Good morning and welcome to Sixth Street Specialty Lending Inc. Third Quarter ended September 30, 2021 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 the 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 the number of factors including those described from time to time in Sixth Street 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 closed the company issued its earnings press release for the third quarter ended September 30, 2021 and posted a presentation to the Investor Resources section of its website www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. Sixth Street 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 for the third quarter ended September 30, 2021. As reminder this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending Inc.

Thank you. Good morning, everyone and thank you for joining us. With me today is my partner and our; President, Bo Stanley; and our CFO, Ian Simmonds. For our call today, I will review this quarter's results and then pass it over to Bo to discuss this quarter's origination activities and portfolio metrics. Ian will review our quarterly financial results in more detail and I will conclude with final remarks before opening the call to Q&A. After market closed yesterday, we reported third quarter adjusted net investment income of $0.55 per share and adjusted net income of $0.80 per share. This result correspond to an annualized year-to-date return on equity on adjusted net investment income of 12.9% and in an adjusted net income of 21.5%. This quarter's robust net investment income was driven by higher fees from elevated repayment activity relative to the first half of the year. It was also supported by a robust level of interest income from the strength in the core earnings power of our portfolio. The difference between this quarter's net investment income and net income was due to the net unrealized and realized gains from portfolio company-specific events which Bo and Ian will discuss later in the call. As a result of this quarter's net gains, we continue to accrue capital gain and incentive fee expenses totaling $0.05 per share which we've excluded in presentation for this quarter's adjusted results. Again, this is because we believe the expense accrual requirement creates noise around the fundamental earnings power of our business. As the year have ended on September 30 and we were to calculate the capital gains incentive fees that are actually payable to the adviser in cash it would be -- it would be -- it would have been 0 because the games driving…

Thanks, Josh. Let me first provide our thoughts on the current direct lending environment and how our business is positioned to serve borrowers and management teams as well as our stakeholders for the period ahead. It was 10 years ago when TSLX made its first direct lending investment and the landscape of private credit has streamed dramatically since then. In the last 10 years private debt AUM has grown over threefold, in what was a relatively niche asset class has become increasingly institutionalized, attracting new managers and investors into the space. The value proposition of private credit for borrowers over this time has remained constant. Speed and certainty of execution, documentation flexibility for management teams to achieve strategic goals and the opportunity to work with value-added trusted financing partners. The pandemic-induced market volatility and growth trends in sponsor M&A have only underscored the value proposition of direct lenders. More so than ever, we're seeing an increasing number of borrowers and sponsors turn to the direct lending market for larger financings instead of the traditional syndicated markets. We believe this broadening of the opportunity set is a net positive for our sector and specifically for our business and our stakeholders, given our ability to be solutions providers at scale through co-investment with our affiliated funds. While competition for direct lenders is likely to remain strong in both the larger cap and traditional mid-market for the foreseeable future, we believe that our thematic investment approach and differentiated underwriting capabilities will allow us to expand our borrower and sponsor relationships and continue generating attractive risk-adjusted returns for our shareholders. Moving now to this quarter's origination activity. We funded five investments including upsizes to our existing portfolio of investments, totaling $105.4 million in commitments and $65.4 million in fundings. We mentioned on our last…

Thanks Bo. For Q3, we generated adjusted net investment income per share of $0.55 and adjusted net income per share of $0.80. At quarter end, total investments were $2.4 billion, down from $2.6 billion in the prior quarter as a result of net repayment activity. Total principal debt outstanding at quarter end was $1.1 billion and net assets were $1.3 billion or $17.18 per share prior to the impact of the special and supplemental dividends that were declared yesterday. Our average debt-to-equity ratio decreased slightly quarter-over-quarter from 1.07 times to 1.01 times and our debt-to-equity ratio at September 30 was 0.9 times. As Bo previewed, the net funding activity we've experienced post quarter end to-date has brought our debt-to-equity ratio back to approximately one times and we expect to finish the quarter at 1.05 times to 1.15 times leverage. Given that the size of the stock settlement on our convertible notes in Q4 will approximate our special dividend payment, there will be no material net impact from those two transactions on our financial leverage. As we head into year end, our liquidity position remains robust with over $1.3 billion of unfunded revolver capacity at quarter end against $122 million of unfunded portfolio company commitments eligible to be drawn. Note that during the quarter, we increased the size of our revolver by $25 million to $1.51 billion with the addition of a new lender. We now have 21 lenders in our credit facility. Looking across our debt maturities as Josh mentioned, we have approximately $100 million remaining principal value of 2022 convertible notes that will mature in August of next year. Similar to our approach on the early conversion on a portion of these notes this fall, we plan to settle our remaining convertible notes in either cash stock or a…

Thank you, Ian. With this being the 10-year anniversary of when we first began our investment activities, we think it's a good time to reflect on the basis of any success we've enjoyed to date. We think there are two drivers for this, with the first being our one team culture. Our cultural philosophy of collaborating across platforms to harness best ideas and best practices, allow us to continue to provide thoughtful solutions for our management teams and sponsors, will also create strong outcomes for our shareholders. Examples of this include a thematic investing in retail ABL, financing former royalty streams, upstream E&P and growth capital, which have all contributed in their own way to be also in our portfolio's performance to date. This one team culture extends to our capital base. The power to co-invest with our affiliated funds, which in Q3 surpassed $9 billion in cumulative Sixth Street direct lending investments, has allowed us to expand our investment opportunity set and our relationships with sponsors and management teams. Our ability to scale up through co-investment -- co-investing with affiliated funds continue to benefit TSLX shareholders, as it allows us to size our funds appropriately to remain nimble in any environment for supporting middle-market borrowers. The second driver of our success to date, if any, we believe is simply our focus on doing good fundamental credit work. Our emphasis on first principles thinking and using tools to manage the inherent fragility of our credit assets or in our view, the foundation of our strong track record to date. Since inception, we've experienced an annual -- experienced an average annual gross realized loss rate on assets of 7 basis points, or a net realized gain of 5 basis points. This compares to a net loss of 115 basis points across…

Certainly. First question comes from Devin Ryan with JMP Securities. Your line is open.

Good morning. This is Kevin Fultz on for Devin.

Hi, Kevin. Yes.

First question. Just looking at investment activity during the quarter, gross originations were fairly healthy at $572 million, but new investment covenants were fairly light at $105 million, which is similar to 80% of originations were sold down. Just curious given where leverage is at a level of repayments if that gross origination over was skewed by a larger deal during the quarter, or if the small share that you retained was the result of raising investments that were less suitable for that portfolio?

Yes. Great question. So that gross origination number I think is largely impacted by Biohaven which we had capped out basically at our position size -- risk position size or risk appetite for the portfolio. The other thing I would note on origination activity in this quarter there is a -- as Ian noted and Bo in their prepared comments there was a timing issue which is there's been a large net origination already in Q4 and we expect that to continue. And so, quarter was somewhat arbitrary right? In the sense that there are a moment in time they don't tell the entire story. I think this year obviously the portfolio has grown significantly year-over-year. Our expectation is it will on a calendar year basis experience net portfolio growth too. It just happens to be subsequent into Q4.

Okay. That makes sense Josh. And then just on the repayment side obviously repayment activity was elevated during the third quarter. Could you talk about how your payment activity has tracked quarter-to-date and your expectations for repayment activity through the end of the year?

Yes. So -- by the way if in just to take a step back and we wind I know is hard for people to rewind. If you talk about Q2, I think there was like very little repayment activity and people were questioning what was happening with the investment income given that there was no activity-based fees. So again, there happen to be some in Q3 which helped economics and helped earnings. I think in Q4, it feels like it's a pretty good mix which there will be most definitely repayment activity. One that's public is Motus. We're being taken out of Motus which was a long-time client of ours I think in the syndicated loan market. We also had an equity co-investment in Motus. And so I would say generally the portfolio activity it's pretty balanced and kind of looks like historical between repayment -- new activity and less repayments, but net portfolio growth. So that's how I would frame it if that's helpful?

Okay. That’s helpful and thanks for taking my question and congratulations on a strong quarter.

Thank you so much.

Our next question comes from Ryan Lynch with KBW. Your line is open.

Good morning and thanks for taking my question. First one I had was, Josh do you or Sixth Street really have any high-level views on how the inflation picture will look over the coming quarters or even coming years? And are there any actions that you guys are taking within your portfolio of companies -- existing portfolio of companies or potential new deals and how to prepare for this?

Yes. It's a great question Ryan. We most definitely have views and I would say they're informed. The reality is, is that, it's a complicated issue and I think there's divergent opinions in the firm. I'm not sure my opinion matters. But I can tell you kind of the framework, how I think about the framework. And then I could tell you about how we position the portfolio. Look so, obviously a lot of money printing. And if you talk -- if people talk about the inflation they really point to that. If you really look at -- there's still a decent amount of excess capacity, especially labor capacity in the markets. That labor capacity has been really sidelined given the stimulus that -- in the residual stimulus from COVID. And so, I think there's $13 billion to $17 billion of -- or $13 billion to $17 trillion of excess savings in the US system. You saw this with household debt coming down and credit card balances coming down and those are starting to pick up. And so at some point people are going to have to go back to work once they've burned through the stimulus and the excess savings. And I think we're getting close to an inflection point on that. I think there was a job number out today so there was a decent amount of job creation. So I think people are starting to come back to work, given that they're bringing through that stimulus. So I think that will most definitely – that's a deflationary factor. Look as people know and we participated in the portfolio construction side, we've been an early investor in software and technology. And that industry and sector is a massive exporter of deflation on a global basis. And so I…

Yes, that's a super comprehensive and very thoughtful response. I very much appreciate that. Kind of on the opposite and more just a technical question I think for Ian. Can the convertible owners, can they continue to convert early until the maturity in August 2022, or is that just like a one-time effect at that and the option to do it then and then they'll have to decide when it comes to maturity?

Hey, Ryan I just want to point out that I can answer technical questions too but I will let you – will let Ian take that.

Ryan, there’s kind of two parts to that question. One depends on whether the early conversion triggers have been met prior to six months prior to maturity. So think of it as two periods, prior to February 1 of next year, there has to be an early conversion trigger met. As of today, there's no early conversion triggers met. So as of today, there's no more early conversion. Until we get to February 1, which is six months prior to maturity and then the early conversion triggers are not applicable and holders can convert early at their option.

Yes let me color that up. So the – that's the – Ian's right on. The early conversion trigger was a broker bid parity calculation. And for some reason in a moment in time, the broker bids were less than I think 98% of parity. That doesn't seem to exist today. It sometimes happens in high paying dividend stocks. And what I would say is we take another step back is that there's two basically -- there's two kind of holders of the convertible bonds hedge holders and non-hedge holders. And the hedge holders when the bonds get deeply in the money and like really deeply in the money and the delta hedge the bonds they're basically hedging the bonds on a one-to-one basis because they're effectively just own the stock, and therefore they're short the dividend of SLX and they only have 4.5 points on the coupon and the dividend yield is much higher. And so they have a cash flow. So they really want to issue so they really want to unwind the hedge, which is why that early -- and they can unwind their hedge basically through two things. One is either selling the bonds and unwinding the hedge or -- and so the trigger exists that, which is if the bonds for some reason are trading below parity that they have a liquidity option so they can unwind the hedge. It has felt like all of the hedged buyers have exercised early conversion trigger -- I mean early conversion option. In addition to that it feels like that environment of where the bonds trade at parity no longer exist. And so I would expect that we won't see that again. That was a point in time given a little bit of a market dislocation on the price of the bonds and then the nature of the holders, and the nature of the holders are no longer hedged holders.

Okay. Yeah. That makes sense. I understood the color behind that.

Technical answer.

Well, I appreciate the time today, and nice quarter guys.

Thanks.

Thank you. Our next question comes from Melissa Wedel with JPMorgan. Your line is open.

Good morning, everyone. Thank you for taking my questions today. Most of them have actually been anticipated or already asked and answered…

Melissa, we can't hear you. Sorry you're muffled.

Sorry about that. I hope that's better.

Perfect.

Yeah, yeah.

Okay. I wanted to clarify the $100 million in activity that you mentioned so far quarter-to-date. Was that gross or net?

That was gross.

Gross? Okay. And then the $100 million to $150 million of additional that you expected that was a net number correct?

That's correct. That's a net number that's expected.

Okay. And then just to round out that mass a little bit you also continue to expect elevated prepayment activity into 4Q?

Yeah, I think what Josh said is we expect normalized repayment activity in Q4 to what we've seen at typical levels and combine that with a robust pipeline coming into Q4, we expect those net funding is between $150 million and $250 million.

Yeah. Look I think the math historically and somebody can correct me if I'm wrong typical average repayments tend to be $200 million, $175 million to $250 million and then gross originations seem to be somewhere between $200 million and $275 million. And I would expect that we're $150 million -- $100 million to $150 million net on the quarter up. Is that helpful? We may have lost her.

We lost her. If you can requeue. Shall we continue with the next question sir?

Sure, sure.

From Finian O'Shea with Wells Fargo. Your line is open.

Hi, everyone. Good morning. I guess, first question for Josh or Bo on the ABL opportunity set high level. We haven't seen a new portfolio company too recently. Is this part of the private credit arena as Bo described where there's a lot of new entrants in terms of coming too much, or are you just not seeing your style of opportunity -- preferred opportunity there?

Yes, good morning. So, thanks for your question. Good question. So, the good news is not to go there is one -- we actually have one that we've committed to that we've been actually earning a little bit of commitment fees along the way over last quarter and this quarter that's taken some time to get regulatory approval, but that should close early next week consistent with what you've seen in the past. I would say it's not really a private credit competition issue, it's really a broader issue which is when you look at pre-pandemic what retail look liked was that you had foot traffic declining and store-based retailers. You had -- it's a low barrier industry, so you got a lot of competition. You had share being taken from being taken away from physical stores from omnichannel providers and from Amazon. And so you saw a lot of pressure on those business models including on a gross margin basis and a discounting basis. And then the consumer was kind of stable or down. And then when the pandemic hit what you had was you had basically a culling of the herd. Retailers only the strong survive and got to reduce our footprint and rebase. So, they were themselves better positioned. There was less competition. Foot traffic has remained stable or slightly declining. Consumers are in much better shape given excess savings and so you've had no discounting, you've had margin expansion and retailers are generally those who survived are living in a slightly better environment with a better consumer. My guess is the big secular will continue to play out. But in this moment in time, retail is relatively healthy.

Yes. No, makes sense. Just a follow-up. We can call it technical or high level but either way it goes to Ian. Is there a change in the supplemental dividend policy? I think you used to pay out about half of the NOI spillover. I know there's a few wrinkles going on this quarter with the big special on the preferred and everything. But are we seeing any change to what you pay out for the quarter supplemental?

No, Finian, it's the same formula. I think maybe what we didn't do as good a job of articulating. We're using the adjusted NII figure to calculate that. So, it's the $0.55 less the base dividend of $0.41 and then 50% of that, so that's how we got to the 7.

Because the part two in capital gains incentive fees are not paid in cash and are not expected to be paid in cash any time soon that you have to make an adjustment to the adjusted net investment income number to get to the power and the cash earnings part of the business.

Awesome. Thank you so much.

Thank you.

Our next question is from Robert Dodd with Raymond James.

Hi everyone. Congratulations on the quarter for what it's worth. My questions are -- anybody can answer them. So, on the -- I suspect I know who's going to answer this. On the kind of portfolio mix going forward I mean and I don't mean first lien second lien, I mean more by verticals. I mean you addressed ABL, but you've got pharma royalty expertise. You've got a whole bunch of other expertise beyond just regular way LBO sponsor finance. Do you expect to shift the mix at all? I mean as you pointed out right? The regular way business seems to be getting more competitive, big managers coming in large pools of capital. You've always run higher -- typically higher IRRs, MOIs, whichever metric you want to look at. Because of those more niche verticals where a lot of big players don't participating in, so should we expect the kind of -- the number of verticals you're willing or want to operate in to increase or expand as a piece of the mix, as the more vanilla ends of the market get increasingly competitive?

Yes. So, it's a great question. And I'll let Fishy answer it. No, I'm just joking. But Fishy is here, he can hop in. And I like your approach to who you direct the question at, but I'll take a shot, then Bo and everybody else. First of all, look, I think you're right. We try to be very thoughtful in the sectors and lanes that we've operated in. And quite frankly, there is inefficiencies where we operate. What you find over now in the 10-year anniversary of the business, you found us having higher IRRs or higher ROAs or higher spreads and less defaults, significantly less defaults, like actual net gains versus losses. And so, we've found lanes that offer higher risk-adjusted returns. That's the power of the Sixth Street platform. The power of the Sixth Street platform, as we have 400 people now and we have a whole bunch of people in sectors and hunting and thinking about what's happening in those individual ecosystems and where we can have direct dialogue with companies and picker lanes and pick them in a thoughtful way, where we can find the balance of providing a tremendous amount of value to our issuers, but also value to our shareholders. I think you will see us continue to evolve -- this year retail was down. My expectation is, retail will come back when that industry is less healthy in the secular overrides the cyclical, vis-a-vis the consumer. I think you'll see us do some energy stuff in the coming moment, given the pullback of capital in that space. I think you'll continue to see us still attack software as we have and we have a little bit of an incumbency benefit there. And so I just think that there is -- on the pharma side, we'll continue to be a thoughtful investor there as well. So I just think that there were -- given that Sixth Street Specialty line is, we really focus on the middle market and focus on specialty verticals, I think you'll continue us to do -- see us do our thing and across sectors when we find good relative value and good risk-adjusted returns and where we can provide value to our issuers. Fishy, do you have anything to add. Fishy just as a background always judging, but he’s here as well.

I think the only thing I would add is, we say software, right? It's such a broad category and encompasses so much. I think one of the things we've done is, kind of, dig deeper. And there's a lot of sub verticals, whether it's health care, IT or education, or EdTech or payments. I mean there's such a -- we're developing, I guess, expertise, I would call it, in subverticals of something that's very, very broad. So we're constantly looking for, I would say, a differentiated view in different areas. And just -- I know, we just throw around software. So that's the only thing we've talked about.

Bo, anything to add?

No. I mean, I guess, what I would add is, when I look forward at the Q4 pipeline, it's across a number of themes and a good mix of both sponsor and nonsponsor deals. I think that has been the power of the platform that's constantly rotating thematic approach, where we have hundreds of investment professionals speaking directly to management teams, sponsors, intermediaries to find the best risk-adjusted return. So that's -- and I think that's going to be represented in our Q4 results.

Yes. Hey. And then -- Bo I know you didn't ask this question, but I think it's worth saying. Look, we didn't get the spillover question and I want to talk quickly about the spillover, look, spillover given the unrealized gains in the portfolio, spillover is going to quickly increase again. That being said, I am not sure the value of keeping always a spillover income in the system. Ultimately, what matters is the forward earnings power of the business and protecting the dividend vis-à-vis the forward earnings power of the business. And so we've tried to do a decent job of being thoughtful and appropriately choosing our capital structure and eliminating the excise tax, although that excess tax will probably build again, given as we convert the unrealized book to realize will create more spillover income. That being said, I think our philosophy is a little bit shifting. And we're using that as a lever to optimize our capital structure at any given time to create the right balance to generate forward earnings in the power and earnings of the business and making sure that we keep ROEs in an acceptable level. So I wanted to hit that. The other thing I wanted to hit I think Ian's earnings estimate, which was in excess of $2 per share I would probably slightly reframe that. It's probably going to be well in excess of $2 per share – for Q4 my guess. And so I won't define well in excess but it's going to be...

That was going to be next question.

Yes. People should model $2 a share for the year that would be wrong. So – or I think would be wrong. But – and then Robert, offline we could debate the spillover income piece because I think the sole over income concept was this idea of providing protection to the dividend. Ultimately, if you're paying the dividend through spillover income you're reducing net asset value per share from that moment forward. So we're trying to really find that balance of kind of letting go over income increase, which it will and then using it as a kind of letting their out of balloon to make sure we keep the optimal financial leverage and make sure that we don't have a drag on our use of the excise tax.

I appreciate that and you're not the only one whose view on spillover maybe philosophically evolving as well. So I look forward to that topic later. I appreciate those – that follow-up from everybody. Thank you.

Okay. Great.

Thank you so much.

Thank you. And this concludes our Q&A. I would like to turn the call back to Joshua Easterly for his final remarks.

So thank you. Thanks for the time and attention and participation from everybody. What I would say is, this year – this time of the year always makes you a little bit sad because it's not going to be for – it's going to be a longer period before we connect next. I think in February, sometime, given the Q4 additional timing to facilitate the year-end audit. So first, I want to wish people a happy Thanksgiving, a lot to be thankful for this year and a lot to reflect on. It's obviously been a difficult two years for people and given the pandemic and the uncertainty in the world and a lot of other issues of the diverse equity issues that are real and affecting parts of our communities. So – and we obviously have to deal with them as a society deal with the reckoning of some of our history. And so – but a lot to be thankful for. So thank you for your time and efforts. And I deep believe from our team, I hope people have a healthy holiday season and can take some time to sit with their family, given the last two years.

Thanks, everybody.

Thank you, ladies and gentlemen for participating in today's conference and you may now disconnect. Good day.