Sixth Street Specialty Lending, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Sixth Street Specialty Lending is a business development company (BDC) that primarily originates loans to middle-market companies. Unless otherwise stated, financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total investment income | $107.6 million | $63.9 million | $204.1 million | $131.3 million |
| Net investment income | $48.8 million | $40.8 million | $91.7 million | $76.5 million |
| Net increase (decrease) in net assets from operations | $53.1 million | $(13.5) million | $106.0 million | $27.4 million |
| Basic earnings per share | $0.63 | $(0.18) | $1.28 | $0.36 |
- At June 30, 2023, investments were valued at $3.089 billion, compared with $2.788 billion at December 31, 2022. Net asset value was $1.461 billion, or $16.74 per share, versus $16.48 per share at year-end.
- Cash and cash equivalents, including restricted cash, were $25.9 million. Six-month operating cash flow was negative $186.6 million, primarily reflecting $455.6 million of investment fundings, partly offset by $176.6 million of repayments and investment proceeds. Financing activities provided $186.8 million; cash increased by $0.2 million.
- Debt carrying value was $1.623 billion; outstanding principal was $1.698 billion. The revolving facility had $659.2 million of stated availability, subject to borrowing-base and asset-coverage limits. Statutory asset coverage was 186.1%, down from 188.6% at year-end.
- Portfolio debt and income-producing securities had a weighted-average total yield at fair value of 14.0%, versus 13.5% at year-end. The portfolio was 90.6% first-lien debt; 99.2% of debt investments bore floating rates, with all floating-rate investments subject to floors.
Changes versus comparable periods
- Q2 investment income increased 68% year over year, with interest income rising as reference rates and amendment fees increased. Net investment income rose about 20%.
- Interest expense increased to $32.4 million from $12.0 million in Q2, reflecting both higher average debt ($1.713 billion versus $1.157 billion) and a higher average debt rate (7.1% versus 3.1%). For the first half, interest expense was $60.9 million versus $21.6 million.
- Q2 operations improved from a $13.5 million loss to $53.1 million of income, primarily as unrealized results changed from a $54.8 million loss to a $2.8 million gain. First-half operations increased to $106.0 million from $27.4 million; unrealized results were positive $7.6 million versus negative $63.2 million.
- The company issued 5.175 million shares in Q2, generating $89.3 million net proceeds. The portfolio grew to 130 investments, including structured-credit positions, from 121 at year-end.
Outlook, risks and unusual items
- Management said available cash and borrowing capacity were expected to support near-term investing and operations; the filing gives no earnings or dividend guidance. Dividends remain subject to Board approval and performance. First-half declared dividends totaled $1.05 per share, including base and supplemental distributions.
- Non-accrual investments rose to $19.4 million fair value, or 0.6% of the portfolio, from $0.2 million at year-end. The filing identifies American Achievement as non-accrual. Bed Bath & Beyond-related DIP loans were held at $33.2 million fair value; a separate $10.9 million make-whole claim had a full valuation allowance due to collectability uncertainty.
- Most investments are valued using Level 3 inputs, making valuations judgment-dependent and potentially different from realizable sale prices. Credit-spread widening and borrower-specific developments were cited among unrealized-loss drivers. The portfolio also includes paid-in-kind interest, which may not be received in cash.
- Key risks include leverage, rising funding costs, borrower defaults, limited liquidity of private investments, foreign-currency exposures, and dependence on access to debt and equity markets. The company reported compliance with its debt covenants and no material pending or threatened litigation. Disclosure controls were assessed as effective.
- The company’s LIBOR-linked swaps and notes were scheduled to transition to SOFR on September 25, 2023. The revolving credit facility was amended in June, increasing commitments to $1.710 billion and extending the revolving period for most commitments.
Important facts for investors to verify
- Whether portfolio marks and the increase in non-accrual exposure accurately reflect current borrower credit conditions, particularly American Achievement and Bed Bath & Beyond-related claims.
- How higher interest expense, future reference-rate movements, and the scheduled LIBOR-to-SOFR transition affect net investment income and dividend coverage.
- Actual borrowing capacity after facility borrowing-base and asset-coverage restrictions, and the company’s headroom above its 150% statutory minimum.
- Whether future portfolio-company commitment draws, including the $299.3 million outstanding at quarter-end, can be funded while maintaining liquidity and leverage limits.