Sixth Street Specialty Lending, Inc. Q3 FY2024 earnings call

• Joshua Easterly provided highlights of Q3 results, with Bo Stanley discussing portfolio activity and Ian Simmonds reviewing quarterly financial results.
• Closed $269 million of commitments across eight new investments and upsizes to four existing portfolio companies, with 100% in first lien positions and diversified across seven industries.
• Lithium Technologies position is less than 1% of total portfolio fair value, with net unrealized losses recognized, and credit losses incorporated in the unit economic model.
• NAV was $17.12, down $0.07 per share from June 30. Adjusted net investment income per share was $0.57, exceeding the base quarterly dividend by $0.11 per share.
• Annualized ROE target range is 13.4% to 14.2%, with year-to-date 13.6% consistent with the target.

Adjusted net investment income per share was $0.57, corresponding to an annualized return on equity of 13.2%, and adjusted net income per share was $0.41, with an annualized return on equity of 9.6%. Net investment income for the quarter was $0.59 per share and net income was $0.44 per share. The $0.15 per share difference between net investment income and net income was due to net unrealized losses from the markdown of the investment in Lithium Technologies, which is less than 1% of the total portfolio fair value. In Q3, 100% of fundings were in first lien positions, contributing to a 93% first lien asset mix. The portfolio's weighted average yield on debt and income producing securities at amortized costs decreased from 13.9% in the prior quarter to 13.4%. Non-accruals represent 1.9% of the portfolio at fair value.

• Adjusted NII per share for the full year is expected to be within the range of $2.27 to $2.41.
• Base quarterly dividend of $0.46 per share declared, with a supplemental dividend of $0.05 per share related to Q3 earnings.
• Continues to expect adjusted NII per share for the full year to be within the previously stated range of $2.27 to $2.41.

• Unrealized losses from the investment in Lithium Technologies, with the position representing less than 1% of total portfolio fair value.
• Potential impact of higher interest rates on other portfolio names, as seen with the underperformance of Lithium Technologies.
• Valuation gaps in sponsored M&A due to election uncertainty and the need for assets purchased in low interest rate era to work through high valuations.

Q: Brian McKenna asked about the non-sponsored business, including team size, collaboration with the Sixth Street platform, sector and size coverage, and if they'll lean into non-sponsored transactions.

A: Joshua Easterly responded that historically 65% sponsored, 35% non-sponsored, this quarter ~50-50. There are ~250 investment professionals grouped in strategy and industry teams, and they like the model of toggling between risk return. They expect to continue leaning into non-sponsored transactions.

Q: Mark Hughes inquired about interest coverage improvement, amendment activity, and credit outlook.

A: Interest coverage went from 2.1 times to 2.2 times, due to earnings growth and slightly from rates. Amendment activity was very low, all positive credit amendments. Credit outlook is positive with no credit names below 90% in the book.

Q: Robert Dodd asked about the percentage of the portfolio the interest coverage metric applies to, the non-sponsored mix, and credit risk if rates stay high.

A: The interest coverage metric applies to most of the portfolio. Non-sponsored mix includes deals like Belk and Arrowhead, which are asset-based. On credit risk, fundamentally challenged names overlap with non-accrual names, and they think they've worked through that.

Q: Bryce Rowe asked about portfolio velocity and the base dividend increase.

A: It's hard to gauge portfolio velocity, but activity fee-based income may increase with declining interest rates. The base dividend is set based on through-the-cycle earnings power, and they use supplemental dividends and specials to return capital to shareholders.