Q1 2025 Sixth Street Specialty Lending Inc Earnings Call
Mode.
After the speaker's presentation, there will be a question and answer session.
I ask a question during this session you will need to press star one on your telephone.
Then here automated message about your hand is reyes.
To withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded.
And I hand, the conference over to your first speaker today can be van Harten head of Investor Relations. Please go ahead.
Joshua Easterly: So, I guess let me start with saying I have no idea what the retail flows are. I would suspect, given the volatility in the market, that retail flows have slowed. Time will tell. I think that the data is dated, and I don't think there's good data post-liberation day. Also, as you know, with those vehicles, you know, they're called semi-liquid for a reason, which is the problems with liquidity. So, in times of volatility, if the analog is non-traded REIT sectors, they've been a, you know, sucking down the liquidity out of the system, not a net flow, but time will tell.
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 uncertainty.
Ts.
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 and sixth Street specialty lending Inc. Filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward looking statements.
Speaker Change: Yesterday after the market closed we issued our earnings press release for the first quarter ended March 31, 2025, and posted a presentation to the Investor resources section of our website Www Dot sixth Street specialty lending dot com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC.
Joshua Easterly: So, that's one piece of it. The second piece of it is, look, we've managed, the way we've built our business is we've managed a relatively small amount of capital for the opportunities that, and we have a big top of the funnel, including the non-sponsors and more complex transactions. That has made our business more resilient to the spread tightening movement, because we're just not truly in this box. And then we've been really disciplined allocators of capital. And I think we, you know, deeply understand where we fit in the cost curve and our cost of equity. And so we're not going to allocate capital, just allocate capital and grow assets and therefore grow revenues, which we believe that we have, you know, we have two basically important people in our ecosystem.
Sixth Street specialty lending Inc. 's earnings release is also available on our website under the Investor Resources section unless noted otherwise all performance figures mentioned in today's prepared remarks are as of and for the first quarter ended March 31, 2025. As a reminder, this call is being recorded for replay purposes, I will now turn the call over to Joshua easterly.
Speaker Change: <unk> Chief Executive Officer of fifth Street specialty lending Inc.
Speaker Change: Good morning, everyone and thank you for joining us with.
Speaker Change: With me today, our President Bo Stanley and our CFO is in Florida.
Speaker Change: For our call today, I will review, our first quarter highlights and pass it over to Bo to discuss activity in the portfolio.
Speaker Change: Ian will review, our financial performance in more detail and ill conclude with final remarks before opening up the call for Q&A.
Joshua Easterly: First being the capital providers who provided capital to us and entrusted that capital to earn an acceptable risk-adjusted return on their capital and cost of equity. The second being our counterparty community. And we can't be a good lender and a good counterparty unless we have capital. So we need to do both well, and we plan to keep doing both well.
Speaker Change: In addition to todays earnings call and public filings. We also published a letter to our stakeholders.
Speaker Change: We may currently be one of the most pivotal periods for the U S and global markets since the global financial crisis.
Speaker Change: We believe we're operating under a new world order and it's our job as investors embrace with reality and proactively position our business based on probabilistic assessments to navigate the evolving environment, we encourage and welcome your feedback.
Joshua Easterly: In the, just to zero in, like, the top of the funnel... You haven't seen a material impact there from all the direct lending and private credit capital, which seems to be converging in style. Like, is there just less? that meet the standards in terms of spread and structure, for example, you know, even if it's something that would more traditionally fall into your wheelhouse. Well, uh, again... Maybe we're saying the same thing, maybe we're not. The top of the funnel, the very, very top of the funnel has no impact. Now, we quickly might decide that is not for us.
Speaker Change: While we recognize that the world has changed since March 31.
Speaker Change: We believe our business remains well protected on the asset side with limited direct exposure to tariffs and well positioned in the liability side.
Speaker Change: We already said a mouthful on these topics in our letter for my opening remarks today to briefly covering our first quarter results and framing how we think about the future earnings potential of our business.
Speaker Change: After the market closed yesterday, we reported first quarter adjusted net investment income of 58 cents per share.
Speaker Change: Otherwise return on equity of 13, 5% and adjusted net income of 36 cents per share or an annualized return on equity of eight 3% as presented in our financial statements. Our Q1 net investment income and net income per share inclusive of the unwind of noncash accrued capital gains incentive fee.
Joshua Easterly: The top of the funnel is really, and I think the impact on top of the funnel is broad-based, which is the M&A cycle, which is obviously we've been very negative on that returning. And that is systematic across the industry. But, yeah, we decide more things are not for us early on. But because we have a big top of the funnel and other channels, we find, you know, places to put our shareholders' capital in a responsible way that generates the required returns. That's been the business model. That business model worked out.
Speaker Change: <unk> was 62 and 39, respectively.
Speaker Change: <unk> 22 per share difference between net investment income and net income only <unk> <unk> per share with credit related. This was primarily markdowns on our existing non accrual loans and therefore, there was no impact to net investment income the remaining <unk> <unk> per share was in two buckets, the first bucket, which we characterize as geography really.
Speaker Change: There was <unk> 11 per share of prior period unrealized Skus have moved out of last quarter's net income and then to this quarter's net investment income primarily related to investment realizations.
Joshua Easterly: We also think we're going into a world where there will be more opportunity for combustion. And we're excited about that, given the macro. So I feel really confident on our ability to continue to earn returns across cycles. If you look at it historically, we put this in the letter, and I don't think people get this, but like, you know, we've actually done better in moments like this than we've done better in kind of regular wave markets. So market volatility has provided us a return, an ability, because how we manage our balance sheet and the top of the funnel and the culture of history, we've been able to generate outside returns.
Speaker Change: And the second bucket characterize as market related there were six cents per share impact from widening credit spreads, which assuming no credit losses will be reversed as the investments are paid off or reach maturity.
Looking ahead, we estimate that the quarterly earnings power of the business, assuming a base case of no additional non accrual investments and no spread impact on investment valuations is approximately 50 cents per share.
Speaker Change: This includes interest income generated by the and the ground portfolio today, plus limited activity based fee income.
Speaker Change: This translates to a return of equity of approximately 11, 7% above the floor of the calendar year 2025 guidance. We provided on our last earnings call of 11, five to 12, 5%.
Joshua Easterly: I think in like volatile years, we generate, you know, almost 200 basis points of excess returns compared to non-volatile years. And our outperformance in the industry actually grows significantly. So we could be more excited about the board for our business. And that is from a design, how we design the business, and how we put, you know, shareholders and capital, you know, on that list as a priority, and the capabilities we have given the market opportunity. When you say, like, very negative on M&A returning, do you just mean... you know, a couple quarters from what was supposed to be more like now or do you think more protracted and anything you can unpack there for us?
Speaker Change: Given increases in repayment activity with potential upside to that figure if activity based fees return to our average prior to the start of the rate hiking cycle.
Speaker Change: We believe our asset quality today supports Ford's earnings profile, which we anticipate will differentiate our returns from the public BDC sector for three important reasons.
Speaker Change: First we have continued to be a very disciplined capital allocator, our portfolio yields are meaningfully higher than the sector average with a weighted average yield at amortized cost of 12, 5% in Q4 compared to 11, 6% for our peers.
Joshua Easterly: Yeah, so look, the industry has been beating the drum on M&A returning. Partly to justify, I think, the amount of capital they've raised, and we've been negative on that. The constraint is not the amount—the issue is not that there isn't dry powder for a private equity deal to get done. There's a ton of dry powder. The problem is that people pay too much for assets between 2019 and 2020. And time, those assets, nobody wants to sell those assets without an acceptable return because it's not in their economic interest. And so people need time and growth.
Speaker Change: Also have a significant small of a portion of our portfolio invested in loads with spreads below 550 basis points, which Bob will discuss later, we believe our disciplined approach will allow us to outperform as the sector experienced a more significant decline in portfolio yields.
This leads to the second point, which is that our patience and discipline over the past several quarters combined with increased repayment activity have provided us with significant capacity to invest in what we expect to be a more interesting investment environment.
Speaker Change: We have seen in the past periods of heightened volatility often present, the most attractive investment opportunities, we are well positioned with the level of capital and significant amount of liquidity. We have for the period ahead and finally, we believe our returns will continue to be differentiated given our track record of lower credit losses.
Operator: There is a headwind to growth, which we think will extend the time. So do I know, do I think it's, do I think there's gonna be a whole bunch of non-investment grade M&A in 2025? No. Do I think maybe in 2026? Possibly. But the uncertainty in the macro and the drawdown on growth expectations is going to make non-investment M&A harder. Thank you. One moment for our next question.
Speaker Change: And effective.
Speaker Change: Yesterday, our board approved a base quarterly dividend of 46 cents per share to shareholders of record as of June 16th payable on June 30.
Speaker Change: Our board also declared a supplemental dividend of <unk> <unk> per share.
Speaker Change: Relating to our Q1 earnings to shareholders of record as of May 30 payable on June 20th our net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday is $16 98.
Speaker Change: We estimate that our spillover income per share is approximately $1 31.
Speaker Change: With that I'll now pass it over to Bo to discuss this quarter's investment activity.
Brian McKenna: And our next question comes from the line of Brian McKenna of Citizens. Your line is now open. Thanks, good morning everyone. So Josh, you've been very clear the last several quarters about how the firm has been focused on finding attractive risk reward opportunities and making sure you're getting paid the right economics for the risk. The environment has clearly shifted here, but I'm curious, you know, how are your teams able to price risk when there's a meaningful pickup in uncertainty and volatility, and then there's clearly been a healthy reset in valuations here. So where are you seeing the most attractive deployment opportunities?
Bo Stanley: Thanks, Josh I'd like to start by sharing some perspectives on market beginning with a look at the underlying supply and demand dynamics that have shaped the current investment environment.
Bo Stanley: Specifically as it relates to the U S direct lending market and focusing on bdcs as a proxy for direct lending vehicles, the supply and demand dynamics over the past several years have been characterized by an imbalance.
Client capital.
Bo Stanley: <unk> demand.
This is.
Bo Stanley: Largely been fueled by the growth of the retail investor oriented perpetual non traded BDC structure.
Joshua Easterly: Yeah. Hey, Brian, good morning. I appreciate that question. It's a really good question. I think the way we're able to price risk, I don't think the private market And we, from what we're seeing today, are doing a very good job of pricing. which is, you know, somebody showed me a slide this morning that said middle market spreads haven't moved, but probably syndicated spreads have moved. And I don't know where the data came from, but that's still pretty consistent. And that seems like a technical issue in the middle market, which is... previous flows, people need to put the previous flows to work.
Bo Stanley: Accounted for roughly 80% of asset growth within the BDC sector in 2024.
Bo Stanley: This inflow of capital has exerted downward pressure on new investment spreads leading to answer a series of sub optimal capital allocation.
Bo Stanley: We anticipate that the current uncertainty and volatility will moderate the supply and demand imbalance by slowing inflows into the non traded vehicles and shifting the pendulum towards direct lending from our broadly syndicated loan market.
While these factors may contribute to a more balanced supply and demand environment over time, we continue to believe that a meaningful resurgence of M&A activity remains a longer term prospect.
Joshua Easterly: But you know, how we think about the world is we're deep fundamental investors. We look at where we sell the cost curve, what's our required equity, you know, the illiquidity premium that we need, which is I can't change my mind when I'm making an investment. You know, we look at what we think that asset is worth and what is the value on that asset. And what do we think that asset is worth in kind of a normalized interest rate environment and a normalized growth environment. And so having kind of that deep, fundamental view of the world and doing real work allows us to price risk in moments of volatility.
Bo Stanley: However, our through the cycle business model and diverse origination channel enable us to deploy capital into attractive investments across market cycles.
Bo Stanley: In Q1, we provided total commitments of $154 million in total fundings of $137 million across six new portfolio companies and upsized to support existing investments.
Bo Stanley: $270 million repayments from seven full and four partial investment realizations, resulting in.
Bo Stanley: $133 million net repayment activity.
Bo Stanley: As Josh highlighted market dynamics have changed significantly since Q1.
Joshua Easterly: In addition to that, you know, 6th Street is a big place. We have, you know, $100 billion in assets under management. We have large platforms in ABF, healthcare, sports media, telecom, energy, retail consumer, etc., etc., growth, etc., etc. So we're able to see relative value. Not only are we able to see the top of the funnel in a lot of different things, but we're able to see relative value across asset classes and what people are pricing for growth and what discount rates are using. That's super helpful to keep a kind of steady head on our shoulder and be able to make capital when other people don't.
Bo Stanley: That said, our new investments during the quarter underscore our commitment to remaining highly selective and disciplined in our capital allocation in all market environments.
Bo Stanley: This is demonstrated in two ways, including lower levels of new investments funded during the quarter relative to our longer term average.
Bo Stanley: The percentage of our new investments network semantically driven non sponsor deals.
Bo Stanley: On this first point new investment spreads remained historically tight through the first quarter.
Bo Stanley: We are an investor first firm, which means we prioritize shareholder returns and we will not put capital to work for the sake of growing assets and second is our ability to originate opportunities in the non sponsored channel, where we're able to differentiate our capital turn on appropriate risk adjusted return for our business.
Joshua Easterly: Okay, great. That's helpful. And then you touched on this a little bit, but you look at TSLX and even the broader Sixth Street platform, I mean, you've really delivered impressive returns, kind of through cycles, looking back over your history. And I think some of the market actually forget volatility is a great thing for your business.
Bo Stanley: In Q1, 84% of new fundings originates outside the sponsor channel. This includes new investments in our retail ABL team, our energy portfolio and an investment driven by long standing relationships within the sixth Street platform, where the founder.
Bo Stanley: I'll spend a moment highlighting our largest investment during the quarter broke logistics, which is a provider of logistics software and services for the rail and trucking industry.
Joshua Easterly: So can you just remind us again, why does TSLX and really the broader Sixth Street model work so well in all parts of the cycle? And then why do periods of volatility ultimately drive value for all your stakeholders? Yeah, so this is, by the way, I was shocked when we looked at, I was in shock for us, I was shocked at the industry. The industry has actually done a decent job, which is, in moments of volatility, the industry returns are robust compared to in moments of not volatility, which is, they don't go down, I think they're basically flat at about 20 basis points, which is, you know, was a little bit shocking.
Bo Stanley: It is a founder owned business for our direct to company relationship led to an investment opportunity.
As agent and sole lender sixth street structure, a bespoke solution that enabled the company to execute on its growth initiatives.
Bo Stanley: Flexible approach reflects our ability to meet specific needs of our borrowers while ensuring we earn appropriate risk adjusted return.
Bo Stanley: On a blended basis across our securities the weighted average yield at amortized cost for this investment was 13, 9%.
Bo Stanley: Our investment in Arrowhead Pharmaceuticals is another example of our differentiated investment capabilities as.
Bo Stanley: As a reminder, from our last earnings call.
Bo Stanley: We expected to receive a prepayment fee in Q1, driven by the previously announced agreement with throughout the therapeutics.
Joshua Easterly: So they're not a forced sell. This is on the trading side. I think on the non-trade side, time will tell because there will be a liquidity pull. But the structure of the industry, which is that they have permanent capital and they're not that levered so they don't get closed out of their option, and the financing is robust, that they're able to withstand volatility. And so the industry itself and the capital structure of the industry and the permanency of the capital allows robustness. I think SOX, we actually have this idea of anti-fragility which we actually do better when there's stress.
Bo Stanley: I don't know had repaid a portion of the loan and we received a prepayment fee, which contributed <unk> <unk> per share net investment income in Q1.
Bo Stanley: This resulted in a reversal of a portion of the unrealized gain on the balance sheet of December 31.
Bo Stanley: The impact news out of last quarter's net income into net investment income this quarter.
Bo Stanley: From an overall perspective, 89% of total funding this quarter Werent, some reinvestments of 11% supporting upsides to existing portfolio companies.
Bo Stanley: This quarter's funding has contributed to our diversified exposure to select industries with six new investments across six different industries.
Bo Stanley: In terms of asset mix, we remain focused on investing at the top of the capital structure with total first lien exposure at 93% across the entire portfolio.
Joshua Easterly: I think that's because we've done a good job of allocating capital, which means that we have capital to allocate in moments of volatility. Not only are we not a forced seller, but we actually grow our investments during that time when the rest of the world is risk-off. And that is a function of, A, being a good allocator of capital, and B, understanding that we need a reserve for unfunded commitments. We need a reserve for investment capacity during those times, both capital and liquidity. And so that allows us to actually be on the front of our feet, in the balls of our feet during those times and really capture that opportunity.
Bo Stanley: As part of our new investment embarked logistics restrictions and investment to include a first lien term loan and senior secured notes along with a small equity portion all of those new investments in Q1 were first lien consistent with our long term approach.
Bo Stanley: Moving onto repayment activity Q1 was a second consecutive quarter of elevated churn related to the new to payoff period, we experienced beginning in early 2022.
Bo Stanley: LTM portfolio churn through Q1 was 28% based on the bidding any period investment at fair value, which is the highest level in nine quarters.
Bo Stanley: The increase in repayment activity contributed to the highest level of activity based fee income. Excluding other income we've had since Q4 2021 totaling <unk> 16 per share.
Joshua Easterly: So I was shocked when I looked at the data for the industry, but it makes sense because the industry should be never a forced seller given the permanency of the capital. Again, the non-traded space will be interesting because capital will stop flowing and there will be, my guess is, some type of liquidity pull, total liquidity that happens, which is the dialogue being, again, the non-traded space. Capital came out of the system during that moment of volatility. Capital did not come in for people to be aggressive as it was to investment opportunities outside their capital structure.
Bo Stanley: Q1 relative to our three year historical average of <unk> <unk> per share.
Bo Stanley: Biggest driver of this and curious in Q1 was was the arrowhead prepayment fee as previously mentioned.
Bo Stanley: Five of our six full payoffs were driven by refinancings of the five four were refinanced by other direct lenders and spreads ranging from 450 to 550 basis points and did not present, an appropriate return profile for our shareholders.
Bo Stanley: The other was refinanced in the broadly syndicated loan market had a spread of 325 basis points.
Bo Stanley: As we have reiterated we will continue to pass on participating in deals.
Bo Stanley: Are the economics do not align with where bdcs have any format sit on the cost curve.
Operator: Appreciate it, Josh. I'll leave it there, and congrats on the strong quarter. Thank you. One moment for our next question.
Bo Stanley: To highlight the differentiated nature of our portfolio only five 4% of our portfolio by fair value isn't senior secured loans with spreads below 550 basis points further less than 1% of our portfolio by fair value carries a spread below 500 basis points.
Mickey Schleien: Our next question comes from the line of Mickey Schleien of Leidenberg. Your line is now open. Yes, good morning, everyone. Josh, as usual, your prepared remarks were excellent and answered all of my top-down questions. So, I just have one modeling question. In the first row of slide nine, which is your interest in dividend income, excluding fees, looks a little light relative to the 3% decline in the portfolio at cost and considering movements and spreads and so forth. And that could be due to things like the cadence of investments or some sort of a reversal, or was there something else in there that we should be aware of?
Bo Stanley: Outside of the five refinancings, we had one additional pay off in Q1, which was in our energy portfolio in February Mark Natural resources repaid its outstanding term loan after a whole period at 1.2 years, we received call protection on the payoff and generate an unlevered IRR of approximately 16.
Bo Stanley: <unk> and one <unk>, respectively for us I'd like shareholders are.
Bo Stanley: Our dedicated energy team and expertise in this sector continue to be a differentiator for our business demonstrated by a weighted average unlevered IRR and MLM realized investments of 22% and 1.2 X respectively.
Ian Simmonds: I'll do that at the end, but we might have to come back to you. I don't... I do not...
Bo Stanley: Moving on to our portfolio yields a weighted average yield on debt and income producing securities and amortize costs decreased slightly quarter over quarter from Cove, 0.5% to 12, 3%.
Ian Simmonds: Well, let's come back to you exactly on the, there was a, sorry, in 2000, and now we're in 1231, that quarter 24, there was a large dividend income payment that was included, that was like not a non-recurring spread item, spreading. Yeah, that's right. So that probably creates a little bit of noise. That creates a noise. The better way to look at it is, is a little bit of spread compression, a little portfolio shrinkage compared to September 30th, 2024. But there was a one-time dividend payment related to an energy name, right Ian? Yeah, that's right. Mickey, you always have me.
Bo Stanley: The decline reflects approximately 15 basis points from the decline in reference rates and five basis points from the spreads compression on new investments.
Bo Stanley: The weighted average spread over reference rate of new investment commitments in Q1 was 700 basis points, which compares to a spread of 541 basis points on new issue first lien loans for the public BDC peers in Q4.
Bo Stanley: Our ability to earn wider spreads is largely driven by 84% of our new fundings in Q1 following into what we call our planed two and line three buckets characterized by non sponsor originated investments.
Bo Stanley: In Q1. This included our investments in Hudson's Bay company, North when midstream embark logistics.
Ian Simmonds: Sorry. You almost had me, but I think I got you the answer.
Bo Stanley: Moving on to our portfolio composition and key credit stats across our core borrowers for whom these metrics are relevant we continue to have conservative weighted average attached and detached points of 0.5 times and five one times respectively.
Ian Simmonds: There was a one-time pivot of payment. What was that payment? $5,000, $2,000, and a quarter of $12,000.
Ian Simmonds: Hello, everyone. We'll come back to you with the exact number. But that's what is, there's a dividend payment, non-recurring dividend payment of 5.1 million in the prior quarter. So that's, so apple to apple, it's pretty consistent with a little bit of yield compression and the portfolio shrinkage. If you look at dividend, interest and dividend income, any proforma that is 1231, 2024, right at about 113 million minus 5 million bucks. That would be more consistent with your modeling. Yeah, dividend income went from 5.8 in Q4 to 0.9 in Q1. Okay, I appreciate that. Thank you.
Bo Stanley: Our weighted average interest coverage remains constant at two onex.
Bo Stanley: As of Q1 2025, the weighted average revenue and EBITDA.
Bo Stanley: Portfolio of companies was $383 million and $112 million respectively.
Bo Stanley: Median revenue and EBITDA was $139 million and 52 million.
Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 111 on a scale of one to five with one being the strongest.
Bo Stanley: Non accruals represent one 2% of our portfolio at fair value with no new investments added to non accrual status in Q1.
Speaker Change: Before passing it over to Ian I'd like to address the potential impact of the recent tariff announcements on our portfolio companies.
Speaker Change: While the situation continues to evolve and uncertainty across the broader economic landscape remains elevated we believe Theres limited direct risk from these tariff policies on our portfolio.
Mickey Schleien: That's it for me. Thank you.
Speaker Change: The majority of our exposure is across software and services economies, which we believe will experience limited direct reps from these policy shifts.
Kenneth Lee: One moment for our next question. Our next question comes from the line of Kenneth Lee of RBC Capital Markets. Your line is now open. Hey, good morning, and thanks for taking my question. Just given the prepared remarks around some of the newer investments, including, I guess, one in the retail ABL side, could you further flesh out your outlook for lane two and lane three investments? Would it be fair to say that you're starting to see a lot more of these opportunities materializing right now, or do we still have to wait a little bit more to see more stress across the sectors there?
Speaker Change: While we maintain a small exposure to our energy sector, which we expect will have derivative impacts.
Speaker Change: Our commodity price exposures typically hedged on the front end of the curve mitigating short term price volatility.
Speaker Change: To date, the backend of the curve has not moved materially.
Speaker Change: We believe the potential derivative impacts on the real economy growth evaluations on the bigger risk.
Speaker Change: However, these impacts are likely to take a number of quarters to flow through and hence are more difficult to quantify at this stage.
Speaker Change: That being said, we feel good about where we sit in the capital structure of our borrowers and average loan to value across our portfolio of 41%.
Joshua Easterly: Thanks.
Joshua Easterly: You know, I think, so we've committed to one last quarter, or this quarter, that we'll fund here before year-end, a side that we think is very interesting, and it's published. The, I think there will be, there's a little bit more stress, a little bit more time, but we're kind of, we're excited, we're starting to see stuff, you know, obviously the volatility of the loan market is down. My guess is, if you look at the data, I think that Moody's have revised their LME kind of distress, which is a distress signal, and probably indicated a loan market of 2x, I think, or something like that, so I think those opportunities are coming our way.
Speaker Change: To assess potential risks, we completed a comprehensive named by May and tariff related analysis of our entire portfolio.
Speaker Change: <unk>, our retail ABL investments. This review identified three out of 115 portfolio companies that could be directly affected.
Speaker Change: These investments represent.
Speaker Change: 2% of our overall portfolio by fair value.
Speaker Change: And based on our current understanding we anticipate only a mild impact on the topline and EBITDA performance.
Speaker Change: Regarding our retail ABL portfolio, which comprises three 4% of our portfolio at fair value at quarter end, we acknowledge the potential for the impact on these consumer and retail businesses to higher cost of goods.
Speaker Change: Lower margins and demand destruction.
Speaker Change: However, our investment thesis on these companies remains intact.
Speaker Change: Predicated on the value of the underlying collateral not the cash flow related to performance of the businesses themselves.
Joshua Easterly: Great, very helpful there. And just one follow-up, if I may, and this is just on the ATM equity program. And it sounds like the general approach towards, you know, any kind of potential capital raises is still very consistent with your previous approach. But just wondering whether you could be raising capital a little bit more frequently than in the past, because I believe that TSLX had very infrequently raised capital in the past. We just wanted to see if the frequency could potentially change there. Thanks. No change in how we raise capital, the frequency we raise capital, and the ways we look through.
Speaker Change: We will continue to maintain close communications with management teams and sponsors during this period of heightened uncertainty to understand their strategies for navigating these potential headwinds.
Speaker Change: We will continue to monitor the situation closely but remain confident in our underwriting standards and asset selections.
Speaker Change: With that I'd like to turn it over to my partner and to cover the financial performance in more detail.
Speaker Change: Thank you Bo.
Speaker Change: For Q1, we generated adjusted net investment income per share of <unk> 58, and adjusted net income per share of 36.
Speaker Change: Total investments of $3 4 billion down slightly from $3 5 billion in the prior quarter as a result of net repayment activity total principal debt outstanding at quarter end was $1 9 billion and net assets were $1 6 billion or $17.04 per share prior to the impact of the supplemental dividend that was declared yet.
Joshua Easterly: I think Ian hit it perfectly, which is it has to be both a premium on an hourly basis as related to our cost of equity and an asset value basis. And it is, you know, we were pretty, I would say we were pretty stubborn about the ATM. But, you know, quite frankly, it's better for shareholders because the cost is lower. But there is zero change in how we do it and zero lends. And it means that only really makes sense for shareholders. I think that's spot on. We were very deliberate about making the comment about no new shares issued this quarter because we didn't want people to assume that just because we have the tool, we would use it.
Speaker Change: Good day.
Speaker Change: Just noted the strength of our balance sheet positioning earlier today, reflecting what has been a busy start to the year as we completed two capital market transactions during the first quarter.
Speaker Change: In February we issued $300 million of long five year notes at a spread of treasuries, plus 150 basis points, which at the time matched the tightest spread level for BDC in the five year part of the curve.
Speaker Change: As we do with all of our issuances, we swap these fixed rate notes to floating at a spread of sofa, plus 152 five basis points.
Operator: It's more about making sure that we can be as effective as possible for shareholders. I mean, let's put it this way. We'd like to balance you all down. and therefore, Revenue. to the manager of Get Smaller. We don't think the opportunities that in this past quarter was. good for our shareholders. We're surely not going to issue new capital when we let an existing balance sheet go bad. Gotcha. That's very helpful there. Thanks again. Thank you. One moment for our next question.
Speaker Change: While the execution level stands out in its own right and particularly so in the face of widening BDC credit spreads that we have seen since mid February.
Speaker Change: Issuance illustrates execution on our underlying philosophy of proactively managing our liquidity needs and our commitment to enhancing the depth of our investor base with each issuance.
Speaker Change: In March we further enhanced our debt maturity profile by closing an amendment to our revolving credit facility.
Speaker Change: With the ongoing support of our Bank group, we amended our $1 $6 75 billion secured credit facility, including extending the final maturity of 152 5 billion of these commitments through March 2030.
We are pleased with the outcome of this transaction as we successfully converted a legacy non extending linda to extending status marginally decreased the drawn spread through the introduction of a new pricing grid and lowered the undrawn fee on the facility.
Sean Paul Adams: Our next question comes from the line of Sean Paul Adams of B-Value Securities. Your line is now open. Hey, guys. Good morning. I'm Obviously, your non-accruals are quite low. Credit quality-wise, you've been doing really well. Your letter made an excellent point on the deployment of capital to take advantage of non-standard opportunities during volatile periods. However, that's based on an assessment of not having any trouble at home. On the impact of, you know, risk ratings and have you guys seen any material migrations in internal risk ratings assigned within the portfolio? No, not really.
Speaker Change: The combination of the February bond issuance and the closing of the amendment to our credit facility extended the weighted average maturity on our liabilities to four two years, which compares to an average remaining life of investments funded by debt of approximately two three years.
Speaker Change: This element is important to our asset liability matching principle of maintaining a weighted average duration on our liabilities that meaningfully exceeds the weighted average life of our assets funded by debt.
Speaker Change: Following both of these transactions, we believe our balance sheet is in excellent shape.
Joshua Easterly: And I would say the one thing we did not do, just put, just FYI, do a great job in our letter, I'll take the criticism for it. I'll give you a little more detail on, I think you're asking a question about credit quality at home. So I feel really good about the portfolio and our ability to pay offense. And you hit exactly right. The insight's exactly right, which is for you to be able to play offense, not only do you need capital and liquidity, you need bandwidth. And the bandwidth means that you don't have any problems at home.
Speaker Change: As of March 31, we had approximately 1 billion of unfunded revolver capacity against the $175 million of unfunded portfolio company commitments eligible to be drawn.
Speaker Change: In terms of capital positioning our ending debt to equity ratio from the balance sheet decreased quarter over quarter from $1. One eight times to 1.15 times. The decrease was driven by the elevated repayment activity experienced in Q1.
Speaker Change: Further we have no near term maturities with our nearest maturity obligation not occurring until August 2026.
Speaker Change: As you may have seen through an 8-K filing in February we entered an ATM program to expand our capital raising toolkit.
Speaker Change: We have not issued shares through the program to date and have no plans of doing so with capital coming back to us through repayments.
Speaker Change: We believe the ATM program is beneficial for shareholders given the cost of issuing equity in this format is lower relative to the follow on offerings, we have done in the past <unk>.
Speaker Change: Consistent with our disciplined approach to raising equity capital, we will look to utilize the ATM program. When we have confidence that the new shares issued will be accretive to net asset value and return on equity.
Speaker Change: Pivoting to our presentation materials slide eight contains this quarter's NAV bridge, which Josh walked through earlier.
Speaker Change: Moving onto our operating results detailed on slide nine we generated $116 3 million of total investment income for the quarter compared to $123 7 million in the prior quarter.
Speaker Change: Interest and dividend income was $98 9 million down from prior quarter, primarily driven by the decline in interest rates.
Speaker Change: Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were higher at $14 million compared to $5 1 million in Q4, driven by the Arrowhead prepayment fee KOL protection and accelerated amortization of OID on other investment realization.
Joshua Easterly: So we have capital, we have liquidity, and we have bandwidth. Got it. Thank you for the color. I appreciate it. Thank you. One moment for our next question.
Maxwell Fritscher: Our next question comes from a line of Maxwell Fritscher of Truth, your line is now open. Hi, good morning. I'm on for Mark Hughes. We've heard that banks are going a little more risk off. Do you anticipate any impact on the liability side of your balance sheet from this? Ian's comments on the facility and the note issuance. suggest that answer is probably no. Any comments there? No, I mean, I think the answer is no. We just got an amendment on an extension. We do that every 12 to 15 months. We effectively took one non-extender, maybe an extender, tightened pricing a little bit, and then we opportunistically issued financing.
Speaker Change: Other income was $3 5 million compared to $4 8 million in the prior quarter.
Speaker Change: Net expenses, excluding the impact of the noncash reversal related to unwind of capital gains incentive fees was $60 7 million.
Speaker Change: Down from $65 9 million in the prior quarter, primarily driven by the decline in base rates and a benefit from a lower weighted average cost of debt. Following the maturity of our 2024 notes in November and the subsequent issuance of the 2013 notes in February.
Speaker Change: This contributed to a weighted average interest rate on average debt outstanding decreasing approximately 60 basis points from 7% to six 4%.
Speaker Change: Returning to our ROE metrics before handing it back to Josh we're reaffirming our target return on equity on adjusted net investment income of 11, five to 12, 5% for the full year consistent with the assessment of our earnings potential outlined earlier on this call.
Joshua Easterly: Like, if you would have asked us when we were gonna do our next bond deal six months ago, we would have said in September, you know, we did it early, so we pre-funded that maturity, and so we feel, like, really, really good. In addition to that, like, we have, you know, a lot of, in a downward-sloping. Great environment, we have liability sensitivity, so we swap out all of our liabilities, so we should not have net interest margin compression, all things being equal in the environment going forward.
Speaker Change: To the extent, we see widening of credit spreads we would expect some downward pressure on net income and potential diversion between net investment income and net income metrics given the spread movement is incorporated into the discount rate, we utilize in determining fair value of our investments each quarter.
Speaker Change: That impact would unwind as investment approach maturity or repaid with that I'll turn it back to Josh for concluding remarks.
Joshua Easterly: So, we managed the balance sheet, Ian's done a great job, we managed the balance sheet, you know, Ian and Christy, we managed the balance sheet exactly, you know, in the right way, and so we're excited, shout out to the team, Ian and Christy. Thank you very much. Thank you.
Speaker Change: I'll keep my conclusion brief today and hope that people will take the time to read our letter which is available on the investor resources section of the <unk> III specialty lending website.
Speaker Change: In closing I'd like to encourage our shareholders to participate for upcoming annual and special meeting is on May 22nd consists.
Speaker Change: Consistent with previous years, we're thinking shareholder approval to issue shares below net asset value effective for the upcoming 12 months to.
Operator: One moment for our next question.
Melissa Wedel: Our next question comes from the line of Melissa Wedel of JPMorgan, your line is now open. Good morning. Thanks for taking my questions. I wanted to follow up on a point that you made. Brief point made in the shareholder letter, and it's really it is a bit more of a modeling question, but I think you referenced sort of making more space in terms of allowing more repayments rather than deploying capital so far in the second quarter. I want to make sure I was, one, understanding that right, and then, two, just wanted to understand maybe the scale of that compared to some pretty sizable repayment activity in the last two reported quarters.
Speaker Change: To be clear to date, we have never issued shares below net asset value under prior shareholder authorization granted to us for each of the past eight years, we have no current plans to do so.
Speaker Change: Merely view this authorization as an important tool for value creation and financial flexibility in periods of market volatility.
Speaker Change: As evidenced by the last 11 plus year since our initial public offering our bar for raising equity at high we've only raise equity when trading above net asset value on a very disciplined basis. So we would only exercise the authorization to issue shares below net asset value. If there were sufficient high risk adjusted return opportunities now.
Speaker Change: Ultimately be accretive to our shareholders through over earning our cost of capital and any associated dilution.
Joshua Easterly: Yeah, look, I would say my guess is we'll be at the end of Q2, somewhere between Flat and slightly down, you know, not, not, not, I don't think it impacts modeling. I think it's like, you know, a balance sheet might be down $30 million to $40 million or something like that. We've been, so, I, look, we are, you know, we are going to, you know, it's obviously part of the economics of the system is keeping financial leverage, which drives, you know, capital efficiency and interest income, etc. And I think that's reflected in our guidance. So I don't think it's a, I think it's on the margin.
Speaker Change: If anyone has questions on this topic, please don't hesitate to reach out to us.
Speaker Change: We have also provided a presentation, which walks through the analysis and the Investor resource section of our website.
Speaker Change: We hope you find the supplemental information helpful. As a way of providing a clear rationale for providing the company with access to this important tool.
Speaker Change: Thank you for your time today operator, please open up the line for questions.
Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one when I get a telephone and wait for your name to be announced.
Speaker Change: Your question. Please press star one again, please standby, while we compile the Q&A roster.
Speaker Change: Yeah.
Speaker Change: And our first question comes from the line of Finian O'shea of Wells Fargo. Your line is now open.
Joshua Easterly: Okay, I appreciate that. And to your point about, you know, volatility historically creating good opportunities to deploy capital and generate higher returns versus sort of regular way markets. We know that there tends to be a bit of a lag between what's happening in the broadly syndicated market and what's happening in sort of the private credit area. We've obviously seen a lot of spread volatility, but it's only been remarkably one month that we've really seen that. So it sounds like you're not really seeing that volatility. create more interesting opportunities in the private credit space quite yet.
Speaker Change: Yes.
Speaker Change: Hey, everyone. Good morning.
Speaker Change: Josh we enjoyed your shareholder letter.
Speaker Change: Wanted to ask about the the downward pressure on spreads.
Speaker Change: With the ongoing non traded BDC fundraising headwind.
Speaker Change: Can you talk about your your resilience to that and how far it goes.
Speaker Change: Just imagining that more capital is making its way into the.
Speaker Change: Complex non sponsor and so forth.
Speaker Change: Styled origination opportunities.
Speaker Change: Yes, Kevin.
Speaker Change: So I wouldn't I wouldn't.
Speaker Change: Yes, let me start with Dave and I have no idea all retail flows are.
Joshua Easterly: Am I reading that right?
Speaker Change: In fact, given the volatility in the market.
Joshua Easterly: Yeah, what I was going to say is, like, the great thing about our platform is we don't hunt elsewhere. And so, like, you know, we will capture some of that spread. So, A, you're right, there's a technical thing happening in the private credit market. Uh, uh, um, so... A, you're right about that, and there's a lag, that pricing lag, but we don't need it to happen just in the private credit market, because we've been able to capture it elsewhere. And so if you look at, in these moments of time, we will go to more liquid markets to capture the spread volatility.
Speaker Change: At retail flows as well as.
Speaker Change: As a slower time will tell I think that data is data in and out.
Speaker Change: Data published.
Speaker Change: <unk>.
Okay.
Speaker Change: Also as you know with those vehicles.
Speaker Change: They are called <unk>.
Speaker Change: For a reason which is there.
Speaker Change: Problems with liquidity, so it kind of volatility if the analog is non traded REIT sector and they've been a.
Speaker Change: Talking about our liquidity.
Speaker Change: Not on that flow, but time will tell.
Speaker Change: That.
Speaker Change: That's one piece of it.
Joshua Easterly: Okay, appreciate that color. Thanks, Josh. Thank you.
Speaker Change: The second piece of it is what we manage the way we built our business as we managed a relatively small amount of capital for the opportunity is that and we haven't been paying top of the funnel.
Operator: One moment for our next question.
Robert Dodd: Our next question comes from the line of Robert Dodd of Raymond James, the line is now open. Hi everyone. Two questions. First, on the, it really comes down to the year capital. Spillover is now $1.31, right? I mean, from an ROE perspective, with the excise tax friction, et cetera. And if you, you know, isn't this the point in the cycle, to your point that you're, you might be down a little bit in Q2 or flat, is this the point of the capital to, the point of the cycle to shrink the capital base slightly? Be accretive to ROE just on excise tax reduction alone potentially going forward?
I mean.
Speaker Change: Non sponsor or and more complex transactions.
Speaker Change: It has made our business more resilient to.
Speaker Change: Spread tightening movement, because we're just not purely in the sponsor business and then we've got ongoing disciplined allocators of capital and I think.
Speaker Change: The people, we understand where we sit in the cost curve and our cost of equity.
Speaker Change: And so we're not going to allocate capital to allocate capital and grow assets and therefore grow revenues.
Speaker Change: We believe that we.
Joshua Easterly: And maybe, you know, you, as you say in the letter, there's not an infinite number of opportunities that are appropriate for BDCs. So again, is this kind of the point of the cycle where you want to be more selective? So shrinking the capital base and distributing some of that spillover might make sense. And so, look, we're not at that point, right? We're not at that point where we need to return capital. That is obviously a lever. You save the excise tax, but remember to fund that distribution you're borrowing, you know, the excise tax costs you 4% annually.
Speaker Change: We have you know we have.
Speaker Change: Sure.
Speaker Change: Basically the important people ordering or so.
Speaker Change: <unk>.
Speaker Change: Got it.
Speaker Change: Capital providers, who provided capital to us.
Speaker Change: And then that capital there are capital risk adjusted return on their capital cost of equity.
Speaker Change: The second being our counterpart community and we can be a good when you are in a good counterparty and lastly on the capital so.
Speaker Change: We needed to bode well and we will probably keep Jos Manuel.
Speaker Change: And then just to zero in like the top of the funnel you haven't seen a material impact there from all the.
Joshua Easterly: The borrow costs you, on a marginal basis, 150 over SOFR. And so, it is accretive on a leverage standpoint, it's dilutive on a NIMS standpoint. And so, but we're not close to that point. We actually think having capital in times of volatility is good. So it is effectively making you more capital efficient, but it is a negative arm as it relates to the cost of the excise tax and your borrow to fund the excise tax. On NIM, yes, not on NII or CAPP, either way, necessarily, right? Understood.
Speaker Change: The direct lending and private credit capital, which seems to be converging in style like is there just less.
Speaker Change: That meet the standards in terms of spread and structure. For example, even if it is something that would win more traditionally fall into your wheelhouse.
Speaker Change: Well.
Speaker Change: Again.
Speaker Change: Maybe we're hitting everything everywhere.
Speaker Change: And top of funnel.
Speaker Change: Very very top of funnel.
Speaker Change: I don't know what impact now we might decide that is not for us.
Speaker Change: The top of the funnel was really and I think the impact on top of the funnel a broad gauge, which is the M&A cycle, which has obviously been very negative on that returning and that is.
Joshua Easterly: On to the second question. It goes to your letter. I mean, one of the underlying themes in that letter seems to be, correct me if I'm wrong here, that you think globalization of trade may have peaked and be on a downturn. Obviously, that is not something that happens usually for like a couple of years. I mean, the increase, there's one of the charts in here, I mean, it was a multi-generational trend upwards in global trade as a percentage, which obviously made a ton of sense then to go into services businesses, because anything that was physical as globalization was rising and offshoring was rising made sense to stay away from.
Speaker Change: Systematic across the industry.
Speaker Change: But yes, we decide where more things or not for us.
Speaker Change: We are in line.
Speaker Change: But because we have a big top of funnel and other channels refi.
Speaker Change: Our shareholders' capital in a responsible way that generate the required returns that all of our business model worked out.
Speaker Change: We also think were going to a world, where there will be more opportunity for complexity.
Speaker Change: And we're excited about that.
Joshua Easterly: If that is the core thesis in the letter and the outlook for Sixth Street, How does that change over the next, not, you know, year or two, but the next... 10 years, which is only really two iterations of owning an asset, given the repayment. How does this view on global trade and, essentially, onshoring, potentially, change how you might allocate capital over a longer period of time? Or does it just not make sense? I know I look I think that so look, most of our businesses and services and what I would say that the global the de-globalization started happening in 2010.
Speaker Change: Given the macro so I feel really confident on our ability to continue to earn returns in cross cycle, but if you look at historically would put us at 11, I don't think people felt like.
Speaker Change: We've actually done better at moments like this.
Speaker Change: <unk> done better than kind of a regular way market for market volatility provided the return.
Speaker Change: And our ability because how we manage our balance sheet and the top of the funnel and the culture of fixed rate, we'd be able to generate outsized returns I think you'll like volatile years regenerate.
Speaker Change: On a return basis point in the back half in terms of converting non volatile years and our outperformance in the.
Speaker Change: The industry actually grows significantly so we couldn't be more excited about the Florida market with us.
Joshua Easterly: Now there was a peak up in COVID etc. But if you look at there's two things look in that chart. One is the trend post 2010, which was declining, and then most recently declining. And what I Well, mostly services businesses, but the impacts, I think, are more, the way I think about it is, it probably slows velocity of capital, which will slow growth. It leads to, it's inflationary, which will affect discount rates on assets. And so, the super cycle of return equities, I think, and the value is going from, you know, and by the way, there are great private equity sponsors and great hedge fund managers and great equity managers that will pick up the idiosyncratic.
Speaker Change: Okay.
Speaker Change: Got it from a refining how we design the business.
Speaker Change: Hello.
Speaker Change: Shareholders and capital.
Speaker Change: On that list that priority.
Speaker Change: And with the capabilities, we have given the market opportunity.
Speaker Change: You sound like very negative on M&A, returning do you just mean.
Speaker Change: A couple of quarters from what was supposed to be more like now or do you think.
Speaker Change: More protracted and.
Speaker Change: Anything you can unpack there for us.
Speaker Change: Yeah. So.
Speaker Change: Okay.
Speaker Change: I think the industry has been beating the drum on M&A returning.
Speaker Change: Partly to justify I think about capital being raised.
Joshua Easterly: But the broad-based tailwinds to equities, I think that's changing, which is de-globalization, the way I think about it is, it's inflationary, it is, will increase discount rates on assets and slow growth, and what made for a very accommodative equity return environment, which is low discount rates and high growth, those conditions no longer exist. And so, I think what, as it relates to our underwriting, you have to be clear-minded about yesterday's valuations and yesterday's LTVs are different. They're going to be different. just run a DCS, cut your growth by half, increase your discount rate by two.
Speaker Change: And we've been negative on that the constraint is not be the amount that the issue is not mature this dry powder for private equity deals to get done.
Speaker Change: Contract out.
Speaker Change: Problem is that people pay too much for assets between 2019 and 2022.
Speaker Change: And time that goes out that nobody wants to sell those assets.
Speaker Change: Without an acceptable return.
Speaker Change: A lot of economic interest Enzo people lead time.
Speaker Change: And growth there is a headwind to growth.
Speaker Change: Which we think both in the not so do I know.
Speaker Change: So I think theres going to be a whole bunch of non investment grade M&A and 2012.
Joshua Easterly: Like, it's gonna come out with a different value. And so, that is where I think that, where this generation of investors are going to have a little bit of challenges. They're going to look at yesterday's news, yesterday's comps, yesterday's multiples, and think those are a real thing. Guess what? The environment's changed. To that point, would that mean you would expect even, I mean, this quarter, I think it was 11% sponsor-backed. No, it was 11% follow-ups. It was 16, 15% sponsor-backed, I think. Would you expect that? That's obviously significantly below your long-term average. Is that kind of, do you think, going to be the new, more of the new norm going forward?
Speaker Change: Five years ago.
Speaker Change: In 2026, possibly but the.
Speaker Change: Unfortunately in the macro.
Speaker Change: And then draw down on growth expectation is going to make an investment and M&A are.
Speaker Change: Sure.
Speaker Change: Mhm.
Speaker Change: Awesome. Thank you.
Speaker Change: Okay.
Speaker Change: One moment for our next question.
Speaker Change: Thanks, Good morning, everyone. So Josh you've been very clear in the last several quarters about how the firm has been focused on finding attractive risk reward opportunities and making sure you're getting the right economics for the rest of your taking the environment has clearly shifted here.
Speaker Change: But I'm curious how are your teams able to price risk when there is a meaningful pick up in uncertainty and volatility and then theres clearly been a healthy reset in valuations here. So so where are you seeing the most attractive deployment opportunities today.
Joshua Easterly: No, I mean, I think the sponsors are super smart. We love them. They're sophisticated users of capital. They're great investors, but they're sophisticated users of capital, and I think that tech people in the private press space, which includes a lot of folks and a lot of money-putting stuff, wanting to put money, needing to put money to work in that channel, it hasn't shifted for them, but we love them, and we're going to be right there with them when they need capital and scale and size. But we're going to go where there's the best risk-return, and the technicals in the private credit market were not accommodated.
Speaker Change: Hey, Brian Good morning, I appreciate that question, it's a really good question.
Speaker Change: Look I think the way, we're able to price, whereas I don't think the private market.
Speaker Change: And before the <unk>.
Speaker Change: Today are doing a very good job of pricing risk.
Speaker Change: Which is somebody show we applied this morning that middle market spreads have moved but probably syndicated spreads have moved.
Speaker Change: And I know, where the data came from but that totally predictable.
Speaker Change: And that seems like a technical issue in the middle market.
Operator: Yeah, I'll follow up with that one. Thank you. Thank you so much.
Which is.
Speaker Change: Previous flow people, even put the previous flows work.
Speaker Change: But.
Paul Johnson: Thank you, one moment, our next question. And our next question comes from the line of Paul Johnson of KVW. Your line is now open. Yeah, good morning. Thanks for taking my questions. Just want to credit if I may, IRG Sports and Entertainment, I believe that How is that company performing? We've obviously seen a lot of interest in professional sports facilities, but it was marked down just a little bit slightly in the quarter. Are you expecting to exit that? Yeah, I mean, so IRG is a name that we, we, we, there's a whole bunch of assets that we're working to sell, including the significant, I think it's 160 acres or something like that, a little bit more and outside of White Palm Beach.
Speaker Change: We think about the world is where deep fundamental investors, we look at where retail the cost curve, what's the required equity.
Speaker Change: The illiquidity premium that we need which is I can't change my mind and making that investment.
And.
Speaker Change: We look at what we think that asset and.
Speaker Change: And loan to value on that asset and when we think that asset is worth it kind of a normalized interest rate environment and normalized growth environment, and so having kind of that deep fundamental view of the world and doing real work allows us to price risk enrollment volatility in addition.
Speaker Change: To that.
Speaker Change: I don't know enough about the under management, we have a large platform than ABF healthcare sports media Telecom energy retail consumer et cetera has grown et cetera et cetera.
Joshua Easterly: And so that will work to resolve that. Got it. Thank you for that.
Speaker Change: Not only are we able to see the top of it.
Speaker Change: And a lot of different vein below the relative value.
Ian Simmonds: And then, real quick, just on the cost of debt. You guys have it. I thought. down a little over 130 basis points or so over the last few quarters, which is a little bit more than what base rates have done over the past year. Is there anything, I guess, that's benefiting the hedges or anything that's driving? costs a bit lower, I guess. I'll make a shot at it and I'll give it to Ian. One is mixed probably. The other one is hedges or hedges lag, maybe. But one is mixed, funny mixed. The new price of the revolver wouldn't have an impact on the LTM period.
Across asset classes, and what people are pricing for growth.
Speaker Change: Our discount rates or even super helpful. Thank.
Speaker Change: Thank you Bob kind of steady at other short shoulder, we are able to commit capital one of the tables out.
Speaker Change: Okay great.
Speaker Change: Helpful and then.
Speaker Change: You touched on this a little bit but.
Speaker Change: You look at <unk> and even the broader sixth Street platform. I mean, you really deliver an impressive returns through cycles looking back over over your history.
Speaker Change: And I think some of the market actually forget volatility. It's a great thing for your business. So can you just remind us again, why does <unk> and really the broader sixth Street model works, so well in all parts of the cycle and then why do periods of volatility ultimately drive value for all your stakeholders longer term.
Ian Simmonds: So it's probably a little bit of a mix. Yeah, Paul, if you look at the last two quarters in particular, we had one maturity of an unsecured note. So that rolled off and we funded that with the revolver drawdown. So that was a positive benefit. So lowering overall weighted average cost of debt. And then the new bond that was issued was only in the second half of February. So it doesn't have as much of an issue, but that was also lower spread. And then the effective base rates, so don't forget 100% of that. Got it.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: We've actually got a few.
Speaker Change: Which is.
Speaker Change: And lowered the volatility there.
Speaker Change: This return profile compared to the.
Speaker Change: Tony.
Speaker Change: What's that.
Ian Simmonds: OK. Thanks for that. That helped.
Speaker Change: One of the lowest shocking that structural in the sense that the capital decently permanent.
Joshua Easterly: And then last one, Josh, Ian, you know, I'd love to get your thoughts on. Structured Risk Transfers Does that have any potential, I guess, to change, you know, funding costs at all? Do you see that as a positive development or? So, I saw this yesterday, and you're referring to the effort he done on a group of some risk transfer from banks to the private credit market, banks to the asset managers. Is that what you're referring to? Yes. I suspect it was done not for capacity issues. which is, it allows things... to effectively get capital relief and expand more lending relationships.
Speaker Change: So theyre not a forced seller this is already on.
Speaker Change: On the trading side I think on the non traded Thailand.
Speaker Change: Time will tell because there will be a liquidity pool, but the structure of the industry, which is to have permanent capital.
Speaker Change: And they are not that levered, so there no okay.
Speaker Change: Another option.
Speaker Change: And Andy is robust.
Speaker Change: So the industry itself and the capital structure of the industry and the permanent.
Speaker Change: The capital allows robustness.
Speaker Change: <unk>.
Speaker Change: We actually have this idea of an acreage holder, which we actually can better where theres stress.
Speaker Change: We know that we manage.
Speaker Change: We've done a good job of allocating capital, which means that we have capital to allocate and moment of volatility not only are we not a forced seller, but we actually grow.
Our investments during that time, when the rest of the world.
Joshua Easterly: So, on the margin, I think it's helpful. I don't think it reduces pricing, but I do think it's helpful as it relates to expansion of capacity. You know, the bank's model is balance sheet, you know, into the space and then hopefully drive fees. And if they can put more balance sheets into the space from a capital relief trade, they get to, you know, get more fees. So, and turn over that capital. So, my guess is that on the margin, it expands capacity or it keeps capacity but doesn't do anything to pricing. Thank you. It's all for me.
Speaker Change: Off and that is a function.
Speaker Change: And you can get allocated capital and the understanding that we need to reserve for unfunded commitments, we need to reserve for investment capacity during those times, both capital and liquidity and so that allows us to actually be on the final RFP.
Speaker Change: <unk>.
Speaker Change: All of our eight during those times and really capture that opportunity. So I was shocked.
Speaker Change: When I look at the data for the industry.
Operator: Thank you, one moment for our next question. Again, as a reminder to ask a question, you'll need to press star 1-1 on your telephone.
Speaker Change: And.
Speaker Change: But it makes sense because what.
Speaker Change: Demonstrates ever reported should be number four seller given the permitting and the capital again, the non traded space will be interesting because there will be capital stop flowing and there will be my guess is some type of liquidity pool.
Finning O'Shea: And our next question comes from Lina Finnean O'Shea of Wells Fargo. Your line is now open. Hey, everyone. Thanks for the follow on. I just wanted to go back to the question on the ATM. I think, Beau, you said no, you know, no changes whatsoever, sort of, to the you know, the historical approach, which has been. something like, you know, every couple of years, something like 5% of NAV. Does that mean you'll do that sort of same thing with perhaps an institutional direct or will it be more of a dribble out type ATM program? Thank you, sir.
Speaker Change: Total liquidity that which.
Speaker Change: Which is.
Speaker Change: The dialogue in the market.
Speaker Change: Capital came out of the system.
Speaker Change: During that moment of volatility and capital did not come in for people going to be aggressive adequate to invest opportunities outside of their capital structure and capital structure.
Speaker Change: I appreciate it Josh I'll leave it there and congrats on the strong quarter.
Speaker Change: Thanks.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Mickey <unk> of Ladenburg. Your line is now open.
Joshua Easterly: Sorry, that was Josh. That's a very good, nuanced question. I meant no changes philosophically or a framework of how we raise capital. The ATM does allow you to take capital just in time. Historically, what we've done, we've kind of actually pre-funded the asset size and balance sheet, so people that fill the J-curve are dragged and then raise capital and got it kind of back and normalized. The ATM will give us the flexibility to dribble stuff out, we'll use that flexibility. But philosophically, we're not changing how we raise capital in the sense that, you know, we're going to raise capital in one of the credos of NAF and where we think that capital will earn a return in excess of a return on equity.
Speaker Change: Yes, good morning, everyone.
Mickey: Josh as usual your prepared remarks were excellent.
Speaker Change: Excellent answer.
Speaker Change: All of my top down questions. So I just have one modeling question.
Speaker Change: First row of slide nine which is <unk>.
Speaker Change: Interest and dividend income excluding fees.
Speaker Change: It looks a little light relative to the 3% decline in the portfolio at cost and considering movements in spreads and so forth.
Speaker Change: That could be due to things like the cadence of investments or some sort of reversal or was there something else in there that we should be aware of.
Ian: I'll turn that to Ian.
Speaker Change: We may have to come back to you Tom.
Joshua Easterly: But, you know, will we, you know, does it give you more flexibility to do smaller size stuff and do just in time? Yes, versus what we have historically done is we've kind of taken the leverage up and then brought it back down, which, you know, is, I wouldn't say risky because we know, you know, where we're trading, but it is, you know, this is probably slightly more efficient in that way. But it's really a change in the execution that the philosophy hasn't changed. When you see, like, you've done it historically very judiciously and prudent, the dribble, you know, seems a bit more of like an asset-gathering approach, which I know you'd be against.
Ian: <unk>.
Speaker Change: And I do not.
Speaker Change: Let's come back to you exactly on the.
And 2000.
Speaker Change: I know it was 12, everyone that 424, there was a large dividend income payments and included.
Speaker Change: Not a nonrecurring type item right and yeah, that's right.
Speaker Change: Probably creates a little bit of noise.
Speaker Change: That creates a noise or a better way to look at it is is a little bit of a brand.
Speaker Change: And the loan portfolio shrinkage compared to September 32024, but there was a onetime dividend payment relating to energy name any of them yet.
Speaker Change: That's right.
Speaker Change: Many of you always have been.
Joshua Easterly: So can you... like do it fast enough, as you historically have when the deal flow is big. Your question is the right question. We're not saying we're exclusively using the ATMs. What we're saying is it's a tool that is lower, that is lower cost for shareholders to exercise. There might be a time where, like, you know, we want, like, there's an opportunity to grow the balance sheet step function, and we think it's really good, and the A-team's not gonna allow us to do that. And when we go to the public markets, yes, 100%. So it's not, it's not, it's just another tool.
Speaker Change: Yeah.
Speaker Change: Sorry.
Speaker Change: You always have a I think I've got to be answered, but there was a onetime dividend payment.
Speaker Change: 2000, and the headquarters.
Speaker Change: Hello, everyone.
Speaker Change: We'll come back to you with exact numbers.
Speaker Change: We've got one.
What is the dividend payment nonrecurring dividend payment.
Speaker Change: $5 1 million.
Speaker Change: And that is at the prior quarter, so that apples to apples.
Speaker Change: It's pretty consistent with a little bit of yield compression.
Speaker Change: And the portfolio as you engage if you look at dividend and interest and dividend income and a pro forma.
Joshua Easterly: It's not a exclusive tool. Thanks for the color. It's all for me. Thank you. I'm showing no further questions at this time.
Speaker Change: 12, 31 2024.
Speaker Change: Right at about $113 million minus 5 million Bucks.
Joshua Easterly: I'll now turn it back to Josh Easterly for closing remarks. My hope was, I'm kind of joking, my hope was that the letter would have made the question and answer section shorter, it might have had the opposite impact, shame on us and shame on me, but I really appreciate all the good questions, super thoughtful, we're excited about Eli's ad, you know, this is what makes this job interesting, changing environments, obviously the environment keeps changing, and lifelong learners, this is what we kind of get up every day to do and the platforms here to execute.
Speaker Change: That would be more consistent with your modeling.
Speaker Change: Income went from $5 nine.
Speaker Change: In Q4 with <unk> now.
Speaker Change: <unk> nine in Q1.
Speaker Change: Okay I appreciate that thank you that's it for me.
Speaker Change: Okay.
Speaker Change: One moment for our next question.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Kenneth Lee of RBC Capital markets. Your line is now open.
Kenneth Lee: Hey, good morning, and thanks for taking my question.
Speaker Change: Just given the the prepared remarks around.
Some of the newer investments, including I guess, one in the retail ABL side.
Speaker Change: Could you further flush out your outlook for <unk>, two and <unk> three investments.
Operator: We hope people enjoy their summer, we hope that we'll catch up with people after Q2, or if not sooner, please feel free to reach out. Thanks so much. Thank you for your participation in today's conference.
Speaker Change: Would it be fair to say that youre, starting to see a lot more of these opportunities materializing right now or do we do we still have to wait a little bit more to see more stress across the sectors. There. Thanks.
Speaker Change: I mean.
Operator: This does conclude the program.
Operator: You may now disconnect.
Speaker Change: <unk>.
Speaker Change: Got it.
Speaker Change: One last or this or that or the profile here before year end of size that we think is very interesting.
Speaker Change: And pellets.
Speaker Change: I think there will be either will not long stress.
Speaker Change: A little bit more time.
Speaker Change: But we're kind of we're excited we're starting to see and stuff.
Speaker Change: Obviously, the volumes and the gain loan market is down.
Speaker Change: My guess is if you look at the data.
Speaker Change: Moody's revised.
Alex: Sure Alex.
Alex: We can.
Alex: Distress, which we've been discussing over probably in the cable market up to accessing or some buying that so I think those opportunities are coming our way.
Alex: Great very helpful. There.
Alex: Just one follow up if I may and this is just on the ATM equity program and it sounds like the general approach towards.
Alex: Any kind of potential capital raises its still very consistent with with your previous approach.
Alex: But just wondering whether you could be.
Alex: Raising capital a little bit more frequently than in the past.
Alex: I believe it's just Alex had very infrequently raise capital in the past, but just wanted to see if the frequency could potentially change there. Thanks.
Alex: No change in how we raise capital at a frequency rate of capital or whether we were going through I think in a perfect way, which is has to be both accretive on a rolling basis as it relates to our cost of equity in an asset value basis.
Alex: And it is yes.
Alex: We were pretty I would say, we're pretty stubborn about ATM.
Alex: But quite frankly, it is better for shareholders.
Alex: Cost is lower.
Alex: Zero change and how we do it.
Alex: And zero land and.
Alex: It means that only really makes sense for our shareholders in anything either I think thats.
Alex: We were very deliberate about making the comment about no new shares issued this quarter because we didn't want people assume that just because we have the tool we would use it it's more about making sure that we can be as effective as possible to shareholders I mean.
Alex: Let me put it this way.
Alex: We like the balance sheet roll down.
Alex: And therefore, our revenues.
Alex: To the manager.
Alex: Small RFP, we don't maybe opportunities that in the past quarter was.
Alex: Good for our shareholders.
Alex: We are not going to issue new capital.
Alex: Earnings and balance sheet go down.
Alex: Yeah.
Alex: Got you.
Alex: Very helpful. There.
Alex: Thanks again.
Alex: Thank you Amit next question.
Speaker Change: Our next question comes from the line of Sean Paul Adams from Bofa Securities. Your line is now open.
Speaker Change: Hey, guys good morning.
Speaker Change: Obviously, your non accruals are quite low credit quality wise, you've been doing really well your letter made an excellent point on the deployment of capital to take advantage of non standard opportunities during volatile periods. However.
Speaker Change: However, that's based on an assessment of not having any trouble at home.
Speaker Change: On the impact of.
Speaker Change: No.
Speaker Change: Risk ratings and have you guys seen any material migrations and internal risk ratings assigned within the portfolio.
Speaker Change: No that was not really and I would say the one thing we did not do just to put that why do a great job and are aware of.
Speaker Change: I'll take the criticism for I'll give you a little more detail on <unk>.
Speaker Change: I think youre asking a question about the credit quality and at home.
Speaker Change: Let me hit the tariff real quick.
Speaker Change: We outline.
Speaker Change: Closure of the direct exposure to tariffs.
Speaker Change: <unk>, which is about 2% the reality of it is that 60 basis points of that is already on non accrual.
Speaker Change: American achievement.
Speaker Change: Hum.
Speaker Change: Another $4 million position that we think has limited impact there.
Speaker Change: There's really only one day, which is one 3% that name.
Speaker Change: Is.
Speaker Change:
Speaker Change: Not very levered today.
Speaker Change: At the end of the lesson.
<unk> Levered.
Speaker Change: 60% of its manufacturing here in the U S is that a.
Speaker Change: Sourced from overseas.
Speaker Change: We think we estimate that there might be a.
Speaker Change: Kind of a 20% impact on EBITDA.
Speaker Change: Ultimately roll through.
Speaker Change: And then they can pass along cost and for that reason credit for like six five times, Levered, which is still <unk>.
Speaker Change: First of all for that credit and scale of that credit so I feel really good about the portfolio.
Speaker Change: Our ability to pay off.
Speaker Change: And you hit it exactly right the impact exactly right, which is going to be able to play offense now and you need capital and liquidity you need bandwidth.
Speaker Change: And it is the bandwidth that you don't have any problems at all.
Speaker Change: So we have capital we have capital we have liquidity and we have bandwidth.
Speaker Change: Got it thank you for the color I appreciate it.
Speaker Change: Thank you Amit for next question.
Speaker Change: Our next question comes from the line of Maxwell Fitzgerald of choose your line is now open.
Speaker Change: Hi, good morning, I'm on for Mark Hughes.
Speaker Change: Heard that banks are going a little more risk off.
Speaker Change: Do you anticipate any impact on the liability side.
Speaker Change: Your balance sheet from this in his comments.
Speaker Change: On the facility and the note issuance.
Speaker Change: Suggest that answer is probably no but any commentary.
No I mean.
Speaker Change: And the answer is no.
Speaker Change: An extension, we do not only 12 15 months.
Speaker Change: I can we.
Speaker Change: <unk>.
Speaker Change: Tightened pricing alone.
Speaker Change: And then we Opportunistically issued financing you would have asked us when we were going to do our next bond deal six months ago, we would've had in September.
Speaker Change: We did it early we pre funded debt maturity and so we feel really really good and in addition to that we have.
Speaker Change: And in a downward sloping.
Speaker Change: Rate environment, we have a liability sensitivity, we swap out all of our liabilities.
Speaker Change: So we should not have net interest margin compression.
Speaker Change: All things being equal and the environment going forward. So we.
Speaker Change: We manage the balance sheet in some great job, we manage the balance sheet.
Christy: And Christy we manage the balance sheet exactly.
Speaker Change: And the right way and so.
Christy: We are excited to shout out to the team to even increase.
Christy: On to you.
Speaker Change: Thank you very much.
Christy: Yeah.
Christy: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Melissa <unk> of J D.
Speaker Change: Morgan Your line is now open.
Melissa: Good morning, Thanks for taking my questions.
Speaker Change: Wanted to follow up on a point.
Speaker Change: It was.
Speaker Change: Great point made in the shareholder letter and its really it is a bit of more of a modeling question, but I think you referenced sort of making more space in terms of allowing more repayments rather than deploying capital so far in the second quarter.
Speaker Change: I want to make sure I was one understanding that right and then can you just wanted to understand maybe the scale of that.
Speaker Change: Compared to some pretty sizeable repayment activity in the last two reported quarters.
Speaker Change: Yeah look I would say.
Speaker Change: My guess is we'll.
Speaker Change: We'll be at the end of Q2 somewhere in between.
Speaker Change: Flat and slightly down.
Speaker Change: Not that I don't think I'd add backs modeling I think everybody.
Speaker Change: <unk> might be down 30 to 40 million bucks or something like that.
Speaker Change: And so I love, where we are.
Speaker Change: We are going to you know, it's obviously part of the economics of it.
Speaker Change: Is keeping financial leverage.
Speaker Change: Drive.
Speaker Change: So capital efficiency is an interesting et cetera, and I think that's reflected in our guidance. So I don't think its a.
Speaker Change: On the margin.
Speaker Change: Okay I appreciate that.
Speaker Change: And to your point about.
Speaker Change: Volatility historically, creating good opportunities to deploy capital in.
Speaker Change: And generate higher returns versus sort of regular way markets.
Speaker Change: We know that there tends to be a bit of a lag.
Speaker Change: Between what's happening in the broadly syndicated market and what's happening and started the private credit area.
Speaker Change: Obviously seen a lot of spread volatility, but it's only.
Speaker Change: Remarkably one month that we've really seen that so it sounds like youre, not really seeing that volatility.
Speaker Change: Create more interesting opportunities in the private credit space quite yet.
Speaker Change: My reading, you're reading that right.
Speaker Change: Yes.
Speaker Change: The great thing about our platform is we don't have elsewhere.
Speaker Change: Hello.
Speaker Change: We will capture some of that is pricing, so and youre right.
Speaker Change: It was a technical thing happening in the private credit market.
Speaker Change: Ah.
Speaker Change: Okay.
Speaker Change: You're right about that and there's a lag and the lag, but we don't need it to happen just in the private credit market, because we've been able to capture it elsewhere.
Speaker Change: And so if you look at any moment in time, we will go to more liquid markets to capture that spread volatility.
Speaker Change: Okay I appreciate that color. Thanks, Josh.
Speaker Change: Thank you Amit for next question.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Robert Dodd Raymond James Your line is now open.
Speaker Change: Hi, everyone.
Speaker Change: Two questions first on the <unk>.
Speaker Change: It really comes.
Speaker Change: It comes down to your capital Spillovers now Buck 31, right I mean women, although we perspective.
Speaker Change: With the excise tax friction et cetera, and if you.
Speaker Change: The point in the cycle to your point that you're you might be down a little bit in Q2 or flat is this deployment of capital to the point in the cycle to shrink the capital base slightly be accretive to although we just on excise tax deduction alone potentially going forward and maybe you know you as you say.
There's not an infinite.
Speaker Change: A number of opportunities that are appropriate for bdcs. So again is this kind of the point in the cycle, where you want to be more selective so shrinking our capital base that is distributing some of that spill over it might make sense.
Speaker Change: And so.
Speaker Change: Look we're not at that point right, we're not at that point, where you were where we need to return capital.
Speaker Change: That is obviously however, you.
Speaker Change: You pay the excise tax, but remember, it's a fund that distribution you're borrowing.
Speaker Change: <unk> costs were 4% annually the borrowing cost.
Speaker Change: On a marginal basis 150 over so for and so it is.
Speaker Change: Great.
Speaker Change: On a leverage standpoint.
Speaker Change: They're worried about an M&A standpoint.
Speaker Change: And so we're not opposed to it that's why we actually think having capital and tightened the volatility is good so it is.
Speaker Change: It is effectively making a more capital efficient, but it is a negative as it relates to the cost of the excise tax in your body.
Speaker Change: Borrow to fund the excise tax.
Speaker Change: Oh, our NIM, yes, no on.
Speaker Change: And I don't have all the way he necessarily.
Speaker Change: Okay.
Speaker Change: Understood.
Speaker Change: The second question you guys.
Speaker Change: Yes, I mean.
Speaker Change: One of the underlying themes and that seems to be correct me if I'm wrong here that you think.
Speaker Change: Global globalization of trade may have peaked and beyond.
Speaker Change: <unk> cycle.
Speaker Change: Obviously that is not something that happens usually it felt like a couple of years.
Speaker Change: The increase is one of the Charleston here I mean, it was a multi generational.
Speaker Change: And upwards in global trade as a percentage, which obviously you've made a ton of sense then to go into services businesses, because anything that was physical.
Speaker Change: Globalization was rising and offshoring was rising.
Speaker Change: It made sense to stay away from so its if that if that is the core thesis in the letter and the outlook for fifth Street.
Speaker Change: <unk>.
Speaker Change: How does that change over the next year or two but in the next.
Speaker Change: 10 years, which is only really two iterations of owning an asset given that big payment cycles.
Speaker Change: How does how does this view on global trade in.
Speaker Change: Since the onshoring potentially chase.
Speaker Change: <unk>, how you might allocate capital.
Speaker Change: Over a longer period of time or does it just not make any difference.
Speaker Change: No look I think.
Speaker Change: So most of our business in a conservative and what I would say.
Speaker Change: Before the demobilization started to happen in 2000 cabinet now there was a pickup and Colgate et cetera, but if you look at those two things look at that chart. One is the trend post 2010, which was declining and then.
Speaker Change: And picked out and then most recently declining and what I would say is the impact.
Speaker Change: Well the way services businesses.
Speaker Change: But the impact I think are more the way I think about it is probably slow philosophy of capital, which will slow growth.
Speaker Change: <unk> lead to inflationary, which will affect discount rates on assets and so that's super cycle return on equity.
Speaker Change: And the value has gone from.
Speaker Change: And by the way there are a great private equity sponsors and great hedge fund managers are great every manager that will pick up any autocratic, but that's broad based tailwind the equity and I think that's changed.
Speaker Change: Demobilization and the way I think about it is inflationary.
Speaker Change: And why.
Speaker Change: Increased discount rates and asset.
Speaker Change: And what made for a very accommodative equity return environment, which is low discount rates and high growth.
Speaker Change: Those conditions no longer exist.
Speaker Change: And so I think as it relates to our underwriting.
Speaker Change: To be clear minded about yesterday evaluation in yesterday's ltvs.
Speaker Change: Our Denver Theyre going to be different.
So if you run a DCF how do you go about half increase your discount rate by two can.
Speaker Change: It may come out with a different value and so I think that.
Speaker Change: That is where I think that.
Speaker Change: This generation of investors are going to have a little bit of a challenge as they are going to look at yesterday's news yesterday as comps yesterday's multiples and things those are well guess.
Speaker Change: Guess, what the environment's changed.
Speaker Change: So to that point would that mean, you would expect even I mean this quarter I think it was 11% sponsor backed no. It was 11% follow ups.
Speaker Change: 16.
Speaker Change: 16, 15% sponsor backed I think.
Speaker Change: Would you expect that that's obviously significantly below your long term average is that kind of do you think going to be the new more of the new norm going forward.
Speaker Change: No.
Speaker Change: So I mean I think.
Speaker Change: Uh huh.
Speaker Change: Officers tumor smart.
Speaker Change: We love all the sophisticated use of the capital that reinvestment in the business and paying users of capital and I think that technical and the private credit space, which will cause a lot of folks and a lot of money for yourself wanting to book.
Speaker Change: More money to work in that channel.
Speaker Change: Just this quarter, but we love them and we're going to be right right there with them.
Speaker Change: When they need capital and scale.
Speaker Change: So, but we're going to go whether it's the back.
Speaker Change: So risk return.
Speaker Change: The technicals in the private credit market, we're not I've commented this quarter.
Speaker Change:
Speaker Change: Yes.
Speaker Change: I'll follow up with that one.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Thank you our next question.
Speaker Change: Okay.
Speaker Change: And our next question comes from the line of Paul Johnson, Okay. VW. Your line is now open.
Paul Johnson: Hey, good morning, Thanks for taking my questions.
Speaker Change: Just one on credit if I may.
Speaker Change: IRG sports and entertainment I believe that loan is maturing in this quarter, how is that company performing.
Speaker Change: You've obviously seen a lot of interest in professional sports facilities.
Speaker Change: But it was marked down just a little bit slightly in the quarter.
Speaker Change: Are you expecting exit that.
Speaker Change: Yeah. So <unk> is a name that we are theres, a whole bunch of assets that we're working to sell.
Speaker Change: Including the Ah <unk>.
Speaker Change: A significant I think it's about 160 acres.
Speaker Change: And was it more overboard and outside.
Speaker Change: Outside of West Palm Beach.
Speaker Change: And so that's more to resolve that.
Speaker Change: Got it thank you for that and then.
Speaker Change: Real quick on just on the cost of debt.
Speaker Change: That you guys have it.
Speaker Change: I believe it's.
Speaker Change: It's down a little over 130 basis points or so over the last few quarters, which is a little bit more than than what base rates have done over that time.
Speaker Change: Is there anything I guess thats benefiting the hedges or anything that's driving the cost of debt lower I guess.
Speaker Change: I'll take a shot and then I'll give it one is mix probably the other.
Speaker Change: I don't want to hedges are hedges lag, maybe but one of the mix funding mix.
Speaker Change: New types of the revolver.
Speaker Change: Would it have any impact in the LTM period.
Speaker Change: A little bit of a mix, yes, Paul if you look at the last two quarters in particular, we had.
Speaker Change: One maturity of an unsecured notes so that rolled off and we partner that with the revolver drawdown. So that was a positive.
Speaker Change: By lowering overall weighted average cost of debt.
Speaker Change: And then a new bond that was issued it was already in the second half of February. So it doesn't have as much of an issue, but that was also lower spread lower spread.
Speaker Change: Got it and then.
The base rates I forget 100%.
Speaker Change: Yep.
Speaker Change: Got it okay. Thanks for that that's helpful.
Speaker Change: Excuse me and then last one.
Josh: Josh Ian.
Speaker Change: I'd love to get your thoughts.
Speaker Change: On.
Speaker Change: A relatively new development in the BDC space, but structured risk transfers.
Speaker Change:
Speaker Change: Does that have any potential I guess to change funding costs at all within the BDC space do you see that as a positive development or words signal with peak risk.
Speaker Change: So that has been the trade policy yesterday.
Speaker Change: Referring to the answer if he done from.
Speaker Change: I agree.
Risks, our risk transfer from banks and the private credit market.
Speaker Change: <unk> to the asset managers is that what you're referring to.
Speaker Change: Yes.
Speaker Change: I suspect.
Speaker Change: And it was done for not for capacity issues.
Speaker Change: Which is it allows pain.
Speaker Change: To effectively get capital relief.
Speaker Change: And expand more linear relationship on the margin I think is powerful I don't think it reduces pricing, but I do think it's <unk>.
Paul Johnson: Paul as it relates to expansion of capacity.
Speaker Change: Base model balance sheet.
Speaker Change: Into the space and then helping drive speed and I think your pro forma balance sheet to the space.
Speaker Change: From a capital relief trades.
Speaker Change: Get more fees go and turn it over to that capital.
Speaker Change: My guess is it other margin expands capacity or keep capacity, but doesn't do anything to pricing.
Speaker Change: Thank you that's all for me.
Speaker Change: Thank you.
Speaker Change: Our next question again as a reminder to ask a question you will need to press star one on your telephone.
Speaker Change: Our next question comes from the line of Finian O'shea of Wells Fargo. Your line is now open.
Finian O'shea: Hey, everyone. Thanks for the follow on I just wanted to go back to the question on the ATM.
Speaker Change: Think Bo you said no.
Speaker Change: No changes whatsoever sort of to the.
Speaker Change: The historical approach which has been.
Speaker Change: Something like every couple of years, something like 5% of NAV does that mean, you'll do that sort of same thing was with perhaps an institutional direct or will it be more.
Speaker Change: Hum.
Speaker Change: Have a triple outs type ATM program. Thanks.
Speaker Change: Hey, Thanks, John.
Speaker Change: Josh.
Speaker Change: And that's a very good nuance question I meant no no changes.
Speaker Change: Profit way, how our framework of how we raise capital the ATM, that's allowing you to take a capital of just in time historically, what we've done we've kind of actually pre funding that I found the balance sheet. So people have till the J curve of drag and then raise the capital and got it cut back and Don Lino.
Speaker Change: <unk> <unk> will give us some flexibilities rules about where you've got flexibility, but philosophically, we're not changing how we raised capital in the sense that we're going to raise capital and when it's accretive to NAV and where we think we need that capital.
Speaker Change: A return to an acceptable return on equity.
Speaker Change: Yes.
Speaker Change: Well, we you know it doesn't give you more ability to do smaller sized staff and who jumps in time, yes versus what we had historically, we've kind of taken the leverage up and then brought it back down.
Speaker Change: And I won't say risky because we know well.
Speaker Change: We're trading but is it is.
Speaker Change: This is probably slightly more efficient in that way, that's really changing and the execution that the philosophy hasn't changed.
Speaker Change: Good way to give a kit.
Speaker Change: When you see like you've done it historically very judiciously and prudent the durables seems a bit more of like an asset gathering approach, which I know you'd be against.
Speaker Change: So can you.
Speaker Change: Like do it fast enough.
Speaker Change: As you historically have win when the deal flow is big.
Speaker Change:
Speaker Change: Yes.
Speaker Change: To your question the right question, we're not saying, we're supposedly using the ATM.
Speaker Change: What we're saying is it's a tool that is lower and lower cost for our shareholders exercise there might be a time where like.
Speaker Change: We think there's opportunity to grow the balance sheet step function and we think that's really good.
Speaker Change: And the teams back and allow us to do that and when we go into the public market, Yes, I, 100%. So the fact is that it's just another tool in fact, a exclusive tool.
Speaker Change: Thanks for the color that's all for me.
Ken: Thank you Ken.
Speaker Change: Thank you I'm showing no further questions at this time I'll now turn it back to Josh easterly for closing remarks.
Speaker Change: My Hope was at this time, Joe and then it will probably not go and my hope was that.
Speaker Change: The latter would it be the question and answer section sure.
Speaker Change: Matt about the opposite impact.
And shame on me, but.
Speaker Change: I really appreciate all the good questions Super thoughtful.
Speaker Change: We're excited about what lies ahead.
Speaker Change: Yeah.
Speaker Change: This is what this is this is what makes our job interesting changing environment market environment.
Speaker Change: Changing.
Speaker Change: And lifelong learners.
Speaker Change: What we kind of.
Speaker Change: And we need to do in the platform there to execute.
Speaker Change: People enjoy their summer.
Speaker Change: We hope to catch up where people are after Q2.
Speaker Change: Or if not.
Speaker Change: Please feel free to reach out thank you so much.
Speaker Change: Yeah.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.