Sixth Street Specialty Lending, Inc. (TSLX) Q2 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Sixth Street Specialty Lending, Inc. Quarter 2 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Cami Senatore. 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 second quarter ended June 30, 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 second quarter ended June 30, 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. For our call, I will review our second quarter highlights and pass it to Ross to discuss investment activity in the portfolio. Ian will cover our financial performance in detail, and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported second quarter net investment income of $0.43 per share or an annualized return on equity of 10.6% and net income of $0.43 per share or an annualized return on equity of 10.5%. Net asset value per share was $16.24 at quarter end, stable compared to the prior quarter. Our Board has approved a base quarterly dividend of $0.42 per share to shareholders of record as of September 15, payable on September 30. Our second quarter operating earnings exceeded the base dividend level we established last quarter. As we discussed on our last earnings call, we expect activity-based fee income to normalize over several quarters following the market volatility experienced in the first quarter. Consistent with that expectation, repayment activity increased sequentially in the second quarter and contributed to $0.08 per share of activity-based fees during the quarter, although it remained below our long-term historical average. Based on the repayment activity we have experienced thus far in the third quarter, we expect this momentum to continue and are increasingly constructive on activity-based fee income in the second half of the year relative to the first half. Following the meaningful widening of credit spreads in Q1, LCD first-lien spreads were largely unchanged during the second quarter, resulting in limited impact on the fair value of our debt investments from market inputs. The stability of our net asset value per share in Q2 reflects the underlying credit quality of our portfolio, resulting from our consistent focus on disciplined asset selection, structural downside protection and active portfolio management. Portfolio company performance remains strong as evidenced by stable nonaccruals, improving interest coverage and consistent revenue and EBITDA trends. We believe this portfolio quality supports the durability of our business' core earnings power and our ability to generate ROEs in excess of our cost of equity capital through changing market environments. Stepping back, we continue to operate in a market environment characterized by elevated interest rates, geopolitical uncertainty and evolving structural dynamics within private credit. Notwithstanding these uncertainties, the underlying economy has remained generally stable. Recent labor market data, including unemployment claims hovering near multi-decade lows, reinforces that view. We are also seeing early indications of a general pickup in transaction activity as we move through the back half of the year. As companies and sponsors develop greater conviction around industry fundamentals and operating outlooks, we expect a more active M&A environment. For SLX, a more active market should support both increased origination opportunities and higher repayment activity. With that, I'll now pass it over to Ross to discuss this quarter's investment activity.

Thanks, Bo. I'd like to begin with the investment environment. Second quarter activity levels reflect the lagged effects of the market volatility experienced in the first quarter. Direct lending volumes declined by approximately half sequentially and compared to the second quarter of 2025, while private equity deal activity also slowed materially. Sponsor-backed M&A, which is an important driver of financing activity in our market remained constrained as limited exit activity and uncertainty around financing costs continue to suppress transaction volumes. Despite that backdrop, our own investment activity stayed consistent with Q1. During the second quarter, we provided total fundings of $137 million across two new investments and capital called by our joint venture Structured Credit Partners. Our Q2 fundings are a result of our platform's reach and our focus on maintaining deep long-term relationships with our borrowers. Both of our new investments during the quarter were made with borrowers where Sixth Street had long-standing relationships and prior lending experience. We believe this is particularly important in periods when market-wide transaction activity is limited. Our investment in [ Photo Holdings ], also known as Shutterfly, is a good example of this connectivity. As an investor in the company for several years, we have a deep familiarity with its business model and capital structure. This established relationship with both the sponsor and management enabled us to engage constructively on a refinancing of its existing debt resulting in a bespoke structured solution that includes significant contractual amortization, robust documentation and attractive economics for SLX shareholders. We believe this transaction illustrates a core advantage of our platform, the ability to leverage long-term relationships, differentiated conviction and scale of capital to solve for complexity where traditional sources of capital may be less accessible. Pivoting to payoffs, we experienced stronger portfolio turnover during the second quarter relative to Q1. Total repayments in Q2 were $192 million, which drove net repayment activity of $55 million. Repayments increased by approximately 70% compared to first quarter, resulting in annualized portfolio turnover of 23% in Q2 and 18% for the first half of the year. As Bo noted, this activity generated $0.08 per share of activity-based fee income in Q2. We benefit from embedded call protection and unamortized OID in our portfolio that provides meaningful earnings upside and stronger repayment periods. The repayment activity we experienced during the quarter was primarily driven by refinancings in either the private credit or broadly syndicated loan markets. An example is our investment in TS Imagine, a global financial technology provider, which was repaid in June. The company refinanced its existing senior secured credit facility in the private credit market. Upon repayment, we received call protection, which contributed to an unlevered IRR of 15% and a 1.7x multiple of money for SLX shareholders. While transaction volumes remain muted on a broad basis, we are beginning to see earlier signs of a healthier direct lending market. Capital inflows have slowed and underwriting processes are becoming more disciplined, including with respect to documentation, lender protections, access to management teams and the depth of diligence lenders can perform. We believe these developments should be beneficial for the sector over the long term. This shapes our view that we are in a period where the market prioritizes credit quality and certainty over pure speed, which aligns with our investor-first approach. The pace of new opportunities in our pipeline is accelerating. And while the timing of a broader recovery remains difficult to predict, we have the flexibility to remain selective. Our focus remains on leveraging the full breadth of the Sixth Street platform to identify those specific opportunities where we can earn the most attractive risk-adjusted returns for our shareholders. Moving on to portfolio metrics and yields. At June 30, the weighted average total yield on our debt and income-producing securities at amortized cost was 11.2%, reflecting no change compared to March 31. Our omnichannel sourcing capabilities enabled us to put capital to work in a disciplined manner, demonstrated by a weighted average spread on new first-lien investments of 690 basis points, which compares to a spread of 527 basis points on new issue first-lien loans for BDC peers in Q1. Our ability to originate new investments at attractive spreads remains an important differentiator. Over the trailing 12 months, our investment spread on new commitments, excluding structured credit investments, averaged 6.8%, largely consistent with the 7% spread on all floating rate investments across our existing portfolio. This alignment supports the durability of our forward earnings power and mitigates the potential for spread compression as the portfolio turns over. In addition to maintaining discipline on new investment spreads, we remain focused on the high documentation standards that underpin our downside protection. At quarter end, we maintained effective voting control on 78% of our debt investments with an average of two financial covenants per investment, consistent with historical levels. Embedded call protection in our loan documents is a critical component of our underwriting process as it allows us to counteract reinvestment risk and drive long-term value for shareholders. Before turning the call over to Ian, I'd like to provide an update on our existing portfolio companies, highlighting key metrics. 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 5.3x, respectively, with weighted average interest coverage of 2.4x. As of Q2 2026, the weighted average revenue and EBITDA of our core portfolio companies was $465 million and $137 million, respectively. Median revenue and EBITDA were $180 million and $57 million. Finally, overall portfolio performance remains strong as evidenced by a weighted average internal investment rating of 1.20 on a scale of 1 to 5 with 1 being the strongest. Credit quality continues to be stable with no new portfolio companies added to nonaccrual status during the quarter. As of June 30, we had three portfolio companies on nonaccrual status, representing 1.3% of the portfolio at fair value. Top line growth has remained stable, while earnings durability has accelerated, signaling a resilient demand environment and increased operating scale across our end markets. Across our core portfolio companies, LTM revenue and EBITDA growth were approximately 8% and 11%, respectively. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Thank you, Ross. For Q2, we generated net investment income and net income per share of $0.43. Total investments were $3.3 billion, in line with the prior quarter. Total principal debt outstanding at quarter end was $2 billion and net assets were $1.5 billion or $16.24 per share. During the quarter, we completed two capital markets transactions to further enhance our debt maturity profile and balance sheet positioning. As mentioned on our last earnings call, we closed on an amendment to our revolving credit facility on the 1st of May, maintaining the pricing and key terms of the facility while extending the final maturity to May 2031. Also during the first week of May, we issued $300 million of long 5-year notes at a spread of treasuries plus 180 basis points, marking the second tightest spread SLX has printed in the 5-year part of the curve. As we do with all our issuances, we swapped these fixed rate notes to floating at a spread of SOFR plus 185 basis points. This issuance illustrates execution on our underlying philosophy of proactively managing our liquidity needs with term unsecured financing and our commitment to enhancing the depth of our investor base with each issuance. Following these transactions, our capital, liquidity and funding profile remain in excellent shape. For the second quarter, our average debt-to-equity ratio was 1.24x, up from 1.14x in the prior quarter, and our ending debt-to-equity ratio increased from 1.18x to 1.27x. Ending leverage was higher this quarter, driven by cash on the balance sheet held at quarter end that was subsequently used to satisfy the maturity of the 2026 unsecured notes in August. Net of cash held at quarter end, ending net leverage was 1.17x, down slightly from 1.18x in the prior quarter. We had approximately $1.1 billion of unfunded revolver capacity at quarter end against $221 million of unfunded portfolio company commitments eligible to be drawn or coverage of approximately 4.9x. As of June 30, our funding mix was represented by 79% unsecured debt. Post quarter end, we repaid the $300 million of unsecured notes that matured on August 1, 2026. The repayment modestly reduces our prospective weighted average cost of debt. Following the repayment and assuming the use of available revolver capacity and quarter end cash on our balance sheet, we had approximately $966 million of undrawn revolver capacity, representing more than 4.4x our eligible unfunded portfolio company commitments. We have no near-term maturities with our nearest obligation being $300 million of unsecured notes due in the second half of 2028. As it relates to our equity capital, on two separate days during the month of June, our 10b5-1 stock repurchase program was triggered, resulting in the repurchase of approximately $500,000 of common stock, representing roughly 31,000 shares at an average price per share of $16.17. As a reminder, our 10b5-1 program is structured to execute automatically to buy back shares whenever our stock trades at a price that is at least $0.01 below our most recently reported net asset value per share. This automatic framework underscores our conviction in our valuation marks, allowing us to systematically capture an accretive use of capital whenever market pricing diverges from our reported net asset value. This disciplined approach ensures we are allocating capital to the most value-enhancing opportunities for our shareholders. And for completeness on equity capital, we did not issue any shares through our ATM Program during Q2. Pivoting to our presentation materials. Slide 8 contains this quarter's NAV bridge. Walking through the main drivers of NAV movement, we added $0.43 per share from net investment income against our base dividend of $0.42 per share. There was a $0.06 per share positive impact to NAV primarily from net unrealized gains on investments attributable to movement in equity market multiples. The impact of widening credit spreads on the valuation of our portfolio decreased net asset value by $0.04 per share. The reversal of net unrealized gains on the balance sheet related to investment realizations resulted in a $0.02 per share reduction to NAV. And finally, there was $0.01 per share of net realized gains mainly from equity realizations in Caris Life Sciences. Moving on to our operating results detail on Slide 9. We generated $97.8 million of total investment income for the quarter, up from $93.4 million in the prior quarter. Interest and dividend income was $88.5 million, up modestly from the prior quarter. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were higher at $5.4 million compared to $3.4 million in Q1, driven by the increase in prepayment fees earned in Q2. Other income was $4 million, up from $2.2 million in the prior quarter. Net expenses were $55.7 million, up from $52.4 million in the prior quarter, primarily driven by an increase in interest expense quarter-over-quarter. Our weighted average interest rate on average debt outstanding increased slightly from 5.5% to 5.6%. This was primarily the result of a shift in our funding mix following the 2031 notes issuance. Lastly, on undistributed income, we estimate that to be approximately $1.12 per share at the end of Q2. Before handing it back to Bo, I wanted to provide an update on our ROE metrics. Year-to-date, we've generated annualized ROE based on net investment income of 10% (sic) [ 10.6% ]. As discussed on our first quarter call, we anticipate annualized ROE of 10% to 10.5% if full year portfolio turnover remains below 20%, with annualized ROE above 10.5% should portfolio turnover be higher. With that, I'll turn it back to Bo for concluding remarks.

Thank you, Ian. In closing, we remain encouraged by the fundamental strength of our in-the-ground portfolio and the improving opportunity set across the direct lending market. While the global landscape remains marked by complexity and pockets of fragility, these are the environments for which the Sixth Street platform was built. We believe market activity may be approaching an inflection point. While there is an inherent lag between the transaction environment we are observing today and our reported results, we are increasingly confident that conditions are becoming more supportive of M&A activity. The momentum we are seeing in our pipeline supports our expectations for a more active second half of the year. As conditions evolve, we expect to see a wider dispersion of outcomes across the market, and we believe SLX is well positioned to navigate this backdrop. Our confidence is rooted in the quality of our portfolio. Just as importantly, the breadth of the Sixth Street platform, including our thematic sourcing capabilities, sector expertise and scale of capital, which allows us to remain patient and disciplined, ensuring we prioritize opportunities where we can earn attractive risk-adjusted returns. Periods of uncertainty often yield the most compelling deployment opportunities, and we believe our platform, liquidity and investment discipline uniquely position us to capitalize on this evolving market and drive long-term value for our shareholders. With that, thank you for your time today. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan.

Ian, look, at the end of your comments, you touched upon the impact of -- potential impact of portfolio turnover. And I want to ask a couple of questions, one related to that. First, when we think about the dynamics that are driving normalization there, can you tell us a little bit about what is precipitating that activity? Is it the rebound in capital markets and equity prices driving valuations that make it attractive for sponsors to exit or just to be able to refinance on better terms?

Rick, thanks for the question. This is Bo. I'll take that. So there's, as you know, two components really that drive activity-based fees and payoffs within the portfolio. Those two components are first refinancings, which we saw last year a very active refinancing market with very tight credit conditions and compressed spreads. You're not seeing that activity materialize here in 2026 is generally, you're in a better spread environment to deploy. So you're not seeing a lot of activity-based fees or repayments related to the refinancings. The second component that drives refinancings is M&A activity. And we were maybe a little different than others last quarter signaling to the market that we believe that market uncertainty, the war in the Middle East, higher energy prices, we're going to pause the market on M&A activity. And we signaled that to folks, and that is what played out. The good news is we're starting to see that thaw out. We're seeing that within our pipeline. We've also seen that just within our payoff activity. We had a couple of names pay off in Q2. One was an M&A activity, the other was refinancing. We've already had a couple of payoffs in Q3 shortly after Q2 close. Again, M&A activity, one was a refinancing. But -- so you're just seeing a better signs of life in M&A. What I would expect in the second half of the year is muted activity-based fees or activity from refinancings because I still believe it's a better spread environment. We're going to continue to see that persist. But M&A activity is going to pick up, and that will drive more payoffs.

Got it. Very helpful. And you actually then almost perfectly segued into the second part of my question. You guys kind of teed up everything I wanted to talk about. Last quarter, you spoke a little bit about the improving dynamics on the origination side in terms of structure, in terms of diligence, in terms of spread. As activity is picking up on the M&A side, have you been able to retain that ground? Have you gained a little more ground? Where do we stand at this point?

Yes. Look, Ross had some commentary in the prepared remarks, and I'll let him comment a bit as well. But we continue to see those trends. Spreads are generally wider. Maybe it's 25 to 50 basis points, but they're generally wider. Fees are better. But more importantly, processes are just better. I think your ability to actually have access to management to do a full underwriting process, get access to data, have better loan documentations, all the things that we think are important, not only for portfolio yields, but also to protect the portfolio and manage the credits are all better. Ross, is that fair to say?

I agree with that.

Our next question comes from Finian O'Shea with WFS.

I wanted to ask about the bump in the structured credit JV, seeing if this indicates a faster pace of ramp. Also sort of second part, the yield was elevated. Is that sort of a par flush or seeing what to expect there? And then tying those things together, if this does ramp in an expedited way, it looks like you'll be meaningfully above the dividend, let's say. So how you would address that?

Hi, Fin, it's Ross. I'll take those questions. I think on ramp pacing, so through June, the joint venture had called $154 million of equity. So we're a bit over 25% ramped through the first 6 months of the program. And when we look out in the back half of the year and beyond, I think the pacing is really in line with the pacing that we expected and communicated when we established the joint venture. So less to do with accelerated pacing, pacing really in line. I'd say from a quarter-to-quarter standpoint during the ramp phase, there's a couple of different dynamics that will impact the dividend yield from quarter-to-quarter, things like amortizing JV level expenses, what financing structures assets sit in between warehouses and securitizations. I think as we look at the asset spreads that we're originating in the joint venture and the liability market, we continue to feel comfortable with the medium-run guidance that we had given for the joint venture's dividend contribution to its members in the low to mid-teens context.

Would you be able to give the dividend guide from the JV for the third quarter?

I don't think we're going to do that on this call, Fin. I think generally, the -- it will depend on specific timing of securitization closes and overall loan market dynamics over the next several weeks. Obviously, we adjust pacing of ramp to asset market conditions as well. So I think we're really more focused on planning the business using more medium-run guidance.

Okay. That's helpful. And just, I guess, a final one on that, like not -- I think most of us here aren't much of CLO experts, but from what I gather, it's not the best time, the arb isn't great and all that, but there are opportunities, deeper discounts in the software sector per se. Are you more aggressive on that end? Or is this more of a clean, just sort of arb play right now and maybe in the future as you ramp?

Yes. I think on the asset side, the investment strategy is consistent with Sixth Street and Carlyle's broader CLO investing strategy. So our 10-Q includes a number of portfolio metrics, including industry composition of the pool. It's diversified. It's not concentrated in a particular industry. We also break out weighted average spread on investments held within the joint venture financing subsidiaries, which is a bit under 280 basis points. So we view this as a high-quality portfolio, not one that's focused on excess risk on the asset side. And I think as we highlighted in the initial comments around the joint venture, really a big part of the power is the fee-free nature versus the fee-bearing nature of market CLOs that you may reference. And so this program has a 400 to 500 basis point equity return advantage, which allows it to ramp attractively even in tighter arb environments.

Our next question comes from the line of Arren Cyganovich with Truist Securities.

Investment activity, obviously, it's good news. You're seeing some increase and you highlighted your pipelines getting more active, seeing some potential for the second half. Do you think that this is picking up soon enough that you'll actually see some closings in 3Q? Or will it likely be more of a 4Q story?

So pipelines are fickle and general processes run anywhere from 2 weeks on the extreme end to 12 weeks plus. And as we focus on larger deals that maybe have more complex regulatory approval, those can even be more prolonged. The good news is the pipeline includes a lot of late-stage deals that we have decent visibility into. So we do believe you'll start to see that in Q3, but then a marked pickup in Q4. So it's going to be mix. We do see -- we have some things already committed to subject to regulatory approval that should close. We don't have control over that. But I would expect to see some activity in fundings in Q3 and then spilling over certainly into Q4.

Got it. And then maybe you could provide a little update on how your software portfolio company exposures are performing relative to the overall portfolio in terms of either revenue growth or EBITDA growth? And what's the latest update in terms of your software loan exposure is.

Yes, I'll take that. So our technology portfolio continues to perform in line with the general rest of the portfolio. We saw, as we mentioned, about 8% portfolio revenue growth. That was in line with last quarter. We saw a step-up in earnings growth to 11% from, I believe, 9% last quarter-ish. So we're seeing better earnings power, but a continued healthy portfolio. That is true of the technology. It's almost on top of it. It's actually a little bit better from a growth rate standpoint and a little bit better from an earnings standpoint. We're seeing no trends related to particular end markets within technology. Retention rates continue to be stable. So it continues to be healthy. That said, we do believe there will be continued tails. And what I've seen generally, not just in our portfolio, but across the sector is a dispersion of outcomes for businesses. So the businesses that have been performing poorly over the past couple of years continue to perform poorly. But for the most part, the bulk of technology and software names are -- have healthy bookings and are not seeing disruption from any AI initiatives to date.

Our next question comes from the line of Ken Lee with RBC Capital Markets.

Just one on the prepared remarks, you mentioned that you've been seeing consistent spreads on new investments, consistent -- on the new investments with the existing portfolio on a trailing 12-month basis. Just curious, has there been a mix shift towards more complex, more differentiated investments over the last several quarters to be able to support that kind of spread. Just wanted to dig in a little bit more and see where some of that differentiation is coming from.

I'll take that, and Ross can add anything if he'd like. So the power of our platform allows us to be very thematic in our approach to go-to-market and find things that are in the scenes, frankly, away from where a lot of our competitors are sourcing. And that has been a big driver of our originations over the past six quarters of last year, we were very vocal about doing more sort of nonsponsor-related activity than we had seen in historic periods. We've seen a continuation of that trend. And I think last quarter, we mentioned our -- the restructuring initiatives and good company, bad balance sheet type situations, we expect to see more of. We probably had one of those originations this quarter that Ross can talk about. But it's really just the power of the platform and that thematic originations that allowed us to be very consistent with our spreads on what we've originated.

Yes. I think, Ken, this is Ross. Shutterfly is maybe a good example of an investment that fits within our kind of complex balance sheet but high-quality underlying company theme that we've invested in since inception. So that's a dollar one first-lien term loan that we put in place alongside a secured bond issuance in 2Q to refinance the company's capital structure. It's a name that our platform had been invested in over several years. So we had real differentiated insights and views on the company that allowed us to drive a very detailed underwriting and as a SOFR plus 700 basis point spread on that investment consistent with the overall portfolio, one that we think is consistent with the ROEs we're targeting for the SLX business.

Got you. Very helpful there. And one follow-up, if I may, just in terms of the ROE outlook, any other key factors or drivers that we should be mindful of besides the activity-based fee income just for the near term there?

Hi, ken, it's Ian. I think we really think about the upside in our business being tied to elevated activity levels. And so that's why we chose to guide the -- reframe the guidance towards that as the metric. If you think about our portfolio turnover year-to-date of about 18% and our year-to-date ROEs being in that 10% to 10.5% range, that's kind of where we're living today. Does that present upside? We would like to think so, but we can't control the portfolio turnover.

Our next question comes from the line of Chris Muller with Citizens Capital Markets.

Nice to be with you. Maybe starting with the interest rate environment. So given that there are 2 rate hikes priced in by midyear '27, do you guys feel that the tailwind, if that's realized, will put a floor on NII? Or could there be some spread compression and leverage moving lower to offset that? Just curious how you guys are thinking through those dynamics.

That's a really good question. If you look at the forward curve, it has certainly shifted from what we've seen as historical levels and would be supportive of better earnings if the spread environment remains. For the time being, what we're seeing on the origination side, we're seeing continued strength in the spread widening that we've seen in the past, as I just mentioned. So I think we're hopeful that spreads will have reached a floor, and they're not going to be offset by risk-free rates being higher for longer and actually shifting up and to the right. So that would be supportive of better earnings in the future for the space. We're cautious with that because what we saw before was as risk-free rates came down, people offset that with spreads. It is a little bit different competitive environment, certainly with capital coming out of the space and the reallocation of capital away from direct lending. So we're hopeful that's supportive of better long-term earnings for the space and for us.

And I'd just add, Chris, it's Ian. Even if we just look at the data on movement in the forward curve since we last held an earnings call, we're seeing an uplift of 40 to 50 basis points through the end of 2026. So that supports your initial question about it being supportive of overall earnings. Hopefully, that's helpful, Chris.

That's very helpful. And then just a quick clarifying one on the Structured Credit Partners JV. Can you guys just remind me what the target leverage for that vehicle is and just how much of a contribution to earnings it will be once it's fully ramped?

Sure. I'm happy to take that one, Chris. So generally, we would expect that the financing subsidiaries of the joint venture will be something in the 85% to 90% debt to capitalization range, consistent with the way CLOs are structured, which is the final financing structure for the assets that we're ramping within that portfolio. And we haven't given specific contribution guidance at the TSLX level other than to say the target total investment size for TSLX is $200 million. And again, expect a medium-run dividend yield contribution in the low to mid-teens context on that amount.

Our next question comes from the line of Robert Dodd with Raymond James.

I want to reconcile something, if I can. Bo in your opening remarks, you said, obviously, you thought third quarter maybe through the rest of the year, you expected momentum on activity-based fees or we're increasingly optimistic on activity fees in the second half. When I look at the disclosures elsewhere in the portfolio, right, your core price to principal in the portfolio went up a little bit. That's to be expected. I think Shutterfly maybe would have moved that. But your fair value to core price declined, which normally would imply to me that there's lower confidence embedded in the portfolio fair values that the core protection is going to be realized. So can you reconcile that into -- or is it a case of you're optimistic, but you don't have anything identifiable and so it's not factored into the portfolio, but you're hopeful.

Yes. Like I think we're optimistic because we're seeing an increase in the pipeline and M&A activity, which is an early indicator that there's a pickup in M&A, and there's going to be more transactions. That's also coupled with the fact that we've actually seen already a couple of payoffs related both to M&A and refinancings. As it relates to the call price, you're right, our price call price to book widened with a couple of our originations that had a strong call protection, but there's nothing embedded within that, that would suggest that we're not confident of activity-based fees in the future.

Well, I would just say, normally, when you have an imminent activity-based fee that you would expect rather than optimistic about, you tend to factor it into fair value for the asset, and that didn't appear to happen this quarter. But thank you for that. In terms of the -- on structures, do you think if the market remains more rational for lack of a better term, right, to your point, the credit quality matters more than speed. Do you think there will be more opportunities for your specialty, I mean, finding those slightly more complex things. Do you think complexity is going to grow as a share, if you can -- if I can, of the private credit market over the next several years, which obviously would play into your hands if it sort of -- if it did?

Yes. We're generally optimistic that we're entering a period of more complex capital needs. That's coupled with a very robust financing market over the last couple of years where you saw erosion of credit standards, et cetera, and probably a very robust M&A market where things may or may not have been over-levered. Now look, the backdrop also is supported by a generally decent economy. So you're seeing some earnings growth that maybe offset that. But we do believe -- the forward is going to be about managers that have the liquidity and the capabilities to navigate complexity. And I think that's what Sixth Street has been set up for.

Our next question comes from the line of Paul Johnson with KBW.

I'm just curious, like given everything that's occurred this year, like how has the dynamics, the competitive dynamics within the direct lending market, particularly kind of in the upper middle market area, how has that changed this year, I guess, if at all? And are you seeing, I guess, more opportunities to be leading deals, taking effective control of more deals just with some of your competitors that could be potentially a little more constrained?

I think that's definitely a trend that we're seeing. As capital has come out of the market, mainly the capital inflows reversing from the retail -- those that had exposure to the retail fundraising market, you've seen less competition in the upper middle market. That has afforded us the opportunity to be a solution provider in that market. And as you know, we generally like to play a lead role or at least have effective voting control in the majority of our transactions. That's no different than the opportunity set that we're seeing today. I also would say this happens from time to time as market dynamics shift, but the relative value of what you're seeing in the upper middle market from an opportunity standpoint on a risk-adjusted basis is generally better than what you're seeing in the lower middle market right now. So that has been the focus of our originations that can change, but that has been a focus for us.

Got it. Appreciate that. I'm also just curious with some of the changes made at the Fed Reserve here recently and moving away from guidance towards some of these meetings, does that affect sponsor positioning at all or in any way kind of prolong, I guess, the exit path maybe here in the near term as we have less visibility over the forward Fed rate and any sort of potential action from the Fed Reserve? Or I mean, is there anything changed there at all?

I don't think it's specific to that. What I would say is whenever there's periods of uncertainty, it makes it harder for both private equity and corporations to transact. I don't -- I have -- in the conversations I've had with those managers, I haven't specifically heard anything called out around uncertainty with the Fed change in stance there. But I would generally say the less certainty, the harder it is to transact. That being said, we are seeing, as mentioned, a little bit better activity in the pipeline than we had seen earlier in Q2. Coming into Q2, it was very, very anemic.

Our next question comes from the line of Ethan Kaye with Lucid Capital Markets.

Just one quick one for me. Wondering whether you're seeing kind of any more opportunities to buy discounted assets in the secondary market. Is this something you're anticipating becoming a bigger share of new investment activity?

Yes. Thanks for the question. We get this a lot. We wish there were more opportunities to deploy in the secondary market. There really hasn't been. We haven't seen any real meaningful distressed trades because of liquidity, et cetera. There's been some one-off things that we have focused on. There's been some one-off portfolios that are for sale that ended up being quite competitive, but it hasn't been a meaningful opportunity for us to date.

And just to jump in, Ethan, this is Ross. I think where we've seen more opportunity is to pursue private financings of selected liquid loans, again, with Shutterfly being a good example of that actually doing a private loan alongside a liquid security but less so on the purchase of liquid debt.

Our next question comes from the line of Derek Hewett with Bank of America.

Maybe circling back to the forward curve discussion, which could potentially provide some core earnings tailwinds. What about from a credit perspective? Are you concerned that maybe 1, 2 potential rate hikes could either negatively impact credit or maybe even cause the potential recovery in M&A to stall?

Yes, it's a good question. The good news is, I think we mentioned in our prepared remarks, we're actually seeing interest coverage on the portfolio increase sequentially quarter-over-quarter from 2.3x to 2.4x, which is indicative of very healthy earnings growth and earnings power. So we do not actually have concerns at least to date about the forward shift given those strong metrics and the overall health of the portfolio. It may mute the M&A environment modestly. But I think as long as folks can even develop confidence in what they believe is that forward curve and model around that, there may be some activity that folks are comfortable with, and we're certainly seeing that within the portfolio -- I mean, within the pipeline.

Our next question comes from the line of Rick Shane with JPMorgan.

I apologize, I should have asked this earlier in the call. Look, your multiple remains a significant competitive advantage. There are any number of smaller BDCs trading at significant discounts to NAV. I am curious, and you've gotten the question about purchasing distressed assets, but what about just purchasing distressed companies or challenged companies at this point? Is there opportunity there? And when you think about those transactions, is it really an arb -- how important is underlying asset quality in the context of the arbitrage on the multiple of NAV?

Hi, Rick, it's Ian. I'll take this one. I think we're always interested in finding ways to generate shareholder value. So we care about price for asset purchases. We care about asset quality, but the guidance is really just focused on how do we create value for shareholders. So that's sort of the main perspective that we take into any opportunity. I'm not sure that it's easy to take a step back and think about it in the context of the multiple. I think we've always taken the view that our job is to generate a return above our cost of equity. We feel like we have a really clear picture of what that is. And if you think about the guidance that we've given and the track record of generating ROEs that the outcome of that is what the market assigns the multiple to. But if we can find assets to purchase that satisfies that framework, then we're happy to pursue those.

And are you seeing anything in the market that would suggest that some of the -- there are more of those opportunities that exist? I mean, again, look, the history is Josh years ago wrote a piece suggesting that there was a disincentive for managers to sell. You've also seen historically the -- one of the largest players in the space scale their business through those types of acquisitions. I'm just curious sort of given sustained low valuations for some of the smaller peers, whether or not that is unfreezing a little bit.

We have not seen early signs of that unfreezing. We certainly would be happy to explore it when it did, but we are not seeing that as of yet.

I am showing no further questions at this time. I would now like to turn the call over to management for closing remarks.

Great. Thank you very much. Thanks, everybody, for the great questions. I hope everybody has a terrific end of the summer, and we'll speak to you in November. Thank you.

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