Sixth Street Specialty Lending, Inc. Q1 FY2025 earnings call

• Joshua Easterly reviewed first quarter highlights, with Bo Stanley discussing portfolio activity and Ian Simmonds detailing financial performance.
• The firm is a disciplined capital allocator with portfolio yields higher than the sector average.
• Q1 fundings included six new investments across six industries, with 89% of total fundings into new investments. Repayment activity was elevated, contributing to activity-based fee income of $0.16 per share.
• Balance sheet was strengthened with a February bond issuance and March credit facility amendment, extending the weighted average maturity on liabilities to 4.2 years.

In the first quarter, adjusted net investment income was $0.58 per share and adjusted net income was $0.36 per share. The weighted average yield at amortized cost was 12.3%. Total investments were $3.4 billion, down from $3.5 billion in the prior quarter due to net repayment activity. Principal debt outstanding at quarter end was $1.9 billion, and net assets were $1.6 billion or $17.04 per share. The portfolio yields were meaningfully higher than the sector average, with a weighted average yield at amortized cost of 12.3% in Q1, and first lien exposure was 93% across the portfolio.

• Reaffirmed target return on equity on adjusted net investment income of 11.5% to 12.5% for the full year.
• Estimated quarterly earnings power of approximately $0.50 per share, with potential upside if activity-based fees return to average.
• Quarterly earnings power includes interest income from the in-the-ground portfolio and limited activity-based fee income.

• Limited direct exposure to tariffs, but potential impact on some portfolio companies.
• Volatility in market and economic conditions, with potential derivative impacts on real economy growth and valuations being a longer-term risk.

Q: About downward pressure on spreads with nontraded BDC fundraising headwind, can you talk about your resilience to that and how far it goes?

A: Discussion on retail flows possibly slowing, resilience due to being a disciplined capital allocator with a big top of the funnel including non-sponsor transactions, and expectation that market volatility can provide opportunities.

Q: How are your teams able to price risk when there's a meaningful pickup in uncertainty and volatility, and where are you seeing the most attractive deployment opportunities today?

A: Deep fundamental analysis, looking at cost curve, required equity, illiquidity premium, and relative value across asset classes; attractive opportunities in moments of volatility due to Sixth Street's large platform and ability to see relative value.

Q: Would you expect the lower sponsor back ratio to be the new norm going forward?

A: Sponsors are sophisticated, but technicals in private credit market led to lower sponsor back ratio, but the firm will go where there's best risk return.

Q: On the ATM equity program, is there a change in the frequency of capital raises?

A: Consistent approach, capital raises accretive to NAV, ATM is a tool for flexibility but not exclusive to raising capital.

Q: On credit quality and tariff impact, how is the portfolio performing?

A: Low nonaccruals, limited direct risk from tariffs, with only 2% of portfolio directly affected by tariffs and mild impact expected.

Q: On bank risk off impact, what's the impact on the balance sheet?

A: Balance sheet managed well, no material impact from banks going risk off, with amendments to credit facility and bond issuance maintaining strong balance sheet.

Q: On capital base and ROE, is shrinking the capital base accretive to ROE?

A: Not close to that point yet, having capital and being selective in deployment is beneficial, but shrinking capital base has trade-offs in NIM.

Q: On global trade and capital allocation, how does the changing environment affect underwriting?

A: Changing environment affects valuations and underwriting, with lower growth and higher discount rates changing the investment landscape.

Q: On structured risk transfers, does it change funding costs?

A: Helps expand capacity, allows banks to get capital relief and expand lending relationships, but on margin doesn't reduce pricing.