Sixth Street Specialty Lending - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to Sixth Street Specialty Lending, Inc.'s second quarter ended June 30th, 2023 earnings conference call. At this time, all participants are on a listen-only mode. As a reminder, the conference is being recorded on Friday, August 4th, 2023. I will now turn the call over to Miss Cami Van Horn, Head of Investor Relations.

Cami Van Horn (Head of Investor Relations)

Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending, Inc's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the second quarter ended June 30th, 2023, and posted a presentation to the Investor Resources section of our website, www.sixthstreetspecialtylending.com.

The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc's earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the second quarter ended June 30, 2023. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Joshua Easterly (CEO and Chairman of the Board)

Thank you, Cami. Good morning, everyone, and thank you for joining us. With us today is my partner and our President, Bo Stanley, and our CFO, Ian Simmonds. For our call today, I will provide highlights for this quarter's results and then pass it over to Bo to discuss activity levels in the portfolio. Ian will review our quarterly financial results in detail, and I will conclude with final remarks before opening the call to Q&A. After market closed yesterday, we reported second quarter financial results with adjusted net investment income per share of $0.59, corresponding to an annualized return on equity of 14.2%, and adjusted net income per share of $0.64, corresponding to an annualized return on equity of 15.4%.

From a reporting perspective, our Q2 net investment income and net income per share, inclusive of accrued capital gains and sense of fee expenses, were $0.58 and $0.63, respectively. The $0.01 per share difference between the adjusted and reported metric is a non-cash expense related to accrued fees on unrealized gains from the valuation of our investments. This quarter's net investment income continues to reflect the strength in the core earnings power of our portfolio, as we overearned our quarterly base dividend by 28%. As we've discussed in prior periods, our portfolio turnover remains lower in this environment, with only 4% of total investment income this quarter coming from activity-related fees. Net investment income was largely the result of sustained elevated portfolio yields, driven by higher underlying reference rates.

Based on the current shape of the forward curve, we expect that the interest rate environment will continue to support core earnings in excess of our base dividend through 2024 without any activity-related income. We believe the BDC sector is near peak earnings, given the current forward curve is downward sloping from here. With that being said, we think the value proposition of return on equity on a spread basis remains strong. The difference between this quarter's net investment income and net income of $0.05 per share was $0.03 per share from net unrealized gains and $0.02 per share from realized gains on investments.

Through the first six months of 2023, we have generated an annualized return on equity on adjusted net investment income and adjusted net income of 13.9% and 16%, respectively. We are pleased with these results, particularly given we increased operating earnings on a per-share basis during a period in which we raised incremental equity through a share issuance. Ian will speak through the framework of our approach to raising capital in a moment. Based on our results for the first half of the year, we believe we will outperform relative to the guidance we provided on our year-end 2022 earnings call of 13%-13.2% return on equity for 2023. As the macroeconomic environment remains more complex related to lever credit, the importance of sector selection, asset mix, and financial leverage becomes more significant.

Each of these elements conveys levels of risk in the portfolio. We believe our portfolio reflects a conservative path across all these vectors. In terms of sector selection, we are thematic investors and generally avoid industries that have outsized risk of loss for creditors. Our asset mix is 91% first lien, representing a significant lower risk of loss given default compared to second lien and sub-debt exposures. Finally, we remain well within our target leverage range with significant cushion to the regulatory limit. As a reminder, the use of leverage cuts both ways as it magnifies both returns and losses. We believe that our conservative approach across these vectors will help us continue to deliver industry-leading returns to our shareholders through the cycle. In today's market environment, we are focused on the health of our existing portfolio of companies.

We've seen reference rates increase significantly since March of 2022. Borrowing costs, borrowing costs has risen dramatically and could present a challenge for any for many businesses. We are closely monitoring certain key metrics across our portfolio companies, such as interest coverage, which has declined to 2.1 times on a weighted average basis across our core portfolio companies, but is not materially different from 2.2 we reported last quarter. As a reminder, our interest coverage metric assumes we apply reference rates at the end of the quarter to steady state borrower EBITDA. We believe that our metric is a better representation of the position of our borrowers, as opposed to a look-back metric such as LTM. More important than the weighted average portfolio metric that we track are the tails, which we can be hidden in the averages.

We believe the tails within credit portfolios are increasing, which can be a sign of potential issues to come. Using the Leveraged Loan Index as a proxy, the percentage of the index components with a bid price below 70 has more than doubled over the last 12 months, from 2.8% as of June 2022 to 6% as of June 2023. Despite the material increase in loans trading below 70, the weighted average bid price of the index has actually increased over the same period from 92.1 to 94.2, thereby disguising the tails. Although the Leveraged Loan Index is not a perfect comparison to a private credit portfolio, we do believe the data illustrates a dispersion that may exist within some private credit portfolios.

The tails are where the issues will arise, which are minimal in our portfolio. Based on the methodology I described a moment ago, less than 5% of our core portfolio companies, which represent 91% of the portfolio by fair value, have interest coverage below 1.0x. Additionally, non-accruals remain less than 1% of the portfolio by fair value in amortized costs, with only one portfolio company on non-accrual status and no new investments added to non-accrual status during the quarter. Our quarter-end net asset value per share was $16.74, up $0.15 per share, or 90 basis points from net asset value per share at March 31st of $16.59. The growth was primarily driven by continued overearning of our base dividend, the accretive equity raise, and net unrealized and realized gains from investments.

Yesterday, our board approved a base quarterly dividend of $0.46 per share to shareholders of record as of September 15th, payable on September 29th. Our board also declared a supplemental dividend of $0.06 per share related to our Q2 earnings to shareholders of record as of August 31st, payable on September 20th. Our Q2 2023 net asset value per share, adjusted for the impact of the supplemental dividend, is $16.68. We estimate that our spillover income per share this quarter is approximately $0.90. As always, we will review the level of undistributed income as the year progresses to ensure we minimize potential return on equity drags from the excise tax. With that, I'll pass it over to Bo to discuss this quarter's investment activity.

Bo Stanley (President)

Thanks, Josh. I'd like to start by sharing some observations on the broader market backdrop, in particular, the activity levels across both public and private markets. Credit issuance is primarily driven by refinancing and M&A activity, which have both declined in 2023. Refinancings have dropped off as the higher spread environment essentially represents an asset for issuers holding a lower spread than the market level today. As for M&A activity, there continues to be a bid-ask spread, where sellers want yesterday's price and buyers want today's price. With fewer issuers coming to market, the top of the originations funnel is narrower. This is offset for us by the shift towards private credit over the past few quarters. Our pipeline has remained robust, given the increased market share we are seeing as alternatives for borrowers are generally as constrained as ever before.

Access to the broadly syndicated loan and high yield markets has generally only returned for near investment-grade credits. This limited access to public markets has increased the number of high-quality credits we are seeing as direct lenders. We believe the opportunity set continues to be interesting, with plenty to take advantage of while remaining selective. As Josh mentioned earlier, the operating environment for borrowers right now is challenging, which has highlighted the importance of credit selection and disciplined underwriting. Turning to this quarter's activity, we had $260 million of commitments and $240 million of fundings across six new investments, and upsizes to four existing portfolio companies.

Of the $260 million and $240 million of commitments and fundings for the quarter, $248 million and $227 million, respectively, were in new investments, which we believe to be a better vintage than we've seen in some time. As an illustration of the high-quality borrowers and the opportunity set across the Sixth Street platform, we aided and closed on a $2.6 billion senior secured credit facility, of which $75 million was allocated to SLX to support Advent International's take private of Maxar Technologies. Maxar is a scaled and differentiated enterprise with clear reason to exist in a competitive moat.

In addition to the strong unit economics, high free cash flow conversion, and low leverage of the business, the structure of the deal reflected approximately 35% funded loan to value at close, with attractive pricing and terms. On the repayment side, we had three full and four partial investment realizations totaling $114 million in Q2. Our two larger payoffs during the quarter, GTreasury and Modern Hire, were driven by acquisitions which included refinancings. Since our initial investment in GTreasury in 2019, SLX has supported the company through its growth via amendment facilities and follow-on investments. The company was ultimately acquired and generated a gross unlevered asset level IRR and MoM of 15.1% and 1.5%, respectively, for SLX shareholders.

At the time of exit, GTreasury was the 10th largest investment in our portfolio, resulting in $67 million of recycled capital to deploy in new investment opportunities. I'd like to also highlight our payoff from Modern Hire, as the incumbency in this investment assisted Sixth Street in winning an opportunity to redeploy the capital in a larger, more scaled business with less leverage and at a wider spread. Sixth Street proceeded to agent and close on a new $310 million credit facility issued by HireVue, a portfolio company of Carlyle, to acquire Modern Hire and recapitalize the combined business. TSLX generated a gross unlevered asset level IRR and MOIC of 14.5% and 1.3x, respectively, on the payoff.

Since the update we provided on our last earnings call regarding our investment in Bed Bath & Beyond, we have received approximately 40% of our total investment back through the liquidation process as of July 28th. There have been several puts and takes throughout this ongoing process, with key milestones achieved along the way, such as reaching a deal with the unsecured creditors committee. Based on these developments, we believe the band of outcomes has become more narrowly defined. We anticipate continuing to receive capital back as this case progresses. As it relates to the rest of our portfolio, given the challenges presented in today's investment landscape, the health of our existing portfolio companies holds significant importance. Across our borrowers, we have generally observed softness in bookings and slowing growth, given the demand destruction triggered by the higher interest rate and persistent inflationary environment.

However, we have not seen an increase in amendment activity related to PIK conversions in the last quarter. The nature of our portfolio investments gives us confidence in the ability of our borrowers to withstand the macro headwinds, as the vast majority of our exposure is to software and business services companies. These business models are inherently more resistant to economic slowdown due to their embedded customer base and high variable cost structures. We favor the cost structures of these business models, given their ability to maintain and oftentimes expand margins in decelerating growth environments. Despite the general slowdown of the top line in sales, the weighted average EBITDA of our portfolio companies have increased 13.3% quarter-over-quarter, further highlighting the strength of our sector selection and portfolio construction.

From a portfolio yield perspective, yields are up to 14.1% from 13.9% quarter-over-quarter, and are up about 320 basis points from a year ago. Moving on to portfolio composition and credit stats. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points on our loans of 0.9x and 4.9x, respectively, and our weighted average interest coverage declined marginally from 2.2x to 2.1x, driven by the impact of rising interest rates on the cost of funds for our borrowers. As of Q2 2023, the weighted average revenue and EBITDA of our core portfolio companies was $205 million and $67 million, respectively.

Finally, the performance rating of our portfolio continues to be strong, with a weighted average rating of 1.16 on a scale of 1 to 5, with 1 being the strongest. As Josh referenced earlier, we continue to have minimal nonaccruals at 0.6% of the portfolio at fair value, with no new portfolio companies added to nonaccrual status from the prior quarter. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Ian Simmonds (CFO)

Thank you, Bo. For Q2, we generated adjusted net investment income per share of $0.59 and adjusted net income per share of $0.64. Total investments were $3.1 billion, up from the prior quarter as a result of net funding activity. Total principal debt outstanding at quarter end was $1.7 billion, and net assets were $1.5 billion, or $16.74 per share, prior to the impact of the supplemental dividend that was declared yesterday. Our debt-to-equity ratio decreased from 1.2x as of March 31 to 1.16x as of June 30, and our weighted average debt-to-equity ratio for Q2 was 1.22x. The decrease was primarily driven by proceeds from the equity raise, combined with overearning of the base dividend, which offset our net funding activity during the quarter.

We continue to have ample liquidity with $659 million of unfunded revolver capacity at quarter end, against $190 million of unfunded portfolio company commitments eligible to be drawn. As Josh referenced earlier, we executed a small equity raise during May, soon after our Q1 earnings call. Given our ongoing commitment to transparency, I'd like to take a moment to explain the framework of value creation we established for the issuance of new equity in our business. This framework requires the satisfaction of two criterion. The first is that we follow our historical approach of issuing equity at a premium to net asset value per share. TSLX shares have traded at a premium to the most recently reported NAV per share on 98% of such trading days over the almost nine and a half years that we have been listed.

On the day we executed the equity offering, the stock closed at an 11% premium to the most recently reported NAV per share. After the applicable discount, the price paid by such investors represented a 6% premium to NAV per share. The first criterion was therefore satisfied. The second criterion requires us to have conviction that we are deploying new capital raised into assets, generating estimated returns that exceed our calculated cost of capital. In other words, the return on equity available to us on new equity, equity exceeds the marginal cost of that new equity. Let's walk through the math, noting that there are many ways to look at it, but let's assume that our cost of equity is 8.6%, which was sourced from Bloomberg.

Based on this premise, we can back into the required return on new assets by applying the cost structure of our business, including the marginal cost of leverage, fees, estimated credit losses, and other expenses to our unit economics model. This calculation results in a 10.1% return on assets required to generate an 8.6% return on equity. In our case, we deployed the new equity capital into investments with an average asset level yield to maturity of 12.6%, resulting in estimated ROEs of 13.1% for the capital deployed, well above our estimated equity cost of capital. This illustration indicates that the second criterion was satisfied. We note that the return assumptions exclude the incremental benefit we may receive through additional activity-related fees associated with these assets.

In addition to confirming that the equity raise exceeds our cost of capital, we also eliminated any material risk of a so-called J-curve effect on the earnings power of the business, by successfully deploying the capital post quarter end into new investments. In other words, this was not a case of requiring a visible future pipeline. We had already executed on the immediate opportunity set, and the equity raise was a tool to bring our financial leverage profile back within our stated targets. Since we established this business in 2010, we have operated with the fundamental premise of doing right by our shareholders. We believe our approach to raising equity during the second quarter this year is an example of applying that philosophy.

Turning now to our liquidity and funding profile, we enhanced both this quarter through the extension of the maturity of our revolving credit facility. This amendment increased total commitments from $1.585 billion-$1.71 billion, extended the maturity and added two new banks to the syndicate. Tighter capital constraints did, however, result in two new non-extending lenders with a maturity in 2027 rather than 2028. Our ability to maintain pricing and grow commitments during the recent credit contraction in the banking sector, highlights the importance of the size and scale of the Sixth Street platform as a key relationship for banks, in addition to our track record of avoiding credit losses. The upsize of the facility further improved our liquidity profile, which represents three and a half times the amount of unfunded commitments eligible to be drawn.

In terms of our debt maturity profile, we have satisfied two maturities in the last 12 months through unused capacity on our secured revolver. Our nearest maturity does not occur until November 2024. We are focused on normalizing our unsecured funding mix by continuing to target incremental funding through the unsecured market. We have been, and remain, a floating rate borrower. Swap all of our fixed rate liabilities to floating to maintain a spread-based lending approach. This allows us to evaluate the debt capital markets for incremental opportunities without being deterred by the significant increase in treasury yields or volatility in underlying base rates. Moving to our presentation materials, slide eight contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added $0.59 per share from adjusted net investment income against our base dividend of $0.46 per share.

As Josh mentioned, there was $0.01 per share of accrued capital gains, incentive fee expenses related to this quarter's net realized and unrealized gains. The equity raise, including the over-allotment shares issued, provided $0.04 per share of accretion to NAV. There was a $0.13 per share positive inter- impact to NAV, primarily from the effect of tightening credit market spreads on the fair value of our portfolio. Finally, other changes resulted in a $0.10 per share decline in NAV from net unrealized losses on investments, partially offset by $0.02 per share of realized gains, largely from the sale of equity investments. Moving on to our operating results detail on slide 9. We generated a record level of total investment income for the quarter of $107.6 million, up 12% compared to $96.5 million in the prior quarter.

Walking through the components of income, interest and dividend income was $102.6 million, up from $92.2 million in the prior quarter, driven by higher all-in yields and net funding activity. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled pay downs, were slightly lower at $0.9 million compared to $1.6 million in Q1, given the slowdown in repayment activity we continued to experience in Q2. Other income was $4.1 million, compared to $2.8 million in the prior quarter. Net expenses, excluding the impact of a non-cash accrual related to capital gains incentive fees, were $57.2 million, up from $51.4 million in the prior quarter.

This was primarily due to the upward movement in reference rates, which increased our weighted average interest rate on average debt outstanding from 6.7% to 7.1%, coupled with marginally higher average debt outstanding in Q2. For the year-to-date period, we've generated an annualized return on equity on adjusted net investment income of 13.9% and on adjusted net income of 16%. Net investment income has increased due to the asset-sensitive nature of our business and the rise in reference rates, net income has benefited from both net realized and unrealized gains on investments from company-specific events, as well as the positive valuation impact of tightening credit market spreads.

We believe we remain on track to meet or exceed the high end of our previously stated guidance range of $2.13-$2.17 of adjusted NII per share for full year 2023, which corresponds to a return on equity of 13.2%+. With that, I'll turn it back to Josh for concluding remarks.

Joshua Easterly (CEO and Chairman of the Board)

Thank you, Ian. I'd like to close our prepared remarks today by emphasizing the importance of being an efficient user and allocator of capital. Capital to invest in this moment for publicly traded BDCs is extremely limited in our sector, given the regulatory limits on leverage and the slowdown in portfolio churn from the higher spread environment. The only way to participate in this environment is by holding capital through lower leverage or raising new capital by issuing equity. In terms of holding capital, we started the second half of 2022 at 1.06 times debt-to-equity, compared to an average of 1.20 for our peer set.

As capital became limited by leverage ratio constraints across the sector, our leverage profile allowed us to remain highly active in the second half of 2022 and the first half of 2023, despite the slowdown in repayment activity. Some people referred to this as a golden age for private credit, which we've also been able to participate by issuing equity, which requires you to trade at a premium in net asset value. We believe that our track record for avoiding losses and efficiently using shareholders' capital, including a sound understanding of our own cost of capital within a BDC framework, has been rewarded by our stock trading above book value.

Our positioning, characterized by holding more capital and trading at a premium to book value, has allowed us to give SLX shareholders access to this vintage, defined by some of what we believe are the best investment opportunities we have seen in, in recent history. Over the LTM period, we funded $763 million into new investments, representing 25% of the current portfolio. We believe that access to this vintage is, is a benefit to our shareholders and will continue to differentiate our returns from the industry. With that, thank you for your time today. Operator, please open up the line for questions.

Operator (participant)

Thank you. One moment, please. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Finian O'Shea from WFS. Your line is now open.

Finian O'Shea (Director and Senior Equity Research Analyst)

Oh, hey, everyone, good morning. Appreciate the outline of the e-equity framework and the ability to invest in today's vintage. With putting all that together, does that mean you'll be looking to issue equity more often?

Joshua Easterly (CEO and Chairman of the Board)

Hey, hey, Fin. How are you? Good morning. I, I wouldn't go that far. I think we've done, we, TSLX has been public, since March or of 2014. We've done four primary equity deals. We've been, you know, very disciplined in how we've raised capital. I think the answer is, you know, when there's an opportunity, to deploy capital that exceeds our cost of capital, we will issue equity, but we'll be disciplined in doing that. It's, it's environment dependent, and we, it's a very high bar for us to issue equity capital. So I, I, I don't think, I don't think our approach is changing.

We decided to put the math out there, because I think it's important to have a framework that people understand, and a framework for the industry. We, we wanted the math to be clearer, and so we, we just wanted to do that, but hopefully that helps. I don't think our, our, our framework is changing. Also, as Ian pointed out, I think we have to view that it is a near-term, visible pipeline that meets that criteria. We don't wanna do things where we create a earnings drag by deleveraging, significantly deleveraging the, the, the, the, the leverage profile of the business.

Finian O'Shea (Director and Senior Equity Research Analyst)

Sure. Thanks. That's helpful. Then can you, on the pipeline, as you mentioned, can you kinda touch on the-

Joshua Easterly (CEO and Chairman of the Board)

Yeah

Finian O'Shea (Director and Senior Equity Research Analyst)

... sort of quantity and quality of that? You know, obviously, things are good, as you mentioned right now, but are they, are they still really good as the pipeline builds? You know, how big or long is the pipeline? Thank you.

Joshua Easterly (CEO and Chairman of the Board)

I think, thanks. I think the pipeline, I think, is still actually pretty good, although I think we're seeing a couple more payoffs in Q3 that were older vintage payoffs. I'm not sure it'll drive that much activity level fees, given call protection has probably run off on some of them, but not all of them. I think the way we've kind of look at it is, you know, we're gonna be, you know, we're gonna at least as of now, we think we're gonna be kind of flattish on that portfolio activity, maybe up a little bit. The portfolio, the pipeline is still good.

I would say that you have to think about competition, really, both mentioned this, activity levels are down, market share is up, and competition is really coming from not publicly traded BDCs, given their capital constraints, for the most part, but coming from either private, BDCs or GPLP structures. I would say there's, you know, a little bit more competition on the margin. I hope that helps.

Finian O'Shea (Director and Senior Equity Research Analyst)

Yes, absolutely. Thanks so much.

Joshua Easterly (CEO and Chairman of the Board)

Thanks, Fin. Have a good day.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Robert Dodd, from Raymond James. Your line is now open.

Robert Dodd (Director)

Hi, and congrats. Good morning. Congrats on, on, on the quarter, obviously. First, I, I really appreciate the color about the tails. One, one question about that: You, you said less than 5% have interest coverage below one currently. Or, or on go-forward rates, what percentage of those were underwritten to be below one? If, if that makes sense. I mean, are those your recurring revenue businesses that you already expected them to be below one, or, you know, what percentage have gotten below one because of underperformance?

Joshua Easterly (CEO and Chairman of the Board)

Yeah, it's a good question. obviously, American Achievement wasn't underwritten to be... That was a COVID-impacted business. So there's a handful of names. there's, I think, four names or four or five names. I would say half of those were kinda underwritten to be low one and the other half weren't.

In the sense that they were rapidly investing in their business.

Robert Dodd (Director)

Yeah, yeah, yeah. Understood. Then the last one for me, on, on Bed Bath & Beyond, last quarter, you gave us some color. Last quarter, and things have changed since then, you said you expected to collect the fair value at that time, plus-

Joshua Easterly (CEO and Chairman of the Board)

Yeah.

Robert Dodd (Director)

potentially some fairly significant fee income.

Joshua Easterly (CEO and Chairman of the Board)

Yeah.

Robert Dodd (Director)

Do you still expect to collect the full fair value that's left this quarter? What are the prospects for fee income from that?

Joshua Easterly (CEO and Chairman of the Board)

Yeah. What I would say is, there's been push and takes in, in the liquidation. For example, real estate came in better, inventory a little bit less. There's large pools of assets and litigation claims that are still outstanding, that have higher volatility of outcomes that I think will be determined of, and it's hard to tell about the make whole in this moment. I think the, the, it, it's, you know, the structure, I think as people know, it's public out there with the, with the committee, is that we get all of our principal interest and fees back, and then we start splitting proceeds past that. It, it's I think it's, you know, I wouldn't expect us to get our, I think, our we have 15 points or 16 points.

You know, that unless the litigation ends up well, I don't think that's the case. It's, you know, it's going to be dependent on those outcomes.

Robert Dodd (Director)

Got it. Thank you. Appreciate it. Again, congrats, a great quarter.

Joshua Easterly (CEO and Chairman of the Board)

Thanks.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Ken Lee, from RBC Capital Markets. Your line is now open.

Ken Lee (VP and Senior Equity Analyst)

Hi, good morning, and thanks for taking my question. Just one on potential ABL opportunities. Just given where the macro backdrop is now, how do you see these opportunities shaping up over the near term? Thanks.

Joshua Easterly (CEO and Chairman of the Board)

Yeah, I, I remain really bullish on the opportunity set. Honestly, going forward, I think when you think about what's happened is, and, and I think I've said this before, but pre- you know, pre-COVID, a lot of both cyclical and secular issues on brick-and-mortar retail. During COVID, you had, you know, a moment of uncertainty, but then consumers got a lot of money in their pocket, and there was a whole bunch of excess savings, and they had nowhere to spend the money except for hard and soft goods, versus experiences. So retail overearned significantly, which made our capital not needed. Now the consumers' wallet share is now being moved to experiences, and away from buying stuff.

I, I, I would expect that general retail credit gets worse, and they're gonna look for opportunities to enhance their liquidity profile. I think we'll be active, but I think, I think that, that takes some time. But I, I think it's gonna be a, it should be a pretty good opportunity set. Then when you overlay banks having constrained balance sheets... I think it means that that's probably even a better opportunity for us, but time will tell. We, we are, you know, continue to, from a platform perspective, you know, invest in resources around here that allows us to see that flow and underwrite that flow and asset management, and asset manage those deals.

Ken Lee (VP and Senior Equity Analyst)

Got you. Very helpful there. Just one follow-up, if I may, in terms of the pay downs, a nice pickup in pay downs in the quarter. Do you see a more sustainable pickup in pay downs, realizing it's obviously very difficult to forecast, but just wondering what whether the backdrop could spell a more sustained pickup in pay downs over the near term? Thanks.

Joshua Easterly (CEO and Chairman of the Board)

Yeah. The pay downs in the quarter, what was the exact number, Ian? I think it was about...

Ian Simmonds (CFO)

3, 3, full realize.

Joshua Easterly (CEO and Chairman of the Board)

Three, full realize, relative. One of those we rolled into a larger deal.

Ian Simmonds (CFO)

Yes.

Joshua Easterly (CEO and Chairman of the Board)

The pay down's still really, really muted. I, I expect this quarter, because we have a little bit of visibility, that they, that they will pick up, like I said, on Robert's question, a little bit, but not materially. I think historically, the book turned over 30%-40% a year. I think that's, you know, in the LTM period, I think it's, you know, half that or, or, or less. I think what changes that is really there's two components that change it. One is the absolute level of interest rates going down will help bridge the gap between buyers and sellers and will probably spur some M&A activity. If spreads, obviously, tighten, that will create turn in the book from refinance activity.

Then the, the third piece of it is that if capital markets generally reopen, which they haven't for lower-rated credit, you know, then, then obviously that will, you know, you will have repayments from migration of, of, of larger companies into the capital markets. That one seems the most out of the money, but I think that's kind of the framework.

Ken Lee (VP and Senior Equity Analyst)

Got you. Very, very helpful color there. Thanks again.

Joshua Easterly (CEO and Chairman of the Board)

And thank-

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Melissa Wedel from JP Morgan. Your line is now open.

Melissa Wedel (VP and U.S. Equities Research)

Good morning. Appreciate you taking my questions today. Actually, most of them have already been asked. I was hoping you could elaborate a little bit on how you're seeing existing portfolio companies deploying capital. I think you mentioned you had, I think it was four existing companies do add-ons. How are they using that capital? Are people taking share right now? What are they looking to do?

Joshua Easterly (CEO and Chairman of the Board)

Yeah, look, I would say most companies in generally are not deploying capital. They're actually doing just the opposite, which they're increasing trying to increase margin profile. I think, I didn't, I didn't, I didn't really pay attention to, because of this, to the non-farm payrolls this morning, but I think the headline was that it's slowing. So that's kind of been our experience. The add-ons this quarter, my guess were, you know, some small investments in their business and maybe one or two tuck-ins. Yeah, the add-ons were actually, I think, strategic M&A. I think there were basically three of those that were strategic M&A, which was TradingScreen, coordinates and one other one. But I think I think a little bit M&A, but small.

Ian Simmonds (CFO)

That's right.

Melissa Wedel (VP and U.S. Equities Research)

Thanks, Josh.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Mark Hughes from Truist. Your line is now open.

Joshua Easterly (CEO and Chairman of the Board)

Hey, Mark. Good morning.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Good morning. Any reflections, you, you amended your credit facility in mid-June. What was your impression of the appetite of the banks to kind of maintain or grow their BDC exposure?

Joshua Easterly (CEO and Chairman of the Board)

Yeah. It's a great question. We, we've been doing this now... What, what amendment was that, Ian?

Ian Simmonds (CFO)

Fourteenth.

Joshua Easterly (CEO and Chairman of the Board)

Fourteenth Amendment. We've done this and, you know, look, we, we try to amend every year. We want to make sure that we have, you know, it's kind of our part of our risk management philosophy. I would say this was probably our hardest amendment, maybe, or our second hardest amendment.

Ian Simmonds (CFO)

Yeah.

Joshua Easterly (CEO and Chairman of the Board)

Like, up in the top two, at least. RWAs are constrained in banks. The large non-extending commitment was a U.S. consider a reform bank that we understand exited all their BDC exposure. You know, we were lucky enough, I think, which is different from the rest of the space, to get additional commitments.... And we grew our facility. I think others have actually had to shrink their facility. Banks are most definitely capital constrained. You know, it's hard not to miss Jamie Dimon out there, over the last two weeks, screaming from the rooftops about the regulatory environment and capital requirements.

Then with a whole bunch of cash sorting that's happened from deposits to treasuries, I think, I think it's very, very hard for, for, for banks right now. I think that, that the good thing is, generally, that means that the asset side is better. I think it really shows the power of the platform that we were able to grow our, our, our, our facility, but it was most definitely harder. Ian, anything to add there?

Ian Simmonds (CFO)

Yeah. I think you captured it all. That's, that's good.

Joshua Easterly (CEO and Chairman of the Board)

If anybody else is not feeling that, you know, I would love to talk to them. I, I can't, I, I can't imagine people are not having the general comments. Sixth Street, like, look, we're, we're lucky, we're the benefit of a broad $70 billion alternative asset manager that is meaningful to the street and this, you know, we have good relationships. It, it most definitely, I think that most definitely helped us, but it was most definitely harder.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Yeah, appreciate that. This may just be a quirk of the, you know, your industry mix, but it looked like human resources support services, moved up to third, financial services dropped down a little bit. Is that just, some of the, investments you made this quarter?

Joshua Easterly (CEO and Chairman of the Board)

Yeah.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Is there any intentionality there?

Joshua Easterly (CEO and Chairman of the Board)

No, I mean, look, human resources, when you think about human resources, I can tell you that's HireVue.

Ian Simmonds (CFO)

HireVue.

Joshua Easterly (CEO and Chairman of the Board)

which is a software business that, that supports, human resource managers in the hiring process. So I think that position probably grew on the margin, which shifted it.

Ian Simmonds (CFO)

Yep.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Yeah, yeah. Understood. Okay. Thank you.

Joshua Easterly (CEO and Chairman of the Board)

Great.

Operator (participant)

Thank you. If you would like to ask a question, that is star one one. Again, if you would like to ask a question, that is star one one. We have a follow-up question. Bear with me one moment, please. Our follow-up question comes from Ryan Lynch, from KBW. Your line is now open.

Joshua Easterly (CEO and Chairman of the Board)

Hey, Hey, Ryan, I think it's your first question. You get as many as you want.

Ryan Lynch (Managing Director and Equity Research)

All right. Thank you, Josh. I just had two this morning. You talked about kind of the, the environment being much better, which is, which is pretty obvious. We've heard that a lot from other BDCs of just very attractive deals. I'm just curious, have you noticed then, from that, the, the attractive deals in the environment as well as not a lot of deal activity going on, has your close rates that you guys have, you know, all BDCs have that, the famous funnel slide that they put on of close rates. Has your close rates substantially increased over the last, you know, six to nine months versus where it has been from a historical standpoint?

Joshua Easterly (CEO and Chairman of the Board)

Yeah, look, it's a great question. The answer is yes. Although I would say in the last three or four months, we've said... We're, we're kind of saying no more. Either things don't hurdle because of our, the, the BDCs cost structure, and we're going to have a lower cost structure than the industry, or, you know, we don't like the credit. I think, you know, we were, we were, our close rate, if you look at it, probably was higher at the end of last year, in the beginning of this year, and is kind of, you know, and close rate meaning, I kind of look-to-book kind of ratio. I think most definitely it stepped up just because higher quality credits became available and large credits, and you, you like.

I think that's true, most definitely for the industry, although I would say that's kind of normalized back in the last couple of months.

Bo Stanley (President)

That's right.

Joshua Easterly (CEO and Chairman of the Board)

Bo, anything to add?

Bo Stanley (President)

No, you, you hit it. We've seen, we've seen increasing competition over the last few months, that's, you know, we'll, we'll continue to be super selective. I think on the, on the credits that we like, that close rate has remained higher than in historical times. We are seeing pockets of, of competition, and we're gonna, you know, continue to just pick our spots on what we think are the higher quality names and the structures that make sense.

Joshua Easterly (CEO and Chairman of the Board)

Fish, do you have any different view? You're, you're on the front line every day on this stuff.

Michael Fishman (VP)

No, it's the same view. Nothing really to add on that.

Joshua Easterly (CEO and Chairman of the Board)

All right. Thanks, Ryan.

Ryan Lynch (Managing Director and Equity Research)

I appreciate everybody's comments on that. The other question I had is probably for Ian. You mentioned you guys are always looking at your, your, your capital structure from a liability side. You guys do have some notes due in 2024, which, you know, has some time. I'm just curious, if you were to issue new notes today, I'm assuming you guys are about to. If you guys would issue new notes today and then swap, swap out the rate on those, as you guys have done in the past, what sort of pricing would you guys expect to get?

Joshua Easterly (CEO and Chairman of the Board)

Look, Ian gave me that shrug of the shoulders, which the market's gonna tell, the market's gonna tell us.

I, I think the way to I think the way to think about it is, A, we have $650 million of liquidity...Our next note due is 300-

Ian Simmonds (CFO)

Yeah, 347.

Joshua Easterly (CEO and Chairman of the Board)

347 in-

Ian Simmonds (CFO)

November.

Joshua Easterly (CEO and Chairman of the Board)

November of the next year, so a year and a half-ish. There, I would expect generally what I would tell you with confidence that it's going to be dilutive to earnings because of the funding mix. We've kind of got a little bit of a lift on earnings because the growth in the portfolio, because we've refinanced notes with lower marginal cost of financing. That marginal cost of financing has been about LIBOR + 150 when you think about on a marginal basis, because you're getting rid of your commitment fee. The funding, the drawn funding spread minus your commitment fee is about 150. Everything's been accretive as the funding mix has shifted. I, I think you could think about it's gonna be higher on an absolute basis, and it's gonna be dilutive.

I don't know if that's, you know, $0.01 a quarter or something.

Ian Simmonds (CFO)

Certainly marginal.

Joshua Easterly (CEO and Chairman of the Board)

It's marginally or, you know, $0.015 a quarter, but we're most definitely committed to... By the way, I know you're doing the math of what $0.01 a quarter is, and then you can figure out what we think the spread should be. You know, it's in that range from $0.01, you know, to $0.015, a quarter, dilutive, you know, if we do a, you know, a index-eligible deal. Is that-

Ian Simmonds (CFO)

Okay.

Joshua Easterly (CEO and Chairman of the Board)

Is that?

Ian Simmonds (CFO)

Hold on. Yeah.

Joshua Easterly (CEO and Chairman of the Board)

Yeah. Look, the market's gonna tell us what that, that spread, that, that is. It ultimately is still a relatively small part of our cap structure, and so it's not massively dilutive. You know, funding mix is important to us. We've committed to have a funding mix. It's a good question, but the, the market's gonna tell us the, the exact spread.

Ryan Lynch (Managing Director and Equity Research)

Gotcha. No, that, that's helpful. Appreciate the comments today. That's all for me.

Joshua Easterly (CEO and Chairman of the Board)

Great.

Operator (participant)

Thank you. I am showing no further questions. I would now like to turn the call back over to Joshua Easterly, CEO, for closing remarks.

Joshua Easterly (CEO and Chairman of the Board)

Great. Well, well, we thank you for your support. I know we spent a lot of time with people in the last couple of months. We love having those conversations and dialogue. Please feel free to reach out to the team if you have any questions, and I hope everybody has a good end of the summer and, and Labor Day, and we'll for sure see you in the fall. Thanks, everybody.

Operator (participant)

This concludes today's conference call.

Speaker 12

Goodbye.

Operator (participant)

Thanks for participating. You may now disconnect.