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    Sixth Street Specialty Lending (TSLX)

    TSLX Q3 2024: 50/50 sponsored vs nonsponsored split boosts yields

    Reported on Jun 19, 2025 (After Market Close)
    Pre-Earnings Price$20.26Last close (Nov 6, 2024)
    Post-Earnings Price$20.24Open (Nov 7, 2024)
    Price Change
    $-0.02(-0.10%)
    • Robust Portfolio Diversification: The management highlighted a shift in their sponsored/nonsponsored mix to a roughly 50-50 split this quarter, indicating strong deal sourcing and an ability to capture higher incremental yields across different market segments.
    • Strong Credit Quality and Disciplined Risk Management: Very low amendment activity—with only positive credit amendments recorded (0.1% amendment activity)—demonstrates effective risk management and resilient credit fundamentals.
    • Improved Earnings Metrics Supporting Capital Returns: An improvement in interest coverage from 2.1x to 2.2x, driven primarily by earnings growth, supports the sustainability of their dividend policy and reinforces confidence in future shareholder returns.
    • Sustained high interest rates and election uncertainty may delay refinancing and M&A activity, potentially slowing the unlocking of deal flow and negatively impacting valuation and returns.
    • Exposure to underperforming credits, such as Lithium Technologies with weak fundamentals, poses risks if high rates persist, possibly leading to unexpected credit losses and further underperformance in portfolio companies.
    • Marginal improvements in key metrics (e.g., interest coverage only increasing from 2.1x to 2.2x) indicate limited buffer; if economic headwinds intensify, this could exacerbate credit quality and portfolio performance issues.
    1. Dividend Policy
      Q: When can the base dividend increase?
      A: Management stated the base dividend is set at $0.46 and will only be raised when earnings reliably cover it, using supplemental dividends to return excess capital when available.

    2. Risk Factors
      Q: What are risks if rates remain high?
      A: They cautioned that while Lithium faces fundamental challenges, the remainder of the portfolio shows strong fundamentals, though prolonged high rates could impact asset performance.

    3. Portfolio Growth
      Q: What’s the outlook on net portfolio growth?
      A: They noted uncertainty in growth as some assets will naturally recycle while others hold longer, with performance hinging on market conditions and deal velocity.

    4. Credit Quality
      Q: How low was amendment activity?
      A: Amendment activity was extremely low at about 0.1%, with nearly all changes being positive credit amendments, underscoring solid credit quality.

    5. Interest Coverage
      Q: How much did interest coverage improve?
      A: Interest coverage improved modestly from 2.1x to 2.2x, driven primarily by earnings growth and slight benefits from rate trends.

    6. Nonsponsored Business
      Q: What are the details on the nonsponsored segment?
      A: They reported a near 50-50 split between sponsored and nonsponsored deals this quarter, with a team of 250 professionals leveraging asset-based strategies to enhance yield.

    7. Sponsor Activity Post Election
      Q: Were sponsors sidelined awaiting clarity?
      A: Management admitted it's challenging to quantify, noting some sponsors waited for clearer economic signals post-election, given prior high valuation purchases.

    8. Fixed-Rate Investment
      Q: What drove the fixed-rate deal portion?
      A: The fixed-rate component came primarily from the Arrowhead deal, which accounted for about $30 million out of $180 million in new investments, reflecting an asset-based approach.

    9. Coverage Metric Scope
      Q: To which portion does interest coverage apply?
      A: They explained that interest coverage metrics are applied to most of the portfolio, with adjustments made for high-growth software names where cash flow differs.

    10. Nonsponsored Definition
      Q: How much is traditional cash flow lending?
      A: This quarter, nonsponsored deals were predominantly asset-based rather than traditional cash flow loans, differentiating them from typical market standards.

    Research analysts covering Sixth Street Specialty Lending.