Q4 2024 Sixth Street Specialty Lending Inc Earnings Call

February 14, 2025

February 14th 2025, I would now like to hand, the conference over to Cammy Mckamie Vanhorne head of Investor Relations. Please go ahead.

Thank you for watching!

Speaker Change: 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.

Beau Stanley: Both of these examples highlight the differentiated portfolio we have created.

Beau Stanley: This is further demonstrated by examining the overlap of investments in the TSLX portfolio with other BDCs and comparing that to an investment overlap across the BDC sector. As of Q3 2024, TSLX had approximately 25% less portfolio overlap compared to the overlap on average for the sector. Pivoting to funding trends in Q4, 98% 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 deals where we leveraged the size of Sixth Street's capital base to lead and participate in transactions that presented attractive risk-adjusted return opportunities.

Speaker Change: 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 <unk> specialty lending, Inc. 's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward looking statements.

Speaker Change: Yesterday after the market closed we issued our earnings press release for the fourth quarter and fiscal year ended December 31, 2024, and posted a presentation to the Investor resources section of our website Www Dot fixed street specialty lending dot com. The presentation should be reviewed in conjunction with our Form 10-K filed yesterday with the SEC.

and Luis Shiva Stallion.

Beau Stanley: This contributed to 6th Street aging 88% of the deals funded in TSLX in the fourth quarter.

Sixth Street specialty lending Inc. Earnings release is also available on our website under the Investor Resources section unless noted otherwise all performance figures mentioned in today's prepared remarks are as of and for the fourth quarter and fiscal year ended December 31, 2024, I will now turn the call over to Joshua easterly Chief Executive Officer.

Beau Stanley: In today's crowded marketplace of direct lenders, we believe our scaled capital base serves as a competitive advantage, as we're able to lead transactions, ultimately allowing us to drive shareholder Moving on to repayment activity, as Josh highlighted earlier, we experienced a significant pickup and payoffs during the fourth quarter to finish off the year. Total repayments in Q4 were $305 million. For the full year, repayments totaled $794 million, reflecting a 69% increase over 2023 and resulting in net funding activity of $45 million for 2024. To characterize the repayment activity we experienced during the fourth quarter, we saw a mix between payoffs related to M&A and refinancing.

Speaker Change: Fifth Street specialty lending Inc.

Tony: Thank you Tony Good morning, everyone. Thank you for joining us.

Speaker Change: With us today is our president Bo Stanley and our CFO.

Speaker Change: For our call I will review, our full year and fourth quarter highlights and pass the word to discuss activity in the portfolio.

Speaker Change: Ian will review, our financial performance in more detail and I will conclude with final remarks before opening the call to Q&A.

Speaker Change: After the market closed yesterday.

Beau Stanley: Two of our payoffs driven by M&A, TRP Energy, and Kirebra resulted in the repayment of our existing investment, followed by the opportunity to continue lending to the business through a new money term loan. in terms of repayments driven by refinancing. We continue to pass on deals getting done at spreads that do not present an appropriate return profile for our shareholders. From a portfolio yield perspective, our weighted average yield on debt and income producing securities at an advertised cost decreased quarter over quarter from 13.4% to 12.5%. Half of this decline, or 46 basis points, was from lower interest rates, and the rest was a mix between yields on new fundings and spread step-downs on an existing investment.

Speaker Change: We reported strong fourth quarter results with adjusted net investment income of 61 pressure.

Speaker Change: Annualized operating return on equity of 14, 2%.

Speaker Change: And adjusted net income of 54 cents per share or an annualized return on equity of 12, 5%.

Speaker Change: 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.

Speaker Change: Penny per share higher than the adjusted figures.

Speaker Change: Q4, we earned <unk> <unk> per share of activity based fees, including dividend income representing the highest amount in seven quarters. We continue to build net asset value per share grew $17 12.

Beau Stanley: In today's tighter spread environment, we have continued to participate in investment opportunities that we estimate will earn a return that is greater than our cost of capital. This is illustrated by only 5.1 percent of our portfolio by fair value, and senior secured loans with spreads below 550 basis points. Further, less than 1% of our portfolio by fair value carries a spread below 5%. We highlight this for the reasons we have outlined in the previous earnings goal regarding the importance of earning your CASA capital.

Speaker Change: At September 30 to $17 16.

Speaker Change: The December 31.

Speaker Change: C Fifth Street specialty lending Inc. Earnings release is also available on our website under the Investor Resources section unless noted otherwise all performance figures mentioned in today's prepared remarks are adds up and for the fourth quarter and fiscal year ended December 31, 2024, I will now turn the call over to Joshua easterly Chief Executive Officer.

Speaker Change: Additionally, our base dividend remains well covered with adjusted.

Speaker Change: That's an income of 61 cents per share exceeding our base quarterly dividend by <unk> <unk> per share or 33%.

Speaker Change: For the full year 2024, we generated adjusted net investment income per share of $2 33 reps.

Sixth Street specialty lending Inc.

Joshua Easterly: Thank you Tony Good morning, everyone. Thank you for joining us.

Speaker Change: Representing an operating return on equity of 13, 8% and full year adjusted net income per share of $1 97 or return on equity of 11, 6%.

Beau Stanley: Moving on to the portfolio composition and credit stats. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points of 0.6 times and 5.1 times, respectively. And their weighted average interest covers remain consistent at 2.1X. As a reminder, interest rate coverage assumes that we apply reference rates at the end of the quarter to run rate borrower EBITDA. As of Q4 2024, the weighted average revenue in EBITDA for our core portfolio company was $336 million and $110 million respectively. Median revenue in EBITDA was $147 million and $53 million.

Speaker Change: With us today is our president Bo Stanley and our CFO incident.

Speaker Change: For our call I will review, our full year and fourth quarter highlights and pass the word about discuss activity in the portfolio.

Speaker Change: As we've always said return on equity on net income is a measure that matters on that basis, we generated nearly 12% for 2024.

Speaker Change: Ian will review, our financial performance in more detail and I will conclude with final remarks before opening the call up to Q&A.

Speaker Change: This remains well above our estimate 9% cost of capital and significantly above the Q3 LTM average return on equity for the BDC sector of approximately nine 1%.

Speaker Change: After market closed yesterday.

Speaker Change: We reported strong fourth quarter results with adjusted net investment income.

Speaker Change: 61 per share.

Speaker Change: Further we delivered earnings an increase of 70 basis points of net asset value per share from 17.

Speaker Change: Annualized operating return on equity of 14, 2%.

Speaker Change: And adjusted net income of 54 cents per share or an annualized return on equity of 12, 5%.

Speaker Change: $17 <unk> as of December 31, 2023 to $17.16 as of December 31, 2024.

Beau Stanley: Finally, the performance weighting of our portfolio continues to be strong, with a weighted average rating of 1.10 on a scale of 1 to 5, with 1 being the strongest, representing an improvement from last quarter's rating of 1.14, driven by growth in the portfolio from new investments, and the repayment of a 2-rated investment during the quarter. Non-accruals represent 1.4% of the portfolio at fair value with no new investments added to non-accrual status in Q4.

Speaker Change: And then 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.

Speaker Change: Looking back at 2024, while results were driven by a number of factors, including a shift in interest rates additional activity based fees credit headwinds and movement in new investment spreads.

Speaker Change: Penny per share higher than the adjusted figures.

Speaker Change: In Q4, we earned <unk> <unk> per share of activity based fees, including dividend income representing the highest amount in several quarters. We continue to build net asset value per share grew 17 12.

Speaker Change: We will highlight the impact from each of these components starting with a tailwind.

Ian Simmonds: With that, I'd like to turn it over to my partner, Ian, to cover our financial performance and more details.

Speaker Change: First and most obvious.

Speaker Change: Interest rates remained higher for longer providing an earnings boost for the sector.

Speaker Change: At September 30 to $17 16 as of December 31.

Ian Simmonds: Thank you, Bo. 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 $2.39. Our Q4 net income per share was $0.55, resulting in full-year net income per share of $2.03. We experienced an unwind of $0.06 per share of capital gains incentive fees in 2024, resulting in adjusted net investment income and adjusted net income per share for the year of $2.33 and $1.97, respectively. At year-end, we had total investments of $3.5 billion, total principal debt outstanding of $1.9 billion, and net assets of $1.6 billion, or $17.16 per share, which is prior to the impact of the supplemental dividend that was declared yesterday.

Speaker Change: 12 months ago, the forward curve indicated interest rates of approximately three 6% today.

Speaker Change: Additionally, our base dividend remains well covered with adjusted net investment income of 61 cents per share exceeding our base quarterly dividend by 50 cents per share or 33%.

Speaker Change: This compares with three months three year sulfur swap rate today of approximately 4% or 40 basis points difference.

Speaker Change: Our base interest rates supported LTM operating.

Speaker Change: For the full year 2024, we generated adjusted net investment income per share of $2 33.

Speaker Change: Our ROE for the sector through Q3 of 12, 3% and 13, 9% for <unk> well above the long term sector average of eight 9%.

Speaker Change: Representing an operating return on equity of 13, 8% and full year adjusted net income per share of $1 97 or return on equity of 11, 6% as.

Speaker Change: For <unk>.

Speaker Change: The rate environment in 2024 contributed approximately <unk> <unk> per share of net investment income above our guidance.

Speaker Change: As we've always had return on equity and net income is a measure that matters on that basis, we generated nearly 12% for 2024.

Speaker Change: In addition to slightly uplift from rates.

Speaker Change: We earned <unk> 44 per share of growth activity based fee income.

Speaker Change: It remains well above our estimate 9% cost of capital is significantly above the Q3 LTM average return on equity for the BDC sector of approximately nine 1%.

Speaker Change: Including dividend and other income in 2024, representing the highest amount since 2021.

Ian Simmonds: Our ending debt-to-equity ratio was 1.22x, up slightly from 1.19x in the prior quarter, and our average debt-to-equity ratio also increased from 1.14x to 1.23x quarter over quarter. For full year 2024, our average debt-to-equity ratio was 1.19x, down slightly from 1.2x in 2023. In terms of our balance sheet positioning at year-end, we had $674 million of available revolver capacity against $205 million of unfunded portfolio company commitments eligible to be drawn. As discussed on last quarter's call, we satisfied the maturity of our 2024 unsecured notes during the fourth quarter through utilization of undrawn capacity on our revolving credit facility.

A significant portion of the income came in the fourth quarter as we experienced a resurgence of repayment activity in our portfolio.

Speaker Change: Further we delivered earnings an increase of 70 basis points, our net asset value per share from 17.

Speaker Change: This resulted in <unk> per share of activity based fee income for the quarter above our trailing three year historical average of <unk> per share.

Speaker Change: $17 four as of December 31, 2023 to $17 16 as of December 31, 2024.

Speaker Change: This fee income is a product of our in depth underwriting and proactive investment approach as we carefully structure investments include call protection and other features that create value for shareholders.

Speaker Change: Looking back at 2024, our results were driven by a number of factors, including a shift in interest rates additional activity based fees credit headwinds and movement in new investment spreads.

Speaker Change: In 2020 for activity based fee income contributed approximately approximately 15 <unk> per share of net investment income above our guidance.

Speaker Change: We will highlight the impact from each of these components starting with the tailwind.

Speaker Change: Now pivoting to the headwind.

Speaker Change: Consistent with our message for the last couple of years, we expected credit to weaken on the margin until a emerge over.

Speaker Change: First and most obvious answer interest rates remained high for longer providing an earnings boost for the sector.

Speaker Change: Over the last 12 months, we experienced socratic credit deterioration across two portfolio companies.

Speaker Change: 12 months ago, the forward curve indicated interest rate curve.

Ian Simmonds: Following that repayment, our nearest maturity does not occur until August of 2026. Consistent with our ongoing messaging of being an annual issuer, we anticipate accessing the unsecured market in calendar year 2025 to extend our debt maturity ladder and maintain our target funding mix. Last month, we kicked off the annual process of amending and extending our revolving credit facilities. While the current maturity on the facility is not until 2029, we have historically extended the maturity on an annual basis, driven by our asset liability matching principle of maintaining a weighted average duration on our liabilities that meaningfully exceeds the weighted average life of the assets funded by debt.

Speaker Change: Proximately three 6% today.

Speaker Change: <unk> acquisition Corp, and lithium technology.

Speaker Change: As compared to three months three year cohort cooperate today of approximately 4% or 40 basis points difference.

Speaker Change: Both of which we added to nonaccrual during the year.

Speaker Change: The loss interest income from these two investments after being placed on non accrual resulted in a <unk> <unk> per share.

Speaker Change: Higher base interest rates reported LTM operating.

Speaker Change: ROE for the sector through Q3 of 12, 3% and 13, 9% for <unk> well above the long term average of eight 9%.

Speaker Change: Negative impact to net investment income in 2024 relative to our forecast.

Speaker Change: Even with the lower fair value on these investments we continue to grow net asset value.

Speaker Change: <unk>.

Speaker Change: The rate environment in 2024 contributed approximately <unk> <unk> per share of net investment income above our guidance.

Speaker Change: Year over year by 70 basis points.

Speaker Change: This compares to a decline of approximately 160 basis points on average for the BDC peer group through Q3 2024 compared to Q4 2023.

Speaker Change: In addition to slightly uplift from rates.

Speaker Change: We are in.

Speaker Change: 44, <unk> per share of growth activity based fee income.

Ian Simmonds: We anticipate marginally lowering the drawn spread and undrawn fee on the facility upon closing of the amendment in Q1. Moving to our presentation material, slide 10 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added $0.61 per share from adjusted net investment income against our base dividend of $0.46 per share. The impact of tightening credit spreads on the valuation of our portfolio had a positive $0.08 per share impact to net asset value. There was a $0.07 per share decline in NAV from net unrealized losses driven by portfolio company-specific events. Other changes included $0.12 per share reduction to NAV as we reversed net unrealized gains on the balance sheet, primarily related to investment realizations in TRP Energy and Kyrieva.

Speaker Change: For the same period net asset value per share for Trs <unk> increased 50 basis points, representing roughly 210 basis points of outperformance.

Speaker Change: Including dividend and other income in 2024, representing the highest amount since 2021.

Speaker Change: A significant portion of the income came in the fourth quarter as we experienced a resurgence of repayment activity in our portfolio.

Speaker Change: And finally, a new investment spreads move tighter throughout the year driven by the significant amount of capital raised in the directly new space.

Speaker Change: This resulted in <unk> per share of activity based fee income for the quarter above our trailing three year historical average of 95 per share.

Speaker Change: Combined with muted M&A volume.

Speaker Change: This is the supply and balance that we've talked about on several of our previous earnings calls.

Speaker Change: Fee income is a product of our in depth underwriting and proactive investment approach as we carefully structure investments include call protection and other features that create value for shareholders.

Speaker Change: And to illustrate the movement of spreads in 2024 will compare to.

Speaker Change: We will compare Q4 2023.

Speaker Change: Q3, 2024, given we're still early in the fourth quarter reporting cycle.

Speaker Change: In 2020 for activity based fee income contributed approximately approximately 15 cents per share of net investment income above our guidance.

Speaker Change: As of Q4 2023, the weighted average spread on first lien performing assets in our portfolio and public Bdcs was eight 3%.

Speaker Change: Now pivoting to the headwind.

Speaker Change: Consistent with our message for the last couple of years, we expected credit to weekend on the margin of tariff emerge over.

Speaker Change: Six 4% respectively.

Ian Simmonds: And finally, there was a $0.05 per share uplift from net realized gains on investments, largely from our equity investment in Murchison Oil and Gas. Pivoting to our operating results detail on slide 12, we generated a record level of total investment income of $123.7 million, up 4%, compared to $119.2 million in the prior quarter. Walking through the components of income, interest and dividend income was $113.8 million, up from $110.9 million in the prior quarter, driven by net funding activity. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were also higher at $5.1 million compared to $4.3 million in Q3, driven by the activity-based fees earned on repayments that Bo highlighted earlier.

Speaker Change: This compares to a weighted average spread.

Speaker Change: Over the last 12 months, we experienced a socratic credit deterioration across two portfolio companies.

Speaker Change: As of Q3, 2024 of 8% and six 1% respectively representing.

Speaker Change: After acquisition Corp fin.

Speaker Change: Representing a decline of 30 basis points for <unk> and the public BDC sector.

Speaker Change: <unk> technologies.

Speaker Change: Both of which we added to nonaccrual during the year.

The market moved tighter in 2020 for the impact of tighter spreads on new deals lower than net investment income by approximately <unk> <unk> per share compared to our forecast for the year.

Speaker Change: The lost interest income from these two investments after being placed on nonaccrual.

Speaker Change: And a <unk> <unk> per share.

Speaker Change: Negative impact to net investment income in 2024 relative to our forecast.

Speaker Change: That being said, we continue to put on new deals at wider spreads relative sector as evidenced by a weighted average spread on new deals in Q3, 2024, being approximately 150 basis points wire, we average four public BDC peers.

Speaker Change: Even with the lower fair value on these investments we continue to grow net asset value.

Speaker Change: Year over year by 70 basis points.

Speaker Change: This compares to a decline of approximately 160 basis points on average for the BDC peer group through Q3 2024 compared to Q4 2023.

Speaker Change: Although there were puts and takes we met our guidance of an operating income basis for the year.

Speaker Change: Looking ahead to 2025, we believe the earnings potential for Bdcs is larger.

Speaker Change: For the same period net asset value per share for TR, CFO increased 50 basis points, representing roughly <unk> 10 basis points of outperformance.

Ian Simmonds: Other income was $4.8 million, up from $4 million in the prior quarter. Net expenses excluding the impact of the non-cash accrual related to capital gains incentive fees were $65.9 million, up slightly from $65.8 million in the prior quarter. Our weighted average interest rate on average debt outstanding decreased approximately 70 basis points from 7.7% to 7%. This was largely driven by the decline in reference rates coupled with a funding mix shift following the repayment of 2024 unsecured notes in the fourth quarter. As a reminder, our liability structure is entirely floating rate, which means our cost of debt will move in the same direction as interest rates.

Speaker Change: Largely tied to portfolio spreads.

Speaker Change: To put it simply the deals you do today will ultimately get a driver of your returns in the future.

Speaker Change: And finally, a new investment spreads move tighter throughout the year driven by the significant amount of capital raised in the direct lending space.

Speaker Change: As an illustrative example, we've calculate the estimated return on equity assuming our entire portfolio had a weighted average spread equal to the weighted average spread we earned on new investments in the fourth quarter of six 4%.

Speaker Change: <unk> with muted M&A volume.

Speaker Change: Yes, it's a supply and balance that we've talked about on several of our previous earnings calls.

Speaker Change: To illustrate the movement of spreads in 2024 will compare to.

Speaker Change: Based on our balance sheet as of year end, the three year silver swap rate of 4%, one 5% OID over a three year average life and consistent with our Union economics over the last year, a weighted average of 640 basis point.

Speaker Change: Well compare Q4 2023.

Speaker Change: Q3, 2024, given we're still early in the fourth quarter reporting cycle.

Speaker Change: As of Q4 2023, the weighted average spread on first lien performing assets in our portfolio and for public Bdcs was eight 3% to six 4% respectively.

Speaker Change: 640 basis points implies a return on equity of 9% to 10% assuming zero to 50 basis points of credit losses on assets.

Ian Simmonds: Before passing it back to Josh, I wanted to provide a framework for how we are thinking about guidance for this year. We anticipate the key variables in 2025 to be similar to those in 2024, including the movement of interest rates and new issue investment spreads, which will impact the amount of interest income and activity-based fees we expect to earn. Based on our model, which incorporates the forward curve and assumes spreads on new deals and leverage remain consistent with the fourth quarter, we expect to target a return on equity on net investment income for 2025 of 11.5% to 12.5%.

Speaker Change: We can compare this the earnings potential for the affected by using the weighted average spread on new first liens in the third quarter of 529 basis points for public Bdcs to simplify the analysis will assume management and incentive fees leverage cost of funds and in operating expenses are based on the Q3 LTM average for the sector.

Speaker Change: This compares to a weighted average spread.

Speaker Change: As of Q3, 2024, 8% and six 1%, respectively, representing a decline of 30 basis points for <unk> and the public BDC sector.

Speaker Change: As the market moved higher in 2020 for the impact of tighter spreads on new deals.

Speaker Change: In the three months over swap rate of 4%.

Speaker Change: Lower net investment income by approximately <unk> <unk> per share compared to our forecast for the year.

Speaker Change: One 5% OID over a three year average life and the long term annualized return net loss rates. According to club, Florida to appoint an index of 102 basis points.

Speaker Change: Third we continue to put our new deals at wider spreads relative factor as evidenced by our weighted average spread on new deals in Q3, 2024, being approximately 150 basis points wider than the average for our public BDC peers.

Ian Simmonds: The lower end of this range reflects muted activity-based fees, while the upper end reflects a more normalized level of activity-based fees. Using our year-end book value per share of $17.09, which is adjusted to include the impact of our Q4 supplemental dividend, this corresponds to a range of $1.97 to $2.14 for full year 2025 adjusted net investment income per share. As a reminder, our base dividend is $1.84 per share on an annual basis, which we believe remains well protected.

Speaker Change: A weighted average portfolio spread of 529 basis points generates approximately a 5% return on equity for the sector.

Speaker Change: Although there were puts and takes we met our guidance on an operating income basis for the year looking ahead to 2025, we believe the earnings potential for Bdcs as large.

Speaker Change: It is important to note that these return estimates assume a three year swap at four.

Speaker Change: Three year swap rate of 4%.

Speaker Change: If base rates move lower ROE will move lower to given the asset sensitivity and some liability sensitivity for BP for the BDC space.

Speaker Change: Largely tied to portfolio spreads to put it.

Speaker Change: Simply <unk> do today will often we get a driver of your returns in the future.

Speaker Change: As we've said in the past the front book is Tomorrow Factbook.

Speaker Change: As an illustrative example, we've calculate the Effient richer estimated return on equity assuming our entire portfolio had a weighted average spread equal to the weighted average spread we earned on new investments in the fourth quarter of six 4%.

Speaker Change: This was the big theme, we highlighted during our Q2 earnings call six months ago and remains top of mind, when we make our investments to be clear the analysis for illustrative purposes only.

Joshua Easterly: With that, I'll turn it back to Josh for concluding remarks.

Joshua Easterly: Thank you, Ian. I started the call by sharing my thoughts on the union economics of the sector.

Joshua Easterly: And we'll wrap up. today by Clovis and Lupo Net. Competition in the direct lending market is fierce, and spreads on new-issue loans were at a historical Last year, the combination of interest rates and existing portfolio spreads on older investments contributed to above-average operating earnings for the sector. As we anticipated, credit was a headwind to earnings in 2020, 2024 for the This year we expect largely the opposite in terms of tailwinds and headwinds for the sector. As back books convert into front books, we will see portfolios as a potential challenge during The math we illustrated earlier highlights that capital has been misallocated, at least as it relates to return on equity and where firms in the sector sit on the cost.

Speaker Change: If our entire portfolio of colored away our return on equity in the near term would be boosting given the impact of embedded call protection and amortization of upfront fees.

Speaker Change: Based on our balance sheet as of year end, the three year sulfur swap rate of 4%, one 5% OID over a three year average life and consistent with our Union economics over the last year, our weighted average of 640 basis points.

Speaker Change: While it may feel like the value proposition for direct lending is erosion in the margin given spread levels in the market today.

640 basis points implied return on equity of 9% to 10% affiliate zero to 50 basis points of credit losses on assets.

Speaker Change: We set up our business with a differentiated sourcing channels to deliver a sustainable return profile for our shareholders.

Speaker Change: We continue over in our cost of capital even in a more competitive tighter spread environment and believe this will be a key contributor to the dispersion in returns for this sector in the future.

Speaker Change: We can compare this the early potential for affected by using the weighted average spread on new personal lines in the third quarter of 529 basis points for public Bdcs to simplify the analysis or film management and incentive fees leverage cost of funds and in operating expenses are based on the Q3 LTM average for the sector.

Speaker Change: Yesterday, our board approved a base quarterly dividend of <unk> 46 per share.

Speaker Change: Shareholders of record as of March 14th payable on March 31.

Speaker Change: In the three months over swap rate of 4%.

Speaker Change: Our board also declared a supplemental dividend of <unk> <unk> per share related to our Q4 earnings to shareholders of record as of February 28 payable on March 20th.

Speaker Change: One 5% OID over a three year average life and the long term annualized return net loss rates. According to equip water directly an index of 102 basis points.

Joshua Easterly: We expect this to become evident 2025 as weighted average portfolio spreads converge to prevailing spreads in the market today. On a positive note, we believe the majority of credit issues to be known, and therefore we expect credit improves from here. We share these views because we care about maintaining the value proposition for the sector. Ultimately, we are a long sector, and it's important that other direct lenders understand their cost of capital and price risk appropriately. We're dedicated to upholding our standards to ensure that our sector remains a desirable place for investment. both equity and debt.

Speaker Change: Our year end net asset value per share adjusted for the impact of the supplemental dividend.

<unk> average portfolio of credit 529 basis points generates approximately 5% return on equity for the sector.

Bo: It was declared yesterday at $17.09 and we estimated spillover income of approximately $1 23 per share with that ill now pass it over to Bo discussed this quarter's investment activity.

Speaker Change: It is important to note that these return estimates assume a three year swap it.

Speaker Change: Three year swap rate of 4%.

Speaker Change: Yes.

Speaker Change: If base rates move lower ROE will move lower to given the asset sensitivity and some liability sensitivity for BP in the BDC space.

Bo: Thanks, Josh I would like to start by layering on some additional thoughts on the direct lending environment.

Bo: More specifically, how we are positioned for the opportunity set we are anticipating in 2025.

Speaker Change: We said in the past the front book is tomorrow back book.

Bo: 2024 was another year of lower at M&A volumes as interest rates remain elevated and valuation gaps persisted between buyers and sellers in the market.

Joshua Easterly: We look forward to working hard to deliver for all of our stakeholders throughout 2025 and beyond.

Bo: While the setup for 2025 is not entirely different from that of 2024, we are optimistic about the higher activity levels. This year for a few reasons.

Joshua Easterly: With that, thank you for your time today.

Speaker Change: If our entire portfolio called away our return on equity in the near term would be briefly given the impact of embedded call protection and amortization of upfront fees.

Operator: Operator, please open the line for questions.

Operator: Thank you.

Operator: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster.

Bo: First valuation gaps have narrowed after multiples reached a trough in 2023 from the peak prices paid for businesses in 2021. The reality is that if a buyer paid in excess multiple a few years ago and.

Speaker Change: While it may feel like the value proposition for direct lending is eroding the margin given spread levels in the market today.

Speaker Change: We set up our business with a differentiated sourcing challenge to deliver a sustainable return profile for our shareholders.

Bo: Multiples have since contracted that implies additional growth in the businesses required before they can earn back their money, let alone a reasonable return.

Finney O'Shea: And our first question is going to come from the line of Finney and O'Shea with Wells Fargo Securities. Your line is open. Please go ahead.

Speaker Change: We continue over earning our cost of capital even in a more competitive tighter spread environment and believe this will be a key contributor to the dispersion of returns for the sector in the future.

Bo: Achieving that growth generally takes time and companies have had yet another year to go back into earnings.

Finney O'Shea: Hey, everyone.

Finney O'Shea: Good morning. I want to ask about the Origination Outlook, sounds better, and tie it to a name you mentioned, couldn't find it, maybe a new commitment, but TRP Energy. It sounded like the type of cap solutions deal that delevers the first lien and recaps it. Correct me if I'm wrong there. But is that the source of a lot of the new opportunity you're feeling, and what kind of spreads or returns do you get from that opportunity?

Bo: Second in a more stable economic macroeconomic backdrop.

Speaker Change: Yesterday, our board approved a base quarterly dividend of 46 cents per share.

Bo: Turn to 2024 interest rates have stabilized to what we may now consider the new normal while inflationary pressures have largely subsided at least for the time being.

Speaker Change: Shareholders of record as of March 14th payable on March 31.

Speaker Change: Our board also declared a supplemental dividend of <unk> per share related to our Q4 earnings to shareholders of record as of February 28 payable on March 28.

Bo: While still higher for longer we believe that the normalization of rates while still being.

Bo: While still more we'll bring more buyers back into the market. In 2025 lastly pressure has continued to build in the system with sponsors are sitting on record amounts of dry powder. Each of these factors will take time to fully materialize, but they said this is a.

Speaker Change: Our year end net asset value per share adjusted for the impact of the supplemental dividend.

Bo: It was declared yesterday of $17.09 and we estimated spillover income of approximately $1 23 per share with that ill now pass it over to Bo discussed this quarter good about activity.

Beau Stanley: Thanks.

Bo: Promising stage for increased activity levels this year.

Beau Stanley: Hey, good morning. So, TRP was not that type of transaction. TRP was a first-wing financing, obviously in a space that we have expertise in and that is kind of, I would say, off the run in energy. On that, we feel really good about the risk return. We are seeing the capital solutions stuff. I think that will be prevalent in 2025 origination, but that was not TRP. I'm not sure there was any in, I guess, I don't think there's any in that book today. I think we have a couple in our pipeline that would, or at least two that have closed, actually, in Q1 that are kind of, continue to be more off the run capital solutions oriented.

Bo: Amidst the slower M&A backdrop in 2024, we had an extremely productive year of putting capital to work and differentiated investment opportunities.

Speaker Change: Yes.

Bo: Thanks, Josh I'd like to start by layering on some additional thoughts on the direct lending environment.

Bo: More specifically, how we are positioned for the opportunities that we are anticipating in 2025.

Bo: In Q4, we provide a total commitments of 479 million and total fundings of $324 million across nine new portfolio companies and upsize it to seven existing.

Bo: 2024 was another year of lower M&A volumes as interest rates remained elevated and valuation gaps persisted between buyers and sellers in the market.

Investments.

Bo: In terms of commitments Q4 was our busiest quarter three years since Q4 of 2021 for.

Bo: While the setup for 2025 is not entirely different from that of 2024, we are optimistic about the higher activity levels. This year for a few reasons.

Bo: For the full year 2024 be provided $1 2 billion of commitments. It closed on 839 million of fundings, representing an increase from the 2023 levels of $959 million and $808 million respectively.

Bo: In 2024, we stayed active in the market by leveraging our omni channel sourcing capabilities across the <unk> platform.

Bo: Multiples have since contracted that implies additional growth in the businesses required before they can earn back their money, let alone a reasonable return.

Bo: This including being a valuable solution provider in both the sponsor and non sponsor channels.

Beau Stanley: And those range from, you know, obviously in the top of the range, somewhere between So for 600, up to, so for 800, 850. but TRP was not one of them.

Bo: Achieving that growth generally takes time and companies that have had yet another year to go back into earnings.

Bo: And the sponsor finance market, our thematic investment allows us to provide speed and certainty in the sector as we'd like and know well, thereby positioning us as a differentiated source of capital and what has become the most competitive segment of the direct lending market.

Bo: Second in a more stable economic macroeconomic backdrop.

Bo: Paired to 2024 interest rates have stabilized to what we may now consider the new normal while inflationary pressures have largely subsided at least for the time being.

Finney O'Shea: Very good. Thanks.

Finney O'Shea: And a follow-up I wanted to ask about IRG. I think you've been working on that one for a while. It took a touch of a mark this quarter. So, yeah, any update you could give us on that? Thanks.

As for the non sponsored businesses the breadth of <unk> platform provides us with the ability to originate credits away from the regular way sponsor finance business.

Bo: While still higher for longer we believe that the normalization of rates while still being.

Bo: While still more we'll bring more buyers back into the market. In 2025 lastly pressure has continued to build in the system with sponsors are sitting on a record amounts of dry powder. Each of these factors will take time to fully materialize, but they set this stage.

Bo: In 2024, 37% of total fundings were to non sponsor businesses.

Beau Stanley: Yeah, we're working on getting those assets sold.

Finney O'Shea: They own super valuable – the portfolio company owns super valuable assets, and land in Palm Beach or West Palm Beach. We hope to have a resolution there in the next quarter or two quarters on that. Okay, thanks so much.

Bo: It is generally in this less traveled seam of the market, where we earn incremental spreads while maintaining an appropriate risk return for our shareholders.

Bo: Given our access to a wide top of the funnel across multiple origination channels. Our investment pipeline does not solely linked to M&A volume, but rather stems from long standing relationships sector expertise.

Bo: Promising stage for increased activity levels this year.

Bo: Amidst the slower M&A backdrop in 2024, we had an extremely productive year of putting capital to work and differentiated investment opportunities.

Operator: Thank you, and one moment as we move on to our next question.

Bo: In Q4, we provide a total commitments of 479 million and total fundings of $324 million across nine new portfolio companies and upsize it to seven existing IND.

Bo: Flexible capital approach.

Bo: To highlighted a different interchange of investment in Q4.

Brian McKenna: And our next question is going to come from the line of Brian McKenna with Citizens JMP. Your line is open. Please go ahead.

Bo: Also our largest funding for the quarter, we closed on a new investment to TRP energy.

Brian McKenna: Thanks.

Brian McKenna: Good morning, everyone. So it's great to see such strong results in the quarter, despite the 100 base point decline in base rates into year end. And then, you know, looking at page 5 of the deck, you've really delivered impressive results and strong ROEs in just about every kind of operating environment over the past decade. So, you know, the question is, why does your model work so well in any and all? Yeah.

Bo: Investments.

Bo: This was structured as a new term loan facility that recapitalize the business in connection with an asset exchange.

Bo: In terms of commitments Q4 was our busiest quarter in three years since Q4 of 2021.

Bo: As part of the transaction PRP refinance its existing term loan Asia did buy fixed rate, resulting in approximately <unk> <unk> per share from the combination of prepayment fees and dividend income.

Bo: For the full year 2024, we've provided $1 2 billion of commitments. It closed on $839 million of fundings, representing an increase from the 2023 levels of $959 million and $808 million respectively.

Bo: This investment allows us to stay invested alongside a trusted management team through a new deal with call protection.

Bo: In 2024, we stayed active in the market by leveraging our omni channel sourcing capabilities across the sixth Street platform.

Joshua Easterly: Thanks, Brian. Thanks for the question. Yeah, I mean, look, we work really hard, A, to be right on credit. And so when you look at our historical loss rates over time, they've been, well, significantly below the sector loss rates and the asset returns in the industry. So that starts with loss rates, it starts with, you know, being an investor first.

Bo: We believe this investment underscores the power of the sixth street platform and creating unique investment opportunities.

Bo: This including being a valuable solution provider in both the sponsor and non sponsor channels.

Bo: To touch on another non sponsor investments we made in 2024.

Bo: In the sponsored finance market, our thematic investment allows us to provide speed and certainty in the sector as we'd like and know well, thereby positioning us as a differentiated source of capital and what has become the most competitive segment of the direct lending market.

Bo: Arrowhead Pharmaceuticals was in the press of Q4 announcing a large scale global licensing and collaboration agreement with swept up.

Bo: The therapeutics.

Bo: After receiving HSR approval last week, the transaction will be effective in Q1, and we anticipate a repayment of a portion of our loan in accordance with agreed upon repayments prepayment terms.

Bo: As for the non sponsored businesses the breath of sixth Street platform provides us with the ability to originate credits away from the where I go away its sponsor finance business.

Joshua Easterly: Second is, I think we have a bigger top of the funnel, which is, historically, a lot of our competitors have focused purely on the sponsor model, or sponsor origination channel. That origination channel is the most competitive, where you have kind of the most whippy on spreads. And so I think it's a function of having a bigger top of the funnel, where we're able to find off-the-run opportunities that offer better asset-level returns and then minimizing credit losses.

Bo: Based on these terms, we expect to earn <unk> <unk> per share of estimated activity based fees in Q1 of 2025.

Bo: In 2024, 37% of total fundings were to non sponsored businesses.

Bo: It is generally in this less traveled seem that the market, where we earn incremental spread while maintaining an appropriate risk return for our shareholders.

Bo: Similar to our investment in TRP emerging.

Bo: Opportunity was the direct result of deep expertise across the sixth Street platform.

Bo: Having established a core competency of specific themes within the health care sector over a number of years, which has positively benefited our shareholders demonstrated by an asset level level weighted average IRR and MLM up 14, 7% and one for acts on fully realized health care investments and <unk> portfolio.

Joshua Easterly: And so when you look at the unit economics of the space, you can see it, historically, on – let me find it – on – Give me one second. So, the unit economics of this space has historically been, I think, our weighted average return on assets have been, you know, a couple hundred basis points higher on the portfolio. And then credit losses have been, if you look at it so far, it's been about 2.2% on equity, and we've been half that. And so, we've been 208, I guess, historically, since our IPO, 280 basis points higher on all-in-asset yields.

Bo: And flexible capital approach to.

Bo: <unk> highlighted a different interchange of investment in Q4.

Bo: So our largest funding for the quarter, we closed on a new investment to TRP energy.

Bo: Both of these examples highlight the differentiated portfolio. We have created this is further demonstrated by the examining the overlap of investments in the Tfl X portfolio with other bdcs and comparing that to an investment overlap across the BDC sector.

Bo: This was structured as a new term loan facility that recapitalize the business in connection with an asset exchange.

Bo: As part of the transaction PRP refinance its existing term loan <unk> by fixed rate, resulting in approximately <unk> <unk> per share from the combination of prepayment fees and dividend income.

Bo: As of Q3 2020 for GSL acts at approximately 25% less portfolio overlap compared to the overlap on average for the sector.

Bo: This investment allows us to stay invested alongside a trusted management team through a new deal with call protection.

Bo: Pivoting to funding trends in Q4, 98% of our new investments were in first lien loans reinforcing our long term focus on investing at the top of the capital structure.

Bo: We believe this investment underscores the power of the sixth street platform and creating unique investment opportunities.

Bo: To touch on another non sponsor investments we made in 2024.

Joshua Easterly: Again, that's mostly because of a top-of-the-funnel, wider aperture, and we've had significantly less credit losses since inception, since our IPO, compared to space. So, those are the two big drivers of outperformance over time.

Bo: All nine new investments were 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.

Bo: Arrowhead Pharmaceuticals was in the press of Q4 announcing a large scale global licensing and collaboration agreement with.

Bo: Wrapped up.

Bo: This contributed to six street aided in 88% of the deal is funded and Tfl acts in the fourth quarter and.

Bo: Therapeutics.

Bo: In todays crowded marketplace of direct lenders, we believe our scaled capital base serves as a competitive advantage as we are able to lead transactions ultimately, allowing us to drive shareholder return.

Brian McKenna: Okay, that's super helpful. Thanks.

Brian McKenna: And then just a bigger, bigger picture question here. I mean, there's clearly a lot of capital being raised and deployed in private credit today. And then obviously, the public credit markets are also very active. So, you know, borrowers have a lot of different choices across the market.

Bo: Based on these terms, we expect to earn <unk> <unk> per share of estimated activity based fees in Q1 of 2025.

Bo: Moving on to repayment activity as Josh highlighted earlier, we experienced a significant pickup in payoffs during the fourth quarter to finish off the year.

Joshua Easterly: But from your seat, why do borrowers ultimately end up choosing Sixth Street as a lending partner?

Bo: Similar to our investment in TRP emerging.

Bo: Total repayments in Q4 were $305 million for the full year repayments totaled $794 million, reflecting a 69% increase over 2023, and resulting in net funding activity of $45 million for 2024.

Opportunity was the direct result of deep expertise across the sixth Street platform.

Beau Stanley: Yeah, great. So, look, I think, A, again, we have top of the – I think on the sponsor side, it's because – and both should comment on this, too – it's because we travel in the same industries. We can provide certainty and speed and some flexibility and size. That is really important for a sponsor who kind of values speed and certainty and size. Or one of a handful of firms can write $500 million-plus checks across the platform. And then on the non-sponsor side, we tend to have deep industry expertise and can provide those same kind of values, which is speed, size, and certainty, but in less traffic areas.

Bo: We have an established and a core competency in specific themes within the health care sector over a number of years, which has positively benefited our shareholders demonstrated by an asset level level weighted average IRR and MLM up 14, 7% and one for axon fully realized health care investments and <unk> portfolio.

Bo: To characterize the repayment activity, we experienced during the fourth quarter, you saw a mix between payoffs related to M&A and refinancings.

Bo: Two of our payoffs driven by M&A TRP energy anti Riva resulted in the repayment of our existing investment followed by the opportunity to continue lending to the business through a new money term loan.

Bo: In terms of repayments driven by refinancings, we continue to pass on deals getting done at spreads that do not present, an appropriate return profile for our shareholders.

Bo: As of Q3 2020 for Tfl acts at approximately 25% less portfolio overlap compared to the overlap on average for the sector.

Bo: From a portfolio yield perspective, our weighted average yield on debt and income producing securities at amortized costs decreased quarter over quarter from 13, 4% to 12, 5%.

Bo: Pivoting to funding trends in Q4, 98% of our new investments were in first lien loans reinforcing our long term focus on investing at the top of the capital structure.

Beau Stanley: I think that's exactly right. Our thematic investing approach, especially in the sponsor universe, allows us to get up the curve quickly, provides speed and certainty. They have confidence that we can deliver. And we have a lot of longstanding relationships outside of the sponsor community. We're really solutions providers for the sector.

Bo: Half of this decline of 46 basis points was from lower interest rates and the rest was a mix between yields on new fundings and spread step downs on the existing investment.

Bo: And today is tighter spread environment, we have continued to participate and investment opportunities that we estimate.

Bo: This contributed to 60% aided in 88% of the deals funded and Tfl ex in the fourth quarter and.

Bo: <unk> earn a return that is greater than our cost of capital.

Brian McKenna: Got it.

Operator: Thank you, guys.

Mickey Schleien: Thank you, and one moment for our next question.

Bo: This is illustrated by only five 1% of our portfolio by fair value and senior secured loans with spreads below 550 basis points.

Mickey Schleien: Our next question is going to come from the line of Mickey Schleien with Lattinburg. Your line is open. Please go ahead.

Further less than 1% of our portfolio by fair value carries a spread below 500 basis points.

Mickey Schleien: Yes, good morning, everyone. Josh, you talked about the imbalance in the sponsored market, but we did finally see some stabilization of spreads. And I'm curious what your outlook is in terms of the ability for those spreads to remain stable, you know, over the next 12 months, or do you expect more pressure to redevelop? Yeah, so Mickey, it's the right it's the right question. Look, I think what we try to do at the beginning of our earnings call is to compare those spread levels. and what those imply for return and equity for this space. And my hope is, and maybe this is a hope, my hope is that the market mechanism will work, which is the market will kind of wake up and say, oh, my God, what does that mean for, you know, return equity as your front book converts to your back book?

Bo: Moving on to repayment activity as Josh highlighted earlier, we experienced a significant pickup in payoffs during the fourth quarter to finish off the year.

Bo: We highlight this for the reasons, we've outlined in the previous earnings call regarding the importance of earning your cost of capital.

Bo: Total repayments in Q4 were $305 million for the full year repayments totaled $794 million, reflecting a 69% increase over 2023, and resulting in net funding activity of $45 million for 2024.

Bo: Moving on to the portfolio composition and credit stats.

Bo: Across our core borrowers for whom these metrics are relevant and we continue to have conservative weighted average attach and detach points of 0.6 times and five one times respectively.

Bo: And our weighted average interest coverage remains consistent at $2 one acts.

Bo: To characterize the repayment activity, we experienced during the fourth quarter, we saw a mix between payoffs related to M&A and refinancings.

Bo: As a reminder, interest rate covers assumes that replay reference rates at the end of the quarter to run rate borrower EBITDA.

Bo: As of Q4 2024, the weighted average revenue and EBITDA for our core portfolio of companies was $336 million and $110 million respectively.

Bo: Median revenue and EBITDA was $147 million and $53 million.

Bo: In terms of repayments driven by refinancings, we continue to pass on deals getting done at spreads that do not present, an appropriate return profile for our shareholders.

Bo: Finally, the performance waiting of our portfolio continues to be strong with a weighted average rating of 110 on a scale of one to five with one being the strongest.

Bo: From a portfolio yield perspective, our weighted average yield on debt and income producing securities at amortized costs decreased quarter over quarter from 13, 4% to 12, 5%.

Joshua Easterly: And that will be a mechanism to provide feedback for the space about how to price asset level returns. And so, you know, I'm not sure, quite frankly, at the bottom level, not what we're investing, but the bottom level spreads on the sponsor space that it works given the cost curve and return on equity for this space. I think, you know, our math says return on equity is going to be somewhere, you know, based on the cost curve, based on the SOFR swap rate, and based on losses, somewhere between 5 and 7% compared to a cost of equity between 9 and 10%.

Bo: At present, an improvement from last quarter's rating of one four driven by growth in the portfolio from new investments and the repayment of the two related investment during the quarter.

Bo: Half of this decline of 46 basis points was from lower interest rates and the rest was a mix between yields on new fundings and spread step downs on the existing investment and.

Speaker Change: Non accruals represent one 4% of the portfolio at fair value with no new investments added to non accrual status in Q4 with that I'd like to turn it over to my partner and to cover our financial performance in more detail.

Bo: And today is tighter spread environment, we have continued to participate and investment opportunities that we estimate will earn a return that is greater than our cost of capital.

Partner: Thank you Bo 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 <unk>.

Bo: This is illustrated by only five 1% of our portfolio by fair value and senior secured loans with spreads below 550 basis points.

Speaker Change: Resulting in full year net investment income per share of $2 39.

Bo: Further less than 1% of our portfolio by fair value carries a spread below 500 basis points.

Joshua Easterly: And so, hopefully, the market will kind of provide that feedback if capital is misallocated. Now, you know, maybe the cost of equity is too high for the space, and that will adjust. But my hope is that there's a reinforcing market mechanism for the space that will at least provide some floor level to spread.

Partner: Q4, net income per share was <unk> 55.

Partner: Results in full year net income per share of $2. Three we experienced an unwind of <unk> <unk> per share of capital gains incentive fees in 2024, resulting in adjusted net investment income and adjusted net income per share for the year of $2 33, and $1 97, respectively.

Bo: We highlight this for the reasons, we have outlined in the previous earnings call regarding the importance of earning your cost of capital.

Bo: Moving on to the portfolio composition and credit stats across our core borrowers for whom these metrics are relevant we continue to have conservative weighted average attach and detach points as 0.6 times and five one times respectively.

Mickey Schleien: That's really interesting and quite helpful, thank you for that.

Partner: At year end, we had total investments of $3 5 billion total principal debt outstanding of $1 9 billion and net assets of $1 6 billion or $17 16 per share which is prior to the impact of a supplemental dividend that was declared yesterday.

Bo: And the weighted average interest coverage remains consistent at two onex.

Mickey Schleien: Just one follow-up question, the TSLX BDC is relatively small compared to your broad platform at 6th Street. I'm curious whether you have interest in growing the BDC as the platform keeps expanding and growing on a relative basis.

Bo: As a reminder, interest rate covers assumes that replay reference rates at the end of the quarter to run rate borrower EBITDA.

Bo: As of Q4 2024, the weighted average revenue and EBITDA for our core portfolio companies was $336 million and $110 million respectively.

Partner: Ending debt to equity ratio was one to two <unk> up slightly from $1 196 in the prior quarter and our average debt to equity ratio also increased from one <unk> to $1 two to three X quarter over quarter, but full year 2024, our average debt to equity ratio was $1 one nine <unk>.

Bo: Median revenue and EBITDA was $147 million and $53 million.

Joshua Easterly: Yeah, look, it's a great question, Mickey, and it's an interesting way of how we built Sixth Street, because I think it's – look, the goal of Sixth Street is we want to be investors, and we're an investor-first model, and so when you look at Sixth Street as a platform, we're about, I don't know, $100 billion of AUM, but we're – that's across, you know, 8 to 10 strategies that we think we have raised constrained capital so we can invest across cycles, just like we do in the direct lending market, and so, you know, we'll grow our direct lending business, and as people know, we have Sixth Street specialty lending partners, which focuses on that larger cap investment, but we'll grow a direct lending business as we see there's opportunity where we can both provide, you know, an efficacious solution to our sponsors and provide an acceptable return on capital for our investors, but the model is kind of built to be investor-first because we believe, you know, as long as we can't really provide capital to sponsors or to issuers unless we're providing returns to our clients, and that's why we only exist if we're doing a good job for the people who provide us the capital and trust their capital to us.

Bo: Finally, the performance waiting of our portfolio continues to be strong with a weighted average rating of 110 on a scale of one to five with one being the strongest.

Partner: <unk> down slightly from one two times in 2023.

Bo: Represent an improvement from last quarter's rating of one four driven by growth in the portfolio from new investments and the repayment of a two rated investment during the quarter.

Partner: In terms of our balance sheet positioning at year end, we had $674 million of available revolver capacity against $205 million of unfunded portfolio company commitments eligible to be drawn.

Bo: Non accruals represented one 4% of the portfolio at fair value with no new investments added to non accrual status in Q4.

Partner: As discussed on last quarter's call, we satisfied the maturity of our 2020 for unsecured notes during the fourth quarter through utilization of Undrawn capacity on our revolving credit facility.

Speaker Change: With that I'd like to turn it over to my partner and to cover our financial performance in more detail.

Speaker Change: Thank you Bo 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 <unk>.

Partner: Following that repayment our nearest maturity does not occur until August of 2026, consistent with our ongoing messaging of being an annual issuer, we anticipate accessing the unsecured market in calendar year 2025 to extend our debt maturity ladder and maintain our target funding mix.

Speaker Change: Resulting in full year net investment income per share of $2 39.

Speaker Change: Q4, net income per share was <unk> 55.

Speaker Change: Resulting in full year net income per share of $2. Three we experienced an unwind of <unk> <unk> per share of capital gains incentive fees in 2024, resulting in adjusted net investment income and adjusted net income per share for the year of $2 33, and $1 97, respectively.

Partner: Last month, we kicked off the annual process of amending and extending our revolving credit facility. While the current maturity on the facility is not until 2029, we have historically extended the maturity on an annual basis, driven by our asset liability matching principle of maintaining a weighted average duration on our liabilities that meaningfully.

Speaker Change: At year end, we had total investments of $3 5 billion total principal debt outstanding of $1 9 billion and net assets of $1 6 billion or $17 16 per share which is prior to the impact of the supplemental dividend that was declared yesterday.

Partner: Seeds, the weighted average life of the assets funded by debt.

Partner: We anticipate marginally lowering the drawn spread and undrawn fee on the facility upon closing of the amendment in Q1.

Mickey Schleien: Got it. Thank you for that.

Mickey Schleien: Those are all my questions. Thanks for your time. Thank you. Have a good day.

Speaker Change: Our ending debt to equity ratio was 122 X up slightly from $1 one nymex in the prior quarter and our average debt to equity ratio also increased from 114 X 123 X quarter over quarter.

Partner: Moving to our presentation materials Slide 10 contains this quarter's NAV bridge walking through the main drivers of NAV growth. We added 61 per share from adjusted net investment income against the base dividend of 46 per share the impact of tightening credit spreads on the valuation of our portfolio had a positive <unk> <unk>.

Operator: One moment as we move on to our next question.

Ken Lee: And our next question comes from the line of Ken Lee with RBC Capital Markets. Your line is open. Please go ahead.

Speaker Change: For full year 2024, our average debt to equity ratio was 119 X down slightly from one two times in 2023.

Ken Lee: Hey, good morning. Thanks for taking my question. I really appreciate the commentary around the portfolio overlap. I'm just curious, would you attribute the less overlap mainly to... to the proportion of non-sponsored transactions that you have, or part of it's also due to the size of the portfolio companies. Just, you know, curious in terms of the contribution there.

Partner: Per share impact to net asset value there.

Partner: There was a <unk> <unk> per share decline in NAV.

Speaker Change: In terms of our balance sheet positioning at year end, we had $674 million of available revolver capacity against $205 million of unfunded portfolio company commitments eligible to be drawn.

Partner: From net unrealized losses, driven by portfolio company specific events.

Partner: Other changes include a <unk> <unk> per share reduction to NAV as we reversed net unrealized gains on the balance sheet, primarily related to investment realizations in TRP energy and <unk> and finally, there was a <unk> <unk> per share uplift from net realized gains on investments lastly from our equity investment in much some oil.

Speaker Change: As discussed on last quarter's call, we satisfied the maturity of our 2020 for unsecured notes during the fourth quarter through utilization of Undrawn capacity on our revolving credit facility.

Beau Stanley: Thanks. Yeah, I think directionally, it's probably the non sponsor side. I think there's on the sponsor side, for sure, there's a little bit of that. But directionally, I think it's a non sponsor side that contributes, you know, mostly to the lack of portfolio overlap compared to the rest of the space. if that's helpful. Yep, no, that's helpful. That's helpful.

Speaker Change: Knowing that repayment our nearest maturity does not occur until August of 2026, consistent with our ongoing messaging of being an annual issuer, we anticipate accessing the unsecured market in calendar year 2025 to extend our debt maturity ladder and maintain our target funding mix.

Partner: And gas.

Partner: Pivoting to our operating results detailed on slide 12, we generated a record level of total investment income of $123 7 million up 4% compared to $119 2 million in the prior quarter walking through the components of income interest and dividend income was $113 8 million up from.

Beau Stanley: And just one follow up. Talked a lot about spreads on new investments. But just curious in terms of what you're seeing now. Are you seeing any changes in terms of documentation in terms of loan terms? Just wanted to see whether those items have been impacted by it by the level of activity you're seeing there.

Speaker Change: Last month, we kicked off the annual process of amending and extending our revolving credit facility. While the current maturity on the facility is not until 2029, we have historically extended the maturity on an annual basis, driven by our asset liability matching principle of maintaining a weighted average duration on our liabilities that meaningfully.

Partner: <unk> $110 9 million in the prior quarter driven by net funding activity.

Partner: Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled Paydowns were also higher at $5 1 million compared to $4 3 million in Q3, driven by the activity based fees earned on repayments that <unk> highlighted earlier.

Beau Stanley: Thanks. No, I think typically Vulcan comments, I think typically the document and underwriting standards outside of SPREAD have been pretty kind of consistent over the last 18 months or so. For 12 to 18 months, they've been pretty consistent. You'll see some idiosyncratic pop-up where you see lack of discipline and documentation on those ones will pass outright, but for the most part, you've seen stabilization there.

Speaker Change: Seeds, the weighted average life of the assets funded by debt.

Speaker Change: We anticipate marginally lowering the drawn spread and undrawn fee on the facility upon closing of the amendment in Q1.

Partner: Other income was $4 8 million up from $4 million in the prior quarter.

Speaker Change: Moving to our presentation materials Slide 10 contains this quarter's NAV.

Partner: Net expenses, excluding the impact of the noncash accrual related to capital gains incentive fees was $65 9 million up slightly from $65 8 million in the prior quarter, our weighted average interest rate on average debt outstanding decreased approximately 70 basis points from seven 7% to 7%.

Speaker Change: Bridge walking through the main drivers of growth. We added 61 per share from adjusted net investment income against the base dividend of 46 per share the impact of tightening credit spreads on the valuation of our portfolio had a positive <unk> <unk> per share impact to net asset value.

Ken Lee: Great. Very helpful there.

Operator: Thanks again.

Partner: This was largely driven by the decline in reference rates, coupled with a funding mix shift following the repayment of 2020 for unsecured notes in the fourth quarter. As a reminder, our liability structure is entirely floating rate, which means our cost of debt will move in the same direction as interest rates.

Operator: Thank you.

Speaker Change: There was a <unk> <unk> per share decline in NAV.

Melissa Wedel: One moment as we move on to our next question. Our next question comes from the line of Melissa Wedel with J.P. Morgan. Your line is open.

Speaker Change: From net unrealized losses, driven by portfolio company specific events.

Melissa Wedel: Please go ahead.

Speaker Change: The changes included <unk> 12 per share reduction to NAV as we reversed net unrealized gains on the balance sheet, primarily related to investment realizations in TRP energy and <unk> and finally, there was a <unk> <unk> per share uplift from net realized gains on investments lastly from our equity investment in much some oil.

Melissa Wedel: Good morning. Thanks for taking my questions. Following up on something you mentioned before, earlier in the prepared remarks, you talked about some new deals being put on with call protections. I'm just curious, is anything changed in terms of the typical structure on call protection? And is that characteristic of sort of most of the new investments you're putting on the balance sheet?

Partner: Before passing it back to Josh I wanted to provide a framework for how we're thinking about guidance for this year.

Josh: We anticipate the key variables in 2025 to be similar to those in 2024, including the movement of interest rates and new issue investment spreads, which will impact the amount of interest income and activity based fees, we expect to add.

Speaker Change: Oil and gas.

Speaker Change: Pivoting to our operating results detailed on slide 12, we generated a record level of total investment income of $123 7 million up 4% compared to $119 2 million in the prior quarter walking through the components of income interest and dividend income was $113 8 million up from.

Joshua Easterly: No, actually, you kind of opened up something that I was just going to hit in closing remarks, but call protection as a percentage of fair value. So if you look at fair value divided by the call price, it's actually at its lowest level in the portfolio today. And that's a function of, I think, a combination of newer vintage investments, plus that we've been able to retain call protection. So that's at 93.6%. So if our entire portfolio got called away, we would have a lot of embedded economics, and that's kind of at the, that embedded economics is at the highest level.

Josh: Based on our model, which incorporates the forward curve and assume spreads on new deals and leverage remained consistent with the fourth quarter, we expect to target a return on equity on net investment income for 2025 of 11, 5% to 12, 5%.

Speaker Change: One $110 9 million in the prior quarter driven by net funding activity.

Josh: The lower end of this range reflects muted activity based fees, while the upper end reflects a more normalized level of activity based fee.

Speaker Change: Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled Paydowns were also higher at $5 1 million compared to $4 3 million in Q3, driven by the activity based fees earned on repayments that <unk> highlighted earlier.

Josh: Using a year end book value per share of $17 nine.

Josh: Which is adjusted to include the impact of our Q4 supplemental dividend. This corresponds to a range of $1 97 to $2 14.

Joshua Easterly: So call protection has been pretty stable. I would say we're able to generate more call protection on the more off-the-run investments and the more non-sponsors. So generally, I think, call protection on the sponsor stuff has been pretty stable. It does exist.

Speaker Change: Other income was $4 8 million up from $4 million in the prior quarter.

Josh: For full year 2025, adjusted net investment income per share.

Speaker Change: Net expenses, excluding the impact of the noncash accrual related to capital gains incentive fees was $65 9 million up slightly from $65 8 million in the prior quarter, our weighted average interest rate on average debt outstanding decreased approximately 70 basis points from seven 7% to 7%.

Josh: As a reminder, our base dividend is $1 84 per share on an annual basis, which we believe remains well protected.

Josh: That I will turn it back to Josh for concluding remarks, Thank you and I started the call by sharing my thoughts on the unit economics of this sector and we'll wrap up.

Melissa Wedel: Okay, that's helpful. You also mentioned expertise and, you know, and exposure in the healthcare space.

Josh: Today by closing the loop on that topic.

Speaker Change: This was largely driven by the decline in reference rates, coupled with a funding mix shift following the repayment of 2020 for unsecured notes in the fourth quarter.

Joshua Easterly: Just curious, as you look across the portfolio, do you see any sort of reimbursement risk embedded in there? Thank you. So, our healthcare exposure has been really healthcare tech inspect pharma. It has not been on the services side, which has been a difficult place for the space on the services side, given wage inflation and, you know, and on services. So, we, you know, I think there was always, there was a reimbursement on pharma that was priced in the market a couple of years back. We don't expect more of that, but we have a, we have a pretty differentiated healthcare strategy and healthcare portfolio.

Josh: Competition in the direct lending market fears and spreads on new issue loans, where historical times.

Josh: Last year, the combination of interest rates and existing portfolio spreads on older investments contribute to above average operating earnings for the sector.

Speaker Change: As a reminder, our liability structure is entirely floating rate, which means our cost of debt will move in the same direction as interest rates.

Josh: As we anticipated credit was a headwind to earnings in 2000 22024 for this sector.

Speaker Change: Before passing it back to Josh I wanted to provide a framework for how we are thinking about guidance for this year.

Speaker Change: We anticipate the key variables in 2025 to be similar to those in 2024, including the movement of interest rates and new issue investment spreads, which will impact the amount of interest income and activity based fees, we expect to add.

Josh: This year, we expect largely to offer in terms of tailwind and headwinds.

Josh: For this sector.

Josh: As back books, converting front books to front books, we will feed portfolios as a potential challenged areas.

Josh: The math, we illustrated earlier highlighted that capital has been misallocated at least as it relates to return on equity and where firms in this sector sit on the cost curve.

Speaker Change: Based on our model, which incorporates the forward curve and assume spreads on new deals and leverage remained consistent with the fourth quarter, we expect to target a return on equity on net investment income for 2025 of 11, 5% to $12 5%.

Josh: We expect this to become evident in 2025 as weighted average portfolio spreads converge to prevailing spreads in the market today.

Speaker Change: The lower end of this range reflects muted activity based fees, while the upper end reflects a more normalized level of activity based fee.

Operator: One moment as we move on to our next question.

Josh: On a positive note we believe the majority of credit issues to be known and therefore, we expect credit improves from here.

Speaker Change: Using a year end book value per share of $17 nine.

Robert Dodd: Our next question is going to come from the line of Robert Dodd with Raymond James. Your line is open. Please go ahead.

Josh: We share these views because we care about maintaining the value proposition for this sector.

Speaker Change: Which is adjusted to include the impact of our Q4 supplemental dividend. This corresponds to a range of $1 97 to $2 14.

Robert Dodd: Hi everyone. Going back to the spread question, because obviously you pointed out, I mean, there's a supply-demand mismatch that has been for the last few years. But, you know, so what's the probability you think that spreads actually stay as tight if we see a rebound in activity? I mean, some of the spread compression, arguably, make the platform and thank you for joining us. Just because investors want them to, but are there other dynamics if there is a meaningful, somewhat meaningful, rebounding activity in terms of quality of company mix, spread per unit, leverage, anything like that, kind of?

Josh: Ultimately, we are along with factor and it's important that other direct lenders understand their cost of capital and price risk appropriately.

Speaker Change: For full year 2025, adjusted net investment income per share as a reminder, our base dividend is $1 84 per share on an annual basis, which we believe remains well protected.

Josh: We are dedicated to upholding our standards to ensure that our that our effective remains a desirable place for.

Josh: Our investors.

Both equity and debt investors.

Speaker Change: With that I'll turn it back to Josh for concluding remarks, Thank you and I started the call by sharing my thoughts on the unit economics of this sector and we'll wrap up.

Josh: We look forward to working hard to deliver for all of our stakeholders.

Josh: Throughout 2025 and beyond.

Josh: With that thank you for your time today operator, please open the line for questions.

Speaker Change: Today by closing the loop on that topic.

Speaker Change: Competition in the direct lending market fears and spreads on new issue loans, where historical times.

Josh: Thank you as a reminder to ask a question. Please press star one on your telephone in late June aimed to be announced to withdraw. Your question. Please press star one again, one moment, while we compile the Q&A roster.

Speaker Change: Last year, the combination of interest rates and existing portfolio spreads on older investments contribute to above average operating earnings for the sector.

Speaker Change: As we anticipated credit was a headwind to earnings in 2000 22024 for this sector.

Speaker Change: And our first question is going to come from the line of Finian O'shea with Wells Fargo Securities. Your line is open. Please go ahead.

Speaker Change: This year, we expect largely to offer in terms of tailwind and headwinds.

Finian O'shea: Hey, everyone. Good morning.

Finian O'shea: I wanted to ask about the origination outlook sounds better.

Speaker Change: For this sector.

Joshua Easterly: Push the needle a little bit. Yeah, let me, let me, let me, look, I, I, by the way, I wasn't suggesting that my hope can drive spreads. What I was, what I was, what I was suggesting was that ultimately spreads as a function of supply and demand and equilibrium, right? And so, on the supply side, supply capital side, my hope is, is that when people wake up and see, and it's not hope, but what, how the market should work, is that as people's front book compared to their back, converts into their back book, and the market provides them a signaling function that it's no longer meeting the return on equity, and it's a destroying shareholder value that some of that supply at lower prices will be cut off.

Speaker Change: As back books converting front book to front book, we will feed portfolios as a potential challenged areas.

Finian O'shea: Tier two a name you mentioned.

Can find it maybe a new commitment but.

Speaker Change: The math real traded earlier highlighted that capital has been allocated at least as it relates to return on equity and where firms in this sector fit on the cost curve.

Finian O'shea: <unk> energy.

Finian O'shea: It sounded like the type of cap solutions deal that.

Finian O'shea: De levers the first lien and recaps it.

Speaker Change: We expect this to become evident in 2025 is the weighted average portfolio spreads converge to prevailing spreads in the market today.

Finian O'shea: Correct me, if I'm wrong, there, but is that is that the source of a lot of the new opportunity you're feeling.

Speaker Change: And on positive note, we believe the majority of credit issues to be known and therefore, we expect credit improves from here.

Finian O'shea: What kind of gross.

Finian O'shea: Spreads are returns do you get from that opportunity. Thanks.

Speaker Change: Sure. These views because we care about maintaining the value proposition for this sector.

Speaker Change: Hey, good morning.

Speaker Change: So <unk> was not that type of a transaction TRP was a first lien financing.

Speaker Change: Ultimately, we are along with factor and it's important that other direct lenders understand their cost of capital and price risk appropriately.

Speaker Change: Obviously in a space that we have expertise in that is kind of I would say off the run and energy.

Joshua Easterly: Like, that's what should happen, right? What should happen is, is that the market says, no, no, no, your cost of capital is a nine. You can't really allocate capital at 450 spreads. And no matter what you think about the risk adjusted return, and, you know, the stock should trade down or below book value, and that should be a signal to managers of the capital to cut supply off at lower level. So, supply hopefully comes out of the market as there's more transparency in that conversion of front book to back book. On the demand side, so that's the supply side.

Speaker Change: We are dedicated to upholding our standards to ensure that our that our sector remains a desirable place for investors both.

Speaker Change: On that we feel really good about the risk return we are human capital solutions stop I think that comes out that will prevail in 2025 origination but that was not TRP.

Speaker Change: Equity and debt investors.

Speaker Change: We look forward to working hard to deliver for all of our stakeholders.

Speaker Change: Throughout 2025 and beyond.

Speaker Change: With that thank you for your time today operator, please open the line for questions.

Speaker Change: Sure there was any in.

Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

Speaker Change: Uh huh.

Speaker Change: I guess, let me if there is any in that book today.

Speaker Change: Your question. Please press star one again, one moment, while we compile the Q&A roster.

Speaker Change: I think we have a couple in our pipeline that we.

Speaker Change: Good.

Speaker Change: Okay.

Speaker Change: Two that have closed actually in Q1.

Speaker Change: And our first question is going to come from the line of Finian O'shea with Wells Fargo Securities. Your line is open. Please go ahead.

Speaker Change: That are kind of a continued to be more off there on capital solutions oriented.

Joshua Easterly: On the demand side, increased M&A and other demands for capital, but mostly probably given increased M&A, catches up to the supply of private credit, that should also move spreads up. So, you have, in what's happened over the last 12 months, is that you've had a lot of supplies capital move into space. The incentives are for people to put capital to work. There hasn't been a real transparent signaling function about if that capital is being allocated appropriately because that back book hides it. And then on the demand side, you've had low M&A that hasn't caught up.

Speaker Change: And those range from.

Speaker Change: Obviously, the top end of the range.

Finian O'shea: Hey, everyone. Good morning.

Speaker Change: Somewhere between.

Finian O'shea: I wanted to ask about the origination outlook sounds better.

Speaker Change: So first 600 up to <unk>.

Speaker Change: 150.

Speaker Change: Tier two a name you mentioned.

Speaker Change: But <unk> was not one of them.

Finian O'shea: Can find it and maybe a new commitment but.

Speaker Change: Very good thanks, and a follow up I wanted to ask about.

Speaker Change: TRP energy.

Finian O'shea: It sounded like.

Speaker Change: IRG.

Finian O'shea: The type of cap solutions deal that that de levers the first lien and recaps it.

Speaker Change: <unk> been working on that one for a while took a touch of a mark this quarter. So any update you could give us on that thanks, Yeah, we're working on getting those assets sold.

Speaker Change: Correct me, if I'm wrong, there, but is that is that the source of a lot of the new opportunity you're feeling.

Speaker Change: They own Super valuable.

Finian O'shea: What kind of.

Speaker Change: Cumberland Super valuable assets, we think.

Finian O'shea: Spreads are returns do you get from that opportunity.

Joshua Easterly: So that's kind of the basic supply and demand equilibrium framework for spread.

Speaker Change: Land and Palm Beach of West Palm Beach.

Speaker Change: Hey, good morning.

Speaker Change: We hope to have a resolution there in the next.

Speaker Change: So <unk> was not that type of transaction TRP was a first lien financing.

Joshua Easterly: Understood. So presumably, you don't think that. kind of imbalance can be corrected on any short period, given that the guidance assumes spreads stay where they are. Is that fair? You think it might be a longer-term phenomena to, for the market to self-correct? Well, I don't know. I mean, it should self-correct. I'm not sure. It's going to depend on how strong the market signals are and when, and when M&A comes back.

Speaker Change: A quarter or two quarters on that.

Speaker Change: Okay. Thanks, so much.

Speaker Change: Obviously in a space that we have expertise in that is kind of I would say off the run and energy.

Speaker Change: Thank you and one moment as we move on to our next question.

Speaker Change: And our next question is going to come from the line of Brian Mckenna with citizens JMP. Your line is open. Please go ahead.

Speaker Change: On that we feel really good about the risk return we are seeing the capital solutions I think that comes back that will be.

Brian McKenna: Thanks, Good morning, everyone.

Speaker Change: Great to see such strong results in the quarter. Despite 100 basis point decline in base rates into year end and then looking at page five of the deck, you've really delivered impressive results in strong ROE and just about every kind of operating environment over the past decades. So the question is why does your model works, so well in any and all.

Speaker Change: Prevail in 2025 origination, but that was not TRP.

Speaker Change: Im not sure there was any.

Joshua Easterly: I mean, when you look at our specific guidance, and this has come up now twice, I think the guidance being provided is a little bit of just us being conservative. Like, we like to over-deliver on expectations. I guess that's kind of the, you know, the credit mindset of the firm, which is, you know, do no harm, you know, kind of over-deliver. To give you a little perspective, I think 10 out of 10 years, we've beat the loan of a guidance framework. Nine out of 10 years, we've been above the top half, and seven out of 10 years, we've been above the top half, above the top level of guidance.

Speaker Change: I guess, let me if there is any in that book today I think we have a couple in our pipeline that would.

Speaker Change: Or at least to get them closed actually in Q1.

Backdrops.

Speaker Change: Yeah, Thanks, Brian and thanks for your question.

Speaker Change: That are kind of a continued to be more off there on capital solutions oriented.

Speaker Change: Yes, I mean look we work really hard <unk> right on credit and so when you look at our historical loss rates over time, they've been well significantly below the sector loss rates on the asset the asset asset the asset returns in the.

Speaker Change: And those range from.

Speaker Change: Obviously, the top end of the range.

Speaker Change: Somewhere between.

Speaker Change: So first 600.

Speaker Change: So for a 150.

Speaker Change: But <unk> was not one of them.

Speaker Change: Industry so.

Speaker Change: Very good thanks again.

Speaker Change: That starts with loss rates it starts with being an investor first second is I think we have a bigger top of the funnel, which is historically a lot of our competitors are focused purely on the sponsor model or.

Speaker Change: A follow up I wanted to ask about.

Speaker Change: IRG.

Joshua Easterly: So, I think what, when you look at our guidance, it implies actually low levels of M&A. Portfolio turnover, I think, is in our guidance at, you know, somewhere between 15 and 20 percent versus 25 percent this year. So, it implies low level of, which drives activity level fees. So, I think our guidance is relatively conservative. I think what we did was say, hey, spreads, like, let's try to, again, with the framework of over-delivering, let's assume spreads don't get better. Let's assume portfolio turnover gets a little bit worse. What does that mean? And that's what's spit out in guidance.

Speaker Change: <unk> been working on that one for a while took a touch of a mark this quarter. So any update you could give us on that thanks.

Speaker Change: We're working on getting those assets sold.

Speaker Change: Sponsor origination channel that origination channel is the most competitive where you have.

Speaker Change: They own Super valuable portfolio of company owned Super valuable assets, we think.

Speaker Change: The most whippy on spreads.

Speaker Change: And so I think it's a function of having a bigger top of the funnel, where we're able to.

Speaker Change: Land and Palm Beach of West Palm Beach.

Speaker Change: We hope to have a resolution there in the next quarter or two quarters on that.

Speaker Change: Fine after around opportunities that offer better asset level returns and then minimizing credit losses and so when you look at the unit economics of the space.

Speaker Change: Okay. Thanks, so much.

Speaker Change: Thank you and one moment as we move on to our next question.

Speaker Change: You can see it historically.

Speaker Change: And our next question is going to come from the line of Brian Mckenna with citizens JMP. Your line is open. Please go ahead.

Joshua Easterly: But, you know, again, we, you know, we have a track record over-delivering.

Speaker Change: <unk>.

Speaker Change: We find it.

Robert Dodd: So, I would not, what I would not do, Barbara, which I think you do, because you're quick, that PhD is, like, makes you quick. But I think what you've done is, is you've kind of said, hey, I'm looking at their guidance. What does that mean for the environment? I would, you've got to put our guidance in the historical context of, you know, our relationship with the street. Understood.

Speaker Change: Give me one second.

Brian McKenna: Thanks, Good morning, everyone.

Speaker Change: So the unit economics of this space have historically been I think our weighted average return on assets have been.

Brian McKenna: It was great to see such strong results in the quarter. Despite 100 basis point decline in base rates into year end and then looking at page five of the deck you have really delivered impressive results in strong ROE and just about every kind of operating environment over the past decades. So the question is why does your model works, so well and any <unk>.

Speaker Change: Couple of hundred basis points higher on the portfolio and then credit losses have been if you look at it. So far has been about two 2% on equity and we've been half that and so we've been.

Robert Dodd: Thank you and congrats on the quarter. Thanks a lot.

Brian McKenna: Backdrops.

Operator: Thank you, and one moment as we move on to our next question.

Yeah. Thanks, Brian Thanks for the question.

Speaker Change: 200, <unk> I guess historically since our IPO 200 and.

Brian McKenna: Yes, I mean look we work really hard AWP rate on credit and so when you look at our historical loss rates over time, they've been well significantly below the sector loss rates on the asset the asset asset the asset returns in the <unk>.

Speaker Change: 80 basis points higher.

Maxwell Fritscher: And our next question comes from the line of Maxwell Fritscher with Truist. Your line is open. Please go ahead.

Speaker Change: All in asset yield.

Speaker Change: Again, that's mostly because of a top of the funnel wider aperture and we've had significantly less credit losses.

Maxwell Fritscher: Yeah, thank you.

Maxwell Fritscher: Good morning. I'm on for Mark Hughes. I just wanted to get your view on how do you expect the mix of incumbent borrowers versus new borrowers to trend over 2025?

Speaker Change: Since inception, since our IPO compared to the space.

Brian McKenna: Industry so.

Speaker Change: So those are the two big drivers of outperformance over time.

It starts with loss rates it starts with being an investor first.

Beau Stanley: You know, I mean, we've historically put work in our existing portfolio and created new portfolio relationships. I think the number of portfolio relationships have increased significantly, but, you know, it's going to be a mix.

Speaker Change: Okay. That's super helpful. Thanks, and then just a bigger bigger picture question here I mean, there's clearly a lot of capital being raised and deployed in private credit today and then obviously the public credit markets are also very active so borrowers have a lot of different choices across the market, but from your seat.

Brian McKenna: Second is I think we have a bigger top of the funnel, which is historically a lot of our competitors are focused purely on the sponsor model.

Brian McKenna: Our sponsor origination channel that origination channel.

Beau Stanley: I don't know if I have a specific view. We'll take what the – I mean, obviously, we like to put money and work in our existing portfolio company where we can. The portfolio company you know better than the portfolio company that's new to you, but it's going to be a mix of what the opportunity gives us. Both have been brought together.

Brian McKenna: The most competitive where you have a kind of the most would be on spreads.

Speaker Change: To borrow a borrowers ultimately end up choosing <unk> as a lending partner.

Brian McKenna: And so I think it's a function of having a bigger top of the funnel, where we're able to.

Greg: Yeah, Greg so.

Speaker Change: Again, we have top of the I think on the sponsor side because in both should comment on our syrup, because we travel entertainment industries.

Brian McKenna: Fine after around opportunities that offer better asset level returns and then minimizing credit losses and so when you look at the unit economics of the space.

Maxwell Fritscher: Understood.

Speaker Change: We can provide certainty and speed and some flexibility and size that is.

Maxwell Fritscher: And then the large sequential increase in the average new commitments in the new portfolio companies, what's driving that? I assume, is that just TRP energy?

Brian McKenna: You can see it historically.

Brian McKenna: We find it.

Brian McKenna: <unk>.

Speaker Change: Really important.

Speaker Change: For a sponsor who value speed and certainty.

Brian McKenna: Give me one second.

Brian McKenna: So the unit economics of this space have historically been I think our weighted average return on assets have been a couple of hundred basis points higher on the portfolio and then credit losses have been.

Speaker Change: Size.

Beau Stanley: I, let me come back to you real quick. Let me see if I understand your question. Yeah, it went from about 30 and a half to 40. Yeah, give me one second. I mean, TRP was $54 million, so it's not that big of an outsize. It's not that big of an outsize. Most of them were between, you know, the median was probably $40. So, it's not that big.

Speaker Change: We're one of a handful.

Speaker Change: A handful of firms that can write $500 million plus checks across the platform.

Speaker Change: And then the non sponsor side, we tend to have deep industry expertise and can provide those same kind of value, which is speed size uncertainty, but and less traffic areas.

Brian McKenna: If you look at it so far has been about two 2% on equity and we've been half that and so we've been too.

Brian McKenna: 200, <unk> I guess historically since our IPO 200 and.

Speaker Change: I think thats exactly right.

Speaker Change: Investing approach, especially on the sponsor Universal allows us to get up the curve quickly provide speed and certainty they have confidence that we can deliver and we have a lot of long standing relationships outside of the sponsor community, we're really solutions providers.

80 basis points higher.

Brian McKenna: All in asset yield.

Brian McKenna: Again, that's mostly because of a top of the funnel wider aperture and we've had significantly less credit losses.

Maxwell Fritscher: Okay, thank you.

Brian McKenna: Since inception, since our IPO compared to the space.

Operator: Thank you.

Paul Johnson: And as a reminder, to ask a question, please press star one one on your telephone.

Speaker Change: For the sectors.

Brian McKenna: So those are the two big drivers of outperformance over time.

Speaker Change: Got it thank you guys.

Paul Johnson: One moment for our next question. And our next question comes from the line of Paul Johnson with KBW. Your line is open. Please go ahead.

Speaker Change: Thank you and one moment for our next question.

Speaker Change: Our next question is going to come from the line of Mickey Shan Li with Ladenburg. Your line is open. Please go ahead.

Paul Johnson: Yeah, good morning. Thanks for taking my questions. Sixth Street's made a few new partnership announcements over the course of the last few months, but the most recent one, the First Citizens Equipment Financing Partnership, I'm just curious, does this partnership or any other partnerships that you could, I guess, potentially enter, would this provide any deal flow that fit into TSLX's funnel? Yeah, we don't expect the First Citizens equipment leasing, that's really an equipment leasing partnership with First Citizens, so we don't expect that to kind of fit into the, you know, corporate direct lending portfolio for TSLX, but there will be partnerships and there will be cross-platform opportunities that if they're appropriate for TSLX will almost definitely, they will get allocated appropriately.

Speaker Change: Yes, good morning, everyone.

Speaker Change: Josh you talked about the imbalance in the Spa.

Speaker Change: Sponsored market, but we did finally see some stabilization of spreads and I'm curious what your outlook is in terms of the ability for those spreads to remain stable over the next 12 months or do you expect more pressure to redevelop.

Speaker Change: Hi to borrowers borrowers ultimately end up choosing <unk> as a lending partner.

Speaker Change: Yeah, Greg so.

Speaker Change: Again, we have top of the I think on the sponsor side because in both to comment on our syrup, because we travel entertainment industries.

Mickey: Yes, so Mickey.

Mickey: It's a great question look I think what we tried to do at the beginning of our earnings call.

Speaker Change: We can provide certainty and speed and some flexibility and size that is.

Mickey: To compare those spread levels.

Speaker Change: Really important.

Mickey: And what does imply for return on equity for this space.

Speaker Change: For a sponsor who value speed and certainty.

Mickey: And my Hope is and maybe this is.

Speaker Change: Size.

Speaker Change: We're one of a handful.

Mickey: I Hope my hope is that the market mechanism will work, which is the market will kind of wake up and say Oh My God, what does that mean for return on equity.

Speaker Change: A handful of firms that can write $500 million plus checks across the platform.

And then the non sponsor side, we tend to have deep industry expertise and can provide those same kind of value, which is speed size uncertainty, but and less traffic areas.

Mickey: Your front book Converse here back book and that will be a mechanism to provide feedback for the space about how to price asset level returns.

Speaker Change: I think thats exactly right.

Mickey: So I'm not sure quite frankly at the bottom level, not what were investing but the bottom level of spreads on the sponsor space.

Joshua Easterly: Thanks for that.

Beau Stanley: And then, just on, you know, the non-sponsor opportunities within the portfolio, you know, I'm just curious, you know, how frequently do you typically expand financing or, you know, provide add-on financing with existing borrowers in your portfolio that have, you know, come in through primarily the non-sponsored channel, or are these kind of more shorter-term payoff opportunities? Yeah, they're actually a mix. Like, if you look at TRP, TRP was an existing portfolio company that entered into basically an asset swap. And so we were able to expand that relationship. But that's on one side where we're able to expand those relationships in the amount of capital that we deploy.

Mickey: Works, given the cost curve and return on equity for this space I think our math says return on equity is going to be somewhere.

Speaker Change: For the sectors.

Mickey: Based on the cost curve based on.

Speaker Change: Got it thank you guys.

Speaker Change: Thank you and one moment for our next question.

Mickey: The sulphur swap rate and based on losses somewhere between 5% and 7% compared to the cost of equity between 9% and 10% and so hopefully the market will kind of provide that feedback.

Speaker Change: Our next question is going to come from the line of Mickey Shan Li with Ladenburg. Your line is open. Please go ahead.

Speaker Change: Yes, good morning, everyone.

Speaker Change: Josh you talked about the imbalance in the Spa.

Mickey: If capital is Misallocating now maybe the cost of equity is too high for the space and that we will adjust.

Mickey: But my hope is that Theres, a reinforcing market mechanism.

Mickey: Uh huh.

Mickey: For the space that will at least provide some four level of spreads.

That's really interesting and quite helpful. Thank you for that and just one follow up question.

Speaker Change: Yes, so Mickey.

Beau Stanley: And then on the other side, there's some that's more transitory, that they're, you know, our capital is a bridge or, for example, the retail ABL strategy. So it's really a mix of both. I would say on the margin, now there's exceptions to the rule like TRP, but on the margin, they tend to, you know, be more transitory. These are opportunistic in nature. That's right. But we don't, you know, our capital for that channel and that strategy is durable and we want to be long term investors. I think it's very helpful.

It's a great question look I think what we tried to do at the beginning of our earnings call.

Mickey: Yes.

So the BDC is relatively small.

Speaker Change: To compare.

Speaker Change: Spread levels.

Mickey: Compared to your broad platform.

Speaker Change: And what does it imply for return on equity for this space and my Hope is and maybe this is.

Speaker Change: Sixth Street.

Speaker Change: I'm curious whether you have interest in growing the BDC as the platform keeps expanding and growing.

Speaker Change: I Hope my hope is that the market mechanism more work, which is the market will kind of wake up and say Oh My God, what does that mean for return on equity.

Speaker Change: On a relative basis.

Speaker Change: Yes Hello.

It's a great question Mickey.

Speaker Change: Is it kind of a it's an interesting way of how we built <unk> because I think it's.

Speaker Change: Your front book convert your back book and that will be a mechanism to provide feedback for this space about how to price asset level returns.

Speaker Change: The goal of <unk> is we wanted to be investors and were an investor first model and so when you look at <unk> as a platform where about.

Speaker Change: I don't know $100 billion of.

Speaker Change: But we're that's a cross.

So I'm not sure quite frankly at the bottom level, not what were investing but the bottom level of spreads on the sponsor space.

Speaker Change: 8% to 10 strategies that we think we have raised constraining capital. So we can invest across cycles, just like we do in the direct lending market.

Paul Johnson: And then the last one is, I would ask how you guys are feeling from capital standpoint. Leverage has been pretty, pretty stable throughout last year. You guys are right at 1.2 times, you know, in the upper end. Target. The market, you know, seems to be signaling a pretty, pretty optimistic year for activity this year. You know, how do you, how do you guys feel?

Speaker Change: Work.

Speaker Change: Given the cost curve and return on equity for this space I think our math says return on equity is going to be somewhere.

Speaker Change: So we'll grow.

Speaker Change: Our direct lending business.

Speaker Change: And as people know, we have six three specialty lending partners, which focuses.

Speaker Change: Based on the cost curve based on.

Speaker Change: On that larger cap investments, but will vote.

Speaker Change: So for swap rate.

Speaker Change: And based on losses somewhere between 5% and 7% compared to a cost of equity of between 9% and 10% and so hopefully the market will kind of provide that feedback.

Joshua Easterly: And do you think this is an opportunistic time to potentially be raising more capital for shareholders just, you know, given your, your valuation and, and the outlook for the year? Or, you know, how do you guys, you know, think about maybe a line of sight on repayments? Yeah. So, look, I would say given where spreads are, and I don't expect us to grow significantly and issue new capital. Obviously, the puts and takes on issuing new capital is accreted to shareholders given the share price. But because that capital is permanent, and you're not really going to return that capital unless you trade below book value, you have to believe you can invest that capital at accretive ROEs for a long period of time.

Speaker Change: <unk> direct lending business as we see there's opportunity where we can both provide.

Speaker Change: A efficacious.

Our solution to our sponsors and provide an acceptable return on capital for our investors.

Speaker Change: If capital is Misallocating now maybe the cost of equity is too high for aerospace and now we will adjust.

But my hope is that Theres, a reinforced the market mechanism.

Speaker Change: But the model is kind of built to be investor first because we believe.

Speaker Change: As long as we can't really provide capital to sponsors or two issuers, unless we're providing returns to our clients and that flywheel only exists. If we're doing a good job for our people to provide us a capital entrust capital to us.

Speaker Change: Uh huh.

For this space that will at least provide some four level of spreads.

Speaker Change: That's really interesting.

Speaker Change: Helpful. Thank you for that and then just one follow up question.

Speaker Change: So.

Speaker Change: The BDC is relatively small compared to your broad platform sixth Street.

Speaker Change: Got it thank you for that.

Speaker Change: Sir all my questions. Thanks for your time.

Speaker Change: I'm curious whether you have interest in growing the BDC as the platform keeps expanding and growing.

Speaker Change: Thank you have a good day.

Speaker Change: Thank you one moment as we move on to our next question.

Speaker Change: On a relative basis.

Speaker Change: And our next question comes from the line of Kim Lee with RBC capital markets. Your line is open. Please go ahead.

Speaker Change: Yes.

Joshua Easterly: And I don't see us jumping in at spread levels that don't ultimately work for what we think the cost of capital is for this space. And so, you know, we'll, you know, that may change. And if that changes, we'll put capital to work. We'll raise capital and put capital to work.

Speaker Change: It's a great question Mickey.

Speaker Change: It's an interesting way of how we built six three because I think.

Kim Lee: Hey, good morning, Thanks for taking my question.

Speaker Change: Look the goal of <unk> is we wanted to be investors and were an investor first model and so when you look at <unk> as a platform we're about I.

Kim Lee: Really appreciate the commentary around the portfolio overlap.

Kim Lee: Just curious would you attribute the less overlap mainly too.

Speaker Change: I don't know $100 billion of.

Speaker Change: But that's across.

Kim Lee: To the proportion of non sponsor transactions that you have or part of it is also due to the size of the portfolio companies just curious in terms of the contribution there. Thanks.

Speaker Change: 8% to 10 strategies that we think we have raised constraining capital. So we can invest across cycles, just like we do in the direct lending market.

Joshua Easterly: North Star is that investors have entrusted us with their capital. And there is a implied return on equity for that capital. And we're going to do everything we can to make sure we meet and beat those expectations as it relates to the return on equity on that capital. That makes sense.

Speaker Change: So we'll grow.

Kim Lee: Yeah, I think directionally, it's probably the non sponsor side I think there is on the sponsor side for sure. There is a little bit of that but directionally I think it's the non sponsor side that.

Speaker Change: Our direct lending business.

Speaker Change: And as people know, we have six three specialty lending partners, which focuses.

Speaker Change: On that larger cap investors, but will vote.

Kim Lee: <unk> contributes.

Kim Lee: Mostly to the lack of portfolio overlap compared to this to the rest of the space.

Speaker Change: <unk> direct lending business as we see there's opportunity where we can both provide.

Kim Lee: That's helpful.

Speaker Change: A efficacious.

Joshua Easterly: Thank you very much. Those are great answers. Thanks for taking my question. Those are great answers, but there are answers.

Kim Lee: Yes, no that's helpful. That's helpful.

Speaker Change: Our solution to our sponsors and provide an acceptable return on capital for our investors.

Kim Lee: And just one follow up Bob.

Kim Lee: Talk a lot about spreads on new investments, but just curious in terms of what youre seeing now.

Speaker Change: But the model is kind of built to be investor first because we believe.

Kim Lee: Are you seeing any changes in terms of documentation in terms of loan terms just wanted to see whether those items have been impacted by the level of activity you're seeing there. Thanks.

Joshua Easterly: We look for us to have a long term, sustainable platform to serve our issuers. We got it, we got to meet the return on equity and meet investor expectations. And that is Deeply important to 6'3 and deeply important to me personally.

Kim Lee: No I think typically broken comments I think typically.

Kim Lee: The document and underwriting standards outside of the spread has been pretty consistent over the last 18 months 12 to 18 months, they've been pretty consistent youll see some either synchronic.

Speaker Change: Got it thank you for that.

Joshua Easterly: Thank you, and I would like to hand the conference back to Josh Easterly for his closing remarks. Great. Well, first of all, I appreciate all the questions.

Speaker Change: Sir all my questions. Thanks for your time.

Speaker Change: Thank you I have a good day.

Kim Lee: The pop up where you see lack of discipline in documentation on those ones will pass.

Speaker Change: Thank you one moment as we move on to our next question.

And our next question comes from the line of Kim Lee with RBC capital markets. Your line is open. Please go ahead.

Joshua Easterly: I hope people enjoy their holiday weekend. We're always around, we're always available. But thank you from the team. And people again, I hope people enjoy their weekend.

Kim Lee: Alright, but for the most part you've seen stabilization there.

Kim Lee: Hey, good morning, Thanks for taking my question.

Kim Lee: Really appreciate the commentary around the portfolio overlap.

Speaker Change: Great very helpful. Thanks again.

Speaker Change: Thank you one moment as we move on to our next question.

Kim Lee: Just curious would you attribute the less overlap mainly too.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Speaker Change: Our next question comes from the line of Melissa Wedel with Jpmorgan. Your line is open. Please go ahead.

Kim Lee: Two the proportion of non sponsored transactions that you have or part of it is also due to the size of the portfolio companies just curious in terms of the contribution there. Thanks.

Melissa Wedel: Good morning, Thanks for taking my questions.

Speaker Change: Following up on something you mentioned before.

Speaker Change: Earlier in the prepared remarks, you talked about some new deals being put on with call protection I'm, just curious if anything changed.

Kim Lee: Yeah, I think directionally, it's probably the non sponsor side I think there is on the sponsor side for sure. There is a little bit of that but directionally I think thats the non sponsor side that.

Speaker Change: Terms of the typical structure on call protection and has that characteristic.

Kim Lee: <unk> contributes.

Kim Lee: Mostly to the lack of portfolio overlap compared to this to the rest of the space.

Speaker Change: Most of the new investments youre, putting on the balance sheet.

Speaker Change: No.

Speaker Change: No actually you kind of opened up something just going ahead and closing remarks.

Kim Lee: That's helpful.

Kim Lee: Yes, no that's helpful. That's helpful.

Speaker Change: Call protection as a as a percentage of fair value so be it.

Kim Lee: And just one follow up.

Kim Lee: Talked a lot about spreads on new investments, but just curious in terms of what youre seeing now.

Speaker Change: If you look at fair value divided by the call price is actually at its lowest level in the portfolio today. So.

Kim Lee: Are you seeing any changes in terms of <unk>.

Kim Lee: Documentation in terms of loan terms just wanted to see what are those items have been impacted by the level of activity you're seeing there. Thanks.

Speaker Change: That's a function of I think a combination of newer vintage investments plus that we've been able to retain call protection. So that's at 93, 6%. So our entire portfolio got called away. We would have a lot of embedded economics and thats kind of at the.

Kim Lee: No I think typically broken comments I think typically.

Speaker Change: That embedded economics is at the highest level.

Speaker Change: So call protection has been pretty stable I would say, we're able to generate more call protection on the more off the run and <unk>.

<unk>.

Kim Lee: The pop up where you see lack of discipline in documentation on those ones will pass.

Speaker Change: And the more non sponsored so.

Speaker Change: Generally I think call protection on the sponsor stuff is has been pretty stable it does exist.

Kim Lee: Outright, but for the most part we've seen stabilization there.

Speaker Change: Okay. That's helpful. You also.

Speaker Change: You mentioned expertise.

Kim Lee: Great very helpful. Thanks again.

Speaker Change: And exposure in the health care space, just curious as you look across the portfolio.

Kim Lee: Thank you one moment as we move on to our next question.

Do you see any sort of reimbursement risk embedded in there. Thank you.

Speaker Change: Our next question comes from the line of Melissa Wedel with Jpmorgan. Your line is open. Please go ahead.

Speaker Change: No.

Good morning, Thanks for taking my questions.

Speaker Change: Our healthcare exposure has been really health care Tech.

Speaker Change: Following up on something you mentioned before.

Speaker Change: <unk> pharma.

Speaker Change: Got it.

Speaker Change: Has not been on the services side, which has been a difficult place for this space on the services side given wage inflation.

Speaker Change: Earlier in the prepared remarks, you talked about some new deals being put on with call protection I'm just curious.

Speaker Change: <unk> changed in terms of the typical structure on call protection and has that characteristic of sort.

Speaker Change: And.

Speaker Change: On services so.

Speaker Change: Most of the new investments you are putting on the balance sheet.

Speaker Change: We we.

Speaker Change: <unk>.

Speaker Change: No no actually you kind of opened up something that just going ahead and closing remarks.

Speaker Change: I think there was always there was a reimbursement on pharma that was priced in the market a couple of years back.

Speaker Change: Protection is a fair as a percentage of fair value. So.

Speaker Change: We don't expect more of that.

Speaker Change: If you look at fair value divided by the call price is actually at its lowest level in the portfolio today. So.

Speaker Change: But we have a we have a pretty differentiated health care strategy and health care portfolio.

Speaker Change: That's a function of I think a key.

Speaker Change: Thank you.

Speaker Change: Combination of newer vintage investments.

Speaker Change: Thank you one moment as we move on to our next question.

Speaker Change: That we've been able to retain call protection. So that's at 93, 6% so.

Speaker Change: Our next question is going to come from the line of Robert Dodd with Raymond James Your line is open. Please go ahead.

Speaker Change: Our entire portfolio got called away, we would have a lot of embedded economics and thats kind of at the.

Robert Dodd: Hi, everyone.

Speaker Change: Going back to the spread question because obviously you've.

Speaker Change: Embedded economics is at the highest level.

Speaker Change: So call protection has been pretty stable I would say, we're able to generate more call protection on the more off the run.

Speaker Change: You pointed out I mean, there is a supply demand mismatch and has been for the last few years.

Speaker Change: So what is what's the probability you actually stay as tight if we see a rebound in activity I mean, some of the spread compression arguably makes.

Speaker Change: <unk>.

Speaker Change: And the more non sponsored so.

Speaker Change: Generally I think call protection on the sponsors stuff is has been pretty stable it does exist.

Speaker Change: On a spread per unit of leverage gives leverage paying down on new deals as rates came.

Speaker Change: Okay. That's helpful. You also mentioned expertise.

Speaker Change: Next closure in healthcare space, just curious as you look across the portfolio.

Speaker Change: Him up but is that trend kind of reverse if we see an increase in activity we can see.

Speaker Change: Do you see any sort of reimbursement risk embedded in there. Thank you.

Speaker Change: In the last couple of years has been more more a great companies in the mix that we see more b grade and spreads move there I mean.

Speaker Change: Yes, so look our healthcare exposure has been really health care Tech and spec pharma.

Speaker Change: I don't think spreads move.

Speaker Change: Just because the investors want them too, but all the other dynamics.

Speaker Change: Uh huh.

Speaker Change: <unk> has not been on the services side, which has been a difficult place for this space on the services side given wage inflation.

Speaker Change: A meaningful somewhat meaningful rebound in activity in terms of.

Speaker Change: Quality of company mix spread per unit of leverage anything like that.

Speaker Change: Push the needle.

Speaker Change: And.

Speaker Change: Sure.

Speaker Change: On services so.

Speaker Change: Yes, let me let me, let me I think by way of I wasn't suggesting that my hope can drive spreads what I was.

Speaker Change: We.

Speaker Change: <unk>.

Speaker Change: I think there is always there was a reimbursement.

Speaker Change: Men on pharma that was priced in the market a couple of years back.

Speaker Change: Yeah.

Speaker Change: What I was suggesting was ultimately spreads as a function of supply and demand in equilibrium right.

Speaker Change: We don't expect more of that.

Speaker Change: We have a we have a pretty differentiated health care strategy and health care portfolio.

Speaker Change: And so on the supply side supply capital side. My Hope is is that when people wake up and see if that hope, but how the market should work is that.

Speaker Change: Thank you.

Speaker Change: Thank you one moment as we move on to our next question.

Speaker Change: People with front book compared to their back converts into their back book.

Speaker Change: Our next question is going to come from the line of Robert Dodd with Raymond James Your line is open. Please go ahead.

Speaker Change: And the market provide them a signaling function that it's no longer meeting the return on equity and to destroy shareholder value that some of that supply.

Robert Dodd: Hi, everyone.

Robert Dodd: Going back to the spread question, because obviously you've you.

Robert Dodd: You pointed out I mean, there is a supply demand mismatch and has been for the last few years.

Speaker Change: Lower prices will be cut off that's what should happen right, where it should happen is is that the markets have no no no your cost of capital to nine you can't really allocate capital of $4 50 spreads.

Robert Dodd: So what is what's the probably spreads actually stay.

Robert Dodd: As tight if we see a rebound in activity I mean, some of the spread compression arguably makes.

Speaker Change: And no matter, what you think about the risk adjusted return and the stock should trade down or below book value and that should be a signal to managers of the capital the cut supply off at lower level. So supply can hopefully comes out of the market as there is more transparency.

Robert Dodd: On a spread per unit of leverage <unk> leverage paying down on new deals as rates.

Robert Dodd: But is that trend kind of reverse if we see an increase in activity we can see.

Robert Dodd: Last couple of years has been more more a great companies in the mix that we see will be great and we expect to move there.

Speaker Change: Seeing that conversion of front book tobacco on the demand side, so that the supply side on the demand side.

Robert Dodd: I don't think spreads move.

Robert Dodd: Just because investors want them too, but all the other dynamics.

Speaker Change: Increased M&A.

Robert Dodd: There is a meaningful somewhat meaningful rebound in activity in terms of.

Speaker Change: And and other.

Robert Dodd: Quality of company mix spread per unit of leverage anything like that.

Speaker Change: Although demand for capital, but mostly probably driven increase M&A catches up to the supply of private credit that should also move spreads up so you have.

Robert Dodd: Push the needle.

Robert Dodd: Sure.

Robert Dodd: Yes, let me let me let me.

Robert Dodd: I think by way I wasn't suggesting that my hope can drive spreads what I was.

Speaker Change: And what's happened over the last 12 months.

Robert Dodd: Well.

Speaker Change: Is that you have had a lot supply of capital move in the space.

Robert Dodd: What I was suggesting was that ultimately spreads as a function of supply and demand in equilibrium right.

Speaker Change: Incentives are for people to put capital work there hasnt been a real transparent signaling function about at that capital is being allocated appropriately because that back book hides it and then on the demand side.

Robert Dodd: So on the supply side supply capital side. My hope is is that when people wake up and see if that hope, but how the market should work.

Robert Dodd: Is that as people with front book compared to their back converts into their back book.

Speaker Change: <unk> had low M&A that hasnt caught up so that's kind of the basic supply demand equilibrium framework for spreads.

Robert Dodd: And the market provide them a signaling function that it's no longer meeting the return on equity and to destroy shareholder value that some of that supply.

Speaker Change: Understood. So presumably you don't think that.

Speaker Change: Imbalance can be corrected on any shortcut given that the guidance assumes spreads stay where they all is that set do you think it might be a longer term phenomenon to for the market to self correct.

Robert Dodd: Lower prices will be cut off that's what should happen right, where it should happen is is that the markets have no no no your cost of capital to nine you can't really allocate capital of $4 50 spreads.

Robert Dodd: And no matter, what you think about the risk adjusted return.

Speaker Change: Well I don't know.

Speaker Change: It should self correct I'm not sure.

Robert Dodd: And the stock should trade down or below book value and that should be a signal too.

Speaker Change: It's going to depend on how strong the market signals are in wind.

Robert Dodd: Management of the capital of the cut supply.

Speaker Change: And when M&A comes back I mean, when you look at our specific guidance.

Robert Dodd: That lower level, so supply hopefully comes out of the market.

Speaker Change: This has come up now twice I think the guidance that <unk> provided.

Robert Dodd: There's more transparency in that conversion of front book tobacco on the demand side, so that the supply side on the demand side increased M&A.

Speaker Change: A little bit of just us being conservative like we like to over deliver on expectations I guess, that's kind of the.

Speaker Change: The credit mindset of the firm.

Robert Dodd: And and.

Speaker Change: Which is.

Robert Dodd: The demand for capital, but mostly probably driven increase M&A catches up to the supply of private credit that should also move spreads up so you have.

Speaker Change: Do no harm.

Speaker Change: Kind of over deliver.

Speaker Change: To give you a little perspective, I think 10 out of 10 years, we beat the low end of our guidance framework nine out of 10 years, we have been above the top half.

Robert Dodd: And what's happened over the last 12 months.

Speaker Change: And send that out 10 years, we've been above the top at above the top level of guidance. So I think when you look at our guidance it implies.

Robert Dodd: Is that you have had a lot supply of capital move in the space.

Robert Dodd: The incentives are for people to put capital work there hasnt been a real transparent signaling function about at that capital is being allocated appropriately because the back book hides it and then on the <unk>.

Speaker Change: <unk> actually low levels of M&A portfolio turnover I think is in our guidance.

Somewhere between 15, and 20% versus 25% this year. So it implies a low level of.

Robert Dodd: <unk> side.

Speaker Change: At which drives activity level fees so.

Robert Dodd: <unk> had low M&A that hasnt caught up so that's kind of the basic supply demand equilibrium framework for spreads.

Speaker Change: I think our guidance is relatively conservative I think to what we did with a PE spreads like let's try to again with a framework of over delivering this assumes spreads don't get better the system portfolio turnover gets a little bit worse, what does that mean.

Robert Dodd: Understood. So presumably you don't think that.

Robert Dodd: Imbalance can be corrected on any shortcut given the guidance assumes spreads stay where they are is that that you think it might be a longer term phenomenon to for the market to self correct.

Speaker Change: And that's what's put out in guidance, but again, we have a track record over delivering so I would not.

Speaker Change: To Robert which I think you do because youre quick that Phd is makes you question, but I think what you've done is as Ive kind of said Hey, I am looking at their guidance what does that mean for the environment I would you got to put our guidance in the historical context of.

Robert Dodd: Well I don't know.

Speaker Change: It should self correct I'm not sure.

Speaker Change: It's going to depend on how strong the market signals are in wind.

Speaker Change: And when M&A comes back I mean, when you look at our specific guidance.

Speaker Change: This has come up now twice I think the guidance that <unk> provided.

Speaker Change: Our relationship with the Street.

Speaker Change: Understood. Thank you and congrats on the quarter. Thanks, a lot.

Speaker Change: A little bit of just us being conservative like we like to over deliver on expectations I guess, that's kind of the.

Speaker Change: Thank you and one moment as we move on to our next question.

Speaker Change: And our next question comes from the line of Maxwell Fitzgerald with.

Speaker Change: Credit mindset of the firm.

Speaker Change: Which is.

Speaker Change: Your line is open. Please go ahead.

Speaker Change: Do no harm.

Speaker Change: Yes. Thank you good morning, I'm on for Mark Hughes.

Speaker Change: Kind of over deliver.

Speaker Change: To give you a little perspective, I think 10 out of 10 years, we beat the low end of our guidance framework.

Speaker Change: Just wanted to get your view on how do you expect the mix of incumbent borrowers versus new borrowers to trend over 2025.

Speaker Change: Nine out of 10 years, we've been above the top half.

Speaker Change: Our opinion is we've been above the top hat above the top level of guidance. So I think when you look at our guidance it implies.

Speaker Change: No I mean, we've historically put work in our existing portfolio and create new portfolio relationships I think the number of portfolios really relationships have increased significantly.

Speaker Change: Implies actually low levels of M&A portfolio turnover I think is in our guidance.

Speaker Change: Somewhere between 15% and 20% versus 25% this year, so it implies low level.

Speaker Change: But.

Speaker Change: It's going to be a mix I don't I don't know if I have a specific view, we'll take what the I mean, obviously, we like to put money and work on our existing portfolio, where we can that the portfolio Your company knows better than the portfolio company, that's new to you.

Speaker Change: Sure.

Which drives activity level fees so.

Speaker Change: I think our guidance is relatively conservative I think to what we did with a PE spreads like let's try again with a framework of over delivering this assumes spreads don't get better the system portfolio turnover gets a little bit worse, what does that mean.

Speaker Change: But it's going to be a mix of what the opportunity gives us.

Speaker Change: What the market gives us.

Speaker Change: Understood and then the large sequential increase in the average new commitments and the new portfolio of companies, what's driving that I assume is that just the TRP energy.

Speaker Change: And that's what's put out in guidance, but again, we have a track record over delivering so I would not.

Speaker Change: Robert which I think you do it because they are quick that Phd is makes you question, but I think what you've done is as ive kind of said Hey, I am looking at their guidance, what does that mean for the environment.

Speaker Change: E Gov, but let me come back to you real quick let me just see if I understand your question.

Speaker Change: Yes.

Speaker Change: And the average size.

Speaker Change: You got to put our guidance in a historical context.

Speaker Change: Yes give me one second.

Speaker Change: Okay.

Speaker Change: Our relationship with the Street.

Speaker Change: Okay.

Speaker Change: Understood. Thank you and congrats on the quarter. Thanks, a lot.

Speaker Change: I mean, <unk> was $54 million.

Speaker Change: Thank you and one moment as we move on to our next question.

Speaker Change: So it's not that big of an outside that.

Speaker Change: And our next question comes from the line of Maxim <unk> with.

Speaker Change: That big of an outside most of them were between the media was probably 40.

Speaker Change: Charles Your line is open. Please go ahead.

Speaker Change: Yes. Thank you good morning, I'm on for Mark Hughes I, just wanted to get your view on how do you expect the mix of incumbent borrowers versus new borrowers to trend over 2025.

So it's not that big.

Speaker Change: Okay.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you.

Speaker Change: Remind me to ask a question. Please press star one on your telephone.

Speaker Change: I mean, we've historically put work in our existing portfolio and create a new portfolio of relationships I think the number of portfolios really relationships have increased significantly.

Speaker Change: Our next question.

Speaker Change: And our next question comes from the line of Paul Johnson with <unk>. Your line is open. Please go ahead.

Paul Johnson: Yeah. Good morning, Thanks for taking my questions.

Speaker Change: But it's going to be a mix I don't I don't know if I have a specific view will take what the I mean, obviously, we like to put money and work in our existing portfolio, where we can that the portfolio Your company knows better than the portfolio company, that's new to you.

Paul Johnson: <unk> made a few new partnership announcements over the course of the last few months, but the most recent one the first citizens equipment financing partnership I'm just.

Paul Johnson: Curious.

Paul Johnson: This.

Paul Johnson: Partnership or any other partnerships that you could I guess potentially enter.

Speaker Change: But it's going to be a mix of what the opportunity gives us.

Paul Johnson: Could this provide any deal flow that fit into <unk> funnel.

Speaker Change: What the market gives us.

Speaker Change: Understood and then the large sequential increase in the average new commitments and the new portfolio of companies, what's driving that I assume is that just the TRP energy.

Paul Johnson: Yes, we don't expect the first citizens the equipment leasing that's really an equipment we've seen our partnership with first citizens. So we don't expect that to kind of.

Speaker Change: Yes, but.

Speaker Change: But let me come back to you real quick.

The corporate direct lending portfolio for <unk>.

Speaker Change: Just if I understand your question.

Speaker Change: Yes.

Speaker Change: About a third of the average site.

Paul Johnson: Uh huh.

Paul Johnson: But there will be partnerships and there will be.

Speaker Change: Yes.

Speaker Change: Okay.

Paul Johnson: Cross platform opportunities that if they are appropriate for Tfl ox will almost definitely they will get allocated appropriately.

Speaker Change: Sure.

Speaker Change: <unk> was 54 million.

Speaker Change: So it's not that big of an outside.

Paul Johnson: Got it thanks for that.

Speaker Change: That big of an outsider, but most of them were between.

Paul Johnson: And then just on that.

Paul Johnson: The non sponsor opportunities within within the portfolio.

Speaker Change: The meeting was properly 40.

Speaker Change: So it's not that big.

Paul Johnson: Curious how frequently you typically expands.

Speaker Change: Okay. Thank you.

Paul Johnson: Financing or provide add on financing with existing borrower.

Speaker Change: Thank you and as a reminder to ask a question. Please press star one on your telephone one moment for our next question.

Paul Johnson: Borrowers in your portfolio.

Paul Johnson: Come in through primarily the non sponsored channel or are these kind of more shorter term pay off opportunities.

And our next question comes from the line of Paul Johnson with <unk>. Your line is open. Please go ahead.

Yes. Good morning, Thanks for taking my questions.

Paul Johnson: Yes, there are actually a mix like Youll get TRP <unk>.

Speaker Change: <unk> made a SKU.

Existing portfolio company that entered into basically an asset swap.

Speaker Change: New partnership announcements over the course of the last few months, but the most recent one the first set of certain equipment financing partnership I'm just curious.

Paul Johnson: And.

Paul Johnson: So we were able to expand that that relationship.

Speaker Change: Curious.

Paul Johnson: But SaaS on one side, where we're able to expand.

Speaker Change: This.

Speaker Change: Partnership or any other partnerships that you could I guess potentially enter.

Paul Johnson: Those relationships in the amount of capital that we deploy.

Speaker Change: Could this provide any deal flow that fits into <unk> funnel.

Paul Johnson: And then on the other side there is some that's more transitory that there are capitals of bridge or.

Speaker Change: Yes, we don't expect the first citizens equipment leasing that's really an equipment we've seen.

Paul Johnson: For example, the retail ABL strategy. So it's really it's really a mix of both I would say on the margin now theres exceptions to the rule like TRP, but on the margin they tend to be more transitory.

Speaker Change: Uh huh.

Speaker Change: Partnership.

Speaker Change: With first citizens.

Speaker Change: We don't expect that to kind of.

Speaker Change: To the corporate direct lending portfolio for Tfl apps.

Paul Johnson: These are opportunistic in nature, that's right, but we don't.

Speaker Change: But there will be partnerships and there will be.

Speaker Change: Cross platform opportunities that if they are appropriate for PSX will almost definitely they will get allocated appropriately.

Paul Johnson: Yes.

Paul Johnson: We our capital for that channel and that strategy is durable when we wanted to be a long term investors.

Paul Johnson: Got it. Thank you that's very helpful.

Speaker Change: Got it thanks for that.

Speaker Change: And then just on that.

Speaker Change: Then the last one I would ask how you guys are feeling from capital standpoint leverage has been pretty pretty stable throughout last year. You guys are right at one two times so in the upper end of.

Speaker Change: The non sponsor opportunities within within the portfolio.

Speaker Change: Curious how frequently do you typically expands.

Speaker Change: Financing or provide add on financing with existing borrower.

Speaker Change: Of your target the market seems to be signaling a pretty pretty optimistic year for activity. This year. How do you. How do you guys feel and do you think this is an opportunistic time to potentially.

Speaker Change: Borrowers in your portfolio.

Speaker Change: Come in through primarily the non sponsored channel or are these kind of more shorter term pay off opportunities.

Speaker Change: The raising more capital for shareholders just given your your evaluation and the.

Yes, there are actually a mix like Youll get <unk>.

Speaker Change: Existing portfolio company that entered into basically an asset swap.

Speaker Change: The outlook for the year or how do you guys.

Speaker Change: Think about maybe.

Speaker Change: Line of sight on prepayments.

Speaker Change: And.

Speaker Change: So we were able to expand that that relationship.

Speaker Change: Yeah, So I would.

Speaker Change: Look I would say given the given where spreads are.

Speaker Change: But thats on one side, where we're able to expand.

Speaker Change: Those relationships in the amount of capital that we deploy.

Speaker Change: And I don't expect us.

Speaker Change: Grow significantly and issue new capital.

Speaker Change: And then on the other side there is some that's more transitory that there are capitals of Bridger.

Speaker Change: Obviously, the puts and takes and issue new capital is accretive to shareholders given the share price but.

Speaker Change: For example, the retail ABL strategy. So it's really it's really a mix of both.

Speaker Change: That capital is permanent.

Speaker Change: And you're not really going to return that capital unless we trade below book value you have to believe you can invest that capital in accretive Roe.

Speaker Change: I would say on the margin now theres exceptions to the rule like TRP, but on the margin they tend to be more transitory.

Speaker Change: For for a long period of time.

Speaker Change: I don't I don't see us.

Speaker Change: Jumping in it.

Speaker Change: These are opportunistic in nature right.

Speaker Change: At at spread levels that don't ultimately work for what we think the cost of capital is for this space.

Speaker Change: We do yes.

Speaker Change: No.

Speaker Change: We our capital for that channel and that strategy is durable when we wanted to be a long term investors.

Speaker Change: And so you know.

Speaker Change: That may change and if that changes, we'll put capital work.

Speaker Change: Got it. Thank you that's very helpful.

Speaker Change: We'll raise capital and put capital work, but our first.

Speaker Change: And then the last one.

Speaker Change: Asked how you guys are feeling from capital standpoint leverage has been pretty pretty stable throughout last year. You guys are right at one two times on the upper end of your target the market seems to be signaling a pretty pretty optimistic.

Speaker Change: Northstar is that investors have been trusted us.

Speaker Change: With their capital and there is a implied return on equity for that capital.

Speaker Change: And we're going to do everything we can.

Speaker Change: <unk> for activity. This year, how do you how do you guys feel and do you think this is an opportunistic time to potentially.

Speaker Change: To make sure we meet and beat those expectations as it relates to the return on equity on that capital.

Speaker Change: The raising more capital for shareholders given your your evaluation.

Speaker Change: That makes sense. Thank you very much those are great answers.

Speaker Change: Thanks for taking my questions.

Speaker Change: The outlook for the year or how do you guys.

Speaker Change: Great answers, but there are answers.

Speaker Change: Think about that.

Speaker Change: Line of sight on repayments.

Speaker Change: We are.

Speaker Change: Yeah, So I would.

Speaker Change: Look for us to have a long term sustainable platform. The server our issuer, we got it we got to meet the return on equity.

Speaker Change: Look I would say given the given where spreads are.

Speaker Change: And I don't affect us.

Speaker Change: Grow significantly and issue new capital.

Speaker Change: And meet investor expectations and that is deep.

Speaker Change: Obviously, the puts and takes and issue new capital is accretive to shareholders given the share price but.

Speaker Change: Deeply important to <unk> and deeply important to me personally.

Speaker Change: That capital is permanent.

Speaker Change: Thank you and I would like to hand, the conference back to Josh easterly for his closing remarks.

Speaker Change: And youre not really going to return that capital unless we trade below book value you have to believe you can invest that capital at accretive Roe.

Josh Easterly: Great well first of all I appreciate all the questions.

Speaker Change: For for a long period of time.

Josh Easterly: I hope people enjoy their holiday weekend.

Speaker Change: I don't I don't see us.

Speaker Change: Jumping in it.

Josh Easterly: We're always around we're always available.

Speaker Change: At.

Speaker Change: At spread levels that don't ultimately work for what we think the cost of capital is for this space.

Josh Easterly: But thank you from the team.

Josh Easterly: And then people again I hope people enjoy the weekend.

Speaker Change: So.

Josh Easterly: This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Speaker Change: That may change and if that changes, we'll put capital work.

Speaker Change: We'll raise capital put capital work, but our first.

Speaker Change: Northstar is that investors have been trusted us.

Speaker Change: With their capital and there is a implied return on equity for that capital.

Speaker Change: And we're going to do everything we can.

Speaker Change: To make sure we meet and beat those expectations as it relates to the return on equity on that capital.

That makes sense. Thank you very much those are great answers. Thanks.

Speaker Change: Thanks for taking my questions.

Great answers, but there are answers.

Speaker Change: We are.

Speaker Change: Look for us to have a long term sustainable platform that serve our issuers, we got it we got to meet the return on equity.

Speaker Change: And meet investor expectations and that is deep.

Speaker Change: Deeply important to <unk> III and deeply important to me personally.

Speaker Change: Yeah.

Speaker Change: Thank you and I would like to hand, the conference back to Josh easterly for his closing remarks.

Josh Easterly: Great well first of all I appreciate all the questions.

Josh Easterly: I hope people enjoy their holiday weekend.

We're always around we're always available.

Josh Easterly: But thank you from the team.

Josh Easterly: And then people again I hope people enjoy the weekend.

Josh Easterly: This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Josh Easterly: Okay.

[music].

Josh Easterly: Okay.

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