Good morning, and welcome to TPG Specialty Lending, Inc.’s March 31, 2017 Quarterly Earnings Conference Call. 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 TPG Specialty Lending, Inc.’s filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements. Yesterday, after the market closed, the company issued its earnings press release for the first quarter ended March 31, 2017 and posted a supplemental earnings presentation to the Investor Resources section of its website www.tpgspecialtylending.com. The earnings presentation should be reviewed in conjunction with the company’s Form 10-Q filed yesterday with the SEC. TPG Specialty Lending, Inc.’s earnings release is also available on the company’s website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today’s prepared remarks are as of the first quarter ended March 3 1, 2017. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to you, Mike Fishman, Co-Chief Executive Officer of TPG Specialty Lending, Inc.

Thank you. Good morning, everyone, and thank you for joining us. I will begin today with an overview of our quarterly highlights and recent dividend announcement before turning the call over to our President, Bo Stanley, to discuss our origination and portfolio metrics for the first quarter 2017. Our CFO, Ian Simmonds will review our quarterly financial results in more detail. And my partner Josh Easterly will conclude with our remarks before opening the call to Q&A. I’m pleased to report strong financial results for the quarter. Net investment income per share was $0.48, which exceeded our first quarter dividend of $0.39 per share, continuing our track record of overrunning our dividend on a net investment income plus net realized gains basis. Net asset value per share for the quarter hit a consecutive all-time high of $16.04, as compared to $15.95 for Q4 2016, and $15.11 for Q1 2016. Net asset value movement during Q1 was primarily driven by the overrunning of our quarterly dividend, as unrealized gains from the positive impact of tightening credit spreads on investment valuations were offset by the unwinding of unrealized gains and unrealized net losses related to portfolio company-specific events. Yesterday, our Board announced a second quarter dividend of $0.39 per share to shareholders of record as of June 15, payable on July 14. In addition to this base dividend, our Board has declared a variable supplemental dividend of $0.04 per share to shareholders of record as of May 31, payable on June 30. Going forward, in addition to a base quarterly dividend of $0.39 per share, our Board will also declare, when applicable, a formula-based quarterly variable supplemental dividend, which Ian will discuss in more detail. Moving on to portfolio highlights. There have been a few active names in our portfolio since our…

Thanks, Mike. Q1 was a solid originations quarter for us with gross originations of $286 million and fundings of $142 million distributed across five new portfolio companies. Of the $286 million of gross originations, $137 million were syndicated and $7 million consist of commitments we funded post quarter-end or expect to fund. Consistent with the trend that began in the second-half of 2016, the investment environment this quarter was highly competitive, primarily due to strong capital inflows into the middle market credit space. Our investments this quarter were either business services, ABL retail or pharma royalty financings in nature, reflecting our strategy of focusing on sectors and themes that dovetail with our platforms expertise allowing us to structure creative, comprehensive financing solutions with attractive risk-return profiles. While we are not immune to pricing pressures in the broader credit markets, we believe direct originations and underwriting capabilities are key drivers of our consistent portfolio yields over time. At March 31, the weighted average total yield on our debt and income-producing securities at amortized cost was 10.4%, consistent with the prior quarter and in line with a historical range of 10.1% to 10.6% for the 12 quarters since our IPO. The weighted average total yield at amortized cost on new and exited debt investments during the first quarter were 10% and 10.1%, respectively. Consistent with our expectations for elevated repayments in periods of lower risk premiums and tighter credit spreads, we had a record level of repayments in Q1 of $214 million aggregate principal amount from 10 full realizations and four partial sell-downs. A $156 million of these repayments were attributed to illiquid, directly originated loans and the remainder of the repayments were secondary market names, the majority of which were opportunistically purchased in the late 2015 and early 2016, during periods…

Thank you, Bo. Before diving into our financial results, I would like to first expand on the framework for our quarterly variable supplemental dividend that Mike mentioned at the beginning of the call. Going forward, in addition to our base quarterly dividend of $0.39 per share, our Board will declare when applicable a quarterly variable supplemental dividend equal to the lesser of A, 50% of the quarter’s earnings that is in excess of the quarter’s base dividend; and B, an amount that results in no more than a $0.15 per share declined NAV over the current quarter and preceding quarter. Earnings for the purpose of measuring the excess over the quarter’s base dividend is net investment income. The NAV decline measurement is inclusive of the supplemental dividend calculated and to be clear is measured over the two most recently completed quarters. We believe this formulaic dividend framework allows us to maximize distributions to our shareholders, while preserving the stability of our NAV, a factor that we believe to be an important driver of shareholder economics over time. To give you a sense of how such a framework can impact distributions, for illustrative purposes, if we were to apply this framework to our actual results from last year, our Board would have declared $0.12 per share of variable supplemental dividends over the course of 2016. Turning to Slide 18 of the earnings presentation, we’ve laid out the calculation behind the $0.04 per share variable supplemental dividend that was declared by our Board yesterday. In Q1, we had net investment income of $0.477 per share against a base dividend of $0.39 per share. 50% of this over-earning rounded to the nearest cent is $0.04 per share. Given our positive NAV per share movements during Q4 2016 and Q1 2017, after giving effect…

Thank you Ian. While we are pleased with our first quarter results, we remain diligent about the challenges for direct capital providers in today’s environment. Given the competitive dynamics in the credit markets, we believe our direct origination strategy is a key differentiator in our ability to generate consistent shareholder returns. At quarter-end, 92% of our portfolio by fair value was sourced through non-intermediary channels, which enable us to control our investment structure and process and mitigate risks, such as reinvestment risk with call protection of 83% of our debt investments. The fair value of our portfolio at quarter-end as a percentage of our call protection was 95.2%, which means, we have protection in the form of additional economic, should our portfolio get repaid in the near-term. As evidenced by this quarter’s results, we believe that our objective of creating economic value for shareholders across credit cycles requires a discipline to limit growth in certain environments in order to maintain strong underwriting quality and the appropriate pricing of our risk in our portfolio. In Q1, we were able to maintain a weighted average portfolio yield at amortized cost of 10.4%, while increasing our trailing 12 months return on average assets from a 11.9% to 12.3%. By structuring embedded economics into our portfolio in the form of call protection, financial covenants and other control features, we are able to create a margin of safety in our ability to generate attractive shareholder returns over time. As our business evolves, we believe we have an ongoing responsibility to evaluate and expand upon our tools for value creation on behalf of our shareholders. For our upcoming special meeting of shareholders on May 18, we are asking shareholders to vote in favor of a proposal authorizing TSLX, with approval of our Independent Board of Directors…

Thank you. [Operator Instructions] And our first question comes from Leslie Vandergrift of Raymond James. Your line is now open.

Good morning, and thank you for taking my question. First, just quickly, I missed the ABL facility that you said had come at defaults and then was repaid at the end of the quarter, which one was that?

That was – hey, Leslie, good morning. That was Power Solutions.

Oh, yes.

So we have provided a – an asset-based facility with a borrowing base to Power Solutions that was – they’ve had a difficult time around reporting and other issues and we risk-managed that position, where we put in additional borrowing base reserves and effectively forced the repayment of our loan, which happened at the last day of the quarter.

Okay, perfect. And then on Qlik, you mentioned the year-one call premium, and I think the word sizable was used. I know in the past you talked about a 6% year-one call premium, is it still what we are looking at?

I think we’ve talked about 5%.

5%.

So it was called out at 105 in the middle of this quarter, or early in the quarter in April.

Okay. And then syndications in the quarter, I know you had some nice amounts of sell-downs again, and you talked about in the past that the large ones like Qlik in the third quarter of last year. Do you have any outlook with the way that, it’s kind of a seller’s market it seems right now, if there’s – if you’re looking to do a couple more of those large-sized ones to see this level ramp up a bit in the near-term?

Yes. So I think in this market, to be honest with you, where larger companies and issuers have the ability to access much more traditional financing in the leveraged loan market and high-yield market. The opportunity that – the opportunity provides large commitments that allow for additional economics in the form of syndication fees is probably limited. Those opportunities, for example, Qlik, those opportunities happen when markets tend to be dislocated. And so, I would say, in the – not that you – not that there won’t ever be a kind of a one-off transaction, where we’ll be able to earn those fees, but surely not in the same extent. I think in – to put it in reference, in September of 2016 that quarter or so over the summer time, we earned about $0.05 per share on the Qlik syndication. That was a very large underwriting by the team here. So, I think, those opportunities on a go-forward basis in mezzanine environment is more limited. I don’t know, Fish, do you have anything to add there?

No, no, I agree, and it would probably more in the – either will underwrite and retain or club, which will provide, obviously, not as many opportunities to create syndication fee income.

Okay. And then – but on the severance, you had a bit more this quarter, is that – were they just opportunistic and not really seeing overall market up on that?

Yes. So the sell-downs, there are a function of – that’s a good question, there’s a function of two things. On occasion, we’ll sell-down to a bank that’s providing working capital revolver, or small per sale term loan. And then as it relates to sell-downs, where we are using exemptive relief, those have to be on the same economic terms. And so, TSLX by the order can’t skim related parties or related parties can’t skim TSLX. So a decent size of those sell-downs were either done under, for example, under the order, such as Ironwood or small per sale syndication.

Okay, all right. And then my last question, you mentioned, obviously, junior capital still a smaller proportion of the portfolio about 1%, and you mentioned that a normalization kind of range would be 5% to 7%. Now, obviously, that’s a real long-term and people have argued for years and obviously been wrong that we’re near at the end of the cycle, because it’s been years in the argument. But as they continue to argue such, when are we looking at getting up to that range for junior capital? Is that…

Yes. So, sorry if I wasn’t clear. I – so we have been as high as I think probably 12% to 14% over time in end markets, which you could be characterized by more kind of trough leverage ratios and trough earning levels. So you could see us expand and way past the 5% to 7% at the – on the other side of the credit cycle. I think in these markets, where it was a tailwind in the credit cycle, we think it’s 5% to 7%. We just happened to be coming down over time. And so, I would expect and you could see that in next quarter or two or three quarters be in that range. But if we are in 2011, where we think there was very good risk-adjusted returns deeper down in a cycle that could be way higher than that.

Okay, perfect Thank you for taking my questions.

Thanks, Leslie.

Thank you. And our next question comes from Jon Bock of Wells Fargo Securities. Your line is now open.

Good morning, and thank you for taking my questions. Josh, on the $2.1 million in syndication fees or the syndication fees that you earned this quarter, given that you are below what we’d consider optimal leverage. Where is the value in selling additional pieces of the Ironwood credit, for example, if what we are looking for is balance sheet growth, earnings stability, I’m kind of curious what drove you there?

Hey, Jon, I’m not sure where you’re coming up with the $2.1 million; it was $900,000 this quarter. And there was – $750,000 of that was Ironwood. I think the $2.1 million include – your probably pointer includes other income, which is a whole host of other issues and – a whole host of other things, including amendment fees…

Got it.

It includes commitment fees, and so there is a whole host of other things in that number. So syndication fees is relatively small this quarter, $900,000, $750,000 of Ironwood. The Ironwood position on our balance sheet was…

$33 million.

$33 million. And so we think, optimal provisions are somewhere between $30 million and $60 million or $30 million and $70 million, depending on kind of what we think risk-reward is. And so, the – there’s – our strategy was never, I think as we talked about, our strategy was never to have a – be in the moving business. But we are just trying to create syndication fees. Our strategy was, when a provision is higher than our ultimate risk that we want to hold, as it relates to our portfolio construction, we will have the ability to create syndication fees. And so, I hope that answers your question. The syndication is not an activity base level where we’re trying to earn those fees, it is the outcome of our ultimate risk management about our underlying hold position.

I’ll just add to that that regardless whether or not we are in an underlevered position or not. We’re not going to change our mismanagement approach and hold larger position sizes just to leg back into leverage. That from a longer-term perspective, is that how we run the portfolio from a risk management perspective.

I would argue, it’s value destructive across the cycle to take outsized positions at a tail end of a credit cycle, because you are underlevered to solve a short-term issue.

Yep. That helps immensely. Thank you. So then turning to Payless, I was just curious as to – you talked about the amendments and then over time, I think, Mike, you mentioned steady prepayment of that over time. Why – have you received those fees in cash? I’m curious as to why you would book and, Ian, perhaps if you could explain this, why you’d be booking the fee income next quarter if the loan hasn’t yet really paid off yet, unless they’ve given you some form of cash at this point? Can you just walk through why you are counting it as earned when the loan is not yet paid off?

So, the – contractually and by the order of the bankruptcy court, it is a earned fee. So it happens to be a receivable on our balance sheet. But it is contractually, on Payless, it’s a – in Q2 – receivable on our balance sheet in Q2, but it is a contractually earned fee that sometimes gets rolled up into the DIP, which it does. Sometimes it’s interest earning and sometimes it’s not interest earning. When it’s not interest earning, it goes on – it goes into our balance sheet as a receivable. When it is interest earning, it gets capitalized in the loan and in your equity and earning. But it is contractually earned and is protected under the borrowing base. So I’m not sure if I’ve answered your question, Jonathan.

So basically you are saying it’s contractual, once it’s contractual and effectively guaranteed, you book it as earned in the income statement, even though you are going to get that cash at some point in the near future?

That’s right.

Okay.

Just to be clear though, Jon, it wasn’t – the impact of that’s not in Q1.

No, Q2 – so is it – it just looking at the difference between par and fair value is at about $3.25 million. Is that going to be that kind of contractual fee? I’m just looking at the difference between the two. You wouldn’t hold a lot above par, unless you get some form of fee protection or call premium or whatever you want to call it?

I think it’s 7 points.

7 points on the $50 million par?

Yes.

Okay, congrats. Then the next question relates to Bo. Both you and Michael and Josh have generated quite a bit of excess return through your focus on ABL FILO loans, noticed you did another one this quarter with Eddie Bauer. If I understand the structure, you are effectively taking a second lien to another bank, right, and I won’t call it a second, these are all tied to assets. But you are effectively providing a plug from what a first – from what a super-senior ABL lender like a bank would do on available inventory up to 75%, then you’d perhaps offer an additional 15% between what the bank is offering and what this company actually needs. Can you walk us through the downside risk in the events that inventory prices fall? I know you choose to mark-to-market and you would likely take the accounting reports, et cetera in term of what the value of that inventory is. But how can these really go wrong, because these have actually done very, very well and I’m curious as to the downside risk to the extent there is any?

So, hey, Jonathan, I’ll open up and I’ll turn it over to Bo. First of all, I think your construct is directionally correct. Oftentimes, our FILO is also protected by an excess availability covenant. And so effectively, we are just leaning back into that excess availability covenant. As it relates, you typically don’t have in retail inventory, given the nature of retail inventory and the margin structure of retail inventory, it’s a longer, more detailed conversation over time. You don’t have that much variability as it relates to the net quarterly liquidation value at appraisal versus realized. Your risk comes into – you have – sure, we have process risk around – getting around a liquidation, getting left behind and not getting rolled up into a DIP. When you get rolled up into a DIP, the DIP creditors before a case is discharged, has to be satisfied in cash. So at the filing, everybody is making a determination that your money good and you could be satisfied by cash by the estate, which is obviously the case and that’s happened to us in – because of our underwriting and Payless happened to know us and you work hard towards and sports authority et cetera. And so your risk is that you A, have process risk and get left behind and you end up getting a security that you did not bargain for and that you didn’t bargain for when you originally did the deal, that’s one risk. The second risk is, there’s the – there isn’t – the appraisal risk is not that – on top of my list. See I think, you have to know what the – we have a database of comps on, for example, [hard goods] [ph] liquidation recovery. So we know when an appraisal is right or wrong, you – sure, we have some fraud risk, as it relates to inventory counts. We obviously go in and count inventory. This is a very human capital-intensive business, and so you have to be very diligent about managing your borrowing base. In addition to – the biggest risk is that you get back into an over-event. And the way you don’t get back into an over-event is, you have people managing a borrowing base on a daily or weekly basis. So you don’t wake up one day and get over-events, which will obviously put you out of money. I think Fitch had a pretty good story yesterday about recoveries for asset-based loans. The recoveries have historically been high, where the recoveries break down is when you are lending against cyclical assets, where – which is not retail inventory. Retail…

Oil rigs?

Oil rigs, et cetera, where the industry itself is in overcapacity and nobody – and utilization rates are low and nobody has a bid at any price for an asset that’s in overcapacity. So I don’t know, Bo, do you have anything to add there?

The only thing I would add is, our team – our ABL team collectively have 80-plus years of experience in lending to these situations and understand both the process risk and how to mitigate that and also the distribution of outcomes on the inventory and how to maintain a margin of safety. So it’s something we – our team has been doing for a long time, we feel very comfortable with those risks.

Go it. And then last question…

Jon, let me jump in a real quick. It takes a team who has – our team has 20 years of experience doing this. It takes the team, it takes – it’s very human capital-intensive. It’s not like, in our regular kind of cash flow, enterprise value, secondary source of repayment business, you might be speaking to a CFO weekly, or monthly, or quarterly and reviewing financial statements on a quarterly basis, or on a monthly basis. Here it’s hand-to-hand combat with a team dedicated that you are looking at borrowing bases on a daily basis and doing 13-week cash flows. And so, it’s just a much more human capital-intensive business with a specialized skill set.

Got it. And then as a – just a final wrap kind of two questions. One with Saba’s acquisition of Halogen Software and also noting that that also trades at a significant premium to its cost, as well as a bit above its par. Could one assume that that loan also gets prepaid this coming quarter? And then more importantly, when you think about the potential prepayments that are headed your way Payless, Qlik, say about $150 million, would it make sense that we should not see much balance sheet growth near-term, though, earnings are still going to be elevated because of the call and prepayment protection you are receiving off the loans that are prepaying? That’s all my questions.

Got it. Well, everybody in the room for a second was looking at each other, we had no idea what you are talking about. I think you’re talking about Saba.

Sorry, yes.

Okay. So, yes, Saba is in that bucket, where there is call protection. What I would say about as it relates to – we’ve seen probably in the last 30 or 45 days a pretty decent go-forward pipeline. And so, I think we feel pretty good about the stability of the balance sheet and maybe a little bit of growth even given the prepays. But I can’t imagine that in the next quarter, we will be talking about raising equity, given the amount of capacity that we have in our balance sheet. But I think we saw – there surely will continue to be some elevated prepays, including the ones you talked about, including Qlik. That being said, there is stuff that we’ve been publicly announced and like Tango, and stuff that’s not publicly announced, but deals that are publicly announced, that will continue to fund our balance sheet. One of those, for example, who knows what the FTC does on the Fed’s deal, as it relates to Walgreens and Rite Aid. But in that case, we have a very large commitment outstanding there as well. So depending on where the – where things fall, we feel pretty good about the stability of our balance sheet and leverage ratios and actually increasing it, but things move around in our business.

Go it. No problem. Thank you. Congrats on a quarter. Thank you.

Thank you. [Operator Instructions] And our next question comes from Doug Mewirther of SunTrust. Your line is now open.

Hi, good morning. I just had one question. The – what was the actual hit to revenue this quarter from the loss of interest income from Mississippi? And then how much will you get back all else equal from your now performing piece of that in the second quarter?

Sure. Ian?

Yes, sure. Doug, good morning. The actual impact to revenue line was a little less than $0.03 per share and then what that will be transformed into is, when we put it back on accrual status is a little over $0.01 a share.

Okay. That’s gross revenue that’s before any kind of allocated incentive fee….

That’s correct.

…or anything like that?

Yes, that’s just the interest income line.

Okay. All right. Thanks. That’s all my questions.

Great.

Thank you. And I’m showing no further questions at this time. I would like to turn the conference back over to Josh Easterly for any closing remarks.

Great. Well, we as always, the team here appreciates your people’s time and effort and we are working hard for our shareholders in a difficult market and hopefully the results show that. And I hope everybody has a good start to the summer and a happy Memorial Day weekend and we’ll talk, if not before but in Q2 earnings. Thanks.

Thanks, everyone.

Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.