Sixth Street Specialty Lending (NYSE:TSLX) reported second-quarter net investment income and net income of $0.43 per share, while net asset value remained stable at $16.24 per share. The business development company said operating earnings exceeded its recently established base quarterly dividend of $0.42 per share.
The dividend will be paid Sept. 30 to shareholders of record as of Sept. 15. Chief Executive Officer Bo Stanley said the company generated annualized returns on equity of 10.6% based on net investment income and 10.5% based on net income during the quarter.
Repayments and activity-based fees improved
The activity generated $0.08 per share of activity-based fee income, though Stanley said this remained below the company’s long-term historical average. Management said repayment activity experienced early in the third quarter supports its view that activity-based fee income could improve in the second half of the year.
Stanley told analysts that the company expects M&A-related activity to be a greater driver of repayments than refinancings during the remainder of the year. He said refinancing activity has been more limited because the current market offers a more attractive spread environment for new investments than the tighter credit conditions seen previously.
Ross Bruck, head of investment strategy, cited the June repayment of TS Imagine, a financial technology provider that refinanced its senior secured credit facility in the private credit market. The repayment included call protection and resulted in an unlevered internal rate of return of 15% and a 1.7x multiple of money for shareholders, according to Bruck.
Portfolio quality and new investment activity
The company funded $137 million during the quarter across two new investments and capital called by its Structured Credit Partners joint venture. Bruck said both new investments involved borrowers with which Sixth Street had longstanding relationships.
One example was Photo Holdings, also known as Shutterfly. Sixth Street participated in a refinancing of the company’s debt after having invested in the business for several years. Bruck said the structured financing included contractual amortization, lender protections and what management described as attractive economics. In response to an analyst question, he said the investment was a first-lien term loan priced at a spread of SOFR plus 700 basis points.
Management said the direct-lending environment is showing signs of improvement, including wider spreads, stronger fees, better lender access to management teams, more robust diligence processes and improved loan documentation. Stanley said spreads were generally 25 to 50 basis points wider, while the company has also seen less competition in the upper middle market as capital has exited parts of the direct-lending market.
At June 30, the weighted average total yield on debt and income-producing securities at amortized cost was 11.2%, unchanged from March 31. New first-lien investments carried a weighted average spread of 690 basis points, compared with 527 basis points on new-issue first-lien loans for BDC peers in the first quarter, according to the company.
Sixth Street maintained effective voting control on 78% of debt investments and held an average of two financial covenants per investment. The portfolio had weighted average interest coverage of 2.4x, improving from 2.3x in the prior quarter. Core portfolio companies posted approximately 8% revenue growth and 11% EBITDA growth over the prior 12 months.
Credit quality remained stable. The company had no new non-accrual investments during the quarter, and three portfolio companies were on non-accrual status at June 30, representing 1.3% of the portfolio at fair value. The weighted average internal investment rating was 1.20 on a one-to-five scale, where one is the strongest rating.
Balance sheet actions and earnings outlook
Chief Financial Officer Ian Simmonds said total investments were $3.3 billion at quarter-end, while principal debt outstanding was $2 billion and net assets totaled $1.5 billion. The company’s average debt-to-equity ratio rose to 1.24x from 1.14x in the prior quarter, while ending debt-to-equity increased to 1.27x from 1.18x.
Ending leverage was affected by cash held to repay $300 million of unsecured notes maturing Aug. 1. Net of that cash, ending net leverage was 1.17x, slightly below the prior quarter’s 1.18x.
During the quarter, the company extended the maturity of its revolving credit facility to May 2031 and issued $300 million of five-year notes at a spread of Treasury yields plus 180 basis points. The fixed-rate notes were swapped to floating-rate debt at SOFR plus 185 basis points. Following the August repayment of its 2026 notes, the company said it had approximately $966 million of undrawn revolver capacity and no near-term debt maturities, with its next maturity being $300 million of unsecured notes due in the second half of 2028.
Total investment income rose to $97.8 million from $93.4 million in the first quarter, aided by higher prepayment fees and other income. Net expenses increased to $55.7 million, primarily due to higher interest expense. The weighted average interest rate on average debt outstanding increased to 5.6% from 5.5%.
Management estimated undistributed income at approximately $1.12 per share at the end of the quarter. It reiterated that annualized return on equity could be 10% to 10.5% if full-year portfolio turnover remains below 20%, with returns above 10.5% if turnover is higher.
Stanley said the company’s pipeline includes late-stage opportunities that could begin closing in the third quarter, with a more pronounced pickup potentially occurring in the fourth quarter. He said management remains selective and expects a wider dispersion of outcomes across private credit as financing needs become more complex.
About Sixth Street Specialty Lending (NYSE:TSLX)
Sixth Street Specialty Lending Inc (NYSE: TSLX) is a closed-end, externally managed business development company that provides flexible debt financing solutions to middle-market companies. The fund primarily targets senior secured loans, unitranche facilities, mezzanine debt, second-lien financings and equity co-investment opportunities. By structuring tailored capital solutions, Sixth Street Specialty Lending seeks to support growth initiatives, recapitalizations and refinancings across a diverse set of industries, including technology, healthcare and business services.
As an affiliate of Sixth Street Partners, a global alternative investment firm, the company leverages the broader platform’s credit research, operational expertise and industry relationships.
