Sixth Street Specialty Lending, Inc. — Q1 2024 Form 10-Q
Business context and reporting period. Sixth Street Specialty Lending is an externally managed business development company (BDC) focused primarily on lending to U.S. middle-market companies. This unaudited report covers the three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Amounts below are in millions of dollars unless noted.
Financial and operating highlights
| Metric | Q1 2024 / March 31, 2024 | Prior comparison |
|---|---|---|
| Total investment income | $117.8 | $96.5 in Q1 2023 |
| Net investment income | $52.4; $0.59 per share | $42.9; $0.53 per share in Q1 2023 |
| Net realized and unrealized gains (losses) | $(4.8) | $10.0 in Q1 2023 |
| Increase in net assets from operations | $47.5; $0.53 per share | $53.0; $0.65 per share in Q1 2023 |
| Net asset value (NAV) per share | $17.17 | $17.04 at December 31, 2023 |
| Investments at fair value | $3,380.0 | $3,283.1 at December 31, 2023 |
| Debt, balance-sheet carrying value | $1,804.3 | $1,780.3 at December 31, 2023 |
| Cash and cash equivalents, including restricted cash | $35.9, of which $29.1 was restricted | $25.2 at December 31, 2023 |
| Asset coverage ratio | 184.5% | 181.6% at December 31, 2023 |
| Dividends declared per share | $0.54 | $0.55 in Q1 2023 |
Revenue, expenses, and portfolio
- Investment income rose about 22% year over year. Interest income increased to $104.6 from $90.1, which management attributed mainly to higher reference rates and a larger average portfolio. PIK interest increased to $8.1 from $3.0 and represented 6.9% of investment income, versus 3.1% a year earlier.
- Net investment income rose about 22%, but reported earnings per share fell to $0.53 from $0.65 as the current quarter included net unrealized losses rather than gains. Net realized gains were $2.1 versus $5.2; net unrealized losses were $7.0 versus gains of $4.8.
- Net expenses increased to $64.6 from $53.2. Interest expense rose to $39.0 from $28.5; average debt outstanding increased to $1,883.9 from $1,569.4 and its weighted-average rate increased to 7.6% from 6.7%.
- Portfolio fair value increased by $96.9 from year-end. First-lien debt represented 92.3% of the portfolio at fair value; 99.6% of debt investments bore floating rates, all subject to floors. The weighted-average yield on debt and income-producing securities at fair value was 13.8%, down from 14.1% at year-end.
- Investments on non-accrual rose to $38.4, or 1.1% of portfolio fair value, from $20.7, or 0.6%, at year-end. The report identifies Astra Acquisition and American Achievement investments as non-accrual.
Cash flow, liquidity, and capital
- Operating activities used $65.5 of cash, principally reflecting $211.3 of net investment purchases and originations, partly offset by $115.4 of investment proceeds and repayments and $47.5 of increase in net assets from operations. Financing activities provided $76.2, including $81.5 net proceeds from a March common-stock offering; debt repayments and dividends were significant uses of cash.
- At March 31, gross debt principal was $1,877.9, including $580.4 outstanding under the revolving facility and $1,297.5 of notes. The facility showed approximately $1,104.6 available, subject to borrowing-base and other limits. Balance-sheet debt is lower because it is presented net of financing costs and related adjustments.
- The company issued $350.0 principal of 6.125% notes due 2029 in January and 4.0 million common shares at $20.52 per share in March. Proceeds were used to repay revolving borrowings. A further 600,000 shares were issued in an over-allotment on April 1 for $12.0 net proceeds.
- Portfolio-company funding commitments totaled $363.9, up from $316.1 at year-end. Management stated that cash and available revolving capacity were expected to be sufficient for near-term investing and operations.
Material changes and management commentary
- New investment commitments were $263.6, compared with $176.1 in Q1 2023; funded investments were $162.8 versus $138.9, while exits and repayments were $108.6 versus $50.8. Gross originations were $5.1 billion, but included $4.9 billion of syndications or sell-downs.
- Portfolio valuation changes were mixed: management cited positive valuation adjustments and spread movements among gains, offset by negative credit adjustments, spread changes, and reversals of prior unrealized gains. The filing reports $15.4 of unrealized gains across 75 investments and $27.1 of losses across 69 investments.
- The April 24, 2024 amendment to the revolving facility increased commitments to $1.7 billion and extended the revolving period and maturity for most commitments. It also increased the minimum stockholders’ equity covenant to $650 million plus a specified portion of later equity proceeds.
- The board declared a $0.46 base dividend and $0.08 supplemental dividend per share for the quarter. Dividends remain subject to board approval, earnings, liquidity, regulatory requirements, and other considerations; the filing provides no earnings or investment guidance.
Risks, contingencies, and unusual items
- Most investment fair values rely on Level 3 inputs and significant management judgment. The company cautions that actual liquidation proceeds could differ materially from reported values.
- Credit risks include deterioration in portfolio-company performance and the increase in non-accrual investments. The company’s debt investments are generally below investment grade if rated.
- Interest-rate sensitivity remains material: management estimates that, holding the March 31 balance sheet constant, a 100-basis-point increase would raise annualized net interest income by $12.7, while a 100-basis-point decrease is not presented; the filing instead estimates a 25-basis-point decrease would reduce it by $3.2 and a 50-basis-point decrease by $6.4. Actual outcomes may differ with portfolio and market changes.
- Derivative collateral requirements can vary and failure to meet a margin call could cause default. Restricted cash includes $29.1 pledged as swap collateral; swap fair value was $(42.2) before collateral netting.
- The company applied a full valuation allowance to a $12.3 contractual make-whole claim related to Bed Bath & Beyond because collectability was uncertain. It reported no material pending or threatened litigation and no material subsequent events other than those disclosed.
- The company stated it was in compliance with its debt arrangements at March 31, 2024. Asset coverage was above the statutory 150% minimum. Forward-looking statements remain subject to economic downturn, inflation, borrower performance, and access-to-capital risks.
Important facts for investors to verify
- Whether the rise in non-accrual investments and PIK income signals further borrower stress; review developments for Astra Acquisition, American Achievement, and other watch-list exposures.
- How the company’s Level 3 valuation assumptions, including discount rates and comparable-company multiples, affect NAV and unrealized losses.
- Whether cash generation, repayments, and revolving availability can support the $363.9 of unfunded portfolio commitments, dividends, and upcoming debt maturities, including the $347.5 of 2024 Notes due in November 2024.
- The effect of increased financing costs, changing base rates, hedges, and the revised revolving-facility covenants on net investment income and liquidity.
- How the March equity issuance and April over-allotment affect per-share NAV, leverage, and future earnings per share.