Good morning and welcome to Sixth Street Specialty Lending Inc.'s Third Quarter ended September 30, 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Friday November 3, 2023. I will now turn the call over to Ms. Cami VanHorn, Head of Investor Relations.

Thank you. 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 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 we issued our earnings press release for the third quarter ended September 30, 2023 and posted a presentation to the Investor Resources section of our website www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending Inc.'s earnings release is also available on our website under the Investor Resources section. Unless noted otherwise all performance figures mentioned in today's prepared remarks are as of and for the third quarter ended September 30, 2023. As a 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, Cami. Good morning, everyone, and thank you for joining us. With us today is my partner and our President, Bo Stanley; and our CFO Ian Simmonds. For our call today, I will provide highlights of this quarter's results and then pass it over to Bo to discuss activity levels in the portfolio. Ian will review our quarterly financial results in detail and I will conclude with final remarks before opening the call to Q&A. After market closed yesterday, we reported strong third quarter financial results with adjusted net investment income per share of $0.60. Corresponding to an annualized return on equity of 14.4% and adjusted net income per share of $0.77, corresponding to an annualized return on equity of 18.5%. From a reporting perspective, our Q3 net investment income and net income per share inclusive of accrued capital gains incentive fee expenses were 57 and 74 respectively. The $0.03 per share difference between the adjusted and reported metrics is a noncash expense related to accrued fees on unrealized gains from the valuation of our investments. As a reminder, we exclude the $0.03 per share in the presentation of our adjusted results. If this year were to have ended on September 30, and we were to calculate the capital gains incentive fee as payable to the adviser and cash it would have been zero given the gains driving, the fee accrual or unrealized. Our net investment income this quarter continued to be a function of robust net interest margin attributable to the asset sensitivity of our floating rate portfolio in this higher rate environment. The difference between this quarter's net investment income and net income of $0.17 per share was driven by $0.11 per share from unrealized gains largely from the impact of credit spread tightening on the values…

Thanks Josh. I'd like to start by sharing some thoughts on activity levels in the public and private markets followed by observations on the competitive environment. Activity levels have picked up in the back half of 2023 as we continue to see a steady trend of private credit taking share from the broadly syndicated loan market. The total amount of outstanding in the leveraged loan index is declined by $23 billion or 1.6% over the last 12 months and 2023 is on track to be the first year to show year-over-year decline since the global financial crisis. This shift has brought increased deal flow to the direct lending market, which we expect to continue as a broader reopening of the BSL market is largely dependent upon CLO creation, which remains challenged. Until the CLO machine resumes, which represents the largest buyer base of leveraged loan markets at roughly 65%, private credit is expected to continue to dominate as a leading credit provider to fund M&A transactions. Notably approximately one-third of CLOs are now out of their investment period with that the total increasing to approximately 40% by year-end. Without substantial and unexpected new CLO volume this amount of the vehicles and harvest would imply a potential decline in the participation for longer maturity credit financings. That being said, the return of the BSL market in the future is inevitable, but we do believe there's been a more permanent structural shift to direct lending that will persist. Under this lens, we expect to see a portion of the $130 billion of leverage loans maturing by the end of 2025 to come to a private credit creating opportunities to put capital to work when interesting opportunities arise. While activity levels have picked up in the pipeline building, we are in a much…

Thank you, Bo. For Q3, we generated adjusted net investment income per share of $0.60 and adjusted net income per share of $0.77. Total investments were $3.1 billion, up slightly from prior quarter. Total principal debt outstanding at quarter end was $1.7 billion, and net assets were $1.5 billion, or $16.97 per share prior to the impact of the supplemental dividend that was declared yesterday. Our debt-to-equity ratio decreased slightly from 1.16 times as of June 30 to 1.15 times as of September 30, and our weighted average debt-to-equity ratio for Q3 was 1.18 times. We continue to have significant liquidity for the size of our balance sheet with $952 million of unfunded revolver capacity at quarter end against $197 million of unfunded portfolio company commitments eligible to be drawn. At quarter end, our balance sheet and funding profile were in excellent shape. Shortly after our Q2 earnings call in August, we capitalized on what proved to be a small execution window and raised unsecured debt in the investment-grade capital markets. We priced a $300 million, five-year bond offering at treasuries plus 295 basis points consistent with our overall risk management framework to have floating rate assets and liabilities we used interest rate swaps matching the principal amount and maturity of the bonds and converted the effective cost of these new notes to SOFR plus 299 basis points. We were very pleased with the strong reception we received from investors for our offering. We continue to view the unsecured market as an important component of our debt capital stack, irrespective of underlying base rates. The issuance also rebalanced our funding mix to 56% unsecured debt. In terms of our debt maturity profile, the issuance of the 2028 notes essentially pre-funded our nearest maturity, which does not occur until November of…

Thank you, Ian. In closing, I'd like to take a minute to discuss how we're thinking about the future of private credit. It sounds like a big topic. As Bo mentioned earlier, the massive shift towards private credit has significantly increased the dry powder and a number of players in the space. While there are more firms in today's market, we continue to be one of the few who can drive structure and terms given our ability to write sizable checks with speed and certainty of execution. In addition to the significant capital base across the Sixth Street platform that provides attractive investment opportunities for SOX, we believe that our long-term success in today's growing market will be a productive two key differentiators. First, SOX benefits greatly from the shared resources of the Sixth Street platform. We just returned from our Annual General Meeting of Momenta Partners in San Francisco last week. We're leaders in each of our business units across the franchise came together to provide insights and updates on different segments of the market. The broad range of sector expertise and cross -- combined with cross-platform collaboration, enhances the deployment opportunities available to SOX as evidenced by higher all-in returns net of losses relative to the sector. And second is our continued focus on the shareholder experience. Since our first investment in 2011, we have worked to uphold a distinguished return profile for investors by working to avoid credit losses and being disciplined allocators of our shareholders' capital. This has been our commitment to shareholders since inception. As a final note, and probably to end on a somewhat somber topic in our prepared remarks, the world fills very much in a dark place right now. There's a lot of pain and suffering. Risks and instability are elevated both economically and from a geopolitical standpoint. With this in mind, what we can do is focus on aspects that are within our control, including active portfolio management and optimal capital allocation. With that, thank you for your time today. Operator, please open up the line for questions.

[Operator Instructions] Our first question comes from Finian O'Shea with Wells Fargo Securities. Your line is open.

Hi everyone, good morning. Josh, first question on the direct lending platform. It looks like you're head count jumped up a bit this quarter. So seeing if you could double-click on that, particularly if it relates to adding a new strategy or if this is part of your build-out to larger market origination.

Thanks. Good morning. First of all, thanks for the question. Look, we always continue to add resources across the platform. Some of that's been in general sponsor coverage given the opportunity in the direct lending market given the challenges in the broadly syndicated loan market. In addition to that we've added other expertise for example in the health care side with the senior hire that used to work with us at Goldman, so we continue to add resources for stakeholders and shareholders.

Great. And just another higher-level question. You mentioned that you expect the lag impact of rates to place through that sounded like it related more to the economy, but obviously direct lending borrowers have already been feeling this sort of on the front line of experiencing the higher base rates. And as we know most have sort of treaded water so far at very low interest coverage. So can you talk about the sort of state of the union on the sponsor side dealing with this? Is there maybe fatigue setting in? Or is there dry powder running off or anything that would say finally catalyze a wave of keys being handed over? Or is there still a lot of runway in your view? Thanks.

Yeah. Great. Thanks. Look, I think what's been a little shocking to us and quite frankly why we're in this higher for longer moment is that the economy has been relatively robust. So if you look at the portfolio quarter-over-quarter growth, I think it's been about 6% in our portfolio. Earnings have been kind of in line with that quarter-over-quarter, year-over-year revenue growth has been about 12%. And so, you've had this -- you've had obviously fixed charges go up, but you've had given the strength of the economy and the strength of the US consumer, which is showing on the margin some signs of weakening, but still historically is in a relatively good position. You've had a decent backdrop for revenue growth and earnings growth that you haven't had a huge -- although you've had declining coverage, you haven't had a huge pinch. I think on the sponsor side and capitulation side, I don't think we're seeing it. For example, on lithium which I think is Cronos on the schedule of investments, as a software business that has some idiosyncratic challenges, but the sponsor put in a ton of capital to support the business for just a year extension. And so I think we have that market like yield to maturity and the sponsor put in a whole bunch of capital to continue to support the business. So I think that was only one or two kind of "credit amendments" this quarter. But it feels like we're -- sponsors continue to support the business. There continues to be fundamentals continue to be okay to good although coverages are declining.

Thanks, so much.

One moment for our next question.

In just real quick. The one other thing I just want to address which I think you saw that uptick we -- for comprehensive purposes we've added the -- our European direct lending team we see a lot of opportunity there. That's obviously part of the bad bucket, but we did -- we have done some European deals in the US fund. And so that team was added to the disclosure generally. So I think that is a piece of your first question.

Yeah, that makes sense. And just to clarify that that team existed at Sixth Street previously? Or did you -- ?

No, most have existed, although we got into it.

Awesome. Thanks so much.

Thanks, Finian.

Our next question comes from Mark Hughes with Truist Securities. Your line is open.

Yeah. Thank you. Good morning. Related to the last question any specific numbers you can share in terms of the percent of the portfolio maybe at or below one times in terms of interest coverage and kind of how you're modeling that progressing through 2024, if we do stay higher for longer?

Yeah. So look outside of the -- the math quickly outside the nonaccrual name it's about 5% the non-accrual name of American achievement. And although, I would say two of those are really good businesses there to just continue to make investment and have a ton of liquidity. So it's still at a reasonably low level. And again, I think companies are really focused on capital allocation and solving for cash flow. So, I don't know, if that's the peak number, but it's surely companies are very much focused on it. The other thing, I would say is interest coverage across the portfolio. So we just talked about the tail. But across the portfolio is about two times. And so it ended up down slightly. And I think that's LQA annualized. And obviously, we're kind of peakish rates. And I think that was basically flat down 0.1% quarter-over-quarter.

Appreciate that. And then Bo, you mentioned only 3% upsize this quarter. Was that -- is that reflective of maybe pressure on the companies that they are not in a position to raise more capital? Or is that just some normal variation perhaps? .

Yeah, I think it's really more driven by skill or a rather anemic M&A market. So when we see a lot of upside as the portfolio companies it's generally M&A related or it can be an investment related. As Josh just mentioned, I think companies have been focused on capital allocation, they are investing heavily prior when interest rates were lower cost of capital is lower now folks just in terms of people investment, in terms of the capital investments are really focused on areas that drive high ROIC. So you're seeing less of that and more focus on getting super efficient driving more cash flows. But the big driver for this would be M&A.

Understood. Thank you.

One moment for our next question. Our next question comes from Robert Dodd with Raymond James. Your line is open.

Hi, guys. Good morning. So going back to one of your comments Josh on Tim's question. I mean, when you look at what's going to be the differentiator for private credit businesses and obviously, low term you normally bought out to credit. Your comment being that the sponsors are stepping up. The economy is only really weakening at the margin. So what kind of time frame do you think the credit differentiation between portfolios, between managers, between shareholder returns? What kind of time frame do you think that's going to manifest on?

Yes. Thanks. I think -- let me repeat the question back understood it, which was, if there's differentiation in shareholder experience based on credit losses when does that start appearing? Is that the question, Robert?

Yes.

Okay. So let me start off and say I think -- what we should have said if it wasn't clear is that there will be more differentiation. I think there is -- if you look at the data and you know the data both and I do. There has been -- even in the benign credit environment of the last -- eight to 10 years there's been significant differentiation already across the space as it relates to investor experience, most of that driven by credit losses. And so, I would say that the differentiation already kind of exists. I think since -- if you look at since our IPO, for example, I think ROE for the space have been averaged about 7%, top quartile has been about -- first pointing to the top quartile about 9%. We've been to 13.3% most of that's been on the credit line. And so there's already been vast kind of experience already. The funny thing about credit and losses and defaults they tend to lag the economy. And so, I would suspect that it will happen in the next 12 to 15 months, if it does happen. I would say the other vector, I would think, if I expect that private credit -- so I think there's going to be dispersion and experience for private credit for people. I also think on the margin private credit we'll do better than broadly syndicated credit. I think the big differentiator for private credit generally has been their ability to tilt into industries. And historically, that's financed higher-quality industries. Put aside healthcare services for a second, which we don't really have exposure to. But they got to pick better industries and they were -- they didn't have to be index huggers. So I would expect that private credit outperforms on the loss line and on the total return line, broadly syndicated credit. And I would expect that there will be differentiation within private credit. That -- more differentiation, that differentiation already existed for this moment in time.

Got it. I appreciate. The second thing that kind of has historically driven your ROE performance has been the fee income and you tend to get more core protections than an average private credit lender, et cetera. When I look you did disclose the -- if I look at your core protection in the portfolio the potential, core protection on the portfolio today versus principal. It's the lowest level, it's been in a year. I mean there's been -- fee income was up this quarter but what's left looks to be relatively potentially lower, is that -- is some aging out of the portfolio and that's just taking the ratio of the two lines. Is some aging and portfolio? Or is that just a random volatility hit?

I think -- let's come back to exactly, but I think some of that, if you're looking at the fair value as a percentage of core price, I think…

I'm taking the ratio of that versus the fair value as a percentage of principal to get the fair value as a percentage of the core price…?

On the fair value of percentage of core prices most definitely that went up because fair value went up. But the portfolio is most definitely stuck around longer than usual given spreads have -- we've been in a wider spread environment, so repayments have slowed. And so there's been a slow -- I won't call it aging out but there's been a roll down of core price in the book. And so I think, if you look at the fair value side, the fair values are up a little bit and repayments have slowed a little bit.

Got it. Thank you.

One moment for our next question. Our next question comes from Melissa Wedel with JPMorgan. Your line is open.

Good morning. Thanks for taking my questions today. A lot of them have actually already been asked and answered. So I thought it might be helpful to look at maybe a couple of the new investments made during the quarter. There were a couple that were larger in size. If I'm looking at this right, maybe Skylark and Marcura [ph] those are listed as manufacturing and transportation sectors, respectively. Just wondering if you could walk through your thinking there on -- are those a bit more cyclical? How do you get comfortable with that? I would appreciate it.

Yeah. Yeah. Marcura is actually a software business, mostly for providing software and outsourcing business, providing support solutions and cost management and payments to support the maritime and shipping industry. So think of it as business services software in the shipping industry. And so we don't -- we think we're a little bit cyclical but not cyclical but very, very high-quality business. The other name you mentioned and I think a Skylark, again a European investment, software ERP business mostly end markets manufacturing so not cyclical.

Thank you.

[Operator Instructions] And our next question comes from the line of Ryan Lynch with KBW. Your line is open.

Hey, good morning. First question I had was just kind of a long maybe kind of bolted question regarding your comments on…

We're excited about that Ryan. That's a good leeway.

All right. Well, it kind of has to do with just your comments on the broadly syndicated loan market a lot of deals maturing by the end of 2025 and that as a potential opportunity. There’s already been a decent amount recently of direct lenders taking out some broadly syndicated loans. Look at PEXA Highland, Fenestra. I don't believe that fire has kind of been an active participant in that market but please correct me if I'm wrong in that. So, I would just love to hear a couple of questions on. How do you view those kind of because I'm sure you've looked at those deals? How do you view those current deals that have been refinanced out of the broadest low market the quality of those deals are those deals in the future that that potentially could come out? Would those be deals that would go into the BDC? Or would that go more your perpetual private BDC that maybe has a little bit more of an upper middle market focus. And then one of the critiques or the fears is that investors have is that the broadly syndicated loan market is a little challenged right now but the fact maybe changes a little bit and that could open back up. There's a fear of why are these investors going to private credit versus payment it's already in the broadly syndicated low market why not stay in there when potentially you could get better term. So, why would they go to the private credit market unless if they are guys who cannot finance in the broadly syndicated loan mark so kind of like adverse credit selection. So kind of you can go over some of that at all.

Let me -- I want to correct on the record. We don't manage a perpetually non-credit BDC. So, I want to make sure that is clear for people. We have an institutionally backed drawdown private vehicle but that is very, very different structurally. So, I want to thank the direction side. Yes. Look let me take you -- I don't want to talk about specific credits. What I would say is that the great thing about our business is that we get up every day we get to make we get to underwrite and make decisions that we think are appropriate for our shareholders' capital. And so the names you mentioned we've looked at and we didn't participate and that's a great thing about a marketplace. People can have different views different views about required returns cost of capital documents, momentum all those things. And people have different risk tolerances and people have different incentives about putting money work. We're not putting money to work et cetera. So, I don't -- I -- like that's a great thing about a marketplace. And that's what our investors pay us for. The second thing I think you said is kind of what's happening in the broadly syndicated loan market. Look I think the broadly syndicated loan market is most definitely structurally more challenged. That market has been 60% buyers have been CLOs 60% of those capital structures are AAAs. AAAs are difficult to find in place today outside of a unique buyer base particularly in Japan. And so that -- and that market is starting to amortize -- and the -- so that's the technical backdrop of that market. And the fundamentals of that market my guess are going to weaken. Downgrades are outpacing upgrades recoveries have been low. And so a…

Okay. That's helpful get good background thought for response and all that. The other question I had maybe for you Ian, you guys talked about some of the declines in NAV in 2022 from spread widening, you guys have had and it continued this quarter of some spread I think tightening and increase kind of an uplift from spreads. I'm just curious I know this is something we could probably calculate on our own by looking at your portfolio, but I'd just be curious if you have any sort of commentary on how much of that spread do you think is still -- and meaning an uptick in loan values do you think it's still to be recovered? Or do you think we're kind of mostly you're done with it at this point?

Well, I think, we're a little over halfway done, Ryan. So there's a little bit more to come. Some of that will come back to us through natural repayment activity. But we're probably let's call it two-thirds of the way on that particular pool of assets that was in place back in June of 2022.

Yes. I mean, I think we try to do a pretty good job of bridging it, which is some of the portfolio we try to look at the portfolio in apples-to-apples basis before the Fed rate hiking cycle started. And I think we did it on a per share basis and how much of that has come back, and then obviously the portfolio that we put in the ground in the wire spread environment most definitely as spreads have tightened got a lot of that benefit. And so I think, Kansas, I think that we'll go back to the script as you describe -- and then I think, we -- I think is right. And when I look at the fair value of like 98.5% or something like that, my guess is probably going to seats right.

Okay. Understood. I appreciate the time today. That's all for me.

Thanks.

And I'm showing no further questions at this time. I would now like to turn the conference back to Josh for closing remarks.

Great. Well, first of all thank you for your participation. We'll keep working hard for you. Obviously, as I said in my final remarks folks, dark out there in the world with elevated risk. We'll keep working hard. And I hope everybody enjoys their Thanksgiving and holiday season to come and we'll talk to people after Q4 in Q1 if not sooner. Thank you so much.

Thanks everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.