Q2 2025 Sixth Street Specialty Lending Inc Earnings Call

Good morning and welcome to Sixth Street, especially lending, inks second quarter ended, June 30th 2025 for earnings conference call.

At this time, all participants under the snowy mode.

As a reminder, this conference is being recorded on Thursday July 31st, 2012.

Joshua Easterly: Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the second quarter-ended June 30th, 2025, and posted a presentation to the Investor Resources section of our website, www.sixthstreetspecialtylending.com.

I will now turn the call over to miss Camry Senator head of investor relations.

Thank you, before we begin today's call, I would like to remind our listeners that remarks made. During the call may contain forward-looking statements.

Statements other than statements of historical facts made during this call, May constitute forward-looking statements in our not guarantees of future, performance or results, and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in 6th Street Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.

Joshua Easterly: The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc.'s earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the second quarter-ended June 30th, 2025. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Yesterday, after the market closed we issued our earnings press release for the second quarter ended June 30th 2025 and posted a presentation to the investor resources section of our website, www.6streams.com 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 second quarter ended, June 30th 2025. As a, reminder, this call is being recorded for replay purposes. I will now turn the call over to John

Ian Simmonds: Good morning, everyone, and thank you for joining us. With me today are President, Bo Stanley, and our CFO, Ian Simmonds. Before we get started, I want to take a moment to express a profound sorrow following the tragic events that unfolded in our city earlier this week. On behalf of our entire company, our hearts go out to the victims and their loved ones. Our thoughts and prayers are with the families, first responders, and local firms affected by the senseless and random act. After the market closed yesterday, we reported the second quarter adjusted net investment income of 56 cents per share or an annualized return on equity of 13.1%, an adjusted net income of 64 cents per share or an annualized return on equity of 15.1%.

Joshua easterly, Chief Executive Officer of 6th Street specialty lending Inc.

Good morning, everyone, and thank you for joining us.

With me today, our president both Stanley and our CFO incidents before we get started, I want to take a moment to express a profound sorrow following the tragic events that unfolded in our city earlier this week on behalf of our entire company. Our hearts go out to the victims and their loved ones. Our thoughts and prayers are with the families. First Responders, the local firms affected by this in random act.

Ian Simmonds: As presented in our financial statements, our Q2 net investment income and net income per share, inclusive of the accrued capital gain incentives to expenses, was 54 cents and 63 cents respectively. As a reminder, any differences between the adjusted and reported metrics is a non-cash expense related to accrued fees on unrealized gains from the valuation of our investments. The difference between adjusted and net investment income and adjusted net income of 8 cents per share in Q2 was largely related to net unrealized gains from the impact of tightening credit spreads on the valuation of our investments and positive portfolio companies' specific events. I'd like to frame an important shift we see unfolding in the sector following the mini-credit cycle that took place over the last few years, beginning in mid-2022, with the rapid rise of interest rates.

1 percent.

As presented in our financial statements are Q2 net investment income and net income per share, inclusive of acred capital, gains incentive to expenses, were 54 cents and 63 cents respectively. As a, reminder, any differences between the adjusted and reported metrics is a non-cash expense related to cruise fees on unrealized gains from the valuation of our investments. The difference between adjusted net investment income and adjusted net. Income of 8 cents per share in Q2 was largely related to net unrealized gains from the impact of tightening credit. Spreads, and the valuation of our investments and positive portfolio companies, specific events.

I'd like to frame an important shift. We are we we see unfolding in the sector following the many credit cycle. That took place over the last few years beginning in the mid 2022.

Ian Simmonds: Through that cycle, public BDCs, including FOX, experienced idiosyncratic credit issues, putting downward pressure on net asset values. While the average public BDC saw its net asset value per share decline by 10.1% from the fourth quarter of 2021 through the first quarter of this year, FOX's net asset value per share increased by 1.2% over the same timeframe, or 2% through Q2. Even with the rise of non-accruals and the losses we recognized, our disciplined approach to capital allocation allowed us to overrun our cost of equity and grow net asset value. Over this period, we generated a total economic return calculated as change in net asset value plus dividends of 42.6%, more than doubling the average of our public BDC peers of 19.1%. We expect that credit issues are predominantly behind us.

With the rapid rise of interest rates.

Through that cycle. Public bdcs, including SOS experience, idiosyncratic, credit issues, putting downward pressure on that asset values.

well, the average public BDC assault net asset value per share declined by

10.1% from the fourth quarter of 2021. Through the first quarter of this year, Sixth Street's net asset value per share increased by 1.2% over the same time frame, or 2% through Q2.

Even with the rise of non across and the losses, we recognize our discipline approach to Capital, allocation allowed us to overrun a cost of equity and grow net asset value.

Over this period. We generated a total economic return calculated as change in, massive Value, Plus dividends 42.6%, more than doubling, the average of our of our public BC peers of 19.1%.

Ian Simmonds: This is evidenced by an improvement in non-accruals for FOX this quarter and also for the sector more broadly, which experienced a marginal decrease in non-accruals in Q1. While we don't have pure data for Q2, we expect the trend to continue this quarter. This should result in a convergence between net investment income and net income for the sector. Under the premise that credit has broadly stabilized, we anticipate the focus for the sector shifts from credit quality to dividend coverage as portfolio yields decline from the combination of lower forward rates and tighter portfolio spreads. For FOX, adjusted net investment income in Q2 of 56 cents per share exceeded our base dividend by 22%. This robust dividend coverage is tied to our ability to source and execute on differentiated investment opportunities.

We expect that credit issues are predominantly behind us. This is evidenced by an important improvement in non-accruals for stocks this quarter and also for the sector more broadly, which experienced a marginal decrease in non-accruals compared to Q1.

While we don't have pure data for Q2, we expect the trend to continue this quarter.

This should result in a convergence between net investment income and net income for the sector.

Under the premise that credit has broadly stab stabilized. We anticipate the focus for the sector shift from credit quality to Dividend coverage, as portfolio, yields decline from the combination of lower forward, rates and tiger portfolio spreads

For socks investment income in Q2 of 56 cents per share exceeded our base dividend by 22%.

Ian Simmonds: This is clearly demonstrated by our weighted average spread on our new first lien investments in the second quarter of 6.5%, which compares to the public BDC sector average of 5.3% on new issued first lien loans for the first quarter. Again, we don't have comparable Q2 data for our peers, but we expect the weighted average portfolio spread to decline further this quarter. We continue to caution that there has been complacency in the sector. In addition to the pursuit of AUM growth, we believe this is largely driven by a backward-looking focus on LTM metrics that reflect an elevated rate and spread environment that is no longer indicative of today's investment landscape. What matters today and always is the forward view, and we believe our approach will continue to positively distinguish our earnings profile.

This robust data coverage is tied to our ability to source and execute on differentiated investment opportunities.

This is clearly demonstrated by our weighted average spread on our new firstly investments. In the second quarter of 6.5%, which compares to the public BDC sector, average of 5.3% on new issued first lean loans for the first quarter again. We don't have comparable Q2 data for a period but we expect the weighted average portfolio spread to decline. Further this quarter.

We continue to caution that there has been complacency in the sector. In addition to the pursuit of

Ian Simmonds: Looking ahead, we estimate the quarterly earnings power of our business to exceed our base dividend levels, assuming stable credit, leverage in the middle of our target range, and conservative fee income. As of June 30th, our net asset value was 17.17 per share, representing an increase of 70 basis points from 17.04 as of March 31st. Yesterday, our board approved a base quarterly dividend of 46 cents per share to shareholders of record as of September 15th, payable from September 30th. Our board also declared a supplemental dividend of 5 cents per share related to our Q2 earnings to shareholders of record as of August 29th, payable September 19th. Net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday at $17.12. We estimate that our spillover income per share is approximately $1.30.

AUM growth. We believe this is largely driven by a backward-looking focus on LPN metrics that reflect an elevated rate and spread environment that no longer indicative of today's investment landscape. What matters today and always is the forward View and we believe our approach will continue to positively distinguish our earnings profile

Looking ahead. We estimate the quarterly earnings. However, our business to exceed our base dividend level, assuming stable credits, leverage in the middle of our target range and conservative fee income.

As of June 30th, our net asset value was 17.17 per share representing an increase of 70 basis points from 17.

004 as of March 31st.

Yesterday, our board approved a dividend of $0.46 per share to shareholders of record as of September 15th, payable on September 30th. Our board also declared a supplemental dividend of $0.05 per share related to our Q2 earnings.

To shareholders of record as of August 29, payable September 19.

Net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday at 17.12.

Ian Simmonds: With that, I'll now pass it over to Bo to discuss this quarter's investment activity.

We estimate that our school over income per share is approximately $1.30.

Bo Stanley: Thanks, Josh. I'd like to start by sharing some thoughts on the M&A environment and how that's impacting activity in our portfolio. As we've discussed for several quarters, the M&A market has yet to deliver the meaningful rebound that many had anticipated in 2025. This muted transactional environment is clearly reflected in the leveraged loan market, where M&A-related loan volume was down approximately 31% in the second quarter compared to the first. In the second quarter, loan volume marked its lowest levels since the fourth quarter of 2023. From our perspective, a meaningful reacceleration in M&A requires a catalyst from one of three areas: economic growth, interest rates, or time. Given the prevailing uncertainty around trade policy, a surge in near-term growth appears unlikely, and the forward curve suggests rates will remain higher for longer. This leaves time as the most important factor.

With that, I'll now pass it over to B to discuss this Court's investment activity.

Thanks, Josh. I'd like to start by sharing some thoughts on the m&a environment and how that's impacting activity in our portfolio.

this muted transactional environment is clearly reflected in The Leverage loan Market where m&a related loan volume was down approximately 31% on the second quarter compared to the first

In the second quarter, loan volume marked its lowest levels since the fourth quarter of 2023.

From our perspective, a meaningful reassuring and m&a requires a catalyst for 1 of 3 areas.

Economic growth, interest rates or time.

Given the prevailing uncertainty around trade policy. A surge in near-term growth appears on likely

In the forward, curve suggests rates will remain higher for longer.

Bo Stanley: In an environment of slower growth and elevated rates, sponsors and management teams need a longer runway for portfolio company earnings to grow and generate appropriate return on investments. While we can't predict the future, we estimated the timing of M&A activity taking inspiration from the Hubert Peake theory, which was used in the 1950s to estimate when US oil production would peak. Utilizing data sourced from PitchBook, the median buyout multiple at peak levels in 2021 has declined roughly three turns compared to the median for closed buyout yields year to date. If we assume no multiple compression from the peak in 2021 and an average annual EBITDA growth rate of approximately 9%, consistent with historical S&P earnings growth, it would take approximately four to five years for a buyer to earn an appropriate multiple of money on their investment.

This leaves time as the most important factor.

In an environment of slower growth and elevated rates, sponsors and management. Teams need a longer runway for portfolio company earnings to grow and generate appropriate return on investments.

While we can't predict the future. We estimate made the timing of m&a activity. Taking inspiration from the Hubert Peak Theory, which was used in the 1950s to estimate when us oil production would Peak.

Utilizing data sourced from PitchBook, the Medium buyout multiple reached peak levels in 2021.

There has been a decline of roughly three turns compared to the median foreclosed by our deals year to date. If we assume no multiple compression from the peak in 2021.

and an average annual EBA growth rate of approximately 9%, consistent with historical S&P earnings growth.

Bo Stanley: If we apply the same assumptions, but including the rerating of multiples since the rate hiking cycle, this lengthens the timeline to six to seven years, implying an additional two years needed to grow earnings until an appropriate multiple of money is achieved. Based on our analysis, the earlier wave of investments from the pre-COVID vintages are now approaching the six to seven-year mark, which should moderately increase M&A activity in the next few quarters. As for the record-setting post-COVID, pre-rate hiking vintages of 2021 and early 2022, which we estimate make it more than 40% of current private equity net asset value, sellers need six to eight additional quarters to reach an acceptable multiple of money, implying a further delay of the broad-based return of M&A activity that many are predicting.

It would take approximately 4 to 5 years for a buyer to earn an appropriate multiple of money on their investment.

If we apply the same assumptions, but including the Ahri rating of multiple since the rate, hiking cycle, this lengthens the timeline to 6 to 7 years implying as additional 2 years needed to grow earnings until an appropriate. Multiple money is achieved.

Based on our analysis, the earlier wave of investments. From the preco vintages are now approaching the 6 to 7 year mark, which should moderately increase m&a activity in the next few quarters.

As for the record setting, postco pre- rate, hiking vintages of 2021 in early 2022.

Bo Stanley: We recognize there are additional factors at play, and this timeline will vary for different segments of the market. For example, investment-grade M&A is likely the first to return, given the favorable regulatory environment. These businesses are also less leveraged compared to non-investment-grade companies, which means they have less sensitivity to interest rates. While the widespread return of M&A in our markets remains a future prospect, we have observed a noticeable shift in market sentiment beginning in late June and strengthening through July. In addition to some green shoots related to the buy and build strategies, we have more notably seen a pickup in non-M&A-related activity within sponsor portfolios, such as duration management transactions. We expect these types of financings to be a prominent theme in the second half of the year as sponsors work to optimize their portfolio companies in preparation for an improved exit environment.

Which we estimate make it more than 40% of the current private Equity. Net asset value, sellers need 6 to 8 additional quarters to reach an acceptable, multiple of money, implying a further delay of the broad-based return of m&a, activity that many are predicting

We recognize there are additional factors at play and this timeline will vary for different segments of the market.

For example, investment grade m&a is likely the first to return given the favorable regulatory environment.

These businesses are also less levered compared to non-investment grade companies, which means they have less sensitivity to interest rates.

While the red widespread return of m&a in our markets remains a future Prospect, we have observed, a noticeable shift in markets, beginning in late June and strengthening through July.

In addition to some green shoes related to the buy and Bill strategies.

Bo Stanley: We believe we are very well positioned to provide the kind of complex, bespoke capital solutions these situations require, creating attractive risk-adjusted returns for our shareholders. Turning now to activity in the second quarter, we provided total commitments of $289 million and total fundings of $209 million across 13 new investments and four upsizes to existing portfolio companies. To characterize our origination activity in Q2, approximately 30% of our commitments were sourced outside the sponsor channel. The remaining 70% came through the traditional sponsor-backed finance market, where we leveraged our deep relationships and platform scale to deploy capital into investments that earn an appropriate risk-adjusted return for our business. An example of our non-traditional transactions in Q2 is our direct-to-company investment in Genivis Health.

We have have more not notably seen to pick up in non m&a, related activity within sponsored portfolios such as duration management transactions. We expect these types of financing to be a prominent theme in the second half of the year as sponsors work to optimize their portfolio companies in preparation for an improved exit environment.

We believe we are very well positioned to provide the kind of complex, bespoke Capital Solutions, these situations require creating attractive risk, adjusted returns for our shareholders.

Turning now to activity in the second quarter, we provide a total commitment of 289 million and total funding of 209 million across 13 new Investments and 4 up sizes to existing portfolio companies.

To characterize our origination activity in 2, approximately 30% of our commitments, were sourced outside the sponsor channel. The remaining 70% came through the traditional sponsor, back Finance Market, where we were leveraging, our deep relationships and platform scale to both deploy Capital into Investments. That earn a appropriate risk, adjusted return for our business.

An example of our non-traditional transactions in Q2.

Bo Stanley: This was an accounts receivable securitization financing, where the combination of our deep knowledge and specific healthcare themes, combined with a longstanding track record in asset-based loans, created a unique investment opportunity for FLX shareholders. With the resources in place across the Sixth Street platform, including dedicated ABL and healthcare teams, we have the ability to source and underwrite these off-the-run transactions that diversify our assets as well as our return profile relative to the sector. Another differentiated investment in our portfolio is Caris Life Sciences. As a reminder, we made initial debt and equity-linked investment in Caris in 2018 and subsequent equity-linked investments in 2020 and 2021. We fully exited our debt security in 2023, and the company recently completed an IPO in June. We still hold an equity position today, which is valued quarterly based on the company's closing stock price on the last day of the quarter.

Is our direct company investment in in Geneva's health.

This was an accounts receivable of securitization financing where the combination of our deep knowledge and specific Health Care themes combined with the long-standing track record in asset based loans. Created a unique investment opportunity for SLX shareholders.

Is off the Run transactions that diversify our assets as well as our return profile relative to the sector.

Another differentiated investment in our in our portfolio is Caris life sciences.

As a reminder, we made an initial debt and Equity linked investment in Keras, in 2018, and subsequent Equity, linked investments in 2020. And 2021,

We fully exited our debt Security, in 2023 and the company. Recently completed, its an IPO in June.

Bo Stanley: While equity positions are a small part of our overall portfolio, our ability to embed potentially incremental economics into our business through unique thematic sourcing and disciplined underwriting serves as a competitive advantage for our shareholders. I'd like to spend a moment providing an update on one of our existing portfolio companies, Lithium Technology, that had previously been on non-accrual status. During Q2, we navigated a sale process and restructuring of the business, working closely with a new sponsor to negotiate and drive an outcome. As a result of the restructuring, we hold a smaller loan that is paying cash interest and an earn-out equity security. This transaction had no material impact on our net asset value in Q2, as the realization of our original investment was consistent with our valuation as of March 31st. Lithium has therefore been removed from non-accrual status following the restructuring.

We still hold an equity position today which is valued quarterly based on the company's closing stock price on the last day of the quarter.

Well Equity positions by small part of our overall portfolio. Our ability to embed potential in incremental economics into our business through unique thematic sourcing and disciplined underwriting serves as a competitive Advantage Advantage for our shareholders.

I'd like to spend a moment, providing an update on 1 of our existing portfolio companies with the technology.

At it previously, been on non-accrual status.

During Q2, we navigated a sale process and restructuring for of the business working closely with the new sponsor, to negotiate and drive an outcome.

As a result of the restructuring, we have hold a smaller loan that is paying cash, and trust and an earnout equity security.

This transaction had no material impact on our. Net asset value in Q2 as a realization of our original investment was consistent with our valuation as of March 31st.

Bo Stanley: Moving on to repayment activity, the second quarter marked the third consecutive quarter of elevated payoffs. Total repayments in Q2 were $389 million. This repayment activity contributed to another strong quarter of activity-based fee income, excluding other income totaling 11 cents per share in Q2 relative to our three-year historical average of 5 cents per share. The repayment activity we experienced during the quarter was driven by a mix of refinancings and M&A activity. Of the exits that involved refinancing transactions, the majority were completed at lower investment spreads. As the portfolio continues to reflect our disciplined capital allocation, as only 6.2% of our investments by fair value as of quarter-end had a contractual spread of 500 basis points or below.

Lithium has therefore been removed from non-accrual status following the restructuring.

Moving on to repayment activity, the second quarter marked, the third consecutive quarter of elevated. Payoffs

Total repayments in Q2 were 3899 million.

This repayment activity contributed to another strong quarter of activity based fee income.

Excluding other income totaling 11, cents per share in Q2 relative to our 3 year, historical average of 5% per share.

The repayment activity we experienced during the quarter was driven by a mix of refinancing and m&a activity.

Of the excess that involved reconvening transactions. The majority were completed at lower investment spreads

Our portfolio continues to reflect our disciplined Capital allocation.

Bo Stanley: While we don't have the comparable Q2 peer data set available yet, this is nearly five times less than the average of 29% of public BDC portfolio spreads of 500 basis points or below as of March 31st. A large proportion of our payoffs during the quarter came from older pre-2022 vintages, reducing our exposure to these assets to 29% of the portfolio by cost. This compares to 59% or roughly double pre-2022 vintage exposure for the public BDC sector average as of March 31st. We view this as a positive differentiator for our business as it reflected greater exposure to newer vintage assets that were originated following the commencement of the rate hiking cycle in early 2022. Given this greater exposure to new vintage assets, 37% of our exits were post-2022 investments, resulting in an incremental economics of shareholders driven by prepayment fees.

Is only 6.2% our investments by fair value. As a quarter end have a contractual spread of 500 basis, points or below.

Well, we don't have the comparable Q2 per data set available. Yet, this is nearly 5 times less than the average of 29% of public, BDC portfolio spreads at

Of 500 basis points or below as of March 31st.

A large proportion of our payoffs during the quarter came from older pre-2022 vintages, reducing our exposure to these assets to 29% of the portfolio by costs.

This compares to 59% or roughly double pre 2022 into exposure for the public BDC sector average of as of March 31st.

We view this as a positive difference differentiated for our business. As a reflected greater exposure to newer Ventures assets that were originated from following the commencement of the rate hiking cycle in early 2022.

Bo Stanley: Moving on to the portfolio metrics and yield, despite recent competitive dynamics, we remain committed to high documentation standards that provide robust downside protection. At quarter-end, we maintained effective voting control of 78% of our debt investments and an average of two financial covenants, consistent with historical levels. As for managing prepayment risk, the fair value of our portfolio as a percentage of call protection is 94.1%, which means that we have protection in the form of additional economics that would flow through net investment income should our portfolio get repaid in the near term. As of June 30th, the weighted average total yield on our debt and income-producing securities that amortize costs was 12.0% compared to 12.3% as of March 31st. Given the meaningful payoff activity we experienced in Q2, the decline primarily reflects payoffs of higher yielding assets exceeding the yields of new investments funded during the quarter.

Given this greater exposure to New Vintage assets, 30% of our exes were post-2022 investments, resulting in an incremental economics of shareholders driven by prepayment fees.

Moving on to the portfolio metrics in yield.

Despite recent competitive dynamics, we remain committed to high documentation standards that provide robust downside protections.

At quarter Ram, remaining effective, voting control of 78% of our debt investments in an average of 2 Financial commitments consistent with historical levels.

As for managing prepayment risk, the fair value of our portfolio as a percentage of call Protection. Has 94.1%.

Which means that we have.

Protection in the form of additional economics. That would flow through net investment income. Should should our portfolio. Get repaid in the near term.

As of June 30th, the weighted average total yield on our debt and in producing Securities of advertised cost was 12.0%. Compared to 12.3% as of March 31st.

Bo Stanley: While credit spreads have remained competitive in Q2, our omnichannel sourcing capabilities enabled us to put capital to work in a disciplined manner, demonstrated by a weighted average spread on new first lien investments of 652 basis points, which compares to a spread of 533 basis points on new issued first lien loans for the BDC peers in Q1, as Josh mentioned earlier. Moving on to the portfolio composition and key credit stats across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment points of 0.3 times and 5.0 times, respectively. And our weighted average interest coverage remained consistent at 2.1x. As of Q2 2025, the weighted average revenue and EBITDA of our core portfolio companies was $377 million and $114 million, respectively. Median revenue and EBITDA was $147 million and $46 million, respectively.

Giving the meaningful payoff activity. We experienced in Q2 that declined, primarily reflects playoffs of higher yielding assets exceeding. The yields of new Investments during funded during the quarter

While credit spreads have remained competitive in Q2, our omni-channel sourcing capabilities enabled us to put capital to work in a disciplined manner. This is demonstrated by a weighted average spread on new first lien investments of 652 basis points, which compares to a spread of 533 basis points on new issues. Firstly, loans for the BDC peers and Q1, as Josh mentioned earlier.

On to the portfolio, composition and keys credit stats. Across our court borrowers for whom these metrics are relevant. We continue to have conservative weighted, average, attachment and Detachment points of 0.3 times and 5.0 times respectively.

And their weighted average interest coverage remained consistent at 2.1x.

As of Q2 2025 the weighted, average, revenue and ebit of our core portfolio, companies was 377 million and 114 million respectively.

Bo Stanley: Finally, overall portfolio performance is strong, with a weighted average rating of 1.10 on a scale of one to five, with one being the strongest. The Lithium restructuring resulted in an improvement in non-accruals quarter over quarter from 1.2% of the portfolio at fair value to 0.6%. As of June 30th, we have two portfolio companies on non-accrual status. With that, I'd like to turn it over to my partner, Ian, to cover our financial performance in more detail.

Medium revenue in Q2 was $147 million and $466 million, respectively.

Finally, overall portfolio performance is strong, with a weighted average rating of 1.100 on a scale of 1 to 5, with 1 being the strongest.

So lithium restriction, resulted in an improvement in non-approval quarter over a quarter from 1.2 of the portfolio, at fair value, to 0.6%, as of June 30th, we have 2 portfolio companies on Monaco status.

Ian Simmonds: Thank you, Bo. For Q2, we generated adjusted net investment income per share of 56 cents and adjusted net income per share of 64 cents. Total investments were 3.3 billion, down slightly from 3.4 billion in the prior quarter as a result of net repayment activity. Total principal debt outstanding at quarter-end was 1.8 billion, and net assets were 1.6 billion, or $17.17 per share prior to the impact of the supplemental dividend that was declared yesterday. Our average debt-to-equity ratio was 1.2 times, up from 1.19 times in the prior quarter, and our ending debt-to-equity ratio decreased from 1.18 times to 1.09 times quarter over quarter. Average leverage was higher than ending leverage, driven by the timing of repayment activity, which predominantly occurred towards the end of the quarter.

With that. I'd like to turn it over to my partner, Ian to cover our financial performance in more detail.

Thank you both for Q2 we generated adjusted, net investment income per share of 56 cents and the adjusted. Net income per share of 64 cents. Total Investments for 3.3 billion down slightly from 3.4 billion in the prior quarter as a result of net repayment activity.

Total principal debt outstanding at quarter end was 1.8 billion and net assets were 1.6 billion or 17.17 per share prior to the impact of the supplemental dividend that was declared yesterday.

Our average debt to equity ratio was 1.2 times up from 1.19 times in the prior quarter, and our ending debt to equity ratio, decreased, from 1.18, times to 1.09 times, quarter over quarter.

Ian Simmonds: We continue to focus on maintaining leverage within our target range of 0.9 to 1.25 times, and since the regulatory change in late 2018, we have operated with an average quarterly debt-to-equity ratio of 1.03 times. Leverage remains within our target range and above our historical average, providing ample capital for new investment opportunities. In terms of balance sheet positioning, we had approximately 1.1 billion of unfunded revolver capacity at quarter-end against 159 million of unfunded portfolio company commitments eligible to be drawn, or coverage of approximately seven times. Our quarter-end funding mix was represented by 71% unsecured debt. As a reminder, we proactively completed several capital markets transactions during Q1, strengthening our balance sheet. Following these transactions, our capital, liquidity, and funding profile remain in excellent shape. Further, we have no near-term maturities, with our nearest obligation being $300 million of unsecured notes not occurring until August 2026.

Average leverage was higher than ending leverage driven by the timing of repayment activity, which predominantly occurred towards the end of the quarter.

We continue to focus on maintaining leverage within our target range of 0.9 to 1.25 times. And since the regulatory change in late 2018, we have operated with an average quarterly debt to equity ratio of 1.03 times.

Leverage remains within our target range and above our historical average, providing ample capital for new investment opportunities.

In terms of balance sheet positioning we had approximately 1.1 billion of unfunded revolver capacity at quarter end against 159 million of unfunded portfolio company. Commitments eligible to be drawn or coverage of approximately 7 times.

Our quarter end funding. Mix was represented by 71% unsecured debt.

As a reminder, we proactively completed several Capital markets transactions during q1 strengthening our balance sheet.

Following these transactions. Our Capital liquidity and funding profile remain in excellent shape.

Ian Simmonds: We did not issue any shares through our ATM program during the quarter. Pivoting to our presentation materials, slide eight contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added 56 cents per share from adjusted net investment income against our base dividend of 46 cents per share. As Josh mentioned, there was approximately two cents per share of accrued capital gains incentive fee expenses related to this quarter's net realized and unrealized gains. There was a 13 cents per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognized these gains into this quarter's income. The reversal of unrealized gains this quarter was primarily driven by early payoffs, resulting in accelerated OID and call protection.

Further, we have no need term maturities with our nearest, obligation being 30 million of unsecured notes, not occurring until August 2026.

We did not issue any shares through our ATM program during the quarter.

Pivoting to our presentation materials, flight 8 contains this quarter's NAV bridge.

Walking through the main drivers of NAD growth. We added 56 cents per share from a just a net investment income against our base dividend of 46 cents per share.

As Josh mentioned, there was approximately 2 cents per share of a crude capital gains incentive fee, expenses related to this quarter's net realized and unrealized gains.

It was the 13th cents per share reduction, to nav. As we reverse net unrealized gains on the balance sheet, related to investment realizations and recognized these games into this quarter's income.

Ian Simmonds: There was a 9 cent per share positive impact to NAV, primarily from the effect of tightening credit market spreads on the fair value of our portfolio. Portfolio company-specific events increased NAV by 7 cents per share, and finally, there were 6 cents per share of net realized gains, mainly from equity realizations in ReliaQuest and Murchison. As Bo mentioned earlier, there was no material impact to net asset value from the Lithium restructuring, as the realized value was consistent with our fair value as of March 31. As shown in our financial statements, there was an unrealized gain from the reversal of the previous unrealized loss that was equally offset by a realized loss this quarter. Moving on to our operating results detail on slide nine, we generated 115 million of total investment income for the quarter compared to 116.3 million in the prior quarter.

The reversal of unrealized gains, this quarter was primarily driven by early payoff resulting in accelerated oid and coal protection.

There was a 9 Cent per share positive impact to nav, primarily from the effect of tightening. Credit Market, spreads on the fair value of our portfolio.

Portfolio companies, specific events, increased nav by 7 cents per share. And finally, there was 6 cents per share of net realized gains mainly from equity realizations in reliably and purchase them.

As Bo mentioned earlier, there was no material impact to net asset value from the lithium restructuring, as the realized value was consistent, with our fair value. As of March, 31st, in our financial statements, there was an unrealized gain from the reversal of the previous unrealized loss. That was equally offset by a realized loss this quarter.

Ian Simmonds: Interest in dividend income was 97.2 million, down slightly from prior quarter, primarily driven by lower dividend income and a decline in foreign base rates. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were lower at 10.2 million compared to 14 million in Q1, driven by the significant arrowhead prepayment fee that occurred in Q1. Other income was 7.6 million, up from 3.5 million in the prior quarter. Net expenses, excluding the impact of the non-cash accrual related to capital gains incentive fees, were 61.4 million, up marginally from 60.7 million in the prior quarter, primarily driven by expenses incurred for the annual and special shareholder meetings held during the second quarter. Our weighted average interest rate on average debt outstanding decreased slightly from 6.4% to 6.3%. This was primarily the result of a decline in foreign base rates.

Interest in dividend income. Was 97.2 Million down slightly from prior quarter, primarily driven by lower dividend income, and a decline in foreign base rates.

Other fees representing prepayment fees and accelerated amortization of upfront. Fees from unscheduled. Pay Downs were lower at 10.2 million compared to 14 million in q1 driven by the significant Arrowhead prepayment fee. That occurred in q1.

Other income was 7.6 million up from 3.5 million in the prior quarter.

Net expenses, excluding the impact of the non-cash across related to capital gains incentive fees were 61.4 million up. Marginally from 60.7 million in the prior quarter of primarily driven by expenses, incurred for the annual, and special shareholder meetings held during the second quarter.

Ian Simmonds: Before handing it back to Josh, I wanted to provide an update on our ROE metrics. Year to date, we've generated strong annualized ROEs based on adjusted net investment income and net income of 13.3% and 11.7%, respectively. We believe this reflects our broad originations platform, ability to embed economics into our portfolio, and disciplined capital allocation. Based on our year-to-date performance and our expectation of the quarterly earnings power of the business in the second half of the year, we anticipate generating a return on equity based on adjusted net investment income in the top half of our previously slated range, stated range of 11.5% to 12.5% for the full year. If activity-based fees remain elevated, as we have experienced in recent quarters, there is potential to exceed the top end of that range. With that, I'll turn it back to Josh for concluding remarks. Thank you, Ian.

Our weighted average interest rate on average debt outstanding decreased slightly from 6.4% to 6.3%. This was primarily the result of a decline in foreign base rates.

Before handing it, back to Josh, I wanted to provide an update on our Roe metrics.

Year to date. We've generated strong annualized Roes based on adjusted net investment income, and net income of 13.3% and 11.7% respectively.

We believe this reflects our broad originations platform ability to embed economics into our portfolio and disciplined Capital allocation.

Based on our year-to-date performance and our expectation of the quarterly earnings power of the business. In the second half of the year, we anticipate generating a return on Equity based on adjusted, net investment income in the top half of our previously, slated range, stated range of 11.5% to 12.5% for the full year.

If activity based fees remain elevated as we have experienced in recent quarters, there is potential to exceed the top end of that range.

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

Ian Simmonds: It's a tricky investment environment driven by the imbalance between supply and demand of capital. Competition is elevated, and it's increasingly difficult to generate outsized returns. However, Sixth Street was built to navigate such complexity. We have a long and proven history of delivering for our shareholders through challenging backdrops, including the emerging the energy market volatility that started in late 2014 and continued in 2015 and '16, the global pandemic in 2020 and 2021, and most recently the interest rate hiking cycle of 2022 and 2023. Through past dislocations, we have consistently proven our ability to protect capital and generate value. During these years, FOX generated an average annualized return on equity of 13.7%, a significant outperformance compared to the 7.5% average for our public BDC peers over the same years.

Thank you.

So tricky investment environment driven by the imbalance between supply and demand of capital competition is elevated. Just increasingly difficult to generate outside of returns.

However 6 Street is built was built to navigate such a complexity. We have a long and proven history of delivering for our shareholders to challenging back jobs including the emerging the energy Market volatility that started in the late, 2014 and continued and continued in 2015 and 16 the global pandemic in 2020. And 2021 and most recently, the interest rate hiking cycle of 2022 and 2023.

To pass this locations. We have consistently proven, our ability to protect capital and generate value.

Ian Simmonds: While today's market presents a different set of challenges, our core strategy remains unchanged, leveraging a deep bench of talented individuals who work collaboratively to source and underwrite investments that differentiate our return profile. This investor-first approach is not just a guiding principle; it's deeply embedded in our firm's culture and business model. To appreciate our strategy, one must first understand the framework of our industry. The path to outperformance in the highly regulated BDC sector is exceptionally narrow. First, there is little to no opportunity for differentiation through leverage or financing, as the liability side of the balance sheet offers no real source of excess return. Second, most industry participants operate on a similar cost structure of fees and expenses. Consequently, outperformance must be generated almost exclusively on the asset side by sourcing differentiated investments and, just as importantly, minimizing investment losses.

During these years, folx generated an average annualized return on equity of 13.7%. This represents a significant outperformance compared to the 7.5% average for our public BC peers over the same years.

while today's market presents, a different set of challenges, our clothes strategy remains unchanged

Leveraging a deep bench of talented individuals, who work collaboratively to source and underwrite Investments, That differentiate our return profile.

This investor first approach is not just a guiding principle. It's deeply invested in our firm's culture and business model.

To appreciate our strategy when the first understand, the framework of our industry. The past, the outperformance, in the highly regulated, BDC sector is exceptionally narrow.

First there is little to no opportunity for differentiation through leverage or financing. As the liabilities have the balance sheet, offers no real source of access for security.

Second most industry participants operate on a similar cost structure of fees and expenses.

Consequently outperform. This must be generated. Almost exclusively on the asset side. Sorry it's forcing differentiated Investments.

Ian Simmonds: This is ultimately accomplished by the team, which becomes the real differentiator. This is the core of the Sixth Street model, where our platform has consistently shined. For over a decade as a public company, the human capital advantage has delivered strong risk-adjusted returns for our shareholders. Looking forward, we will lean on these proven capabilities, remaining steadfast to our promise to be an investor-first firm dedicated to building a robust business that compounds value over the long term. With that, thank you for your time today. Operator, please open up the lines for questions.

And just as importantly, minimizing investment losses.

This is ultimately accomplished by the team, which becomes the real differentiator.

This is the core of the 6 feet model where our platform has consistently shown.

For over a decade of the public company. The human capital Advantage, has delivered strong risk, adjusted returns for our shareholders, looking forward. We will lean on the on these proven capabilities remaining steadfast to our problems to be an investor for

For for dedicated to building a robust business, that compounds value over the long term.

Cami VanHorn: Thank you. If you'd like to ask a question, please press star one one. If your question has been answered and you'd like to remove yourself from the queue, please press star one one again. And our first question comes from Brian McKenna with Citizens. Your line is open.

With that. Thank you for the your time today. Operator, please open up the lines for questions.

Thank you, if you'd like to ask a question. Please press star 1, 1 1.

If your question has been answered and you like to remove yourself from the queue. Please press star 1 on again.

Bo Stanley: Thanks. Good morning, everyone. Josh, I'm curious how you think about portfolio diversification as it relates to risk. Some of your larger peers have average position sizes of 20, 30, 40 plus basis points. I look at the average position at TSLX continues to be around 90 basis points. So how do you balance managing risk through diversification but also sizing positions appropriately in order to match your conviction in an investment?

Your line is open.

Ian Simmonds: Yeah. Hey, it's a good question. Look, we are, I think we've done a really good job of managing risk on an idiosyncratic basis. At the end of the day, this is all about idiosyncratic underwriting. And when you look at FOX's loss history and the inverse of that, NAV growth over time compared to the rest of the industry, I think it speaks for itself as it relates to our risk management set of risk management parameters, to be honest with you. At the end of the day, this is about, this business is about originating and underwriting credits that have an asymmetrical skew where you cut off the left tail and minimizing losses. That is your, as we mentioned in the script, that is the only path at the end of the day to outperformance because of the regulatory framework of the industry.

Thanks, good morning everyone. Uh, Josh, I'm curious how you think about portfolio diversification as it relates to risk. Some of your larger peers have average position sizes of 2030 40 plus basis points. I look at the average position at tslx continues to be around 90 basis points. So how do you balance managing risk through diversification but also sizing positions appropriately. In order to match your conviction in an investment?

Yeah. Hey, uh, it's it's a good question. Look, we are, I, I think we've done a really good job of managing risk on an idiosyncratic basis. At the end of the day, it's all about idiocratic underwriting. And when you look at SLX is lost history and the inverse of that nav growth over time compared to the rest of the industry. I think it speaks for itself as it relates to service management, instead of risk management parameters, to be honest with you, at the end of day, this is about this business is about originating in, um, underwriting credits.

Ian Simmonds: You don't have the ability to do it through capital structure or financing costs. It's just about your portfolio yields compared to your losses and your risk management. And you know, I think we have the best-in-class track record of that.

Uh, that has an asymmetrical skew where you cut off the left tail and minimize losses? That, as we mentioned in the script, is the only path, uh, at the end of the day to outperformance. Because of the regulatory framework of the industry, you don't have the ability to do it through capital structure.

Bo Stanley: Okay. That's super helpful. Thanks. And then one of your partners was speaking in a public forum recently. He talked about how an investable theme typically lasts about one to three years at Sixth Street. So, you know, what are some of the more attractive themes you're investing into right now? You know, and really, what areas of the market have the best return opportunities per unit of risk? And then, you know, what are some of the sectors or themes you're shying away from?

Sure, our financing costs, it's just about your portfolio yields compared to your losses, uh, and your risk management and you know, I think we have the best-in-class track record of that.

Ian Simmonds: Yeah. So look, I think the most challenged, you know, although we still pick our spots is the on-the-run sponsor finance business that tends to be the most crowded at the moment, although we still pick our spots in that space if we have industry overlap. But generally, we like more off-the-run non-sponsored stuff today, most definitely harder to source and harder to underwrite, for sure, and but has generally led to a whole bunch of excess return. And so that could be spec pharma, that could be asset-based lending, that could be energy. You know, those tend to be less picked-over spaces with less capital, and generally, they tend to have less, you know, kind of traditional private equity sponsorship. Bo, do you have anything to add there?

Okay, that's super helpful. Thanks. Um and then 1 of your partners was speaking in a public forum recently, he talked about how an investable theme typically lasts about 1 to 3 years at 6th Street. So you know what are some of the more attractive themes you're investing into right now, you know, and really what areas of the market are the best return opportunities per unit of risk. And then, you know, you know what are some of the sectors you're or seems you're shying away from?

yeah, so look I think the the the most challenged

You know, although we we still pick our spots is the the the On The Run sponsor Finance business. That tends to be the most crowded at the moment, although we still pick our spots, uh, in that space if we have industry overlap, uh, but generally, we like more off the Run non-sponsored stuff today. Uh, most definitely harder to Source, um, and harder to underwrite, um, uh, for sure. Um, and but has generally led to a whole bunch of excess return and so, uh, that could be spec form. Uh, uh, that could be asset based lending. That could be energy. Um, you know, those tend to be less picked over spaces with less Capital, uh, and generally they tend to have

Bo Stanley: The other thing I'd say is we continue to build out sector capabilities across the platform, and our shareholders are beneficiaries of that as they source deals across the capital structure. And you know, we still are active in the sponsor space, but it's going to be where our themes overlap, and we're not, you know, competing with commodity providers of capital. Okay. I'll leave it there. Thank you, guys.

You know, kind of traditional private Equity sponsorship. But if you have anything to add there, the other thing I'd say is we continue to build out um, sector capabilities across the platform and our shareholders are beneficiaries of that is they they Source deals across the capital structure. Um, and uh, you know we still are active in the in the sponsor space but it's going to be where our themes overlap and we're not uh we're not you know competing uh with commodity providers of capital.

Ian Simmonds: Thanks, Brian.

Okay, I'll leave it there. Thank you guys.

Cami VanHorn: Thank you. Our next question comes from Mickey Schlein with Clear Street. Your line is open.

Thanks Brian.

Mickey Schleien: Yes. Good morning, everyone. Josh, a high-level question to start about the sector in general. The growth of non-traded BDCs and other funds investing in private credit, you know, continues to broadly pressure loan spreads, and we saw a little bit of that in your portfolio. Do you think that process is a secular trend, and do you expect spreads for debt liabilities in the space to also compress, or maybe for fee structures to come down and allow listed BDCs to maintain their arbitrage? Or, you know, do you think investors need to begin to accept lower ROEs in the sector? Yeah, I realize Sixth Street may not be as exposed to these trends, but I think everyone would like to hear your views.

Thank you. Our next question comes from Mickey. Shane with clear Street, your line is open.

Uh, yes, good morning everyone. Um Josh uh, a high level question to start about the sector in general. Um, the growth of non-traded, BDC and other funds investing in private content. Uh credit, you know, continues to broadly pressure loan spreads and we saw a little bit of that in your portfolio. Do you think that process is a secular Trend? And do you expect spreads for debt, liabilities in the space to also compress or maybe for fee structures to come down and allow listed bdcs to to maintain their Arbitrage? Or, you know, do you think investors need to begin to accept?

Ian Simmonds: Yeah. Yeah. By the way, Mickey, congrats on the new seat. Glad you joined the call.

Lower Roos in the sector. Yeah, I I realized 6 Street may not be as exposed to these Trends but I think everyone would like to hear your your views.

Mickey Schleien: Thank you.

Ian Simmonds: You have an important voice in this, so thank you. Look, I wrote extensively about this last quarter, so I would point people to my letter on the subject last quarter about 90% of the asset growth, which I think you're referring to and flows came from the perpetually offered non-traded space. And I would, you know, I would include, you know, interval funds or merging interval funds in that category as well. So I think the challenge you have is in this particular time, and we talk about this in this letter, I mean, in this earnings script, is there this complacency, which is we think investors are looking at the historical return backward-looking LTM, which is higher than the Ford, given both the combination of the higher spread in the backbook compared to reinvestment spreads today, plus the difference between the downward sloping SOFR curve.

90% of the asset growth, which I think you're referring to, uh, and flows came from the, the the perpetually offer non-traded space. And I would, you know, I would, I would include, you know, interval funds, uh, emerging interval funds, and that category, as well. Uh, so, I, I think the challenge you have is, in this particular time.

Ian Simmonds: And so you have spot SOFR, which is somewhere between 80 and 90 basis points above the SOFR swap curve. And so, you know, as people do, they kind of look at things and say, "Oh, what's the return profile been?" But we think the return profile is going lower. And that is a, that needs to shake out. I would expect that that will shake out, and you know, the flows will change, flow get reallocated to those managers that have been able to, you know, continue to produce in the new environment an attractive ROE. When you historically look at balance sheet, when you historically look at balance sheet heavy financials, we were hard to find a balance sheet heavy financial that had an ROE requirement less than 9%.

The uh, and and we talked about this in this, in this letter, I mean, in this earning script is there's complacency, which is we think investors are looking at the Historical return backward-looking LPM, uh, Which is higher than the 4 GI both the combination of the higher spread in the back book, compared to reinvestments, spreads today. Plus the difference between the, the downward flow sloping sulfur curve. And so you have spot sulfur, which is somewhere between 80 and 90 basis points above the sulfur swap curve. And so, you know, a as people do, they kind of look at things and say, oh, what's, what's the return profile been? But we think that the return profile is going lower and that is a, that, that, that needs to shake out. I would expect that that will

Shake out and, you know, the flows will change flow, get reallocated to to those managers that have been able to, you know, continue continue to produce.

In, in the new environment and attractive Roe. When you historically, look at balance sheet, um,

when you quickly look at balance sheet, uh,

Uh, heavy financials.

Ian Simmonds: And so if it's banks or FINCOs or BDCs, so I'm not super hopeful that the market's going to wake up, especially in an environment where treasuries, the 30-year treasury, it's near fives, that they're going to, you know, require, you know, a, you know, 6% or 7% ROE. That doesn't seem like a spread that's super competitive to risk-adjusted returns. So I think we're in this moment of time where the backbook and the spot Ford is hiding some of the economics of where the industry is going. And as I wrote about, I'm pretty concerned about that. And I think there's been a lot of complacency around that. As it relates to your other two levers, which is the liability lever, like it doesn't make a difference.

We were hard to find a balance sheet, heavy Financial, that had an Roe requirement less than 9%.

And so if it's Banks or fin codes, or bdcs, so I'm not super hopeful that the Market's going to wake up, especially in the environment, where treasuries, the 30-year treasury is near 5 that they're going to, you know, we require, you know, a, you know, 6 or 7% Roe, that doesn't seem like a a a a spread that's super competitive the risk adjusted returns.

Ian Simmonds: I mean, you know, it would be nice like if, you know, our investment-grade spreads rally, you know, they kind of trade somewhere between investment-grade and high yield, and you know, they tighten by 20 or 30 basis points. But at one-to-one or 1.15 times levered, it's not a real pickup in additional excess returns to investors. And the last lever is obviously, you know, fees. And you know, if the industry can't generate immediate ROE, you know, capital will get reallocated or, you know, people will be forced to get more efficient. And you know, that's the way capitalism works. But I would point, I wrote too long about this subject and probably spoke too long about this subject on this call, but it is the right topic.

So, I think I think there we're in this moment of time where the the back book and the spot forward is hiding some of the economics of where the industry is going. And as I wrote about, I'm, I'm pretty concerned about that. Um, and I think there's been a lot of complacency about that the, the, as it relates to your other 2 levers, which is the liability level lever, like it doesn't make a difference.

I mean you know it would be nice like if if you know our investment grade spreads rally you know they kind of trade somewhere between investment grade and high yield and you know they tied them by 20 to 30 basis points, but at 1 to 1 or 1. 1 5,

Uh, uh excess uh, return to investors.

And the last lever was obviously you know fees and you know if the industry can't generate, I mean it's Roe, you know Capital will get a reallocated or you know people will be forced to get more efficient and you know that's the way capitalism works.

Mickey Schleien: Yeah, I agree, and you know, I share all of your concerns. That's why I asked. A couple more questions, simpler ones. There was some migration in your internal risk ratings from one to two. You know, at a high level, can you tell us what drove that decline?

But I, I would point, I, I, I, I, I I, I wrote too long about this subject. It's probably probably, probably spoke too long about this subject on this call, but I, I, it it, it is, it is, it is the right topic.

Yep. There were, so we had a couple of names that actually were lower rated that came off non-accrual and moved up or were refinanced out. And then we had two specific names that went from one to two. Those are businesses that are not performing to our original plan. However, they have, you know, strong interest coverage, and you know, so we moved them to one to two, but they're, you know, the general trend was down a bit, but it was two specific names.

Yeah, I I agree and you know I share all of your concerns that that's why I asked. Um couple more questions, a little simpler ones, there was some migration um in your internal risk ratings from 1 to 2, you know, at a high level. Can you tell us what drove that decline?

There were, there were, um, so we had a couple names that actually were lower rated. Um, that came off. Nano cool and moved up or were refinanced out. And then we had 2, you know, specific names that went from 1 to 2. Uh, those are businesses that are not performing uh to the our original plan. However, they have, you know, strong interest coverage and you know, so we moved into 1 to 2 but they're, you know, the general Trend was down a bit, uh but it was too specific names.

You know the the earnings growth quarter over at quarter over quarter. So when you look at q1 uh or you know, q1 earnings uh

2025 over last year's earnings they were off. Uh, in the mid te low to mid teens on an earnings basis on an LTM basis. They're around 8, uh, 8%. So the portfolio is in very good shape. These were 2 idioms and again still performing uh still have strong interest coverage. They're just they're not performing to our original plan.

Okay. Look, I I Mickey, I would say generally 1 of our big themes is I I, we think

We've been pretty good about calling stuff, by the way, I just want to. I just want to point it out to that team but we like I I think our the theme is that credit quality, you know, we talked about this last quarter probably quarters and kind of bottomed out it's probably slightly get slightly gets better, it's slightly got better for us, at least on the nonel line. And that um, now the focus is going to be to Dividend coverage and

You know, which we think, you know, for the first time be between the combination of reinvestment spreads and uh um and uh the so for swap curve that there might be some dividend Cuts in this space, our dividend coverage, just happens to be really, really strong due to a, we have excess economics in our book and 2 resize our dividends. And we think about the liability but like we

We think credit quality should you know like the economy is growing credit? Quality should be pretty good and so we we we feel pretty good about credit quality but we think the shift should be focused now on Roe's and Roe's compared to to to the promises people made as a real estate dividend.

Yeah, I agree with that as well. And I do expect to see some dividend cuts. Um, my last question, just a housekeeping question, maybe for Ian, what was the nature of the increase in the prepaid expenses and other assets on the balance sheet? It it moved pretty meaningfully, I suspect it might be a receivable before Investments you've sold.

Yeah, that's right. Mickey. We had 1 name that paid off on June 30th but the cash didn't come in until post quarter end. So it was shown as a receivable rather than kept in the SLI.

Okay, thank you. I appreciate your time. This morning. That's it for me.

Securities, your line is open.

Uh, Hey guys, good morning here, everyone. Um, I guess going back to the high level Josh. I was interested in some of your opening remarks on credit. Um give you describe them as

Idiosyncratic, but also likely behind us. So I was wondering,

Why? Um, I idiosyncratic can mean a few things, um, basically 1 off, but I would kind of think, I think of it as, you know, coming from from looser underwriting and seeing if, if you think that's something that's changed.

yeah, look the the so um,

Look, I let me look at our book and say things are mostly behind us.

Uh, or, you know, we think behind us. I would also say, uh, um, that when you look at

The shock of the rate hike cycle in mid-2022 takes time to show its effects, particularly as it relates to defaults. There is a lag, which historically has been due to companies having cash on their balance sheets and some flexibility to manage operations. Although there is an initial shock, there's a shock absorber, but that absorber gets worn out over time. It typically shows up about two years later. So, if you think about 2022, we're now in mid-2025. Generally, my feeling is that a lot of the credit issues have shown themselves. As it relates to what we call idiotic, when you look at what we got wrong. What we got wrong was...

The.

Uh, specifically on um, lithium was there. It was a business where it benefited from koide.

We clearly did not see that.

and as the co kind of ran off,

Democratic credit issue with that business model.

Yeah, it's been the only thing I'd say.

We never compromise our underwriting standards as you know, but we sometimes get things wrong. That's something we missed.

You know, absolutely. And I was referring to, um, the industry at large. I was interested in the, the, the makes sense. So the the answer is helpful. Um, just as a small follow-up.

Can you touch on the the changes in the latest co-investment order. And if the BDC still have priority on direct lending, origination

Yeah they they they do. They do. I mean the call investment order give me uh co-investment. Uh slightly quite frankly easier and more manageable but yes.

You, you will see nothing different.

Okay, great. Thanks so much.

Excellent.

Thank you. Our next question.

RBC Capital markets, your line is open.

Hey, good morning, and thanks for taking my question. Uh, I think at the prepared remarks, you you mentioned that about 30% of the originations in the quarter were, were driven by, by non-sponsored. Uh, transactions wondering, uh, what your outlook is for, uh, the so-called Lane 2 or Lane 3 Investments over over the near term. Are you seeing more opportunities given the, the macro backdrop? Thanks.

Oh, go ahead. Yeah sure, I'll take that. So um, yeah, this quarter was about 70% sponsor and 30% non-sponsored. That's you know, fairly close to what our historical levels have been over time. Um, you know, it's usually about 65% sponsor and 35% non sponsor, some quarters like last quarter you'll have uh, more uh, thematic non-sponsored coverage. We're we're, you know, I think generally, um, uh, we're generally positive and second half activity, being stronger than it was last year given last year, the election cycle, probably paused some demand. Um, the pipeline feels pretty robust. Now, with the competitive environment, we're going to continue to be thoughtful on how we allocate Capital, but we're seeing pretty strong demand across both sponsor and non-sponsored activities. So I like I I'm not going to make a prediction on what that's going to look in the second half. Um, you know, it generally follows over the, you know, the long Arc of of these, you know, that 6.

65535, uh, but we we seem to be seeing good activity across each of our thematic areas.

Great very helpful there and just 1 follow-up. Uh, if I may, I think you touched upon this briefly. Uh, you mentioned the the covenants and and some of the documentation on on on the new investments just curious uh for for the more recent and new investments in the current environment. Uh have you been seeing any kind of changes in terms of uh, terms of

And documentation.

Thanks.

We we have not seen a change over the last few quarters and the fact that probably, the last year in, you know, the document standards or, or Covenant packages, they've remained stable. I think, you know, in part because how we Source deals, um, away from some of, you know, the more, the more combed over areas but, uh, we have not seen a change in that

Gotcha. Very helpful there. Thanks again.

Thanks guys. Thanks, thank you. Our next question comes from Aaron. Ciganovich with truist Securities. Your line is open.

Hi, thanks. Um, I was wondering if you could talk a little bit about your thoughts on, um, the push to open up retirement vehicles to private investment assets. And if you have any expectations of how that might impact the direct lending Market,

yeah, I mean I think it's a little too early to tell uh, I think um,

It it is, I think it's a very complicated issue. Um I I I I I like the idea of giving access

To returns an alternative, uh, to to individual investors.

Um, they've obviously had some of that through the BDC sector on the private credit side. Uh, to be honest, I'm a little concerned that the incentives are not exactly right and that the that, you know, there was a decent prophylactic around alternative where you had either a super sophisticated individual investors or institutions that could do the work and um,

you know, I'm, I'm a little concerned about

Her protections. Uh, you know, I hope we that gets cleared through and people are responsible in that way. I mean, I can I can tell you go back 15 years when we started in the BDC industry and you talked to individual investors and I think this is this is not supposed to be um, snarky at all but like they there was

Vast majority did not understand the difference between return on Capital and return of capital and dividend yield and Roe.

And so there was a whole individual investor that was chasing High dividend paying stocks, not realizing that it was returned of capital not return on Capital. And by the way, some of that still exists.

And so the you know, um and the people on this call which I I is as as as been significant upgrade in contributions in space, have been doing that work for, you know, for on the research side, to make sure that people understand that. But so I'm I'm I have mixed feelings. I'm concerned. I understand why GPS want access because it's a big Cam and big growth but you you know, at the end of the day we got to take care of our clients and our job is to provide something of value of clients and um

You know, not not, and that Focus sold needs to be, you know, should should we remain? Which is

Everything works. Well when you provide value to your customer everything the entire ecosystem takes care of itself and I would, I would urge the space to, you know, keep keep that at the most you know, as their North Star.

Got it, that's helpful. Thanks. Um and then just a quick 1 on uh new Investments. Uh, there was a an 8% stake in. Uh, it looks like a structured credit. Can you just talk a little bit about what that is and uh, what kind of the underlying assets are are in that

Yeah, I I'll hit that real quick that that that that, you know, on on occasion, we, you know, buy uh uh structured credit a structured credit portfolio, which is of corporate loans. Uh uh the underlying corporate loans and probably typically broadly, syndicated loans. Uh it the those Securities, uh are rated Securities typically double beer, Triple B. Uh, they offer a competitive, uh, uh, the offers, you know, competitive risk adjusted returns with subordination, uh, and so we, we, we've, uh, you know, come in and out of that market, uh, uh, through the years.

so I think in, you know, and we sold 8 structured kind of investments in Q2 that we had bought for a price of 97 and a half and it had a whole bunch of carry that we sold for

402, I think. And so we come in and out of that market.

Okay, so these are just more opportunistic then.

Tough.

Thanks.

Thank you so much.

Thank you. Our next question comes from Melissa widell with JP Morgan. Your line is open.

Good morning. Thanks for taking my questions. Um, appreciate the context that you provided around sort of second half activity levels that you, you might expect to see. I'm curious, if you're also expecting sort of repayment activity to remain elevated in the second half to sort of match that.

I just know looking at the, the net repayments over the last couple of quarters, they've been pretty, pretty sizable. And I, I know you don't manage to that necessarily on a quarterly basis, but just trying to

Put a framework around that.

Yeah, I mean, look at the good news. I think for SLX shareholders is that we have outside exposure to vintages post 22 rate, hiking site goals. Uh, so those were higher spread assets. As, you know, how our County works is, we, uh, don't recognize any of the upfront fee day 1. Uh,

Cycle. Uh, and so I, I think that in the short term is good for net investment income, uh, because it will be excess returns and fees. Uh, and then, you know, we're going to as, as I said at the end of our script, we got to like, you know, we we we we we, we do it for a living. We have a large top of the funnel and we'll go, we'll go replace it with stuff we really, really like, right? Okay, thank you for that. Um, and then just wanted to follow up on sort of looking across the portfolio, um, now that you've had a few more months after some, uh, tariff announcements, I'm just curious, if, if you're still seeing low exposure, um, across the portfolio,

Has your be changed on that at all?

No. I mean I look, I'll let Bo hit it. I think the answer is no. And I think our traffic exposure is actually reduced poor post quarter end but go ahead. That's exactly right. If you remember, right? We have very low exposure, you know, less than, you know, 1% of the portfolio on a fair market value basis. Uh, it was really 3 names that we thought had Direct exposure. We didn't know exactly what the impact was going to be. Um, since uh last recording, I've actually 1 of the names. Uh, uh, 1 of those 3 names has actually been paid off. So we, you know, because this was performing well paid off uh, into a cheaper financing. So um, it's it's down to 2 2 small names. That's

Thank you.

Thank you. Our next question comes from Paul Johnson with KBW. Your line is open.

Hey, good morning. Uh congrats on the good quarter. Um can I just ask? So what um drove the higher other income uh this quarter versus last was that just the repayment activity in order?

So, Paul, you cut out again. I think the question was, what drove higher other income?

Yeah, correct, correct. Yeah. All right.

Seeing I'll take that 1.

It's really just a number of miscellaneous exit fees that were embedded in transactions that paid off during the quarter.

And not, not a sorry if I didn't.

I and I, I sorry if I didn't catch it, but did, did you guys disclose what the, um, what the prepayment income was? The accelerated prepayment income for share this quarter.

Uh, for my per share basis. The the prepayment income was about a third of activity basis, so around 6 cents per share.

For specific payment today. Yeah. I mean, I incorrectly if I'm wrong that in in the other income line, there was extra fees. Yeah. Which is, is like a very close cousin to prepayment fees. Yeah. So I like it, it it the other income line was, how much

Uh, other income was about 7 cents per share. Yeah. So I I I I think it's fair to think of like prepayment and exit fees being

Pre on a growth pace is somewhere between 11 and 13 cents per share. I like they're they're pretty. They were pretty close cousins. You know, the the, the question, the the difference is technically is, you know, a prepayment, a, a prepayment income was existed in the contract from day 1, where an exit fee, might have existed in the, in, in the contract, along the way, right? That's right.

Okay, got it. That makes that makes sense very helpful. And then in terms of

sorry, go ahead didn't know if I cut someone off their

No, no. I'm just saying there's the same thing. Go. Go ahead.

Okay. So the terms of the structuring fee income though. I mean from the kind of sponsor portfolio optimization that you you mentioned with um some some transactions or add-ons on add-on activity. There is there any sort of structuring fee income that would come along with that?

No. I mean, take a little bit of a deep dive on this because I think people in the industry do it differently.

so there are people in the industry that take some of their upfront fees,

if I I I that and split it between a structuring fee and oid

Structure of being half or so ID.

You know, and ultimately, then what happens is, is that you have smaller oid that gets advertised over time. So something, if you take more of the income up front,

and with something prepays, you have less accelerator ID because you've already taken the income

and that is not how we do our accounting, how we do our accounting, unless there is a syndication fee, um, we don't take a structure and fee, it all goes into oid and so when the portfolio churns, there's more accelerated oid and

There is, uh, then it would have been the case if we took a structured fee. So all of our.

fees are effectively deferred and put in oid uh at least from a a structuring perspective so people do it different it's a really important Nuance so in the in the former case

New activity will drive.

Knee on the marginal basis.

In the latter case, our case.

Is that repayment activity and portfolio churn will drive an II?

Sorry for the Deep dive.

No I got it. That's really sense. And again uh helpful answer their last 1 for me, just on the um the lithium restructuring positive to see that that was done without any additional um, write down or loss on the investment this quarter. Um but can I just have this on the earnout security? So what exactly I guess is kind of a triggering the the payout there is is it just based on revenue or even or is there any sort of sales that are taking place within the company and also just kind of what's maybe the expected? Kind of realization timeline there and that's all for me. Thanks.

Yeah. Yeah sure. So again this was uh, this was split into into 2 security Securities which was an interest-earning debt security that the smaller and then an equity participation and all cash flows that are generated beyond that. Um, the expectation is, um, that uh, the the duration will be about 3 years um, for for to fully realize the value on that equity. And, you know, there's a chance that we can over-perform that. We took a view of what um, those cash flows would look like over the 3 years and that's how we value the equity security.

No loan. Advertisers Lipa, correct?

I appreciate it. Thank you.

Thank you. And our last question comes from Robert Dodd with Raymond James. Your line is open.

uh, hi guys, and, and congrats on the quarter, if I can go to, um, back to the the, the repayment, uh, issue briefly, and then I've got a different, uh, to quote Ian, um, you know, expect, uh,

Full year, and I are we and obviously not include to be in the top hat, half of of, of previous guidance. But if fees remain elevated could be about that to quote, Josh, uh, expect repayments to remain elevated. Um, and then, if we look at the, your fair value to call Pro, which ticked up fairly meaningfully, this quarter tends to imply that you're expecting less

Call Protection.

In in certain Q3 um maybe the second half then you've got in the first half or lesser that's built into nav. So can you reconcile like

You know, you can have IV payments without having high V payment fees depending on the Vintage of the asset. Etc, etc. Um, but can you kind of reconcile those those, those bits, like, if we payments are elevated, why wouldn't fees be elevated to? But that doesn't seem to be factored into your, your fair value to call probation from the presentation.

Yeah. So what I would say is, look, my comment as it relates to repayments is a Q3 look. Ian's comment was a 4-year look.

So let's start. Let's start with that.

Right. Like there is a, you know, he was talking about full year guidance. I was talking about, you know, in the next, you know, quarter. That's kind of what we have as much visibility as we have.

you know, and then obviously,

Fees. And the amount of fees is a little bit of a function of what vintage and you know, we we don't control that.

um,

A huge disconnect of what we all said is just it's, we're just trying to round it out. No, no, no, no, I appreciate that. And that little breakdown does does help the way down for me. So thanks for that on on the the second question, if I can I mean I was going to ask you about the the Retro, um, peak oil model. But uh something simpler to your point Josh.

Typically balance sheet financials, you know you need an Roe greater balance sheet heavy financials, you need another, we greater than 9 to trade that book or better.

If yeah, um, institutional investors are the primary ones driving valuation. I think, uh, that's my addendum to that. So how do you think given given a, a huge amount of the tackle raised? Obviously, it's it's these Evergreen funds which are it is not institutional Capital. Um so you know and obviously those those are

For a lot of the market, the actual kind of drivers of spreads and volume are more so than the public vehicles. So how do you think to that point, like that 9%, is that what the industry is going to be satisfied with?

Given what the Evergreen funds are doing and who the primary Capital comes from on that sort.

Yeah. I mean I I I'm a big believer that markets are typically not very efficient in the short term but very efficient in the long term and what I would say is

if you have an individual investor or an Ria who's sitting in front of that individual investor, they should

at some point are going to pick their head up and say,

I can earn.

I can buy something at a discount to book in the public markets.

And, you know, a 9, you know, versus buying something at par and have daily liquidity versus buying something at nav, and rebinding for them now, because I'm not redeeming that. I'm earning a 7 and that I may, or may not have liquidity when I put in at the end of the of, of the quarter like that that will work its way through if people are doing their job at fiduciary.

and,

you know, and so in the short term that you know, that that disconnect might exist,

But in the long term, my My Hope and belief if markets were doing their job and and people are active fiduciaries, they will put their clients from the best risk, adjusted return on Capital and look at Alternatives, and look at liquidity premiums and, you know, optionality and discounts of books and all that.

so, I think ultimately,

it it will come out in the wash you, you would, I think

All things being equal, if you want to own something, will you have daily liquidity versus not? And where you might get dated, you know, and that, you know, people have to experience that firsthand to kind of realize it. But at some point, they will, and they will work through it. Thank you.

Thank you at this time. I'd like to turn the call back over to Josh easterly for closing remarks.

Okay, um I you know, to 2 2 things have gone look. We live in the teams in New York City. Uh, most of us live in New York City, except for fish and, and Cammy. And I, I would say it's hard not to end any type of call this week without saying that it is life is fragile, um, and random and

You know, like, you know, what happens this week was on, nobody's, Bingo board, and people should make sure they, you know, are present with the people. They care about and give them lots of hugs. So I, I, I, I will say that, um, because that's top of mind for me. The other thing is top of mind for me,

Is.

I I look back at what 6 Street specialty, lending has accomplished.

Pre-public and post public for since 2014.

So those 2 things are top of mind to me. And uh, I think everybody for, you know, tend to call and I hope people have a peaceful rest of the summer.

Thanks everyone.

Thank you.

Thank you for your participation. This is include the program. You may now disconnect everyone have a great day.