Good morning, and welcome to TPG Specialty Lending, Inc.'s June 30, 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 such forward-looking statements. Yesterday, after the market close, the company issued its earnings press release for the second quarter ended June 30, 2017 and posted a presentation to the Investor Resources section of its website, www.tpgspecialtylending.com. The 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 second quarter ended June 30, 2017. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to 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 before turning the call over to our President, Bo Stanley to discuss our origination and portfolio metrics for the second quarter of 2017. Our CFO, Ian Simmonds, will review our quarterly financial results in more detail. And my partner, Josh Easterly, will conclude with final remarks before opening the call to Q&A. I am pleased to report that Q2 was a very productive quarter. Net investment income per share was $0.57 which exceeded our base dividend of $0.39 per share. Net asset value per share, unadjusted for the impact of the variable supplemental dividend, reached an all-time high of $16.15. Net asset value movement during Q2 was primarily driven by the over-earning of our base quarterly dividend. Yesterday, our board announced a third quarter base dividend of $0.39 per share to shareholders of record as of September 15, payable on October 13. In addition, consistent with the formulaic approach introduced last quarter, our board declared a Q2 variable supplemental dividend of $0.09 per share to shareholders of record as of August 31, payable on September 29. Moving on to portfolio highlights. We had no investments on nonaccrual status at quarter end. As mentioned on the last call, our first-lien investment in Mississippi Resources, an upstream E&P company which was on nonaccrual status at the end of Q1 was restructured during the quarter into a performing first-lien loan and equity investment with a combined fair value approximating that of our loan at March 31. At June 30, the combined fair value of our new securities slightly increased, as intra-quarter CapEx resulted in an improved outlook on production volumes, which more than offset the negative impact of the quarter-over-quarter decline…

Thanks, Mike. Q2 was an activity filled quarter, as an issuer friendly loan market drove an acceleration of repayments in our portfolio and a healthy M&A environment supported our efforts on the originations front. Various factors, including increased confidence in the overall economy, expectations for deregulation and tax reform and robust levels of private equity dry powder, drove the highest level of first half middle market M&A deals completed in the last 10 years. The deal environment for direct capital providers like ourselves remain highly competitive due to continued capital formation in the middle market credit space, which has increased the financing alternatives available to borrowers. During the quarter, we generated gross originations of $398 million, well above our prior 12 month quarterly average of $221 million, leading to fundings of $246 million distributed across five new portfolio companies and upsizes to five existing portfolio companies. Of the $398 million of gross originations, $130 million was syndicated or allocated to affiliated funds, and $21 million consisted of commitments we funded post quarter end or expect to fund. We attributed the robustness of our originations activity this quarter to the strength and diversity of our relationships, as well as our collective experience of investing in challenging markets. Out of the five new investments this quarter, four of them were related to sponsor acquisitions, where our ability to provide timely and sizable commitments, along with certainty of execution, presented a strong value proposition. As credit risk premiums continue to tighten in Q2, we experienced a record level of repayments at $271 million aggregate principal amount from 7 full realizations and 1 partial sell-down. In many of these instances, such as Qlik and Idera, we are able to generate sizable economics from prepayment fees and/or the acceleration of OID. Aided by a strong…

Thank you, Bo. We ended the quarter with total investments of $1.55 billion, down from $1.58 billion in the prior quarter as portfolio repayments marginally outpaced fundings. Total debt at quarter end was $585 million and net assets were $968 million. Average debt-to-equity in Q2 was 0.62 times slightly below our target leverage range of 0.75 times to 0.85 times and our leverage at quarter end was 0.6 times. As Mike mentioned, our net investment income per share for the quarter was $0.57 against the base dividend per share of $0.39. For the variable supplemental dividend, 50% of this quarter's over-earn, rounded to the nearest cent, amounts to $0.09 per share, with no impact to this amount from the NAV movement constraint element of the formula. The supplemental dividend will be paid in September. Moving to our presentation materials. Slide eight contains an NAV bridge for the quarter. After giving effect to the Q1 supplemental dividend that was paid during Q2, we added $0.57 per share from net investment income against the base dividend of $0.39 per share and we had a $0.27 per share reduction in NAV from the reversal of net unrealized gains from investment realizations during the quarter. Let me take a moment to provide an example of the impact of a reversal. And for this purpose, I'll use our investment in Idera. In Q4 2015, we purchased $62.5 million par value of Idera's first-lien loan at $0.90 on the dollar in a hung syndication. This purchase discount was booked as OID to be amortized over the contractual life of the loan. Idera's first-lien loan was a level two security, with an observable market price and therefore, as its trading price recovered to par, the fair value of our loan outpaced its amortized cost on our balance…

Thank you, Ian. We're pleased that our strong Q2 results have directly translated into incremental distributions for our shareholders. While none of us could have foreseen the muted risk environment that has persisted post election, we started laying the groundwork for value creation during late 2015 and the first half of 2016, when there were periods of high market volatility driven by decline in oil prices and concerns about global growth. Consistent our investment philosophy of restraining growth in a risk-on environment and capitalizing on high ROE opportunities in moments of market volatility, we grew our portfolio by 15% on a fair value basis during Q4 2015 through Q2 2016. And as of June 30, we have realized an average gross unlevered IRR weighted by capital investment of 29% on fully realized investments made during that period. With respect to the secondary markets, you may recall that we had opportunistically purchased certain names in late 2015 and early 2016, as we identified what we believe to be outsized risk return opportunities in sectors and companies in which we had a differentiated perspective. As secondary market prices have recovered, we've significantly reduced our liquid holdings from $273 million par value in Q1 2016 to $62 million at the end of this quarter. Across our portfolio, since inception through June 30, we have generated an average gross unlevered IRR weighted by capital invested, of approximately 20% on fully realized investments, totaling over $2.1 billion of cash invested. As for our view on the macro landscape, over the short term, we remain constructive on the health of the U.S. economy given continued job and wage growth, strong household net worth and corporate earnings that continue to outperform market expectations. We believe all these factors should support consumer and corporate spending, driving U.S. GDP…

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

Good morning and thank you for taking my question. I had a quick question on the Payless refi. So it got repaid and now you have the DIP due in November. Do you expect that to go all the way to November? I know you said second half of the year, but are you thinking more third quarter or fourth quarter for that?

So Payless, I think the case will be resolved in the next month. So I think the -- August 10th is -- so even shorter than that, August 10th is the confirmation of the case, so I would expect that we get paid out significantly before November.

Okay, all right. And then on My Alarm, I know you guys have the first lien in it and it's marked above cost a little bit this quarter. Other BDCs that are in the second lien that have already reported had it marked down to 25% and it's on nonaccrual. Can you give me an update on that and why the first lien is doing better?

So My Alarm actually got paid out. I think it was announced on July 19. So, we’ve been paid in full of our $63.8 million par investment in My Alarm, and you should see a little bit of OID due to call protection that was put into OID in Q3. I think there’s a lot of lessons learned for My Alarm. One is being in a deal where you have a large voice can help optimize a workout. And the second is, obviously, we have a tendency to invest on top of the capital structure. And by our calculation, my guess is depending on how you value the junior equity and take back paper, the recovery is going to be somewhere between $0.25 and $0.32 for the second lien. But we’ve been paid in full, including call protection.

Okay. And then on, thank you for that color on that. And on just a modelling question, Spillover income as of the end of the quarter?

Spillover?

Hi. Leslie, actual spillover income is $1.10 per share. But I did want to point out, there are some nuances to that, because this past quarter, we realized a loss on one of our investments. And so for your purposes, to think about the right number, it’s closer to $1.24 per share. The nuances I’m referring to are there are different distribution requirements of tax relating to ordinary income and capital income -- or income of a capital nature.

Okay. All right. Thank you. Appreciate it.

Thanks Leslie.

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

Good morning. And thank you for taking my questions. So, Bo and Mike, a question for you on a new origination that seemingly has an outsized yield and was effectively part of yourself and kind of a very exclusive club, of financing Tangoe. And I believe it was Marlin Equity, kind of take private plus a merger with one of their portfolio companies. Only because today’s environment seems to favor folks with a focus on software larger loans. It seems like the syndicate option here might have worked, and then perhaps the spread could have, in fact, have been lower. And can you walk us through why this loan, particularly with the bank involved, PNC, why this loan has such a high yield when a majority of other folks are putting assets on the balance sheet at much tighter spreads?

Thanks, Jonathan. Yeah, I mean, we look at each individual opportunity as far as the total facility and the structure, the syndication structure, whether banks make sense or don’t make sense. We thought that in this security and opportunity, it did make sense. So as you pointed out, we did structure what we think is a very good risk return for us. And in addition, not to get too detailed on the credit, we feel that this credit is similar and consistent with many of the credits we do with strong downside protection on the recurring revenues of this business. So, I don’t know if...

Hey, Jonathan, this is Josh. I think your question was larger credit software, why didn’t it go the syndicate route?

I think that was your question. And so, look, I think the answer is it was a merger of 2 companies that needed certainty and I was provided the opportunity. And it was a take-private, which also requires certainty. So -- and the complexity related to the merger and the take-private has allowed us to provide value. It's not a traditional software company, just to be clear, in the sense that it is a BPO business services that manages telecom spend for corporates. So hopefully, that answers your question. But typically, it's complexity and certainty needed that allows us to drive returns for our investors.

And I'll add one more thing, Jonathan. It's also size. There is a size level under which going the syndicated loan route isn't feasible. So the club market for the size of this credit -- the combination of the size of the credit, the club market, the speed to deliver a close here, made much more sense to club up this opportunity.

Got it, got it. And then just a question, because Bo -- and I know you're looking at everything, would you say that there are similar idiosyncratic-type transactions that are still kind of bubbling up in the pipeline today? Or are you finding that just competitiveness, writ large, is kind of limiting those types of opportunities as spreads grow tighter and it just becomes more and more difficult?

Yes, as we've said in the past, originations quarter-to-quarter can be idiosyncratic. But because we stay in our lanes and in our themes, we tend to come across opportunities that have complexity and the need for platform scale, where we can find outsized returns in this market. So we continue to see those opportunities from time to time.

Okay, okay. Then just a small question in terms of writeups. I noticed that Helix actually received a nice writeup. I believe this is a foreign currency-denominated investment, and so sometimes those fluctuations can affect fair value. Ian, one, am I correct in understanding that that's what was responsible for the $3 million writeup? And/or how would you characterize the operating performance of that business?

So let me -- the answer, Jonathan, is yes. But you would have seen a corresponding -- it would have been NAV-neutral because you would have seen a corresponding unrealized loss on our borrowings on our revolver.

Okay, okay, okay. So it's all hedged out, okay. So then the other question and Josh, for you. You had mentioned talking about equity issuance as the means to -- particularly, the confidence that shareholders are putting in you, Mike and Bo, on being able to issue below book value. Clearly, that's not an issue now. But if we look at the ability to issue equity relative to what you're putting on the balance sheet, you could, in fact, have an accretive offering, both to NAV and to NOI or core, or true earnings in EPS, based on your track record of gains. Can you talk about, not that you just can means you should, but how you and the team are looking at your capital base relative to the opportunity set today and whether or not it would make sense to consider hitting the market and raising a little bit of additional equity capital, if you've got place -- if you and Bo and others have a place to put it?

Yes, so appreciate that comment. I think you, you're exactly right which is on a book value basis accretive. On a NOI basis, it is accretive. If you look -- if you think of our dividend yield as a proxy for our cost of equity, I would argue that since we grow NAV, that our dividend yield is not the sole -- sole cost of our equity. That all being said, is that raising equity capital and the -- and how accretive those returns don't compare to how accretive it would be not to raise equity capital and borrow at LIBOR 200 which is actually a little bit less on a revolver when you think about rebating the unused line fee. Our marginal cost of capital -- our cheapest marginal cost of capital is like LIBOR 165 on our revolver. And given that we have a ton of capacity on our revolver that is the most accretive to our ROEs.

Got it. All right. Correct answer and one that I appreciate. And then lastly, if we...

I appreciate the test. I'm glad we passed.

Yes, you did. That one is important to a lot of folks, just because folks have abused the privilege of a high price to NAV and clearly, that's not the case here. And then the last item is if we look at the loans that are marked above par, it's always a good indication of either an embedded prepayment fee or something that good things can eventually happen. What we're noticing is there's a couple loans for example, Quantros or Frontline Tech or a few others that had been originated in that 2016 time frame, early, when spreads were wide, folks were nervous. I believe you made the Idera investment at that time, Qlik as well. Could we expect to see those potentially prepay near term, likely due to the fact that spreads are tighter than when those were invested and the fact that they're trading at above -- well above par?

Yes, look, the valuations of above par reflect a combination of what the embedded call price is and our expectation on duration. So if we -- if there is a transaction a -- and where we own a spread that is significantly over-market, the limitation of the valuation is based that the duration will be very short because an issuer has that call option and they'll refinance us. So you're right and I will expect continued -- there will be some continual portfolio churn which is, as you've seen in this quarter which is good for forward economics of the business. But I'm not going to comment on any specific name.

Fair enough. Guys, thank you so much for taking my questions.

And our next question comes from Mickey Schleien of Ladenburg. Your line is now open.

Good morning, everyone. I understand that TSLX is not immune from the trends we're seeing in the more liquid leverage -- more liquid end of the leveraged loan markets, but you're clearly benefiting from being able to originate deals for somewhat smaller companies. I think it would be useful if you could remind me what the structure is of your deal origination team and what are the principal deal-sourcing channels that they use?

Sure. I'll let Mike and Bo take that. Just an overview, I think we also benefit, Mickey that we are -- we have a lot of human capital in our -- human capital resources in our business and we don’t as it relates to the relative size of our balance sheet. And so, we get to see a lot of opportunities and are very selective in what we do. And so it’s not only the size of our origination team and the size of the people -- and the dedicated people, and Mike and Bo will talk about that. But, what really matters is the size relative to the capital that you have and the capital you’re trying to deploy or have to deploy. And so the nice thing about our business is that we have a lot of human capital. We have a relatively small balance sheet as it relates to the publicly traded BDC. And then in times when credit spreads widen, we’re able to flex up and use exemptive relief and the affiliated balance sheets that provide certainty in size and scale to our clients. And quite frankly, that scale is important, but that scale doesn’t burden our public shareholders. So Bo, do you want to -- or Mike?

Josh, to follow up on what you just said. I understand, and I had looked at the ratio of investment professionals to deals and it is good. But I also noticed that your OpEx ratio is not out of line for an externally managed BDC. So does that imply that it’s being subsidized by other parts of the organization? Or how do I reconcile that?

I think the OpEx line – you’re just pulling remember, the OpEx line is effectively just external professional fees plus CFO, IR, et cetera. So, I and -- so that does not include, obviously, the core investing team is burdened by those expenses are burdened by the external manager, just to put a -- so the OpEx line, I think, is different than the investment team. But, I think if you look at the investment team, just to take a step back, the BDC shareholders do get the benefit of the broader -- the investment team. So, TSSP, which is a credit and special sits platform, has about 110, 115 investment professionals. And so, there are some investment professionals that, for example that are in sectors such as healthcare, that do a lot of stuff in our special sits funds that on occasion, will originate loans that we don’t consider in the BDC kind of headcount. And so for example, Nektar and Ironwood, two of our specialty pharma deals, effectively, we get the benefit of the broader platform. And then as you build down, we have about 30 professionals in the dedicated week spending 100% of their time on the BDC and about six or seven origination people spending 100% of their time on the BDC, but then they’re actually augmented by our healthcare guy in our special sits platform, our European guy, our European direct lending team, who, on occasion for example, Sovos is a European sponsor or a U.S. asset that is in our portfolio. And so there is, 30 dedicated professionals -- and I’m stealing Mike and Bo's thunder, 30 dedicated professionals, six or seven originators, but that doesn’t count the origination efforts of other parts of the credit platform, which have about 110 investment professionals.

And I'll add to that. Even within the BDC, although there are not a significant number of originators, they are -- you could see the way our portfolio is constructed. They're sector-focused. We have people that are focused on ABL retail, people that are focused on business services and software and payments. So those people are generating opportunities in those sectors, and health care IT also. And beyond that, as Josh mentioned, we have other sector teams that also augment that originations effort.

That's very helpful. And can you remind me, is TSLX still benefiting from a first look on all the TPG middle market deals? Or is that -- has that gone away now that the BDC has sort of matured?

No, no. So any U.S. middle market origination opportunities that come through the broader credit platform, or broader TPG as an organization, TPG -- TSLX shareholders get the first look on that.

Okay, and one last question. I think you said in the prepared remarks that 96% of the portfolio is from non-intermediated channels. Can I interpret that as meaning that only 4% of the portfolio has a private equity sponsor? Or is there semantics involved that I'm not...?

Yes, no, the non-intermediated means so we didn't buy off a desk of a broker-dealer. So like -- non-intermediated is sponsor, direct to company, small broker-dealer. But it's not like we're buying -- it's not a deal that's either been on a secondary basis or on a primary basis that was originated off of a broker-dealer's desk, such as Goldman Sachs, Credit Suisse, et cetera.

Okay, that makes sense. So what percentage of the portfolio does have a private equity sponsor?

It's been -- it's probably higher right now, it's about 62% now, and it fluctuates between 60% and 50-50.

Okay that’s great, I appreciate your time this morning. Thanks a lot.

And our next question comes from Rick Shane of JP Morgan. Your line is now open.

And really sort of following up on the last perspective. One of the things that we're seeing in the sponsor business is that it is becoming more and more concentrated among the large sponsors. And the good news for you guys is that you have the balance sheet to be able to do larger transactions. But the trade-off there is potential spread compression. Just wondering how you guys are thinking about that outlook and if that's something we should be considering, larger, more concentrated, but lower-yielding deals?

Yes, I mean -- it's a good question, Rick. I think from our perspective, you've actually saw a little uplift in yield and amortized cost this period. New investments, 4 out of the 5 deals that were -- this quarter were sponsor-based. New investments had yield amortized cost of, I think it was 12.4% on new investments -- 12.5% on new investments. So there is most definitely a theme of spread compression. We're trying to pick our spots where we like the risk return, we're able to do a private equity-style due diligence, we're able to have a differentiated view, and that we're -- there is complexity or certainty needed that provides us -- provides a need for our capital. Every quarter is kind of idiosyncratic. But there is surely a headwind as it relates to spreads in the business. I think the one watch-out and if you look at the industry data which we probably have been able to avoid a little bit and that's because I think, again, the amount of human capital we have compared to our size of our balance sheet, the one watch-out is that I think we all like to walk around and say we have an asset-sensitive portfolio. But as LIBOR has increased, the benefit of the asset sensitivity has been muted by spread compression.

[Operator Instructions] And our next question comes from Chris York of JMP Securities. Your line is now open.

Just one question this morning, because I bounce between three calls. So you maintained your guidance for '17 despite the strong quarter here in net investment income per share. So I calculate that your high end of guidance of $1.83 implies $0.39 or about $0.39 per share in each 3Q and Q4, which would be low for your results relative to historical periods and then maybe expectations for OID and prepayment fees. So maybe Ian or Josh, is it reasonable to conclude your maintenance of your guidance includes some conservatism?

Yes, I'll take a first shot at this, Chris. I think the math you did is spot on. We've been historically very strong in saying that we will cover our -- we will look to cover our dividend with a high degree of certainty. So the guidance really reflects that, given that the remainder two quarters of $0.39 will get you to the top end of that guidance. I think it's probably a little too early to talk about expectations of repayments in the remainder of the year which would actually potentially lead to some increased activity-based income. But essentially, you're probably correct in your assumption about the conservatism. But we're reluctant at this stage to be any more aggressive.

Yes, look, what I will say, Chris, is I think Ian is dead-on. What I will say is if you use fiscal year 2016 as a proxy, I think our guidance was $1.59 to $1.74 and fiscal year was $1.83. We're generally people who like to under-promise and over-deliver, so I think there is surely conservative built in there. But in an environment where you have some headwinds as it relates to keeping financial leverage and some headwinds as it relates to spread, most definitely, in our business model, offset by activity base, we -- I think that was a methodology built in with a little bit of -- or a lot of us being conservative and liking to not disappoint and over-deliver.

Great, makes sense. Just want to see if I was wrong on the other side of that interpretation for the numbers. And then I just wanted to conclude, Mike. I wanted to extend my congratulations on the new opportunity at TSSP, and then best of luck with the growth overseas.

Well, thank you very much. I really appreciate it.

And just to be clear, there are no health issues, although Mike is getting up there in age. Just joking. Everybody is in excellent health, or at least good health. With two young kids at home, it’s hard to be in excellent health. But, we really appreciate everybody’s time today and hope everybody has a -- oh, I think, Jonathan, are you back on?

We do have a follow-up from the line of Jonathan Bock. Your line is now open.

And now Jonathan is gone. So -- and we hope people have a great end of the summer and a great Labor Day and get to enjoy their time with their friends and family. So, we appreciate it.