.
Yes look I would say.
<unk> speaking.
This call balls and strikes banks' balance sheets, so more stable.
At least the large.
The money center banks.
Thank the deposit shift team that was happening where deposits are flowing in the treasuries.
As it kind of peaked and flowed it might be slightly be reversing on the margin if the.
Joshua Easterly: S.O.B. The App Market Deals, and then given the mid-market deals where, you know, we still write $30-$50 million per year for Aquo, so I think we're uniquely positioned where we can toggle between markets. And we can participate in both. Not many players can do that.
Deposits are much more stable in vain.
And so we are seeing banks come back into purchasing securities.
Including CLO, AAA and et cetera. So.
That's been a.
And I think thats been a slightly different than last year.
Ian Simpson: Some are so large that they don't care about the middle market, or so small that they don't have the balance. But we've gone where the risk just returns in activity. Thanks for that, Josh.
The I think the smaller bank or those banks that have significant commercial real estate exposure, obviously are going to might not have liquidity issues like they did last year. So.
Ian Simpson: That's helpful. And just one follow-up. Ian, could you repeat how much accelerated OID and prepayment fee income was accrued in the quarter? Sure, Mickey accelerated OID and prepayment, it was about four cents. That was recognized, not approved. Recognized, yeah.
We have issued last year had liquidity issues and not so first Republic, obviously cigna.
Signature list this.
This year I think our goal would be.
We have more credit issues credit issues will be around some.
Yes. It is.
Our commercial real estate, most based on the whole non investment grade corporate credit risk.
Got you very helpful. Thanks again.
Ian Simpson: Okay, thank you for that. Those are all my questions. Thanks. Thank you. One moment for our next question. Our next question comes from the line of Brian McKenna from Citizens JMP. Great, thanks. Good morning, everyone.
Thank you one moment far next question.
Our next question comes from the line of Melissa Wedel from Jpmorgan.
Good morning, Thanks for taking my question.
First I wanted to clarify.
The answer I think Josh that you had some one of the earlier questions around origination outlook for the year.
Joshua Easterly: So I believe last year was a record year of deployment for the broader Sixth Street platform. And Josh, I think you said in the past you prefer investing environments where there's a lack of capital and liquidity broadly in the market. So with sentiment and the capital markets recovering here to start the year, how should we think about deployment activity throughout 2024 for the firm relative to 2020? Yes, it's a great question. So I think you, on the direct lending side, no doubt last year was our largest deployment year. I would suspect, however, that I was suspected.
I think you were referencing roughly the same or maybe a little lower I wasn't sure. If you were referring to startup gross originations.
And or are you talking about market share.
Yes.
I was talking about I think the question was related to the entire <unk> platform.
And so.
The platform last year, I think on the growth side, and probably $4 billion to $5 billion of kind of.
Origination so.
Obviously.
Some of that as discussed based on kind of appetite now.
I.
A question on <unk>.
Referring to was growth.
But it wasn't a broader platform.
Uh huh.
Net my guess is repayments will pick up this year, we had the lowest repayment.
Joshua Easterly: Say slightly down, maybe. I think general activity levels in the environment are going to be better, but market shares are going down. And so last year, activity levels were really, really muted.
Year, I think ever last year as I think Bob mentioned in the script. It was 15% portfolio turnover versus the average of like 40% and so the average loan historically has been around for two and a half years or something and.
Last year.
Which.
He is not the math you should do it would've been the average loan would've been around around for five years or something like that.
Bo Stanley: I think, as Beau mentioned, it was like 25%. Beau, what was the statistic you mentioned about M&A volumes? Yeah, there were 10-year historic lows down. I think that's most definitely for a variety of reasons.
Sure.
So I think.
My guess is growth will be the same to slightly lower.
I don't know.
Were investors were going to do things that we think Argentina for our stakeholders.
Bo Stanley: One is less volatility in the interest rate curve, so people.., private equity dry powder, pressure on DPI for private equity sponsors to get money back to LPG. There's a lot of reasons why that's going to change on the activity level front. I think private credit market share will go down, and I think Sixth Street's market share, in the private credit will probably stay the same to go. So I would say it's probably a similar thing. Last year was a really unique opportunity to deploy capital. And look, I don't know if this was clear in the transcript, but.
Not sure we will be.
Lower because the portfolio turnover will pick up.
Okay, I really appreciate that clarification.
As a fall.
Wanted to circle back to something you said about the outlook.
For the upcoming year and sort of thinking about the ROE framework.
It seems like one of the embedded assumption there is that correct.
Spreads will remain roughly stable with sort of the variable factor may be more around activity level.
I guess I wanted to just get your thoughts on sort of spread stability and an environment, where youre seeing a reopening of the broadly syndicated loan market and is that is that a fair assumption or could we see things.
Joshua Easterly: I think there's a circle for 6th Street shareholders, which is that we deploy capital well, we protect the balance sheet, the stock trades above book value, and then those shareholders are actually able to participate in times like last year because we were able to raise capital; few were able to raise capital in that environment. 40% of the assets today are assets from a post-rate hiking cycle. You know, I'm more interested in... So most of that vintage did not, you know, did not end up in the current publicly traded BDC shareholders. And so I'm very proud of what we've been able to do, and I'm thankful for the SLX shareholder support. Got it, super helpful.
Narrow on that launch.
Yes look I think we're kind of hedged on spreads at least in the near term on earnings.
Look I think the earnings when you think about the activity level, even at the top end of our guidance.
Wasn't that high.
As it relates to <unk>.
And I for sure.
You see spreads come in significantly.
My guess is there's going to be a lot more activity level income.
In the book so activity level of income in 2023.
Yeah.
Call It I'm doing the math.
And I mean on an accelerated OID and prepayment fees were 10 cents per share.
In 2022, it was 27 cents per share in 2021, it was 40.
Joshua Easterly: And then just to follow up, you know, ABF is another area of focus across the broader alternative finance industry. So how are you thinking about this opportunity at Sixth Street? Are you looking to expand capabilities here? Is there the potential to add some of these assets to TSLX's portfolio over time? And then could you maybe just walk through how these yields on these types of deals compared to the relative, you know, kind of regular direct lending deals that you're doing? Or maybe, www.
Seven cents per share.
Even in our 2024 estimate and the range is still pretty muted. So what I would say is at least for 2024.
Spreads to come in and we see some pressure.
On.
And then it just.
Margin is surely we'll see activity levels pick up.
Good evening.
Got it thank you.
Thank you one moment far next question.
Thank you. Our next question comes from the line of Erik Zwick from Hovde Group.
Joshua Easterly: TPGSpecialtyLendingInc.com, Credit Suisse, that we hired before the issues at Credit Suisse. And we built out a team across the different idiosyncratic asset classes in the ABF. We actually closed, it's called, I think it shows up as CLGF Holding, on November 7th at $325 million secured term loan, www. LendingInc.com CBF Collateral, tap those shields, www. TPGLending.com. Thank you.
Good morning R J.
Hi, just a quick follow up on the pipeline I'm curious as you look at it today. If there are any particular industries that are either comprising a larger share or look particularly attractive.
Kind of on the flip side, if there's any industries that you're cautious or are shying away from today.
Yes.
Good question.
Look I think there is.
Our frame is coupled with I think there are in 2024 are more hopeful that our company about bad balance sheet opportunities that which has historically been.
Kind of a waiting for it will come back.
Joshua Easterly: Thank you. Thank you. We'll come back to you, but with that, I think my guests...
We're working on a couple of things.
That we think will provide good risk adjusted return that are complicated.
Joshua Easterly: It was a mix of senior and junior capital. So, look, we have those capabilities, we're excited about them, and we're excited about the team. I think that's part of the benefit for SLOP shareholders, that they get the benefit of this broad-based platform that, quite frankly, a monolithic standalone manager of a $3 billion BDC couldn't provide. I'll leave it there. Thank you, guys. Thank you
So I think Thats one thing.
That is a theme so the company's balance sheet.
Capital structures that were put in place in a zero rate environment, that's no longer a zero rate environment.
The second theme is.
We have done actually more industrial.
And industrial services.
In the <unk>.
Recent.
I think the last quarter and this quarter.
That will show up in the book.
Joshua Easterly: Thank you. One moment for our next question. Our next question comes from the line of Finian O'Shea from Wells Fargo. Morning. Hey, good morning. How are you?
And so Ah.
We like those businesses, we think they are kind of that mid cycle slightly maybe above mid cycle earnings, but our underwriter will surely not at peak earnings.
Joshua Easterly: First question, with SSLP, the private BDC, up and running now, can you touch on the degree of overlap that they've had in origination so far? And then maybe... Well, how different the deals look like, how far apart are they in terms of, say, enterprise value? I'll leave it there. Yeah, so just for people to know, Sixth Street Lending Partners is a private BDC that's predominantly institutionally backed, just like SOX, focused on the work. So how we define kind of, You know, softly duties offer is. Bob, $200 million credit facilities, SSO, has a first world, below 200 S.L., given the size of the, Given the co-investment order. I want to get to your questions now.
And so we will and we have the.
The dynamics there.
Our retail cash flow deals still.
But retail hopefully it will be another good opportunity for us the consumer continues to shift wallet share I think you saw the negative print earlier this week and our retail sales shifted from.
Two experiences.
Balance sheet for boy Boyd.
During COVID-19.
Given the consumer can only spend their excess savings on goods.
They're coming back down to Earth. So I think that's going to be a good opportunity and then we will continue to operate in our sector themes, such as software et cetera, but I do think you'll see more industrial Andrew page Youll see the more complicated transaction show back up in 2024.
Joshua Easterly: Given the co-investment order requires, once a public fund, so those would be SSLP or SOX, invests in a company, they have to invest and continue to make follow-on. So the degree of overlap is high in that by name of the portfolio company. So you will see some small token positions.
That's great color I appreciate it thanks for taking my question.
Sure.
Thank you one moment for our next question.
Our next question comes from the line of Robert Dodd from Raymond James.
Good morning, everyone. So first one.
Joshua Easterly: And if there's effectively a duty to offer an SSLP, above $200 million, SOX will take a small piece of that, so they might be able to participate in future transactions. If below $200 million, those credit facilities typically grow, SSLP will take a very small position. It will fill.
It would be simple maybe I missed it could you give us.
Although we and the earnings guidance.
What kind of factored into that I mean to date, we cut some months ago. It was six seven who use them.
Yeah.
Thanks, Good afternoon Robert.
I think the exact date.
Joshua Easterly: And so the degree by number is high. The degree of portfolio overlap by position is awesome. That's a very good color.
By the way in which we got some help earlier it was probably a week ago or last.
Last Tuesday, with the forward curve, we use and rates are slightly up from there.
Joshua Easterly: Just a small follow-up on Bed Bath & Beyond. You seem to flag that as a bit of a special case here, maybe, but it's still pretty well marked. So, I guess, can you give us some color on what the remaining collateral looks like? What kind of timeline is it? Sure, probably my guess. So today, we've received about 56% of the principal interest back on our original investment. The collateral pools are a whole bunch of pools ranging from receiving LCs back on the vendor program with banks, from insurance workers' comp LCs coming back, to litigation. So there are varying details and timelines, but as of now, we think that it's so. Great, thanks so much.
But yes, the forward curve has been very very tricky.
But we used the forward curve as of last Tuesday, and I think right.
Fall off a little bit and are up from there but.
Got it got it. Thank you and then the other one I think in your prepared remarks, you said I mean, there was some refinancing activity already in repricing.
In the fourth quarter, but those were 'twenty one 'twenty two.
Accelerated income, but not as much but can you give us some idea of what you're thinking about how it could play out in 'twenty four I mean, if spreads do come in.
Joshua Easterly: Thank you. One moment for our next question. Our next question comes from the line of Kenneth Lee from RBC Capital Markets. Hey, good morning.
Does the 20 threes stopped refinancing of spreads to tighten up which would generate a considerably more income if that if the younger versus old I mean any at all from it.
Joshua Easterly: Thanks for taking my question. These are the originations for this year. Last year there was a considerable mix within new investments versus upsized or add-on financing. I was wondering whether this year you would expect a similar mix or whether it could be a little bit more balanced.
Yeah look I think.
I think it's a great question.
Obviously, theres more OID unamortized, OID and call protection in the 23% versus the older vintages.
Do you have that right.
Joshua Easterly: Yeah, so. I think our funding this year, most of it was new, I think, like 94% of it was new. We were an agent on the majority of that. You know, I don't have a call.
So you most definitely can see that happen that is not modeled in.
What.
You might have picked up in our guidance.
Is that.
The variable.
Yes.
The dispersion is higher I think this year in our guidance than it ever has been before that's right and it's because of the things that we're talking about on the last three questions. One is there is more.
Joshua Easterly: My guess is that it will probably be more balanced, because a portfolio company is becoming more active and doing add-ons. You start to see a little bit of that. I think we're talking about names later today. I guess two names that are upsized opportunities, but I don't really have a crystal ball. The reality is... Last year. Anything that was new, a change of control, new buyout, or, you know, financing had to be done in the private practice.
There is more volatility on the curve the progress to date.
We moved this past week.
<unk> breadth and prepayment noise, we I would say is in our face.
At <unk>.
To whatever 28.
For sure we don't have that much in an accelerated OID and prepayment.
<unk>.
It's like 13 cents per share so I don't.
Joshua Easterly: Gotcha. Very helpful there. And then just in terms of a follow-up, any updated outlook on potential opportunities from Banks Optimizing Their Balance Sheet and the Changing Regulation. Yeah, look, I would say.
I don't know the dispersion is wider for sure our guidance with wider for sure.
And because the environment seems.
Joshua Easterly: Broadly speaking, as it's called, Balls and Strikes, thanks balance sheets, so more stable, at least the large, the monies that are... I think the deposit shifting that was happening where deposits were flowing into the treasuries as kind of and Mark Hughes, TPG Specialty Lending Inc. All right. The deposits are much more stable.
It still continues to be volatile.
I appreciate that.
The color that I mean, if the market is highly active 13 centers one quarter, but I'll just leave I think.
Okay.
You're typically pretty conservative so understood. Thank you.
Thanks, Robert Thanks, Robert.
Thank you one moment far next question.
Our next question comes from the line of Maxwell Fritcher from <unk> Securities.
Joshua Easterly: And so we are seeing banks come back into purchasing security. That's been, from a bank standpoint, I think that's been slightly different than last year. I think the smaller banks, for those banks that have significant commercial real estate, obviously are going to, might not have liquidity issues like they did last year. Who had issues last year, had liquidity issues, https://www.kennethleel.com will be around, from, you know, my guess is Commercial Real Estate. Got you. Very helpful there. Thanks again.
Hi, good morning, I'm, calling in today for Mark Hughes.
Are you seeing any more competition and winning deals from the stepped up fund raising and direct lending that Bo had mentioned, particularly if the broadly syndicated market becomes more competitive.
Yes.
Most definitely.
More competition and there's been more capital.
I think the overall.
Whatever you want to call capital credit dry powder compared to private equity dry powder.
I'm not a big Big I don't love that theme because the moment in time it doesn't always play out, but that's so old but there's both definitely more competition.
Joshua Easterly: Thank you. One moment for our next question. Our next question comes from the line of Melissa Weddle from J.P. Morgan. Good morning, thanks for taking my question. First, I wanted to clarify an answer, I think, Josh, that you had to one of the earlier questions around origination outlook for the year. I think you were referencing roughly the same, or maybe a little lower.
I think the good news the bad news.
Is that the asset class has been credential eyes, because it provided a.
Good risk adjusted return.
All different types of allocators and investors.
But that leads to more competition and so we will continue will you need to adapt.
And evolve and iterate, so we're going to continue to provide.
Joshua Easterly: I wasn't sure if you were referring to sort of gross originations or met, or were you talking about market share? Yeah, first of all, I was talking about this. I think the question was the way to the entire 6th Street platform.
A great.
For risks to our issuer with speed and certainty and understanding their business and also.
Make sure we do that for our shareholder and stakeholder so most definitely more competition.
Got it that's helpful. Thank you and.
Yeah.
So in the quarter for the new fundings, there was a small step up in <unk>.
Joshua Easterly: And so, the platform last year, I think on the growth side, did probably four to five billion dollars in kind of appetite. The question I thought that was referring to was growth, but it was in a broader class. Net, my guess is repayments will pick up this year. We had the lowest repayment, you know, here. I think every last year, as I think Bo mentioned in the script, it was, This is the average of like... So, you know, the average loan historically has been around for two and a half years. It's not the math you should do. It would have been the average one would have been over.
Equity investments and I was just wondering if theres anything there or if that's just normal course of business.
Normal course.
I think there were some idiosyncratic.
Its normal level of activity.
Look I think part of what we tried to beat were investors in it.
If we have the chance to make a small equity and go about that.
They are really accretive for shareholders, we'll do it.
We like our model is.
Don't do on everything where investors sometimes there's.
Sometimes theres equity stores, we understand and we can underwrite and others not and.
But.
When we can we'll put.
Well first of all.
A small piece of the balance sheet.
Got it thank you.
Thank you one moment for our next question.
Our next question comes from the line of Ryan Lynch from K B W.
Joshua Easterly: Round for five. I think my guess is growth will be the same, just slightly lower, maybe, I don't know. We're investors. We're going to do things that we think are interesting for our stakeholders, but the net will surely be lower. Okay, I really appreciate that clarification.
Hey, good morning.
Hey, good morning.
First question I had was.
Seeing some of the data some of the purchase price multiples coming down.
For new transactions.
I think private equity is finally starting.
Joshua Easterly: As a follow-up, I wanted to circle back to something Ian had said about the outlook for the upcoming year and sort of thinking about the ROE framework. It seems like one of the embedded assumptions there is that spreads will remain roughly stable with sort of the variable factor maybe being around activity levels. I guess I wanted to just get your thoughts on, you know, sort of spread stability in an environment where you're seeing a reopening of the broadly syndicated loan market. And is that a fair assumption, or could we see things narrow a bit more?
Want to exit investments return capital I'm, just curious have you seen the same decline in leverage levels.
On those transactions that you guys are seeing in the market, whereas the loan to value on those businesses, which have been very low over the last year, we'd still be in that same level and the other question on that is our loan to values.
Staying low is that really is that important to you or is it more important or just the absolute leverage levels on these businesses versus the equity checks and loan to values.
Joshua Easterly: Yeah, look, I think we're kind of hedged on spreads, at least in the near term on earnings. I look, I think the earnings, when you think about the activity level, even at the top end of our guidance. What is that?
First of all is good but.
These are all good questions.
Look I think valuations are all in place.
I think we've seen them all over the place I think generally they are down.
Joshua Easterly: As Louise said, and I... If you see spreads come in significantly, and my guess is there's going to be a lot more activity leveling. In the book, so activity level income, What?
They should be down discount rates are up so if you take a series of cash flows and you apply a higher discount rate, Joe Youre going to end up with a lower NPV that lower NPV over ethane current EBIT or operating cash flow number is going to be lower so I think generally valuation should be down directional.
Joshua Easterly: You know, call it, I'm doing the math, and I mean, on Accelerator ID and prepayment. Thank you. Thank you. In 2022, it was $0.27 per share. In 2021, it was $0.40.
Because of the.
Of discount rate.
The average cost of capital is most definitely gone up given the move in treasury.
When we think about and then I would say given the move and again with free companies have.
Joshua Easterly: $0.07 per share. So even in our 2024 estimates in the range, it's still pretty muted. So what I would say is at least for 2024, and we see some pressure on, on that interest margin, you surely will see activity levels. Got it.
Generally speaking have less capacity to take on debt and service debt given the higher interest cost.
And so.
I think most definitely have seen all of those things.
And I think Ltvs are pretty stable I would say the one thing I would frame up on Ltvs is we don't look at Ltvs, we look at Ltvs, but through our lens, which is what do we think the business is actually a word that may be consistent with what our sponsor's paying for it or not paying for it and.
Joshua Easterly: Thank you. Thank you. One moment for our next question. Thank you. Our next question comes from the line of Eric Zwick from Hovde Group. Good morning, all.
We don't really get a whole bunch of comfort on the size of the equity check.
Joshua Easterly: Just a quick follow-up on the pipeline. I'm curious, as you look at it today, if there are any particular industries that are either comprising a larger share or look particularly attractive, and kind of on the flip side, if there's any industries that you're cautious or shying away from today? Yeah, so good question. Look, I think there are, I would frame it a couple ways.
Perfect.
They have a deferred kind of risk return profile than we do we're kind of always sure. We've written a call option and we're sure.
Or to put in.
They don't they don't have that dynamic so I would say I know.
Deep I would say, we look at Ltvs is through our lens.
That capacity is down because the rates are ltvs.
Ltvs are pretty stable and valuations are slightly down, but they continue to be all over the place.
Joshua Easterly: I think there are, in 2024, more hopeful companies that are good company about bad balance, Opportunity Set, which has historically been kind of a wane for us. We'll come back. We're working on a couple of things that we think will provide good risk-adjusted returns that are complicated. You know, so I think that's one thing that's a theme. So good companies that balance the capital structures that we'll put in place in a zero rate environment, no longer a zero rate environment. The second theme is, we have done actually more industrials and industrial services in the recent, in I think the last quarter of this. And so we like those businesses where we think they're kind of at mid-cycle, slightly maybe above mid-cycle earnings but are underwriteable. They're surely not at peak earnings, and we like to have the dynamics there.
Okay. That's helpful color.
The other question I had is with the market.
DSL starting to that market is starting to pick back up I'm. Just curious are you seeing any sort of new.
Terms.
That are coming in deals that direct lenders are implemented in order to win DLC, we've seen read and heard things like.
Portability and things like that being put into 10, new deals are you seeing any sort of like unusual terms or terms kind of reemerge that you guys aren't super comfortable with in order for lenders to win deals as they are now more competing with the BSL markets.
Well I don't I don't know if it's a BSO thing I mean, I think we fall terms getting generally do they move for because there was a whole bunch of more private credit raised in the last six months or years. So.
I, so I think terms generally.
Have weekend.
Joshua Easterly: Retail cashflow deals still, we don't love, but retail hopefully will be another good opportunity for us. The Consumer continues the shift, WalletShare, I think you saw the negative print earlier this week on retail sales, shifting it from goods to experiences. Those balance sheets were buoyed during COVID, given the consumer can only spend their excess savings on goods.
Do you have to look at it in the context of <unk>.
Idiosyncratic credit.
And so.
Is there more.
Having a light green.
Springing covenants on revolver draws in in large cap private credit yes.
I think the market is it okay job decent job of making sure. It's for the right credit So most definitely terms.
Or or or.
Let's say weekend, but can you continue to evolve and you know that.
Joshua Easterly: They're coming back down to earth, so I think that's going to be a good opportunity. And then we'll continue to operate in our sector theme. I do think you'll see more industrials, and I do think you'll see the more complicated transactions show up. That's great color.
That's part of.
Hopefully, what we bring to the table.
The underwrite and make those decisions Bo anything to add there.
I think you hit it.
What I would say is even though document in terms of loosening I think theres still on the margin better than they were kind of in the late cycle peak ish levels in 2000 22021.
Joshua Easterly: I appreciate it. Thanks for taking my question. Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd from Raymond James. Good morning, everyone. So, first one, maybe simple, maybe I missed it.
Competition will mainly from the direct lending market Youre seeing you know the general loosening of terms.
We typically only play in deals in fact, the only plan deals where we have a seat at the table and documentation and we will not do deals.
Joshua Easterly: Can you give us, Ian, for the ROE and the earnings guidance, what forward curve is factored into that? I mean, today, it's three cuts. A month ago, it was six cuts. Can you give us an indicator of what you've gone through?
Visions that we're not comfortable with.
Okay.
I had one last one for me.
You guys have never been.
You guys have always not been well yes.
Been willing to step into some complex deals.
Joshua Easterly: Robert, I think the exact date, by the way, which we got some help earlier, was probably a week ago, or what was last Tuesday was the forward curve we used, and rates are slightly higher from there. But yeah, the forward curve has been very, very tricky. But we used the forward curve as of last Tuesday, and I think rates, Uh, will fold off a little bit, and we're up from there. Yeah, got it. I got it.
In the past you guys have certainly done some some asset backed deals at better than complex I'm just curious.
Do you have any sort of expertise across the platform and or any desire.
For any transactions.
And the real estate space, so that could ever reaching the tfl axes bucket and whether thats a direct loan.
So there's going to be a lot of.
A lot of pieces to pick up in that space that could be an opportunity, but I'm just not sure. If you have that expertise or desire or whether it's <unk> or even though I know in the past you've played in some of the structured products with Cielo is maybe it's a structured product in that space just curious what's the appetite there expertise in that area.
Joshua Easterly: Thank you. And then the other one, I think in your prepared statement, I mean, there was some refinancing activity already in repricing in the fourth quarter, but those were 21s, 22s. So they generate accelerated income, but not as much. If spread, can you give us an idea of what you're thinking about how it could play out in 24?
We have tons of that expertise.
We've invested billions and billions and billions of dollars in real estate.
Oh, the large theme post the global financial crisis people Might've read one of my long time friends and colleagues at Goldman came on Julian for various co CIO with Alan and myself are across our platform. Most definitely continue to focus on real estate and building out.
Joshua Easterly: I mean, if spreads do come in. You know, did the 23s start refinancing to have the spread tighten up, which would generate considerably more income if they're younger versus older. I mean, any thoughts on that?
Joshua Easterly: Yeah, look, I think you see, I think it's a great question. Obviously, there's more OID, unamortized OID, and call protection in the 23s versus the, do you have that? So you most definitely can see that happen. That is not modeled.
The expertise or augmenting the expertise we already have.
As it relates to does it fit in.
Well have to get some thought into that but.
But we surely have the expertise and we surely there's going to be a unique area. Obviously that is a bad asset.
And so.
That's a constraint bucket for us.
I mean is that constrained now but.
It is a.
It's a constrained resources, so we'll have to figure that out.
Joshua Easterly: What you might have picked up in our guidance is that the, the, the very, the, the, the, The dispersion is higher, I think, this year in our guidance than it ever has been. And it's because of that thing that we're talking about on the last one, that there's more volatility on the curve. The curve had two big moves this past week. There's spreads and prepayment penalties. What I would say is, at our base, we don't have that much in Accelerator IT. It's like 13.
Okay makes sense, that's all for me I appreciate the time today.
Thank you.
Thank you one moment far next question.
Yeah.
Our next question comes from the line of Bryce Rowe from B Riley.
Thanks, Good morning, just wanted.
Wanted to hit on.
Some questions on the right side of the balance sheet.
Yes.
If you think about.
Some of the some of the repayment activity that you think will be a little bit more elevated in 24 versus 23 and put that in the context of where your debt to equity is at this point do you think you can you can kind of manage to that higher end of your targeted debt to equity range.
Joshua Easterly: So, I don't... I don't know. The dispersion is wider, for sure. Our guidance is wider, for sure. And because the environment seems, still continues to be involved, I appreciate that and the cover that I mean, if the market's highly active, 13 cents is one quarter, but I'll just leave. I think the guy, you're typically pretty conservative. So, understood. Thank you. Thanks, Robert.
Meaning that I guess net originations will be will be will be will be lower like like like like you mentioned.
Yes, I think I mentioned gross originations will be lower my my guess is that will be the same. So I think we'll be able to manage into our into or is that range.
Joshua Easterly: Thank you. One moment for our next question. Our next question comes from the line of Maxwell Fritzscher from Truist Securities. Hi, good morning.
I think people were asking growth.
But I think that will I think that will be.
Uh huh.
It will be able to manage that into the range.
Joshua Easterly: I'm calling in today on behalf of Mark Hughes. Are you seeing any more competition in winning deals from the stepped-up fundraising and direct lending that Bo had mentioned, particularly if the broadly syndicated market becomes more competitive? Yeah, I mean, look.
And Josh are you comfortable operating at the higher end of that range or would you prefer to be in the lower end.
I think we're comfortable with.
Again, the and add that in the range. So.
Joshua Easterly: There's definitely is. More and more. I think the overall, whatever you want to call it, capital credit dry powder compared to private equity dry powder, you know, I'm not a big fan of that. I don't love that kind of theme because the asset class has been credentialized because it's provided a decent or a good risk-adjusted return for all different types of allocators and investors, uh, ah, um, but that leads to more competition, and so we'll continue to really need to adapt and evolve and iterate so we can continue to provide, you know, a great product service to So, there's definitely is.
Public.
Publicly stated a range of one to five.
And I think we're comfortable with that.
At moments, we've got above that I think people remember were $1 33.
And did an equity raise to bring it back into the top end of the range, but I think.
So on the range.
Okay, I know, we're comfortable with the range.
And then one more from me you all mentioned pre funding the 24 maturity.
Does that kind of insinuate that youll see the secured piece of the debt stack go up when we when we get to the end of the year or do you kind of like where you sit right now pro forma for the raise earlier here in 'twenty four.
Yeah.
Ian.
Power up.
Comment specifically, so I think our base case is <unk> is not back into the market this year and the bonds.
Joshua Easterly: Got it. That's helpful. Thank you. And so in a quarter for the new funding, there's a small step up in equity investments. And I was just wondering if there's anything there or if that's just the normal course of business. Normal. I think there's some idiosyncratic taunt about it, but it's the normal level of law.
But the market changes and we reserve the right to be opportunistic, but that is the base case.
It means that our secured debt.
We will borrow on our revolver to repay the 2024.
And so our funding mix will slightly change.
That has two impact was secured versus unsecured funding mix.
Joshua Easterly: Yeah, I mean, look, I think part of what we try to be, we're investors. If we, you know, if there's a chance to make a small equity income, that's been really..., like, we don't our model is don't do it on everything we're www. TPGLendingInc.com but, We'll do what we can and we'll put it, you know..., www.TPGLending.com. Got it.
<unk>, that's our lowest cost of capital and so it will bleed slightly into a lower cost of capital as we do that.
Only thing I'd add to that price as we talked about getting to 70% unsecured and our mix from Oklahoma to.
The January deal.
You look back at where <unk> been historically, we've been in the Eighty's. So.
When there are moments in time, where it's it's opportunistic and it's beneficial for us to increase that funding mix than we liked that unsecured market.
Joshua Easterly: Thank you. Thank you. One moment for our next question. Our next question comes from the line of Ryan Lynch from KBW. Hey, good morning. Hey, good morning.
Yeah the base cases.
Finally on the revolver.
We pre funded like we said that with Greg.
Aggregate with strip, we effectively pre funded that and got that off the table.
The base case.
Over time, it should lower.
Got it thank you all for taking the questions.
Thanks.
Thank you at this time I would now like to turn the conference back over to Josh easterly for closing remarks.
Joshua Easterly: The first question I had was, you know, we've seen some of the data on some of the purchase price multiples coming down for new transactions, as I think, you know, private equity is finally starting to, you know, want to exit investments, return capital. I'm just curious, have you seen the same decline in leverage levels on those transactions that you guys are seeing in the market, whereas the loan-to-value on those businesses, which have been very low over the last year, would still be at that same level? And the other question on that is, are loan-to-values staying low? Is that really important to you, or is it more important just the absolute leverage levels on these businesses versus the equity checks and loan-to-values? Yeah, first of all, it's a good question. Well, I think valuations are a little outdated. I think we've seen them all over the place.
Again, thank you so much for your time.
We really appreciate people support I hope people have a.
Excellent Presidents' day weekend.
If you observe it.
And we look forward to seeing people in the screening thanks, everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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Joshua Easterly: I think, generally, they're down. They should be down. Discount rates are, So, if you take a series of cash flows and you apply a higher discount rate to them, you're going to end up with a lower MPV. That lower MPV over the same current EBITDA or operating cash flow number is going to be lower. So, I think generally, valuations should be down directionally because of.., you know, discount rates, with an average cost of capital has most definitely gone up given the. When we think about, and then I would say given the move in, Again, we're three companies have, have less capacity to take on debt and service debt given the higher... And so I think you've seen all those. I think LTVs are pretty stable.
Yes.
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Yes.
Yes.
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Yes.
Joshua Easterly: I would say, the one thing I would frame on LTVs is, we don't look at LTVs; we look at them through our lens, which is, what do we think the business is actually worth? That may be consistent with whether a sponsor is paying for it or not paying for it. We don't really get a whole bunch of comfort from the size of the equity because they have a different kind of risk-return profile than we do. We're kind of always short.
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Joshua Easterly: We've written a co-op, and we're sure to put it, and they don't have that dynamic. So I would say, and I know I went deep, I would say, we look at LTVs through our lens. Debt capacity is down because the rates are up, LTVs are pretty stable, and valuations are finally down, but they continue to be all over. Okay, that's helpful color.
Yes.
Okay.
[music].
Okay.
Okay.
Yes.
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Okay.
Yes.
Yes.
Yes.
Okay.
Yes.
Joshua Easterly: The other question I had is, with the market, with BSL starting to, that market starting to pick back up, I'm just curious, are you seeing any sort of new terms that are coming into deals that direct lenders are implementing in order to win deals? We've seen, you know, read and heard things like, you know, portability and things like that being put into new deals. Are you seeing any sort of unusual terms or terms kind of reemerging that you guys aren't super comfortable with in order for lenders to win deals as they're now more competing with the BSL market? Well, I don't I don't know if it's a BSL thing.
Okay.
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Okay.
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Joshua Easterly: I mean, I think we saw terms getting generally looser because there was a whole bunch of more private credit raised in the last, for the year. So... I, so I think terms generally have, I think you have to look at it in the context of an idiosyncratic credit. And so, you know, are there more, you know, covenant lights, springing, you know, springing covenants on revolver draws in large cap private credit? Yes,
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Joshua Easterly: But I think the market does an okay job, a decent job of making sure it's for the right credit. So, most definitely, in terms, r r r r r r www.TPGLending.com You know, hopefully, what we bring to the table is being able to, on the right. I think you hit it. What I would say is even though documents...
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Joshua Easterly: I think they're still on the margin better than they were kind of in the late cycle, peak-ish level. www.TPGLendingInc.com. We're not going to do that. Okay, I just had one last one for me.
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Joshua Easterly: You guys have never been, you guys have never not been willing, you guys have been willing to step into some complex fields in the past. You guys have certainly done some asset-backed deals that have been complex. I'm just curious, do you have any sort of expertise across the platform and or any desire for any transactions in the real estate space that could ever reach into TSLX's bucket, whether that's a direct loan, you know, obviously there's going to be a lot of pieces to pick up in that space. It could be an opportunity. But I'm just not sure if you have that expertise or desire, whether it's a direct loan or even, I know in the past you've played in some of the structured products with CLOs, maybe it's a structured product in that space. Just curious about the appetite there or expertise in that area.
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Joshua Easterly: Yeah, we have tons of expertise. We've invested billions and billions and billions of dollars in real estate. That was a large theme post-global financial crisis. People might have read, one of my longtime friends and colleagues at Goldman came on, Julian Faulkner, he's a co-CIO with Alan and myself across the platform, he's most definitely the expertise or augmenting the expertise we already have. As it relates to whether it fits in a SOX, we'll have to get some thought into that.
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Joshua Easterly: But we're sure we have the, Obviously, that is a bad-ass. I mean, it's that, and Transcribed by https://otter.ai Okay, makes sense. That's all for me. I appreciate the time today. Thank you. One moment for our next question. Our next question comes from the line of Bryce Rowe from B. Reilly. Thanks. Good morning.
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Joshua Easterly: Just wanted to hit on some questions on the right side of the balance sheet. If you think about some of the repayment activity that you think will be a little bit more elevated in 24 versus 23 and put that in the context of where your debt to equity is at this point, do you think you can manage to that higher end of your targeted debt to equity range, meaning that I guess net originations will be lower, as you mentioned? Yeah, I think I mentioned gross originations will be lower, but my guesses net will be the same.
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Joshua Easterly: So I think we'll be able to manage, to our, into our, But I think people are asking for growth. But I think that will, I think now, will be our. Josh, are you comfortable, you know, operating at the higher end of that range, or would you prefer to be at the lower end? I think we're comfortable in the range, like in the, at that, in the range, so probably say their range up to 1.25, and I think we're comfortable with that. At moments, we've got above that, I think people remember when we were 1.33.
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Joshua Easterly: We did an equity raise to bring it back into the top end of the range. I think we're up. I know we're a couple. Yeah. And then one more for me.
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Joshua Easterly: You all mentioned pre-funding the maturity of 24. You know, does that kind of insinuate that you'll see the secure piece of the debt stack go up when we get to the end of the year? Or do you kind of like where you sit right now pro forma for the raise earlier here in 24?
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Joshua Easterly: Yeah, I'll let Ian, and I'll power up the comment specifically. So I think our base case is SOX is not back in the market this year. But the market changes, and we reserve the right to be opportunistic, which means that our secured debt, we will borrow on the revolver to repay in 2024, so our funding mix will slightly change. That has two impacts. One is the secured versus unsecured funding mix. The other impact is that it's our lowest cost of capital, and so it will bleed slightly into a lower cost of capital. The other thing I'd add to that, Brian.
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Joshua Easterly: We talked about getting to 70% unsecured in our mixed pro forma for the January deal, www.globalonenessproject.org that funding mix, then we like that unsecured market. Yeah, the basic case is funding, and we've all, We pre-funded, like we said earlier, we effectively pre-funded that and got that up.
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Joshua Easterly: Thank you all for taking the questions. Thank you. Thank you. At this time, I would now like to turn the conference back over to Josh Easterly for closing remarks. Again, thank you so much for your time.
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Joshua Easterly: We really appreciate people's support. I hope you have an excellent President's Day to celebrate it, and we look forward to seeing you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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Operator: Thank you. Thank you, www.kennethleel.com ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? www. LinkedIn.com www. Facebook.com www. Facebook.com www. Facebook.com www.
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Cammie Van Horn: Facebook.com ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? Good evening, and welcome to 6th Street Specialty Lending Inc.'s fourth quarter and fiscal year ended December 31, 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, February 16, 2024. I will now turn the call over to Ms. Cammie Van Horn, Head of Investor Relations. Thank you.
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Cammie Van Horn: Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may 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 in Sixth Street Specialty Lending Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.
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Joshua Easterly: Yesterday, after the market closed, we issued our earnings press release for the fourth quarter and fiscal year ended December 31, 2023 and posted a presentation to the Investor Resources section of our website, www.sixthreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-K filed yesterday with the SEC. Sixth Street Specialty Lending Inc.'s 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 for the fourth quarter and fiscal year ended December 31, 2023. 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, Kami. Good morning, everyone.
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Good morning, and welcome to sixth Street Specialty lending, Inc. Fourth quarter and fiscal year ended December 31, 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 February 16, 2024, I will now turn the call over to MS. <unk> Van Horne 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 statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties actual results may.
Joshua Easterly: And thank you for joining us today as our president, Beau Stanley, and our CFO, Ian Simpson. For our call today, I will review our full year and fourth quarter highs and pass it over to Bo to discuss activity in the portfolio. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening up the call to Q&A. After the market closed yesterday, we reported fourth-quarter adjusted net investment income of $0.62 per share, or an annualized return on equity of 14.5%, and adjusted net income of $0.58 per share, or an annualized return on equity of 13.6%. As presented in our financial statements, our Q4 net investment income and net income per share, inclusive of the unwarranted and non-cash accrued capital gain instead of fee expense, were less than a penny per share. The difference between this quarter's net investment income and net income per share was primarily driven by the reversal of prior-period unrealized gains related to investment realization.
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 and 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 fourth quarter and fiscal year ended December.
<unk> 31, 2023 and posted a presentation to the Investor resources section of our website www dot fixed rate specialty lending dot com. The presentation should be reviewed in conjunction with our Form 10-K filed yesterday with the SEC fixed rate specialty lending Inc. 's 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 as they have in for the fourth quarter and fiscal year ended December 31, 2023. As a reminder, this call is being recorded for replay purposes I will now turn the call over to Joshua easterly Chief Executive Officer at <unk> Specialty lending Inc.
Thank you Jamie good morning, everyone and thank you for joining us with US today is our president Bo Stanley and our CFO Ian Simmonds.
For our call today, I will review, our full year and fourth quarter highs and pass it over to Bo discussed activity in the portfolio Ian will review, our financial performance in more detail and I will conclude with final remarks before opening up the call to Q&A.
Joshua Easterly: Other drivers include unrealized losses from portfolio company-specific events, which were largely offset by realized and unrealized gains, largely from the impact of tightening credit spreads on the valuation of our investors. For the full year 2023, we generated adjusted net investment income per share of $2.36, representing a return on equity of 14.4%, and a full year adjusted net income per share of $2.66, a return on equity of 16.2%. Long-term followers of our business, we know that we measure success based on returns. And 2020 and 2023 were a strong year for charitable returns, excluding the post COVID year rebound in 2021; full year return equity on adjusted net income of 16.2% reflects the highest calendar annual return equity since our IPO in 2014. While this partially reflects the round-tripping of 2022 results reviewed on a combined basis over the last two years, we remain pleased with our performance relative to the sector and in the context of a complex macroeconomic environment. Over the last two years, we have experienced the fastest rate hiking cycle in history, contributing to increased volatility and economic uncertainty.
After the market closed yesterday, we reported fourth quarter adjusted net investment income of 62 per share or an annualized return on equity of 14, 5% and adjusted net income of 58 per share or an annualized return on equity of 13, 6%.
As presented in our financial statements. Our Q4 net investment income and net income per share inclusive of the unwind of the noncash accrued capital gains incentive fee expense, we're less than a penny per share higher.
The difference between this quarter's net investment income and net income per share was primarily driven by the reversal of prior period unrealized gains related to investment realizations other.
Other drivers include unrealized losses from portfolio companies specific events, which were largely offset by realized and unrealized gains.
Largely from the impact of tightening credit spreads on the valuation of our investments.
For the full year 2023, we generated adjusted net investment income per share of $2 36.
Representing a return on equity of 14, 4% and a full year adjusted net income per share of $2 <unk>, our return on equity of 16, 2%.
Long time followers of our business, we know that we measure success based on returns and $2 20, and 2023 was a strong year for shareholder returns excluding the post COVID-19 year rebound in 2021 full year return on equity on adjusted net income of 16, 2%.
Reflects our highest calendar annual return on equity since our IPO in 2014.
While this partially reflects the round tripping of 2022 results when viewed on a combined basis over the last two years, we remain pleased with our performance relative to the sector and in context of a complex macroeconomic environment over.
Over the last two years, we experienced the fastest rate hiking cycle history contributing to increased volatility and economic uncertainty. Despite these headwinds we generated an average annualized return on equity on adjusted net income of approximately 12% for fiscal years 2022 and 2023 while.
Joshua Easterly: Despite these headwinds, we generated an average annualized return on equity on adjusted net income of approximately 12% for fiscal years 2022-2023. While we don't have a complete set of peer data available yet, we believe these returns are nearly double that of our peers over the same two-year period. That is supported by a two-year return on equity on a net income of 6.5% for our peers through September 30, 2023. We believe that the return profile we delivered is largely the result of our disciplined approach to capital allocation. During 2023, we capitalized on attractive opportunities by growing the balance sheet and issuing equity in May, while operating at the upper end of our target leverage range throughout the year. We leaned into an investment environment where the deployment opportunities generated earnings in excess of our marginal cost of capital.
While we don't have a <unk>.
Complete set of pure data available yet we believe these returns are nearly double that of our peers over the same two year period that is supported by two year return on equity on a net income of six 5% for our peers to September 32023.
We believe that the return profile. We delivered was largely a result of our disciplined approach to capital allocation. During 2023, we capitalized on attractive opportunities that by growing the balance sheet and issuing equity in may while operating at the upper end of our target leverage range throughout the year.
Read into an investment environment, where the deployment opportunities generated earnings in excess of our marginal cost of capital our track record for efficiently allocating shareholder capital is being rewarded as evidenced by our stock trading above book value as a result, our shareholders benefit from access to the more recent asset vintage.
Joshua Easterly: Our track record for efficiently allocating shareholder capital has been rewarded, as evidenced by our stock trading above book value. As a result, our shareholders benefit from access to a more recent asset vintage. We believe this exposure will continue to drive differentiation in our returns relative to the industry. We're humbled by what we've achieved in the past, but I'd like to spend time on how we're positioned in the future, starting with the health of the portfolio. Despite the challenging operating environment over the last two years from elevated interest rates, higher inflation, and uncertain geopolitical events, the portfolio has shown resilience and remains in good shape. The weighted average revenue and EBITDA of our core portfolio companies both increased 6% quarter-over-quarter. We continue to have only one portfolio company on non-accrual, which represents less than 1% of the total portfolio by cost and fair value.
We believe this exposure will continue to drive differentiation and our returns relative to the industry.
By what we've achieved in the past, but I'd like to spend time on how we are positioned in the future starting with the health of the portfolio. Despite the challenging operating environment over the last two years from the elevated interest rates higher inflation and uncertain geopolitical events. The portfolio has shown resilience remains in good shape, the weighted average revenue and the EBA.
Of our core portfolio companies, both increased 6% quarter over quarter. We continue to have one portfolio company on nonaccrual, which represents less than 1% of a total portfolio by cost and fair value interest coverage remains stable on a weighted average basis, a two point, though.
Joshua Easterly: Interest coverage remains stable on a weighted average basis of 2.0 based on interest rates as of quarter end. Given the shape of the forward interest rate curve, we expect this to be the trough for interest coverage in our portfolio. While we highlight the overall health of the portfolio, the tales are getting bigger. We anticipate this will be a theme for 2024 for the sector as idiosyncratic credit issues arise in portfolios.
Just on interest rates as of quarter end.
Given the shape of the forward interest rate curve, we expect this to be the.
Trough for interest coverage of our portfolio companies.
While we highlight the overall health of the portfolio the tails are getting bigger.
We anticipate this will be a theme for 2024 for the sector as idiosyncratic credit issues arise and portfolio.