Sixth Street Specialty Lending, Inc. (TSLX) Q1 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s First Quarter ended March 31, 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, May 6, 2026. I will now turn over to Ms. Cami Senatore, Head of Investor Relations. Please go ahead.

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 first quarter ended March 31, 2026, 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 first quarter ended March 31, 2026. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Bo Stanley, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Thank you, Cami. Good morning, everyone, and thank you for joining us. With me today is our Head of Investment Strategy, Ross Bruck, and our CFO, Ian Simmonds. Before I begin, I'm pleased to announce that effective May 21, Mike Fishman will become Chairman of our Board of Directors, following our previous announcement regarding Josh Easterly's retirement from the role. Mike is a respected industry veteran with decades of experience in credit investing and asset management. As an early member of Sixth Street, and a Director of SLX since 2011, including tenure as CEO, he has been instrumental in building our business. His combination of deep industry expertise and platform understand him -- make him uniquely qualified for this position, and we look forward to his contributions as Chairman. For our call, I'll review our first quarter highlights and pass it to Ross to discuss investment activity in the portfolio. Ian will review our financial performance in detail, and I will conclude with final remarks before opening the call to Q&A. Yesterday, we reported first quarter net investment income of $0.42 per share or an annualized return on equity of 9.9%. Inclusive of our movement in fair value of our investments, we reported a net loss per share of $0.27. Our net loss per share this quarter was largely driven by unrealized losses on our investments as we incorporated the impact of wider market spreads and lower market multiples in our fair value determinations, more on that in a moment. At quarter end, our net asset value per share declined by approximately 4.3% from $16.97, which includes the impact of the Q4 supplemental dividend to $16.24. Of this decline, $0.58 per share or nearly 80% was attributable to the movement in fair value from the market inputs, which are unrealized. That included $0.40 per share from unrealized losses in our debt portfolio tied to credit spread widening seen in the broader market and $0.18 per share from lower market valuations and in our limited equity portfolio. $0.08 per share of the decline is related to portfolio company-specific performance and the remainder from the payoffs and realized gains. Ian will walk through the NAV bridge in more detail. These results reflect a period of market-driven volatility rather than a change in the underlying strength of our business. Our portfolio remains healthy. Our balance sheet is strong, and we are well positioned to capitalize on opportunities as the market continues to evolve. Volatility in Q1 was driven by several factors, including market concerns around the impact of AI on software investments, increased redemption requests from shareholders of nontraded BDCs and heightened geopolitical uncertainty, the latter of which was not something we anticipated at the time of our last earnings call. These dynamics contributed to spread -- credit spreads widening in a subdued transaction environment. LCD first-lien spreads widened by 48 basis points and second-lien spreads widened by 256 basis points during the quarter. I want to reiterate our approach to valuation, which incorporates changes in market-wide credit spreads when determining the fair value of our investments. Our process is designed to reflect the price in an orderly transaction at the measurement date. That's not just our perspective. It's the regulatory requirement designed to maintain the integrity of the balance sheet. For additional detail regarding our valuation framework, we encourage you to read the -- our stakeholders' letter on the topic from August 2022 available on our website. We have consistently applied this valuation framework since inception, including periods of volatility, such as Q1 2020 related to COVID and Q2 2022 related to the interest rate hiking cycle. During those quarters, net asset value per share declined by approximately 7.4% and 3.6%, respectively, driven primarily by the impact of wider credit spreads. These unrealized losses reflected in earnings and NAV, are noncash in nature and do not reflect our view of permanent credit losses. As such, we expect these unrealized losses related to credit spread movement to reverse over time as market conditions change, and our investments approach realization or maturity. Our track record of long-term value creation is demonstrated by the 4.7% cumulative growth our net asset value per share since our 2014 IPO through March 31. This compares to an average NAV decline of 7.3% for our public BDC peer group from our IPO through the end of 2025, representing significant outperformance, irrespective of the volatility we experienced in any quarterly period. Market volatility also impacted net investment income through lower activity-based fee income. In Q1, we earned $0.05 per share of activity-based fees, which is below our 3-year historical average of $0.09 per share. As we've discussed in prior periods, activity-based fees, which are primarily driven by early repayments, are inherently episodic. During periods of heightened market volatility our experience is that many borrowers and asset owners defer capital markets activity. As a result, both funding and repayment volumes typically contract as valuation gaps widen and transaction activity slows. While we recognize that the current environment will take time to fully play out, as the market undergoes a period of price discovery, our experience has consistently shown that these periods of volatility create some of the most attractive investment opportunities. We believe we are well positioned to capitalize on that opportunity set. In our earnings release yesterday, we announced a change in our base dividend level from $0.46 to $0.42 per share. This decision was informed by what we believe is a responsible and sustainable dividend policy. As we assess the current environment, we have always believed it is appropriate to align our base dividend with the forward earnings power of the business. That forward view reflects the level of uncertainty we see around near-term activity, including the rate and spread backdrop and also the market volatility caused by geopolitical uncertainty that has occurred since our last call. Our perspective is also informed by historical periods of dislocation, which suggests that activity-based fee income can take several quarters to normalize following a market dislocation. While this segment may differ, history reinforces our decision to take a measured and prudent approach today. The pre-2022 environment provides a baseline for where our dividend level stood before rates began to increase. We had a base dividend of $0.41 per share. Our earnings power increased with higher base rates and wider spreads, we raised the base dividend to $0.42 in Q3 2022, $0.45 in Q4, and $0.46 in Q1 2023, representing a total increase of 12.2%. While we see potential for an increase in transaction activities as the year progresses, the timing and magnitude of that pickup and the resulting impact on our activity-based fee income remains difficult to forecast with conviction. That said, our view on base rates through the forward curve and new issue spreads is more visible. This adjustment establishes a distribution level that is sustainable across a range of potential activity outcomes. At quarter end, we had approximately $1.57 per share of potential activity-based fee income embedded in the portfolio, including unamortized OID and call protection. If activity accelerates, that embedded income provides meaningful upside. Our supplemental dividend framework captures and distributes that upside to shareholders as it's realized. Yesterday, our Board approved a base quarterly dividend of $0.42 per share to shareholders of record as of June 15, payable on June 30. This corresponds to an annualized dividend yield of 10.3% on our March 31 net asset value per share, which we believe is aligned with the core earnings power of the portfolio and with our target return on equity for the year. Ian will speak more on that in a moment. With that, I'll pass it to Ross to discuss this quarter's investment activity.

Thanks, Bo. In Q1, we provided total commitments of $338 million and total fundings of $135 million across two new portfolio companies upsizes to four existing investments and an initial investment in our previously announced joint venture Structured Credit Partners, or SCP. A key advantage for SLX is our deep integration with the broader Sixth Street platform, which manages over $130 billion in assets. This connectivity allows us to leverage the collective expertise of hundreds of investment professionals to conduct the deep proprietary diligence required for today's complex investment landscape. By combining this expertise, the firm's platform-wide sourcing engine, and our disciplined underwriting, we remain well positioned to execute on investments that we believe create long-term value for our shareholders. Our recent investment in Mindbody is a good example of how the platform comes together in practice. Given our history with the business dating back to 2021, we had a differentiated understanding of the company, and we're well positioned to lead the new financing. This was a cross-platform and cross-border effort with our direct lending teams working closely with our consumer team to deliver a bespoke solution. The business benefits from significant network effects with a scaled 2-sided ecosystem across consumers and wellness partners that we believe supports growth and strong underlying business quality, ultimately driving attractive risk-adjusted returns for our shareholders. Our other new investment was Labrie, a leading North American manufacturer of premium refuse collection vehicles and related aftermarket parts. Labrie operates in a recession-resistant market with predictable demand and structural tailwinds. The company's sticky dealer and customer base, combined with a consistent high margin and capital life financial profile, make this a compelling investment aligned with our approach of lending to businesses with attractive unit economics. On repayments, payoffs moderated versus levels seen throughout 2025. We experienced $113 million in repayments from 4 full and 4 partial investment realizations resulting in $22 million of net fundings for the quarter. Of the 4 full payoffs in Q1, 2 were refinancings and 2 were sales of liquid investments. Of the 2 refinancings, both were completed at lower spreads with one executed in the private credit market and the other in the broadly syndicated loan market. Our largest payoff was Galileo Parent, which refinanced its senior secured credit facility originally structured to support Advent's 2023 take-private transaction. Sixth Street served as agent on the original deal and the company refinanced with a broadly syndicated loan priced at SOFR plus 450 basis points compared with SOFR plus 575 basis points on the existing facility. SLX was repaid with call protection generating an asset-level IRR and MOM of 15% and 1.4x, respectively. Our other refinancing was MadCap, a provider of authoring, publishing and content management solutions, which refinanced its existing credit facility in March. Sixth Street originally provided capital in December 2023 to support an acquisition with an underwriting thesis centered on MadCap's robust product offering, granular blue-chip customer base and strong unit economics. Having executed on its business plan, the company was able to transition to the bank market for a lower cost of capital. SLX was repaid in full, generating an asset level IRR and MOM of 16% and 1.3x, respectively. During the quarter, we had one addition and one removal from nonaccrual status, resulting in no change to the total number of investments on nonaccrual at 3 names representing approximately 1.4% of the portfolio at fair value and 1.9% at amortized cost. The addition was our investment in Bed, Bath & Beyond. While the path of this credit has not followed our original expectations, we have driven recoveries through secondary sources of repayment and have received approximately 85% of our cost basis through March 31. While we believe we are well positioned to realize meaningful additional recoveries over time, uncertainty around the timing and ultimate resolution of remaining claims led us to place the investment on nonaccrual effective January 1. The removal was our investment in Astra Acquisition Corp., which was reorganized in Q1 following the company's Chapter 11 process. This had no impact on the quarter's NAV as the position was already fully marked down. Moving on to portfolio yields. Our weighted average yield on debt and income producing securities at amortized costs decreased slightly quarter-over-quarter from 11.3% to 11.2%. The decline primarily reflects the decline of reference rates during the quarter. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment leverage points of 0.4x and 5.2x, respectively, down from 5.3x in the prior quarter with weighted average interest coverage of 2.3x. As of Q1 '26, the weighted average revenue and EBITDA of our core portfolio companies was $425 million and $127 million, respectively. Median revenue and EBITDA were $174 million and $54 million. Before turning the call over to Ian, I'd like to provide an update on our existing portfolio companies highlighting key metrics. The performance rating of our portfolio continues to be strong with a weighted average rating of 1.19 on a scale of 1 to 5 with 1 being the strongest. We continue to see stable top line growth and earnings durability, which signal a healthy demand environment across our end markets. Across our core portfolio companies, LTM revenue and EBITDA growth were both 9%. The overall stability in these metrics continues to reflect proactive actions by management and sponsor teams. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Thank you, Ross. For Q1, we generated net investment income per share of $0.42, and net loss per share of $0.27. Our reported and adjusted metrics converged this quarter as there was no impact related to capital gains incentive fees. Total investments were $3.3 billion, in line with prior quarter as a result of net funding activity offset by lower valuations. Total principal debt outstanding at quarter end was $1.8 billion, and net assets were $1.5 billion, or $16.24 per share. Our average debt-to-equity ratio decreased slightly quarter-over-quarter from 1.17x to 1.14x, and our debt-to-equity ratio at March 31 was 1.18x. The increase in this ratio was largely due to the impact of widening spreads on fair value versus net funding activity. We continue to have ample liquidity with $1.1 billion of unfunded revolver capacity at quarter end against $249 million of unfunded portfolio company commitments eligible to be drawn. Post quarter end, we further enhanced our debt maturity profile by closing an amendment to our revolving credit facility, maintaining the pricing and key terms of the facility while extending the final maturity through May 2031. All of the 19 banks in our syndicate were supported and participated in the amendment, an extension that closed on May 1. Adjusted for the revolver extension, our weighted average remaining life of debt funding is 3.9 years compared to a weighted average remaining life of investments funded by debt of only 2.5 years. At quarter end, our funding mix was represented by a 68% unsecured debt. Moving on to upcoming maturities. As we mentioned on our last earnings call, we have reserved for the $300 million of 2026 notes due in August under our revolving credit facility, after adjusting our unfunded revolver capacity as of quarter end for the repayment of those notes, and our revolver amendment, we have liquidity of $649 million, representing 2.6x our unfunded commitments eligible to be drawn at quarter end. Our balance sheet remains well positioned, allowing us to play offense in the current market environment. We believe the ability to invest capital opportunistically in what we're seeing as a wider spread environment today is a meaningful advantage for our shareholders. Pivoting to our presentation materials, Slide 8 contains this quarter's NAV bridge. As Bo mentioned, the impact of credit spread widening and movement in market multiples on the valuation of our portfolio was by far the most significant driver of NAV movement this quarter, including $0.58 per share from fair value marks. Again, absent permanent credit losses, we would expect to see a reversal of these unrealized losses related to credit spreads over time as our investments approach their respective maturities. The estimated impact of broad market credit spread tightening since quarter end represents approximately $0.12 per share, or 30% of the unwind of unrealized losses on our debt portfolio that we saw during Q1. Walking through the other drivers of NAV movement this quarter, we added $0.42 per share for net investment income against a base dividend of $0.46 per share. There was a $0.07 per share decline in NAV from the reversal of net unrealized gains from paydowns and sales. Other changes included $0.04 per share increase in NAV from net realized gains on investments and an $0.08 per share reduction to NAV primarily from unrealized losses from portfolio company-specific events. Moving on to our operating results detailed on Slide 9. We generated $93.4 million of total investment income for the quarter compared to $108.2 million in the prior quarter. Interest and dividend income was $87.8 million, down from prior quarter, primarily driven by the decline in interest rates. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were lower at $3.4 million compared to $10.9 million in Q4, driven by lower payoff activity in Q1 relative to the elevated level experienced in Q4. Other income was $2.2 million, up from $1.9 million in the prior quarter. Net expenses were $52.4 million, down from $56.4 million in the prior quarter, primarily driven by the decline in base rates. This contributed to our weighted average interest rate on average debt outstanding decreasing approximately 50 basis points from 6% to 5.5%. Lastly, on undistributed income, we estimate that to be approximately $1.15 per share at the end of Q1. Turning to our outlook for the year. Our original guidance was based on an assumption of 30% portfolio turnover in line with our long-term historical average. Given the moderated pace of repayments in Q1, we anticipate an ROE of 10% to 10.5% if turnover remains below 20% for the full year, and an ROE above 10.5% should we experience higher repayment activity. While we are taking a more measured view on forward portfolio activity, our fundamental return hurdle remains unchanged. We will continue to prioritize investing capital into opportunities that generate returns in excess of our cost of equity, maintaining the same discipline that has characterized our platform since inception. We may prove to be moving early on the base dividend adjustment, but our supplemental dividend framework provides the flexibility to capture upside should activity accelerate. With that, I'll turn it back to Bo for concluding remarks.

Thank you, Ian. While the market environment remains dynamic, our conviction of the path forward is rooted in the platform we've built, over the last 15 years. Our historical outperformance through varying market conditions is underpinned by the depth and continuity of our people from this team sourcing and underwriting the risk to the professionals managing the portfolio and working through complex situations, this is a group with years of experience navigating every part of the credit cycle. We've been through these environments before and remain fully committed to the same disciplined approach that has guided the firm since day 1. Looking ahead, we're excited about the investment opportunity set to come as the markets reset our thematic sourcing engine and the breadth of the Sixth Street platform provide us with a significant advantage in identifying and executed on high-quality transactions. We believe the actions we are taking today position SLX to continue delivering strong risk-adjusted returns for our shareholders over the long term, and we are energized by the road ahead. In closing, I'd like to encourage our shareholders to participate and vote for our upcoming Annual and Special Meeting on May 21. Consistent with previous years, we are seeking shareholder approval to issue shares below net asset value effective for the upcoming 12 months. To be clear, to date, we have never issued shares below net asset value under prior shareholder authorization granted to us for each of the last 9 years, and we have no current plans to do so. We merely view this authorization as an important tool for value creation and financial flexibility in periods of market volatility. As evidenced by the last 12 years since our initial public offering, our bar for raising equity is high. We've only raised equity when trading above net asset value on a very disciplined basis, so we would only exercise this authorization to issue shares below net asset value if there was a sufficiently high risk-adjusted return opportunities that would ultimately be accretive to our shareholders through overearning of our cost of capital and any associated dilution. If anyone has questions on the topic, please don't hesitate to reach out to us. We have also provided a presentation which walks through this analysis in the Investor Resources section of our website. We hope you find the supplemental information helpful as a way of providing a clear rationale for providing the company with access to this important tool. With that, thank you for your time today. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from Finian O'Shea from Wells Fargo.

To start with the dividend, I wanted to ask about why it's framed on activity-based fees where it feels like to us more good old-fashioned spread compression, credit loss which happens. You've kept a dividend for a very long time. But with that framing, is it a signal of some kind of shift in strategy, say, more toward flow lending, that's where the market is? Or is it more transient because, say, your software book won't refi for a long time and -- but you'll still focus on the same style and eventually recover in the sort of fee income line.

Fin, thanks. It's Bo. I appreciate the question. There's a lot to unpack there. I'll attempt to get through it all. So first of all, first principles for us is we want to set our dividend level at a sustainable and responsible level. I think that has been from day 1, we've talked about that. We framed I want to take a step back, first of all, and talk about what we have signaled to the market, both for the space and for Sixth Street over the past 12 months and even before that. But I think we wrote a letter in April of last year, outlining what we believed were the path forward for ROEs in the sector, given the interest rate curve and spread compression that we've seen both in the market and at Sixth Street and SLX during that -- in that letter, we laid out what we believed was the path for ROEs for the sector and for Sixth Street. I think we had the forward curve at that day. So 12 months forward, ROEs of 10.3% for Sixth Street in SLX, which is coincidentally where we've set the base dividend level on a yield basis today. So just starting there. The framing of activity-based fees is exactly that for -- as we thought about forecasting ROEs last quarter, we forecasted normalized levels of activity-based fees, which have been generally around $0.08 to $0.09 per share since inception. Last year, on an LTM basis, that was closer to $0.12 per quarter. And this quarter, it was $0.04 because there was muted activity levels -- this is very consistent with what we've seen in the past when spread levels increase. And when you think about it intuitively, Fin, as spreads increase, you're going to have less repayments because people are not going to refinance you into higher-yielding loans. So your activity-based fees are really going to be focused on M&A activity, which was also muted in the quarter. Here's the good news, and what we feel good about is it's a better spread environment. We said last quarter that we believe ROEs for the sector were troughing and for Sixth Street, we still believe that. We think it's a better spread environment. That's going to slowly work through the book. We also are ramping SEP, which should continue to add support, but that's going to take time as well. And eventually, we will return to normalized activity-based fee levels. Historically, that has taken several quarters. Post rate-hiking cycle, it took 6 quarters to get back to normalized activities. I'm not sure it's going to take that long, we shall see. But just as we thought about setting a responsible dividend policy, we took all of those factors into consideration. Also, the great news is, and we commented this in the script, there continues to be high levels of activity-base fees embedded in the portfolio, should that activity return, and we believe it will eventually. So hopefully, that answered your question and it was a comprehensive answer.

Yes. No, it's definitely helpful. Like it will be a bit of a drought maybe sooner, maybe later, they hopefully come back in, I guess, sort of in the meanwhile, like that sort of call pro, correct me if I'm wrong, that's been pretty instrumental to NAV preservation, right? Like that's your sort of formula for gains, which is obviously a very critical input over time. Do you have any like backup plan or approach to solve for that issue in the meanwhile? Or do you think it's sort of also a NAV headwind?

Yes. So, Fin, the great news is, I think our call protection as a percentage of book today is at 94%. Is that right?

94.1%.

It's 94.1%, that is -- that's versus a historical level of 94.7% since inception. So there continues to be a lot of embedded economics within the book. I would also note that, and I think you've heard from others that we're seeing a better investing environment and that includes higher spreads, but also it's better fees. We're seeing better both upfront fees and call protection. And I think that makes us happy about investing in the future. And then lastly, I would say we have seen a pickup of what I would call special situation type deals that have always been a hallmark of our platform and consistent historically, probably of 30% to 35% of what we've done. That had been muted activity. We're seeing a handful of opportunities in the current pipeline that excite me. All of that would support strong activity-based fees in the future when they begin to return. Again, the 2 biggest components that drive that are M&A activity, which we are seeing early signs of stabilization there. I think geopolitical concerns will really be the determinant if that returns, and then repayment activity, which we do believe will be muted for some time because, again, it's a better spread environment and it's just natural if you're -- if new loans are getting created at better spreads than historic, you're not going to have a lot of payoffs.

Our next question comes from Brian McKenna from Citizens.

Okay. Great. So I'm curious, when did the Board make the final decision on the dividend? Was it in and around the end of the first quarter because if it was, I'm curious if the decision was made, call it, this week or today versus roughly a month ago, would that have changed the outcome on the dividend given the broad-based recovery in sentiment and risk assets over the past 5 weeks, similar related to the sharp recovery we saw post Liberation Day last April.

Well, the formal decision was made yesterday at the Board meeting. We, as a team, have been working through this over the past months, given that we saw the muted levels of activity-based fees and have some forward visibility, albeit it's usually no more than 4 to 5 weeks on those activity-based fees. So I would -- so the answer is we've been working on it for some time. Again, we had talked about ROEs for the sector and for Sixth Street in a couple of letters, both in April and November. So this is something we've been thinking about for some time but didn't come to a final conclusion until the final weeks. You're right, there has been a stabilization generally in the credit markets. But again, the spread environment is a more attractive environment and that is going to mute activity levels, at least from refinancings in the meantime. And what we did is really did a thorough analysis of the data, we always when we have questions that are hard to answer turn to the data, and look at periods of historical spread widening in the past, and it always has taken several quarters to return to those activity-based fee normalization levels.

And maybe if I add to that, Brian, just to color up some of the data that Bo was referencing. That means that we went back and looked at every quarter back to 2014 to understand the characteristics of our earnings profile, what was generated from interest income and dividend income alone, what was generated from activity-based fees. We looked at that on a quarterly basis. We looked at that on an annual basis. We overlaid periods of credit spread widening and/or dislocation. So we looked at what was the behavior of our earnings profile during and post COVID, during and post the rate rise cycle in '22, and what are we seeing today? And all of those inputs into a determination about what is our level of conviction about the right level for our base dividend. And so as Bo said, it was data intensive as part of the framework for the discussion with the Board.

Okay. That's helpful. And then just looking at spreads on new deals in the quarter, I think these totaled around 600 basis points versus the recent pace of around 700 basis points. So is the 600-plus basis points going to be the new run rate for spreads on new deals? Was it just a one-off quarter? Like I'm just trying to think through where things settle in on the spread front.

Yes, it's a good question. It was very idiosyncrat. There are only really 2 new originations. Both of those were -- we had been working on free the spread widening environment. Activity in general was muted. So it's -- we've had volatility from quarter-to-quarter given volumes come and go. And by the way, Q1 is always a low volume quarter. What I would tell you is, what we're seeing on the forward is a much better investing environment, wider spreads, more importantly, lower leverage, better documentation standards, better fees and call protection. So the whole package seems to be a better investing environment. I also mentioned with Fin, we're seeing more special situations than we had seen in the past. That's always been a driver of over earning relative to the space. So all of that would point to increasing spreads over time, which we're excited about.

Our next question comes from Robert Dodd from Raymond James.

Thanks for the color on the quarter. I wanted to like the $1.57 that you said was kind of embedded call protection in the portfolio right now. I mean, what's the half-life on that? Obviously, it ages out over time. I mean, if we look at low levels of activity, say, for 12 months, and I don't know, half of that $1.57 ages out over those 12 months, then even if activity rebounds a year from now, you still got structurally lower activity-based fees for a period after that as well, right? So I mean, the deals you're onboarding right now, are those sufficient to kind of maintain that total embedded core protection in the portfolio over kind of a prolonged period? Or is the aging phenomenon kind of going to drag it out even further if you have, say, 12 months, maybe it's not 12 months, but 12-month period of?

I think that's a great question. Again, just turning that $1.57 into a metric that I think that we've talked about before, just to contextualize as a percentage of fair value on the call price is 94% today. That's versus a historical means of 97%. What we're seeing in new activity today, we'll have better call protection than what we've seen in the last couple of years, especially as it relates to some of the special situation deals, which generally have non-call features. What I would tell you is as far as half-life generally speaking, call protection is between 2 to 3 years when you see a number like 94%, which is above historical means, it means it's closer to the earlier vintages where we have that embedded that makes sense given portfolio turnover has been elevated over the last couple of years. So there's a long runway for that half-life. And what we're replacing, and what we're putting in a new deals will continue to actually add to that. When -- I actually don't have these in front of me, Cami, but when we returned after 2022, to the post kind of normalized fees, which took us 6 quarters, about 1.5 years, we started at a slightly less, if you look at 3 years, it was 94.5%. And what we're -- once we returned, I think those embedded numbers were well above historical means of $0.08 per share. We'll get you that data. So there is a shelf life kind of early into those vintages. What we're seeing from new deals, it's better call protection. I think all of that protects what we think should be normalized activity into the future.

Got it. And a kind of tied follow-up. I mean, obviously, one of the issues here is spread widening, maybe that slows down refinancing to the point who wants to refinance that higher spread. Where spread widening has been greatest so far, anecdotally, at least, is in the software segment, which is obviously your biggest single sector, so to speak. How much of this expectation of low activity is tied to software given that spreads have widened more in that sector than elsewhere in the market right now?

It really didn't go into the calculation. We think there's actually for names that are not deeply AI-impacted, and that's a very small percentage of the portfolio. As we've said before and also in our letter about a month ago, there continues to be what we think is a refinancing market for software names, albeit at wider spreads. Again, just looking back at the data historically, whenever there's been spread widening regardless if it was sector-based, it's just you've had muted levels of activity, and that's why we thought it was prudent to set the dividend level where it's at. I would also note that the portfolio continues to be very healthy earnings growth close to 10% in software and technology names are in line with that. In fact, I think the earnings power of those businesses continues to increase as EBITDA margins are expanding as growth slows a bit. Those also would point you to deleveraging over time and being able to refinance. We had, as we mentioned, MadCap was a software name that we had refinanced this quarter by a bank. It had executed well. It had delevered. You could argue whether it was going to be AI affected or not, but it was refinanced into a much cheaper paper. So that did not go into our calculus.

Our next question comes from Arren Cyganovich from Truist Securities.

The amend and extend of the credit facility with no increase in pricing was a positive sign given what we've seen in some press articles about banks looking to increase pricing on these types of -- or I guess more specifically, it was bilateral facilities, but were there any pressure from the banks in terms of that process to raise the pricing? And maybe you just talk a little bit about that process and how the banks have been supportive?

Yes, I'll take that, Arren. It's Ian. I would say there was no pressure, but that's really a factor of continued delivery on what we tell the banks that we're going to do. We view those banks as our capital partners, and so they're pretty in tune with our business. But I'd also point out that these syndicated BDC facilities are pretty well structured to protect the banks that actual LTVs are very low. And given the development of the unsecured market as another form of financing, it's actually a very supportive way to build the capital structure. So I would characterize this as really just ordinary course discussions collaborative in nature and the outcome was the supportive renewal that we achieved.

That's good to hear. In terms of the investment activity slowing down, and I know that you don't have a crystal ball and you don't know when things might pick up. But in terms of whether or not it's discussions with sponsors or what have you, are there any kind of green shoots of activity in areas other than software that are showing some signs that you might see some stronger deal activity, maybe in the second half of the year?

I'll start and then pass it over to Ross. Look, I think the pipeline has rebounded, and there's some -- definitely some green shoots I mentioned, more special situations than we had seen in the past, and that's across a lot of our core thematic areas, whether it's retail ABL, ABL, Energy ABL, some technology, special situations. So that is encouraging. As we speak with sponsors, there seems to be a renewed focus on platform activity and finding new deals. I think a lot of that M&A activity is really going to -- what's going to matter is the geopolitical concerns and where energy prices go over the next quarter. I think that's going to be the big determination. But the reality is, if you think about the robustness of our originations platform, especially the thematic platform across industries and specialties. I think that piece is really picking up here from what we can see. Ross, you should add anything to that.

Yes. I think in addition to either platform acquisitions or full platform refinancings, our portfolio continues to be active on the M&A front. Our management teams, and our sponsors are looking to continue to drive growth and a large portion of our activity on the amendment side, this quarter was to support that growth or support acquisitions, which creates options for us to reprice existing facilities, provide new capital into credits that we know well or catalyze exits where the risk-return doesn't make sense any longer at what's being offered. So there continues to be a fair amount of activity within the portfolio itself.

Very helpful. And just one quick one. The software exposure, I think last quarter, you said it was 40% in the portfolio. You had a refi. What's the exposure as of 3/31?

Yes. Look, as you know, we don't think of software as an industry. We gave that number as a proxy to what we believe others in the space, including enterprise software. That has not meaningfully changed. In fact, we had one payoff. So if anything, it's down a bit, but it's not meaningfully changed quarter-over-quarter.

Our next question comes from Rick Shane from JPMorgan.

Look, and you talked about this a bit in your response to Fin's question, but there's a lot of conversation about how terms and structures have changed since December. If you can help us understand sort of specifically what types of changes you're seeing, not only in terms of spreads, but in terms of structure, in terms of covenants that would be great. And more importantly, if you can put where we are today in the context of the historical continuum, because I don't think we're in sort of this dislocated market. I think, we're probably more in the middle, but I'd like to understand how you guys see things and also valuations on the underlying equity positions.

Yes. I'll take a first swing at that, and then I'll pass it to Ross. So I think that's the right characterization, which is the pendulum is starting to swing back towards the middle from where it was to historic tights, both in pricing fees, and structures. The encouraging thing is all of those are actually improving. We're seeing anywhere from 50 to 75 basis points of spread widening across all industries. I think more encouragingly for us and 1 of the reasons that we were not participating in the market as robustly as others over the past 2 years is that underwriting standards are getting better. You're getting more access to management teams, you're getting better data. Your ability to underwrite and prove your core thesis is better. That is what was keeping us from being able as much as pricing from being able to participate in the market. Those dynamics are better. I would say leverage on average is probably down 0.5 turn to 1 turn in total from what we were seeing at the historic tights. Documentation standards are getting better. So all of those things are contributing to a much better environment, but to your point, I think that pendulum is swinging more to the middle than to look, what would be a deeply distressed environment where you've seen us grow by leaps and bounds in times of past. But that's how I characterize it. Ross, do you have anything you'd add?

I don't have a lot to add. The other thing I'd say that we're seeing is better preservation of the headline economics. So things like carve-outs to call protection, we're seeing pared back where step-downs are set versus headline spread. Those are all things that have been important to us and that we've selectively decided not to participate in transactions where we're not getting the terms to preserve the bargain for economics, and I think we're seeing it come back our way a bit.

Got it. Okay. That's helpful. I mean, is it -- should we think of it that last year you would get sort of an RFT and the request would be, okay, here's the docs, or here's the valuation pack and you have 2 weeks to respond and this is all the information you're going to get now the due diligence time frames are extended to 4 weeks? Like I'd love to anecdotally sort of think about how this has changed from your perspective.

Yes. I'll take that because I've been pretty vocal about this. And actually, in my letter to the team starting the year, this is one of the headlines, which is we will not be velvet roped in processes if we're not getting access to management and the data to underwrite our credit thesis, we don't participate in those deals, literally is almost verbatim what I said to the team. There was this velvet roping by issuers, both private equity and corporates because of the tight markets that, at least in our view, we're contributing to looser underwriting standards and very, very intense time lines, very little access to management, if at all, no real Q&A. And as a result, not only did we shrink the portfolio last year, but if you look at our originations that we did do, they were predominantly nonsponsor away from kind of the traditional channels. We lean very heavily on the thematic originations platform that we've built for -- to be robust through all environments. What we're seeing so far, and this could change is just better access all around. Access to management teams, actual management meetings. I actually think our team is -- this is -- our team is at a management -- all day management meeting today on a special situation deal. It's an 8-hour session. Those are the types of environments that contribute to the full understanding of the businesses, the ability to underwrite your credit thesis, and we do believe that is returning to the broader market and the credit environment as well. Hopefully, that's helpful.

It's very helpful. I appreciate it. And it will be interesting to see how things continue to evolve.

Our next question comes from Kenneth Lee from RBC Capital Markets.

One more on the ROE outlook there. Wondering whether you've been embedding any assumptions or benefit from potentially wider spreads on new investments or at least less spread compression for any kind of prepayments and refis. Just wondering whether there's any impact on the assumptions there.

Yes. From where we set our base dividend, it did not have an impact. But as we think about the future, we do believe that's going to slowly roll through and spreads will increase over time. We do think we are nearing trough levels just based on what we're seeing in the pipeline and in the markets in general. Ian, you're closer to kind of the projections, anything to add to that?

Yes, we did not update our new issue spreads for the purposes of this exercise. I think if you think about the volume of new deals relative to the size of the portfolio, you need to have quite a significant amount of origination activity for that to move the needle. Our business from an ROE perspective in the near term is much more oriented towards repayment activity.

Yes. The one thing, because I think this is important as you think about the future, not only should you see spreads begin to increase over time through the book as you layer on new deals. There are opportunities, obviously, to -- with amendment fees, et cetera, as our portfolios come back to us as they're doing M&A, et cetera, to slowly reprice the book as well. That did not go into our numbers in the near term, but that should show up in -- after several quarters. So that's one of the things that leaves us pretty encouraged about the future earnings of the business.

Got you. Very helpful there. And it looks like you made some initial investments related to the SCP JV, just given the discussion around the geopolitical uncertainty and just the general backdrop there. What's sort of like the outlook in terms of how fast could you ramp up further in terms of that JV there?

Yes. Thanks for the question. This is Ross. So in Q1, SLX invested $14.7 million into SCP, so 0.4% of SLX investments at fair value. This was the first quarter of activity when we put the program in place. Our base case expectation was that it would take about 2 years to 2.5 years to get to fully ramped. That continues to be our expectation. We've continued to invest into the program over the course of 2Q. So there were two CLOs that were priced before the end of Q1 that closed in 2Q. And overall, we are pleased with the results that we think we're achieving in the program. We were able to take advantage of some of the periods of dislocation in 1Q to build the portfolio at attractive prices. And despite the volatility, we're able to price the liability side of those two CLOs at levels that are consistent with the returns target for the program.

Our next question comes from Paul Johnson from KBW.

Yes. I was wondering if you could provide just kind of a very general update in terms of roughly what percent of the portfolio was sort of originated pre-2022. I think last quarter, you said roughly about 20% of it was kind of pre-2022 originated. I was just curious if that's changed at all since last quarter.

No. It's very similar percentage. It has not changed. So pre-2022 is now 8% of the portfolio. No, no, I'm sorry, 18% of the portfolio. I missed the bar, but yes, about 18% of the portfolio.

Okay. And then I was just curious, Mindbody that refinanced during the quarter. So there's some evidence obviously that the market is still there in terms of software companies. But I'm curious, in the last quarter, you also kind of talked about a little bit of slowing economics just within the software space in terms of the lending within that space. But I'm just curious, kind of based on some of the recent transactions, if there's anything that could be deduced from that in terms of what the common thread is of companies within the software space that are able to transact like that, refinance loans, and those that might have a much tougher time doing so.

Yes. I think the trends that we're seeing within our software portfolio is consistent with the commentary that we gave in the prior quarter. So while top line continues to grow at a high single-digit rate on a broad basis, there has been a bit of deceleration in that number. But our portfolio companies are expanding margins and improving leverage profiles, which we think is ultimately supportive of refinancing activity. We talked about MadCap as an example of that transitioning from the private credit market into the bank market, given the deleveraging that the company had been able to achieve. And overall, as we look at our portfolio, we view management teams and sponsors generally as being forward-footed in finding ways to continue to drive organic growth as well as selective inorganic opportunities in order to sustain the deleveraging that we see within our credit book.

Yes. And the only thing I would add to that because I think one of your questions was what we're seeing as far as spreads and leverage for new deals, there was muted activity of new deals in the technology space. In general, there were a couple of proof points. There's one in particular that was a U.K.-based software provider that priced maybe 50 bps wider than it would have been -- would have a year ago, but it was -- it's still a pretty robust package. I think it was 7.5x leverage so for 5 to 5.25. We did not participate in that. We were lower in leverage and wider on pricing, but there seems to still be a pretty robust market for anything other than what people perceive as having immediate AI disruptive risk.

Our next question comes from Derek Hewett from BofA Securities.

Since this is generally a better spread environment and really maybe even just more of a lender friendly environment, how should we think about capital issuance, assuming the shares continue to trade above book, which could potentially help pare back a little bit of the software exposure? And then to the extent that capital issuance makes sense, would you be leaning more towards just ATM issuance at this point? Or would you be willing to do overnight transactions?

Derek, it's Ian. Thanks for the question. I think there's no change to the framework that we've talked about in the past about the conditions that we want to see for considering new issuance. And so we want to have high conviction about the pipeline. We want to have high conviction about the ability to drive earnings as a result of accessing growth capital. So that's a really important piece for us. As to the tool we use, the way we communicated it 12 months ago when we put in place the ATM is it's an efficient tool. So I think our mindset is always how can we be efficient with our shareholders' capital and how can we generate the best outcome if there is an opportunity to raise capital? So without specifically answering which methodology, it's really going to come back to our view on the pipeline before we think about the tool that we apply.

Okay. And then maybe a quick follow-up. Just in terms of circling back to the software portfolio. What is the -- like either the median or average EBITDA of the software portfolio? Or like how would you characterize it relative to the overall weighted average EBITDA?

Do you want to go, Ross?

Sure. Overall, we see margins in the software portfolio as broadly consistent with the overall portfolio, but also expanding at a quicker pace in the overall portfolio. So hopefully, that helps give a little bit of context.

EBITDA margins are a bit higher, and they're expanding. I think quarter-over-quarter, they're up from 20% on average to 22% margins. That's been the historical trend, right? You've seen businesses continue to have slowing growth, which was maybe 2 years ago in the low to mid-teens on an average basis to high single-digit revenue growth, earnings growth continues to trend above that as companies move more to profitability. That has really been the trend post COVID when it was really a growth at all cost environment. And when we believed both public and private markets were kind of missed reading the signals from unit economics and the valuations were not in line with those declining unit economics, but it continues to be healthy, broadly in line on a growth basis, but probably more on the margin, just more profitable businesses in general.

But what about on the absolute level? Is it -- are the software companies, are they similar in terms of the top line with the overall portfolio in terms of EBITDA? So the weighted average EBITDA for the overall portfolio was a little under $130 million for software.

Yes, I would -- I don't know that we have that number in front of us. I would guess they're broadly in line, but we'll have to get back to you.

Our next question comes from Ethan Kaye from Lucid Capital Markets.

Most of mine have been asked and answered, but maybe just a quick one. It looks like commitment activity was relatively kind of in line with historical average was really the funding activity that was maybe a bit lower. I'm curious whether perhaps that suggests, maybe there are some deals like towards the end of the quarter that were closed but not funded? Or if you can just help us kind of reconcile that delta between the commitments and fundings for the quarter?

Yes, Ethan, it's Ian. That's a good observation. Just to be clear, that commitment figure includes the full commitment to the structured credit partners JV. So Ross made the comment earlier that we funded about over $14 million in the quarter, but the commitment was $200 million that was previously disclosed. So that's in the commitment number.

The full -- okay, the full SCP, $200 million.

Yes. I point you don't read too much the gap. It's sort of very specific given we commenced operations of the JV in this -- in Q1.

I'm showing no further questions at this time. I would now like to turn it back to Bo Stanley for closing remarks.

Great. Well, thank you, everyone, for the thoughtful questions. Thanks to the team for the preparation here. And I just want to wish everybody Happy Mother's Day weekend.

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.