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Sixth Street Specialty Lending, Inc. (TSLX)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 delivered solid earnings power: Investment income rose to $123.7MM, adjusted NII was $0.61/sh (GAAP NII $0.62/sh), and adjusted NI was $0.54/sh (GAAP NI $0.55/sh); annualized ROE was 14.2% (adj. NII) and 12.5% (adj. NI). NAV/share increased to $17.16 from $17.12 QoQ, with adjusted NAV $17.09 after the supplemental dividend .
  • Activity-based fees were a key upside driver: $0.15/sh in Q4 (highest in seven quarters) amid a resurgence of repayments; fundings of $323.5MM and repayments of $304.7MM supported fee income and portfolio rotation .
  • The Board declared a Q1’25 base dividend of $0.46/sh and a Q4’24 supplemental dividend of $0.07/sh; adjusted NII covered the base by $0.15/sh (33%), reinforcing dividend sustainability .
  • Outlook: 2025 adjusted NII guidance of $1.97–$2.14/sh (ROE 11.5%–12.5%) assumes current spread conditions and a conservative activity fee range; management expects to amend/extend the revolver with marginally lower drawn spread/undrawn fee in Q1’25 .

What Went Well and What Went Wrong

  • What Went Well

    • Strong earnings quality and coverage: “Adjusted NII of $0.61/sh exceeded our base quarterly dividend by $0.15/sh, or 33%,” while NAV/share edged up to $17.16 .
    • Fee tailwinds resurfaced: “In Q4, we earned $0.15 per share of activity-based fees, including dividend income, representing the highest amount in 7 quarters,” aided by elevated repayments .
    • Balance sheet/liquidity positioning: $674MM undrawn revolver capacity against $205MM eligible unfunded commitments; management anticipates marginally lowering revolver spreads/fees upon amendment in Q1’25 .

  • What Went Wrong

    • Credit headwinds persisted in a few names: Two idiosyncratic credits (incl. Lithium Technologies) weighed on 2024, with non-accruals at 1.4% of FV in Q4 (no new additions in the quarter) .
    • Spread compression: Tighter front-book spreads versus early-2024 reduced NII by ~$0.07/sh vs. forecast; management’s sector ROE math highlights risk to industry returns absent repricing .
    • Portfolio yield stepped down: Weighted avg yield at amortized cost declined to 12.5% (from 13.4% in Q3), driven by lower base rates and mix/spread adjustments on certain assets .

Financial Results

Quarterly P&L and Returns (oldest → newest)

MetricQ2 2024Q3 2024Q4 2024
Investment Income ($MM)$121.8 $119.2 $123.7
Net Investment Income ($MM)$55.1 $54.9 $57.6
NII per Share ($)$0.59 $0.59 $0.62
Net Income ($MM)$47.4 $40.7 $51.0
Net Income per Share ($)$0.51 $0.44 $0.55
Adjusted NII per Share ($)$0.58 $0.57 $0.61
Annualized ROE (NII) (%)13.9% 13.7% 14.4%

YoY Comparison: Q4 2024 vs Q4 2023

MetricQ4 2023Q4 2024
Investment Income ($MM)$119.5 $123.7
NII per Share ($)$0.62 $0.62
Net Income per Share ($)$0.58 $0.55
Annualized ROE (NII) (%)14.7% 14.4%
NAV per Share ($)$17.04 $17.16
Wtd Avg Yield at Amortized Cost (%)14.2% 12.5%

Originations, Repayments, and Credit

KPIQ3 2024Q4 2024
New Commitments ($MM)$269.3 $479.0
Fundings ($MM)$189.0 $323.5
Exits/Repayments ($MM)$90.2 $304.7
Non-Accruals (% of FV)1.9% 1.4%
Yield at Amortized Cost (%)13.4% 12.5%

Portfolio Composition (% of FV)

Asset TypeQ3 2024Q4 2024
First-Lien Debt93.2% 93.9%
Second-Lien Debt0.8% 0.6%
Structured Credit0.1% 0.1%
Mezzanine Debt1.1% 1.1%
Equity & Other4.8% 4.4%

Liquidity and Leverage

MetricQ3 2024Q4 2024
Undrawn Revolver Capacity ($MM)$1,087.0 $674.2
Revolver Capacity ($MM)$1,700 $1,675 (adj.)
Drawn on Revolver ($MM)($610) ($1,004)
Available Unfunded Commitments ($MM)$226 $205
Liquidity (Burdened) ($MM)$867 $449
Debt-to-Equity (Quarter-End) (x)1.19x 1.22x
Wtd Avg Interest Rate on Debt7.7% 7.0%
Total Principal Debt Outstanding ($MM)$1,907.5 $1,954.1

Notes:

  • Q4 GAAP-to-Adjusted: ~$0.01/sh benefit from unwind of accrued capital gains incentive fee expenses; full-year unwind totaled ~$0.06/sh .
  • Activity-based fees: $0.15/sh in Q4 vs ~$0.05/sh in Q3; Q4 level was the highest in seven quarters .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted NII per ShareFY 2025N/A$1.97–$2.14New
ROE on NIIFY 2025N/A11.5%–12.5%New
Base Dividend per ShareQ1 2025$0.46$0.46Maintained
Supplemental Dividend per ShareQ4 2024N/A$0.07New
Revolving Credit Facility1H 2025N/AAmend/extend; anticipate marginally lower drawn spread/undrawn feePositive

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q4 2024)Trend
Spreads & CompetitionQ3: Discipline vs. tighter spreads; lower % of sub-550 bps deals; portfolio yield down modestly; nonsponsored mix at 43% of fundings . Q2: New commitments at 11.6% WAI; portfolio yield at amortized cost 13.9% .CEO’s “ROE math” shows sector ROEs at risk if spreads don’t reprice; TSLX maintains pricing discipline .Spreads tight; discipline emphasized; sector pressure persists.
Activity-Based Fees & RepaymentsQ3: $0.05/sh activity fees; repayments $90.2MM; expectation of rising velocity as rates normalize .$0.15/sh activity fees (7-quarter high); repayments $304.7MM; TRP Energy and other payoffs drove fees .Improving portfolio velocity and fees.
Credit Quality/Non-AccrualsQ3: Lithium added to non-accrual; non-accruals 1.9% FV; interest coverage improved to 2.2x . Q2: Non-accrual 1.1% with no new additions .Non-accruals 1.4% FV; no new additions; performance rating improved to 1.10 .Stabilizing credit with modest improvement.
Rates/Cost of DebtQ3: WACD 7.7%; lagging reset to lower base rates expected; forward curve supportive of base dividend .WACD down to 7.0%; liabilities fully floating; cost benefits as rates decline .Cost of debt declining with floating structure.
Nonsponsored/Platform DifferentiationQ3: Arrowhead & Belk highlighted; 25% less portfolio overlap vs. sector; 43% nonsponsored fundings .TRP Energy recap; Arrowhead update; higher call protection; pipeline includes capital solutions .Sustained differentiation and sourcing breadth.
Guidance & ROEQ3: FY24 adj. NII expected within $2.27–$2.41; strong LTM NI ROE ~12% .Initiated FY25 adj. NII $1.97–$2.14; ROE 11.5%–12.5%; conservative activity fee assumptions .Guidance reset lower vs. FY24, consistent with spread backdrop.

Management Commentary

  • CEO on fee tailwinds and dividend coverage: “In Q4, we earned $0.15 per share of activity-based fees... highest amount in 7 quarters… adjusted NII of $0.61/sh exceeded our base quarterly dividend by $0.15/sh or 33%.”
  • CEO on sector spreads/ROE: “A weighted average portfolio spread at 529 bps generates approximately 5% ROE for the sector… we continue over-earning our cost of capital even in a more competitive… spread environment.”
  • CFO on cost of debt: “Our weighted average interest rate on average debt outstanding decreased ~70 bps from 7.7% to 7%… our liability structure is entirely floating rate.”
  • President on pipeline and differentiation: “Q4 was our busiest quarter in 3 years… TRP Energy recap… we expect ~$0.07/sh of estimated activity-based fees in Q1’25 from Arrowhead prepayment terms.”

Q&A Highlights

  • Origination mix and capital solutions: TRP was a first-lien financing; capital solutions expected to be more prevalent in 2025 with spreads roughly SOFR+600–850 for such deals in pipeline .
  • Credit/watchlist updates: Working on asset sales at IRG; Lithium’s headwinds were fundamental and already captured in non-accruals; overall credit amendments low and mostly positive .
  • Spreads outlook: Market self-correction expected via supply/demand and investor ROE signaling; guidance embeds conservative turnover/fees .
  • Nonsponsored channel: Major contributor to portfolio differentiation and higher asset-level returns; 2024 nonsponsored fundings were notable, with Arrowhead/Belk examples .
  • Capital strategy: Leverage at top end of target (~1.2x); not inclined to issue equity unless ROEs are sustainably accretive at prevailing spreads .

Estimates Context

  • We attempted to retrieve S&P Global consensus (EPS/Revenue) for Q4 2024 but were unable to due to a daily request limit exceeded by the data provider; therefore, we cannot quantify beat/miss versus Street for this quarter. We will update as soon as access is restored to S&P Global consensus.

Key Takeaways for Investors

  • Earnings quality remains robust: Adjusted NII covered the base dividend by 33%, with NAV/share up QoQ, underscoring durable earnings power and capital return capacity .
  • Fee acceleration provided incremental upside: $0.15/sh activity-based fees (7-quarter high) driven by elevated repayments; early Q1’25 fee tailwind expected from Arrowhead .
  • Credit stable-to-improving: Non-accruals fell to 1.4% FV with no new additions; portfolio rating improved; management constructive on credit trajectory .
  • Cost of debt tailwind: Entirely floating liabilities and lower base rates reduced WACD to 7.0%, supporting NII resilience even as asset yields step down .
  • Spread discipline differentiates TSLX: Management highlights sector ROE pressure at current spreads but positions TSLX’s sourcing/pricing to sustain above-cost-of-capital returns .
  • 2025 guide is conservative: Adjusted NII $1.97–$2.14/sh (ROE 11.5%–12.5%) assumes muted fees and current spreads; potential upside if M&A velocity and pricing improve .
  • Near-term catalysts: Supplemental dividends, revolver amend/extend with lower fees/spread, potential incremental fee income from repayments, and continued NAV stability .

Appendix: Additional Relevant Press Releases (Q4 2024)

  • Affirm partnership: Sixth Street’s Asset Based Finance platform agreed to invest up to $4B via a forward flow structure purchasing Affirm loans, highlighting platform breadth and potential deal flow adjacency (platform-level, not necessarily TSLX balance sheet) .