Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sixth Street Specialty Lending Inc (TSLX, Financial) reported a new all-time high net asset value per share of $17.19, representing a 2.7% year-over-year increase.
- The company achieved an adjusted net investment income of $0.58 per share, exceeding the quarterly base dividend level by 26%.
- The Board approved a base quarterly dividend of $0.46 per share and a supplemental dividend of $0.06 per share, reflecting strong financial performance.
- The weighted average spread of new investments this quarter was 6.6%, indicating disciplined capital allocation and strong return on equity.
- The company has ample liquidity with $1.2 billion of unfunded revolver capacity and a well-laddered debt maturity profile, ensuring financial stability.
Negative Points
- The higher interest rate environment may lead to credit deterioration and potential credit losses, as indicated by the growing tails within portfolios.
- The weighted average yield on debt and income-producing securities at amortized cost declined slightly from 14.0% to 13.9% quarter-over-quarter.
- Net unrealized losses from portfolio company-specific events resulted in a $0.08 per share decline in NAV, primarily due to the markdown of the investment in Lithium Technologies.
- The company experienced a slight increase in net expenses, driven by costs incurred during the annual and special shareholder meetings.
- The weighted average interest rate on average debt outstanding increased slightly from 7.6% to 7.7%, reflecting a shift towards higher-cost unsecured financing.
Q & A Highlights
Q: There's a rapid change in private credit. Are you passing on deals due to yield and cost of capital, and does this relate to market deterioration in credit underwriting?
A: In the sponsor sector, our concern isn't credit deterioration but that the sector's cost curve no longer creates a return on equity that meets or exceeds the cost of equity. We are seeing wider spreads in non-sponsor deals, indicating better risk-adjusted returns.
Q: Can you remind us of your footprint in Europe and whether there is growth there?
A: Our European platform is growing and has been successful. The risk-return profile in Europe is currently better than in the US. While the number of deals may be higher in Europe, the dollar amount is still predominantly US-based.
Q: How should we think about the turnover within the portfolio and its impact on performance?
A: The portfolio composition changed due to being below target leverage and raising capital, not due to turnover. Going forward, as deal activity picks up, we expect more natural turnover, benefiting shareholders through increased activity-based fees.
Q: What is your outlook on the broader macro environment over the next year?
A: The economy is slowing, allowing the Fed to pivot, which should loosen financial conditions and spur demand. I'm relatively constructive on the macro environment, though there will be tails and potential pain points, especially in the consumer sector.
Q: Has your hit rate on deal flow changed materially over the last six months?
A: Our hit rate is similar, but there are credits we like at prices we don't. We are focused on ensuring we earn our return on equity, even if it means passing on deals with unattractive pricing.
Q: Are you seeing more opportunities in the smaller end of the market?
A: No, the lower average commitment is due to the co-investment strategy in European deals. Core positions remain significant, with commitments around $35 million to $40 million.
Q: Do you think the massive supply of private debt capital is causing spread tightening, or are we approaching a floor?
A: The supply of private credit capital has outpaced demand due to a lack of M&A activity. As the Fed cuts rates and M&A picks up, we expect supply and demand to rebalance, improving spreads.
Q: What is the probability of more regulation in private credit, and is there systemic risk developing?
A: Systemic risk in private credit is low due to higher capital requirements and match-funded structures. Unlike banks, private credit does not pose a taxpayer risk, and the business model is more robust.
Q: Is the issue with Lithium Technologies indicative of broader sector concerns?
A: The issues with Lithium Technologies are idiosyncratic and not indicative of broader sector concerns. The company faced specific challenges post-COVID that are not reflective of the overall market.
Q: Are you seeing any changes in documentation and terms on newer deals?
A: Documentation and underwriting standards remain stable in private credit. The key issue is ensuring that the spreads meet the cost of equity requirements.
Q: Will more complex investment opportunities arise with a macro slowdown or increased M&A activity?
A: Complexity will come from both the tails of past capital misallocation and increased M&A activity. We expect more opportunities in complex investments as these factors converge.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
