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Sixth Street Specialty Lending, Inc. (TSLX) Q4 2022 Earnings Call Transcript

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Sixth Street Specialty Lending, Inc. (NYSE:TSLX) Q4 2022 Earnings Conference Call February 17, 2023 8:30 AM ET

Company Participants

Cami VanHorn - Head-IR

Joshua Easterly - CEO

Bo Stanley - President

Ian Simmonds - CFO

Conference Call Participants

Mark Hughes - Truist

Finian O'Shea - Wells Fargo

Mickey Schleien - Ladenburg

Kevin Fultz - JMP Securities

Kenneth Lee - RBC Capital Markets

Erik Zwick - Hovde Group

Melissa Wedel - JPMorgan

Ryan Lynch - KBW

Robert Dodd - Raymond James

Operator

Good morning, and invited to nan Sixth Street Specialty Lending, Inc. Fourth Quarter and Fiscal Year ended December 31, 2022, Earnings Conference Call. [Operator Instructions] As a reminder, this convention is being recorded connected Friday, February 17, 2023.

I will now move nan telephone complete to Ms. Cami VanHorn, Head of Investor Relations.

Cami VanHorn

Thank you. Before we statesman today's call, I would for illustration to punctual our listeners that remarks made during nan telephone whitethorn incorporate forward-looking statements. Statements different than statements of humanities facts made during this telephone whitethorn represent forward-looking statements and are not guarantees of early capacity aliases results and impact a number of risks and uncertainties. Actual results whitethorn disagree materially from those successful nan forward-looking statements arsenic a consequence of number of factors, including those described from clip to clip successful Sixth Street Specialty Lending, Inc. filings pinch nan Securities and Exchange Commission. The institution assumes nary responsibility to update immoderate specified forward-looking statements.

Yesterday, aft nan marketplace closed, we issued our net property merchandise for nan 4th fourth and fiscal twelvemonth ended December 31, 2022, and posted a position to nan Investor Resources conception of our website, www.sixthstreetspecialtylending.com. The position should beryllium reviewed successful conjunction pinch our Form 10-K revenge yesterday pinch nan SEC. Sixth Street Specialty Lending, Inc.'s net merchandise is besides disposable connected our website nether nan Investor Resources section.

Unless noted otherwise, each capacity figures mentioned successful today's prepared remarks are arsenic of and for nan 4th fourth and fiscal twelvemonth ended December 31, 2022. As a reminder, this telephone is being recorded for replay purposes.

I will now move nan telephone complete to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending.

Joshua Easterly

Thanks, Cami. Good morning, everyone, and convey you for joining us. With america coming is my partner and our President, Bo Stanley; and our CFO, Ian Simmonds.

For our telephone today, I will reappraisal our afloat twelvemonth and 4th fourth highlights and walk it complete to Bo to talk our originations activity and portfolio metrics. Ian will reappraisal our financial capacity successful much detail, and I will reason pinch last remarks earlier opening nan telephone to Q&A.

After nan marketplace closed yesterday, we reported 4th fourth adjusted nett finance income of $0.64 per stock aliases an annualized return connected equity of 15.5% and adjusted nett income of $0.56 per stock aliases an annualized return connected equity of 13.6%. As presented successful our financial statements, our Q4 nett finance income and nett income per share, inclusive of nan unwind of nan noncash accrued superior gains inducement interest expense, were some $0.01 per stock higher astatine $0.65 and $0.57, respectively.

For nan afloat twelvemonth 2022, we generated nett finance income per stock of $2.01 aliases return connected equity of 12% and a afloat twelvemonth adjusted nett income per stock of $1.27 aliases return connected equity of 7.6%. The quality betwixt nett finance income and nett income for nan twelvemonth was driven overwhelmingly by unrealized losses arsenic we incorporated nan effect of wider in installments marketplace spreads connected nan valuation of our portfolio. The effect of accrued consequence premiums was presented passim astir each plus people successful 2022.

During nan almanac year, LCD's first and 2nd lien spreads widened by 135 and 686 ground points respectively. There has been a batch of talk astir nan deficiency of volatility successful backstage plus marks. In this regard, we work together pinch Cliff Asness's explanation of this arsenic volatility laundering.

As we said successful nan past and for nan reasons we outlined successful our erstwhile nationalist shareholder letter, we judge that utilizing inputs from nan marketplace is not only captious but required and determining adjacent worth of assets. Of nan $0.75 per stock quality betwixt our nett finance income and nett income results for 2022, nan majority, aliases 57%, was related to unrealized losses from in installments dispersed movements unsocial that we expect to retrieve complete clip arsenic in installments spreads tighten aliases investments are paid disconnected and 20% was driven predominantly from nan diminution successful equity valuations.

The remaining quality betwixt nett finance income and nett income is chiefly related to: one, nan unwind connected our liking complaint swaps that are not taxable to hedge accounting; and two, nan reversal of unrealized gains that travel done nett finance income upon realization. The wide wellness of our portfolio remains beardown pinch nary changes successful nonaccruals from nan past quarter.

For nan 3rd consecutive quarter, our Board has accrued our quarterly guidelines dividend, raising nan fig by $0.01 per stock to $0.46 per stock to shareholders of grounds arsenic of March 15 and payable connected March 31. Year-over-year, we've accrued our guidelines dividend by 12.2%. We are besides pleased to stock that our Board declared a supplemental dividend of $0.09 per stock related to our Q4 net to shareholders of grounds arsenic of February 28, payable connected March 20. In nan adjacent term, we expect that nett finance income will transcend our recently established guidelines level owed to our accrued net power.

However, we wished $0.46 per stock to beryllium an due level based connected looking astatine nan guardant liking complaint curve done 2025, which is taxable to changes successful nan market. 2022 was a twelvemonth characterized by dispersed income arsenic a driver of net fixed repayment activity slowed successful nan aftermath of accrued marketplace volatility. Portfolio turnover, which is calculated arsenic full repayments complete full assets astatine nan opening of nan year, was 26% successful 2022 compared to 43% and 41% successful 2021, 2020, respectively. The wider dispersed situation people caused a slowdown successful repayment activity.

As a result, fee-generating income represented a smaller information of our full finance income for nan twelvemonth comparative to humanities trends. We generated a return connected assets, calculated arsenic full finance income divided by mean assets, of 11.6% for 2022 compared to 11.3% successful 2021, which was a twelvemonth defined by a grounds level of repayment activities. This further highlights nan affirmative effect connected nan emergence successful reference rates and driving incremental returns for our shareholders.

Our year-end nett plus worth per share, adjusted for nan effect of nan supplemental dividend that was declared yesterday, is $16.39, and we estimate that our spillover income per stock is astir $0.77. We would for illustration to reiterate that our supplemental dividend argumentation is motivated by: one, rig distribution requirements; two, not burning our returns pinch nan excess clash costs incurred done excise tax; and three, nan extremity of steadily building nett plus worth per stock complete time.

Before passing it to Bo, I'll walk a infinitesimal connected really we're reasoning astir nan broader macroeconomic environment. Big picture, we're cautious. But erstwhile we deliberation astir our portfolio, we are constructive connected really we are positioned for nan roadworthy ahead. The U.S. system faces a number of headwinds successful 2023 that are mostly nan consequence of ostentation and nan resulting displacement successful monetary argumentation successful 2022. The restrictive monetary situation will surely person an effect connected growth. The thought of a near-term Fed pivot remains challenging until occupation maturation slows and nan user weakens.

In summary, it feels for illustration we're surviving successful a transitionary period, pinch restrictive Fed argumentation that will proceed to dampen maturation until we spot an summation successful unemployment and further request disruption. A broad-based slowdown successful nan economy, coupled pinch existent complaint environment, will origin immoderate accent for borrowers.

This highlights nan value of why we are focused connected business models pinch precocious adaptable costs structures and pinch those that person pricing power. 82% of our portfolio by adjacent worth was comprised of package and business services companies astatine 4th extremity and are mostly characterized by precocious levels of recurring revenue, predictable rate flows, adaptable costs structures and pricing power.

Our portfolio has shown resiliency to date, and we judge nan underlying business models of our bars are robust and durable. However, we judge economical cycles do exist. As such, we will proceed to attraction connected staying connected apical of nan superior building and run successful mediate of our target leverage range.

With that, I'll walk it complete to Bo talk this quarter's finance activity.

Bo Stanley

Thanks, Josh.

I'd for illustration to commencement by laying connected immoderate further thoughts connected nan nonstop lending environment, and past much specifically, really it relates to nan positioning of our portfolio successful a measurement we're reasoning astir existent opportunities successful nan market.

2022 was a twelvemonth that underscored nan worth proposition of backstage in installments for borrowers. New issued leverage indebtedness measurement reached a 12-year debased and was down 63% from 2021 arsenic nationalist in installments markets were mostly unavailable. As a result, backstage in installments providers stepped successful arsenic a main root of financing solutions, fixed nan expertise to supply velocity and certainty of execution contempt instability successful nan broader markets.

One of nan main themes complete nan past fewer quarters has been nan increasing marketplace stock of nonstop lenders and nan ample syndicated sponsor financings. Direct lenders, pinch nan expertise to constitute sizable checks, are benefiting from nan opportunity to participate successful larger transactions, which different would person been financed successful nan broadly syndicated indebtedness market.

Notably, these finance opportunities coming charismatic consequence reward dynamics arsenic woody position person moved successful a much lender-friendly direction, indicated by wider spreads, tighter documents and little leverage. We judge this displacement successful nan underwriting position reflects nan due compensation to lenders fixed nan uncertain situation we're investing successful today.

We are good positioned to return advantage of this opportunity successful nan market, fixed our expertise to put - alongside affiliated Sixth Street companies. As superior has mostly go much constrained, nan powerfulness of nan Sixth Street level has allowed america to finance larger, much established companies, while remaining selective. We judge this creates a competitory advantage successful today's investing situation arsenic nan number of nonstop lenders consenting and capable to participate successful larger transactions is limited.

In summation to nan beardown originations activity supporting this opportunity successful nan marketplace successful Q4, we person a robust pipeline for nan first half of 2023, including respective ample financings that person already been publically announced. As we person nan expertise to co-invest pinch Sixth Street affiliated costs connected these transactions, we person elasticity to find nan optimal last clasp sizes for our equilibrium sheet.

Turning now to our finance activity for nan quarter, Q4 was productive, pinch full commitments of $241 cardinal and full fundings of $212 cardinal crossed 7 caller portfolio companies and upsizes to 5 existing investments. We knowledgeable $282 cardinal of repayments from 7 afloat and 3 partial finance realizations.

The summation successful repayment activity was mostly driven by idiosyncratic payoffs of our 2 largest investments by adjacent worth arsenic of 9/30 that we discussed connected our past net call, violating nan beforehand line, which represented 58% of repayments for nan quarter. For nan afloat twelvemonth of 2022, we provided $1.1 cardinal of commitments and closed $864 cardinal of fundings.

Total repayments were $654 cardinal for nan year, resulting successful nett portfolio maturation of $210 million. Year-over-year, our portfolio grew by 11%, which reflects our deliberate effort to turn responsibly. We were capable to stay selective successful nan investments that we make, fixed nan size of our superior base, but not require america to beryllium plus gatherers, but alternatively bottoms up basal investors and attraction connected driving return connected superior for our investors.

82% of full commitments this twelvemonth were sponsored transactions wrong our specialized assemblage sub-teams. We proceed to execute connected our package and business services themes, wherever we judge we person a competitory advantage and wherever nan underlying companies person charismatic gross characteristics, high-quality customer bases and robust business models. At December 31, our apical manufacture vulnerability by adjacent worth was to business services astatine 14.4%.

We'd for illustration to return a infinitesimal to supply an update connected 1 of our unit ABL investments that has precocious been successful nan press, Bed Bath & Beyond. As mentioned during our Q3, 2022 net call, we had aged a FILO word indebtedness committedness successful September of 2022 to support nan operational turnaround by nan institution and supply further liquidity. As a consequence of this transaction, we clasp a $55 cardinal paramount committedness arsenic of 12/31 of nan FILO word loan, which represents little than 2% of our full assets arsenic of year-end.

On February 6, nan institution announced it was raising up to $1.025 cardinal of caller equity superior done a nationalist offering. This offering allows nan institution to debar bankruptcy recovered successful nan adjacent term, which is simply a affirmative for each nan company's stakeholders, including employees. Along pinch nan superior raise, Sixth Street made an further finance successful a much elder position successful nan superior structure.

Our position, which is already underwritten to liquidation value, is improved arsenic a consequence of nan caller superior raise and our much elder position successful nan superior structure. Obviously, this remains an ongoing business that astatine this moment, we consciousness bully astir nan security. Our unit ABL capabilities person been a distinguishing characteristic of our finance strategy since we began nan institution backmost successful 2011.

We person executed complete 25 transactions and invested complete $1 cardinal of superior done TSLX. On these investments, we person taken 9 done nan bankruptcy process without immoderate losses. From a capacity perspective, gross unlevered return connected afloat realized unit ABL investments is 20.8% arsenic of 12/31. We person a halfway competency successful managing these types of investments, and we'll look to proceed to execute connected this strategy done nan aforesaid playbook we established years ago.

Moving connected to nan repayment side, 1 realization that we'd for illustration to item is our finance successful TherapeuticsMD, which demonstrates nan affirmative effect of proactive plus guidance for our shareholders. Since our first finance successful 2019, nan institution faced aggregate challenges, including impacts from COVID-19, resulting successful underperformance comparative to expectations.

As nan business evolves, Sixth Street worked pinch nan institution arsenic advisers toward a way asset, including aggregate amendments and a ample partial paydown anterior to our exit.

In December 2022, Sixth Street's indebtedness was afloat repaid erstwhile nan institution licensed afloat commercialized authorities of its products. TXMD will proceed to beryllium a nationalist institution receiving milestone payments and 20 years of royalties connected sales. Through progressive portfolio guidance and extended acquisition successful nan healthcare space, TSLX generated astir 15.5% IRR and 1.4x MOM connected nan finance pinch a beneficial result for some parties.

From a portfolio output perspective, our weighted mean output connected indebtedness and income-producing securities astatine amortized costs accrued to 13.4% from 12.2% quarter-over-quarter. The summation chiefly reflects a emergence successful nan weighted mean reference complaint reset of 115 ground points complete nan quarter. The weighted mean output astatine amortized costs connected caller investments, including upsizes for Q4, was 12.6% compared to a output of 11.9% connected exited investments.

Looking astatine nan year-over-year trends, our weighted mean output connected indebtedness and income producing securities astatine amortized costs is up astir 320 ground points from a twelvemonth ago. The important summation successful our yields successful 2022 illustrates a, affirmative plus sensitivity for our business from accrued guidelines rates beyond our floors successful summation to our selective origination attack crossed themes and sectors.

Moving connected to nan portfolio creation and in installments stats crossed our halfway borrowers for whom these metrics are relevant. We proceed to person blimpish weighted mean connect and detach points of 0.9 times and 4.5 times respectively. And weighted mean liking sum decreased from 2.6x to 2.2x. The alteration successful liking sum is successful statement pinch our expectations from nan effect of rising rates connected nan costs of costs for our borrowers.

Our liking sum metric assumes we use reference rates arsenic astatine nan extremity of nan twelvemonth to nan tally complaint borrower EBITDA, we judge this is simply a amended practice of our position of our borrowers arsenic opposed to a look backmost metric, specified arsenic LTM. One further nuance, we'd for illustration to item connected liking sum relates to nan positioning of our portfolio towards package and business services.

These businesses mostly spot much constricted fixed complaint requirements, specified arsenic superior expenditures. Other much capital-intensive industries knowledgeable higher fixed charges successful summation to financing costs, meaning liking sum metrics apt understate fixed obligations of those businesses. As of Q4, 2022, nan weighted mean gross and EBITDA of our halfway portfolio companies was $152 cardinal and $46 million, respectively, representing an summation successful some metrics from Q3.

Finally, nan capacity standing of our portfolio continues to beryllium strong, pinch a weighted mean standing of 1.12 connected a standard of 1 to five, pinch 1 being nan strongest, representing nary alteration from past quarter's ratings. We proceed to person minimal non-accruals pinch only 1 portfolio institution connected non-accrual representing little than 0.01% of nan portfolio astatine adjacent worth and nary caller names added to non-accrual during Q4.

With that, I'd for illustration to move it complete to Ian to screen our financial capacity successful much detail.

Ian Simmonds

Thank you, Bo.

We vanished nan twelvemonth pinch a beardown 4th from an net and finance activity perspective. In Q4, we generated nett finance income per stock of $0.65, resulting successful afloat twelvemonth nett finance income per stock of $2.13. Our Q4, nett income per stock was $0.57, resulting successful afloat twelvemonth nett income per stock of $1.38. There was $0.11 per stock unwind of antecedently accrued superior gains inducement fees successful 2022, which is simply a non-cash reversal.

Excluding nan $0.11 per stock unwind for this year, our adjusted nett finance income and adjusted nett income per stock for nan twelvemonth were $2.01 and $1.27, respectively. At year-end, we had full investments of $2.8 billion, full main indebtedness outstanding of $1.5 cardinal and nett assets of $1.3 cardinal aliases $16.48 per share, which is anterior to nan effect of nan supplemental dividend that was declared yesterday.

Our ending debt-to-equity ratio was 1.13x, down from 1.16x successful nan anterior quarter, and our mean debt-to-equity ratio besides decreased somewhat from 1.15x to 1.14x quarter-over-quarter. For afloat twelvemonth 2022, our mean debt-to-equity ratio was 1.03x up from 1x successful 2021 and good wrong our antecedently stated target scope of 0.9 to 1.25x.

Our liquidity position remains robust pinch $866 cardinal of unfunded revolver capacity astatine year-end against $178 cardinal of unfunded portfolio institution commitments eligible to beryllium drawn. Our year-end backing operation was represented by a 53% unsecured debt. Post 4th end, we satisfied nan maturity of our $150 cardinal January 2023 unsecured notes done utilization of undrawn capacity connected our revolving in installments facility. The colony marginally decreased our weighted mean costs of indebtedness and had nary effect connected leverage.

Moving to our position materials. Slide 10 contains this quarter's NAV bridge. Walking done nan main drivers of NAV growth, we added $0.64 per stock from adjusted nett finance income against our guidelines dividend of $0.45 per share. There was $0.11 per stock simplification to NAV arsenic we reversed nett unrealized gains connected nan equilibrium expanse related to finance realizations and recognized these gains into this quarter's income.

The reversal of unrealized gains this 4th was chiefly driven by nan early payoff of Biohaven, which resulted successful an unwinded $0.12 per stock from unrealized gains to nett finance income for nan quarter. There were insignificant affirmative impacts from changes successful in installments spreads connected nan valuation of our portfolio and a affirmative $0.01 per stock effect from portfolio company-specific events.

Pivoting to our operating results elaborate connected Slide 12, we generated a grounds level of full finance income for nan 4th of $100.1 million, up 29% compared to $77.8 cardinal successful nan anterior quarter. The summation was driven by a emergence successful nan contractual liking income net powerfulness of nan business, arsenic good arsenic different income related to nan Biohaven payoff specifically.

Walking done nan components of income. Interest and dividend income was $85.8 million, up 15% from nan anterior quarter. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled salary down, were $11 million, up from $429,000 successful nan anterior 4th owed to higher portfolio repayment activity. Other income was $3.4 million, up from $2.7 cardinal successful nan anterior quarter.

Net expenses, excluding nan effect of noncash reversal related to unwind of superior gains inducement fees, were $47.5 million, up from $40.3 cardinal successful nan anterior quarter. This was chiefly owed to nan upward activity successful reference rates, which accrued our weighted mean liking complaint connected mean indebtedness outstanding from 4.3% to 5.6% and higher inducement fees arsenic a consequence of this quarter's complete earning.

During 2022, guidelines rates accrued by astir 425 ground points. And nan effect connected net became evident successful nan backmost half of nan twelvemonth fixed lag successful reference complaint resets for borrowers. Given nan debased financial leverage embedded successful BDCs, plus sensitivity has a larger effect than liability sensitivity and proved to beryllium a tailwind for our business arsenic we saw accrued plus level yields thrust return connected equity.

For a twelvemonth characterized by dispersed income, nan emergence successful liking rates and wider spreads resulted successful nan business exceeding nan precocious extremity of our opening twelvemonth ROE adjusted nett finance income target of 11.5% aliases $1.92 per stock for 2022. Net unrealized losses, mostly from nan effect of dispersed widening knowledgeable successful Q2 connected portfolio marks, had a important effect connected our nett income for nan year, which we expect to unwind arsenic in installments spreads tighten aliases investments are paid off.

Based connected our expectations for our nett plus level yields, nan activity successful reference rates, costs of costs and financial leverage, we expect to target a return connected equity for 2023 of 13% to 13.2%. Using our year-end book worth per stock of $6.39, which is adjusted to see nan effect of our Q4 supplemental dividend, this corresponds to a scope of $2.13 to $2.17 for afloat twelvemonth 2023 adjusted nett finance income per share. As we said, we expect to complete gain our $1.84 per stock annualized guidelines dividend successful nan adjacent term, and we'll proceed to administer overearnings to shareholders done our supplemental dividend framework.

With that, I'd for illustration to move it backmost to Josh for concluding remarks.

Joshua Easterly

Thank you, Ian.

We judge we are transitioning from an era of easy money to a caller macro ace rhythm that we judge will magnify volatility comparative to caller history. With specified volatility, we'll travel to spurge and returns and will elevate nan value of management's capabilities and skills.

The ironies, however, moreover successful debased volatility and debased complaint environment, returned this type has already existed. Now we tin only expect it to increase. Our rates for nan foreseeable early will astir decidedly origin accent for definite borrowers, followed by an uptick successful defaults from nan humanities debased levels we've knowledgeable much recently.

That being said, we expect in installments issues to beryllium heavy related to borrowers pinch weaker underlying business models, and we are assured successful nan durability of our portfolio companies. We judge our way grounds complete nan past 12 years since inception, supports our expertise to proceed to make industry-leading returns for our shareholders. We person generated an annualized return connected equity connected nett income since our March 2014 IPO of 13.1%.

We property a ample information of our occurrence that our shareholders person enjoyed to expertise to complete gain our costs of superior by avoiding in installments losses and appropriately pricing spreads connected investments that return into relationship nan costs embedded successful operating our business. We stay constructive connected nan opportunity group up of us.

We proceed to acquisition elevated all-in yields connected our assets, and we expect in installments costs to stay debased fixed our finance action subject and nan wellness of our existing portfolio. We began nan twelvemonth pinch important liquidity and capacity to thrust incremental ROEs, and are optimistic astir opportunities to heighten our superior building done nan people of nan year.

With that, convey you for your clip today. Operator, please unfastened nan statement for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first mobility comes from nan statement of Mark Hughes pinch Truist. Your statement is open. Please spell ahead.

Joshua Easterly

Hi, Mark.

Operator

Mark, your telephone mightiness beryllium connected mute.

Mark Hughes

Yes, my telephone is connected mute. I'm truthful sorry. Good morning.

Joshua Easterly

Good morning, Mark.

Mark Hughes

My mobility was, really are you reasoning astir fees -- interest gross successful 2023? You've fixed immoderate bully guidance connected NII. Just funny what you deliberation nan interest situation is going to beryllium like.

Joshua Easterly

Yes, it's a bully question, Mark. It's really difficult to show because it's a usability of benignant of repayment velocity. But to conscionable springiness you immoderate numbers, successful 2000, erstwhile we deliberation astir fees, if we deliberation astir it and fundamentally I would opportunity 2 categories aliases 3 categories, which is accelerated OID, prepayment fees and amendment fees and different income. That's historically been -- I think, successful 2022, those fees were, let's do nan math, astir $0.37 per share. In 2021, those fees were 47 - astir $0.54, $0.56 per share.

In 2023, we really - successful our guidance numbers, they're importantly beneath those levels, and we expect to beryllium importantly beneath those levels that are embedded successful our guidance. So successful our guidance numbers, they are astir $0.22 per share. So that's heavy weighted towards, again, different twelvemonth of dispersed income. If you spot velocity successful nan book, obviously, it's going to beryllium much, overmuch higher, but it's importantly beneath '22 levels and '21 levels.

Mark Hughes

Yes. No, I admit nan specifics there. And past erstwhile you look astatine nan curve, talked astir keeping nan guidelines dividend astatine nan $0.46 informed by your lookout to 2025. How overmuch cushion, conscionable mostly speaking, would you -- do you still person complete nan dividend complete those adjacent mates of years?

Joshua Easterly

Yes. Significant -- look, I deliberation we conscionable went done nan mathematics connected 2023, which 2023 has, again, is mostly dispersed income our per stock guidance is --

Ian Simmonds

2013.

Joshua Easterly

2013 and 2017. The guidelines dividend level is?

Ian Simmonds

A $1.84.

Joshua Easterly

$1.84. So there's really a batch of cushion. In 2024, similarly, again, we don't really exemplary important level. We deliberation astir upside successful interest income arsenic benignant of beryllium an upside to our guidance. So successful 2024, those levels of interest income are fundamentally nan same. And again, our guidelines dividend is $1.84 and we deliberation we're importantly supra that arsenic well.

So we knew we're going to complete for nan adjacent mates of years, but we don't want to put ourselves successful a position wherever we would person to trim nan dividend. And truthful we group dividend wherever we spot a important cushion successful nan adjacent mates of years. We were conscionable looking astatine nan curve.

Mark Hughes

Thank you very much.

Operator

Thank you. And 1 infinitesimal for our adjacent question. Our adjacent mobility comes from nan statement of Finian O'Shea pinch Wells Fargo. Your statement is open. Please spell ahead.

Finian O'Shea

Hi, everybody. Good morning. A mobility connected nan ample nine deals. It looks for illustration we person 1 this 4th pinch Avalara not signaling successful connected that name. But I don't deliberation those are excessively emblematic for you to partake in. Can you talk astir nan period for what makes that benignant of woody compelling? Is it institution value aliases position arsenic to why you truthful seldom put successful those? And past connected nan downside, perhaps, tin you talk astir structural elements you do springiness up? How overmuch little power you mightiness person and truthful forth? Thank you.

Joshua Easterly

First all, bully greeting Fin. I dream you're doing good this point. So look, we've talked a batch astir this. On nan precocious mediate marketplace and that ample headdress abstraction has importantly changed fixed nan situation we're in. And truthful pre-12 months ago, obviously, we thought was competitory and offered small comparative worth compared to nan broadly syndicated market, that's wholly changed.

Quite frankly, that upmarket we find that nan marginal superior fuels are capable to thrust amended position and you tin finance larger companies that are astatine scale. So arsenic I deliberation group know, we've been progressive successful astir of those deals that person been announced including Emerson, which is arsenic yet to close, which we've led, [Max Car] is yet to close, which we've led and different ones.

So we find there's a batch of value. The -- and that nan marginal superior is capable to thrust pricing and structural enhancements -- and truthful -- and past obviously, fixed nan macro, you're financing those businesses successful an situation wherever you are -- you person a debased complaint situation and benignant of a known maturation situation compared to historically. So we for illustration nan worth that's being offered successful that market. The trade-off is that they're clubs and you sewage to spot that you're astatine likeminded group and if that archive works, and we deliberation it does.

So Bo, thing to adhd there?

Bo Stanley

The only point I'd adhd is you had a circumstantial mobility connected what we springiness up. I deliberation fixed there's a superior worth of capital, a batch nan position and archive circumstantial position person gotten overmuch tighter successful these precocious mediate marketplace deals complete nan past six months, and frankly, are not each that different from what you're seeing your mediate marketplace document. So you person a ample separator of information astatine debased LTV, a standard business [indiscernible] marketplace astatine very charismatic adjusted returns successful this existent environment.

Joshua Easterly

Makes sense.

Finian O'Shea

Sure. That's helpful. Thanks truthful much.

Operator

Thank you. And 1 infinitesimal for our adjacent question. And our adjacent mobility comes from nan statement of Mickey Schleien pinch Ladenburg. Your statement is open. Please spell ahead.

Mickey Schleien

Yes, bully greeting everyone. Josh, successful nan 4th quarter, we proceed to spot mediate marketplace indebtedness spreads widen, which is evidently bully for your financial performance, assuming nan in installments value holds up, but it is stressing borrowers, arsenic you mentioned successful your remarks, pinch liking sum declining to 2.2.?

So I'd for illustration to understand, erstwhile we deliberation astir those trends, what is your outlook connected really backstage lenders will behave this twelvemonth successful position of spreads and nan magnitude of leverage they're looking for connected deals?

Joshua Easterly

Yes, truthful Mickey, I deliberation erstwhile you look astatine nan LCD first lien LCD 2nd lien spreads, they really tightened successful Q4 slightly. So - but year-over-year, they're importantly widened, which we've hit. So I conscionable want to - want to framework up. We did not spot - truthful erstwhile you look astatine unrealized gains and unrealized losses, they were negligible fixed that you really had spreads tightened quarter-over-quarter slightly.

Look, in installments value is apical of mind. At what points - it looks for illustration historically driven capacity aliases outperformance aliases underperformance it's in installments losses for nan industry. It's been nan biggest portion that - erstwhile you deliberation astir nan portion economics of nan sector, return connected assets, is simply a constituent of differentiation. Fees and expenses are fundamentally each pinned adjacent each other. Financial leverage is pinned adjacent each other. Cost of leverage is pinned adjacent each other.

So it's really return connected assets and in installments costs that, ultimately, thrust returns to nan sector. And that's going beryllium a usability of nan portfolio that were built in, their ain spot now. And we deliberation our portfolio is differentiated and arsenic robust fixed nan quality of those businesses. But it is - successful this economical situation wherever you person slowing maturation and higher rates, you are astir decidedly going to person tails successful credit.

We person yet to spot those successful our portfolio, but they are astir decidedly emerging and they are accepting and astir decidedly emerging successful nan broadly syndicated indebtedness market. So it's each astir credit. I dream I answered your question.

Mickey Schleien

Appreciate that Josh, that's it from maine this morning.

Joshua Easterly

Thanks Mickey.

Operator

Thank you. And 1 infinitesimal for our adjacent question. And our adjacent mobility comes from nan statement of Kevin Fultz pinch JMP Securities. Your statement is open. Please spell ahead.

Kevin Fultz

Hi, bully morning, and convey you for taking my questions. As Bo mentioned successful his prepared remarks, volatility successful nan nationalist markets and nan pullback from banks has created an accrued opportunity for nonstop lenders to finance larger deals. I'm conscionable funny what your appetite is to enactment arsenic a syndication supplier to perchance make further interest income?

Joshua Easterly

Yes look, erstwhile there's an opportunity, surely, we'll return advantage of that. And so, we'll surely return advantage for that. That's historically been a comparatively debased level of attribution of our income. I deliberation complete nan years it's been location between, astatine nan precocious end, if you look backmost $0.05 since 2013 successful nan debased extremity zero, and this twelvemonth $0.01. So I mean, location surely will beryllium an opportunity. I wouldn't thin successful - arsenic a monolithic driver of outperformance of earnings.

Kevin Fultz

Okay, that's fair. And past past one, you utilized nan revolver to repay nan 2023 notes. I'm conscionable reasoning astir nan correct broadside of equilibrium expanse and your backing mix. Do you spot further opportunity to further optimize aliases diversify your backing floor plan successful this environment? And I conjecture if so, what building is nan astir appealing?

Joshua Easterly

Yes, truthful in installments - fto maine return a measurement back. And I deliberation we've done a really bully occupation of this, which is we've ever built into nan economics of our business, holding much liquidity than nan remainder of nan space. And erstwhile you look astatine revolver size compared to assets aliases arsenic a metric aliases readiness compared to unfunded commitments. We've ever created flexibility, truthful we were ne'er a unit issuer.

And truthful erstwhile you look astatine our business exemplary this year, we person a batch of elasticity astir erstwhile we rumor aliases if we rumor successful nan unsecured market, which rather frankly, we deliberation is nan astir charismatic measurement to entree markets, further superior extracurricular nan revolver - and but we person nan elasticity to do truthful fixed really overmuch liquidity that we hold. And past we load nan portion economics for and our shareholders - person paid for.

What's really astonishing erstwhile you return a measurement backmost is, that we generated outsized return connected equity compared to nan space. We're holding much liquidity and paying for that liquidity action than everybody other successful nan space. And I deliberation that gives america a batch of flexibility. It gives america elasticity not to beryllium a unit issuer. It gives america nan elasticity successful COVID to really person liquidity to beryllium capable to put successful nan market, which created outsized return connected equities for nan pursuing 2 years.

And truthful we will astir decidedly beryllium opportunistic. But really we've built our equilibrium sheet, conscionable we've created a full bunch of elasticity that we deliberation benefits our shareholders, Ian thing to adhd there?

Ian Simmonds

I deliberation nan elasticity and being consenting to salary for that elasticity conscionable really proved its worth. I conjecture it's now 3 years ago, and we for illustration that model. And we're comfortable pinch what that costs burdens america with, fixed nan elasticity it affords us.

Kevin Fultz

Okay that each make sense, Ian I will time off it there, congratulations for a really bully quarter.

Joshua Easterly

Great, convey you truthful much.

Operator

Thank you. And 1 infinitesimal for our adjacent question. And our adjacent mobility comes from nan statement of Ken Lee pinch RBC Capital Markets. Your statement is open. Please spell ahead.

Kenneth Lee

Hi, bully morning, and acknowledgment for taking my question. Just wonderment if you could talk a small spot much astir nan asset-backed lending opportunities that you spot complete nan near-term. And whether you could either beryllium taken much violative aliases protect stance astir specified opportunities fixed nan macro backdrop? Thanks.

Joshua Easterly

Yes. We for illustration that abstraction a lot, nan asset-based lending space. If you look astatine unit specifically, we thought successful COVID, location was going to beryllium a important opportunity. That opportunity went distant very, very quickly. We did a mates of deals successful COVID. And past post-COVID, fixed benignant of what happened connected nan macro level, user is very strong.

Consumers only could walk money by buying equipment versus services aliases experiences. In nan unit space, that conception - that those companies had amended net and amended equilibrium sheets than they ever had that is changing. The user is starting to weaken. And nan retailers who person equipment and services - I mean who person equipment and waste equipment and person inventory they person little marketplace stock of nan consumer's wallet.

And so, we expect that assemblage to proceed weakening, which will supply an opportunity for america to supply superior into that space. And so, we for illustration that. It's plus guidance intensive. It's - which you person to person a halfway competency successful doing it, which we deliberation we do. But we deliberation that opportunities that will turn and we'll proceed to allocate superior to it wherever we find bully risk-adjusted returns.

Kenneth Lee

Got you, very adjuvant there. And past conscionable 1 follow-up, if I whitethorn wrong nan portfolio, non-accrual rates are still deminimis. I wonderment if you could talk a small spot much astir what you're seeing successful position of amendment activity successful the, portfolio? Thanks.

Joshua Easterly

Yes, I would opportunity it picked up slightly, but still really, really benign compared to COVID truthful nary really important worldly amendments. We are seeing amendments, related to package transition, which we deliberation is astir decidedly affirmative from LIBOR. All nan caller loans aliases LIBOR our package base, but I would say, from a in installments perspective, it's picked up a small bit, but thing worldly to speak off.

Kenneth Lee

Got you, very adjuvant there, acknowledgment again.

Operator

Thank you. And 1 infinitesimal for our adjacent question. Our adjacent mobility comes from nan statement of Erik Zwick pinch Hovde Group. Your statement is open. Please spell ahead.

Erik Zwick

Thanks, bully morning. Just a mobility connected nan pipeline, it sounds for illustration you've sewage beautiful bully visibility for astatine slightest nan adjacent six months. Curious if you could supply a small colour into nan manufacture operation successful nan pipeline today? And if it's reasonably accordant pinch nan existent portfolio if there's any, industries aliases sectors that you are targeting aliases staying distant from today?

Joshua Easterly

Yes look, truthful I would opportunity it's accordant pinch immoderate outliers. Emerson is an industrials business, which is simply a small spot of an outlier for us. So we for illustration that business a lot. We deliberation Blackstone did a awesome occupation successful buying that business. I deliberation it's really, really interesting, which we led. And we deliberation it's benignant of mid-cycle net and nan superior building some for this time. Maxo besides a nationalist to private, I deliberation backstage is again, somewhat successful different businesses - is simply a outer business.

We for illustration that business model. We for illustration nan visibility of revenues. We for illustration to sponsor a lot. And then, we'll ever operation successful benignant of our mini power stuff. But different than that, we're mostly focused connected business services and software, but we person beautiful bully visibility successful nan pipeline successful nan adjacent six months arsenic you mentioned.

Erik Zwick

Thanks, I admit that item there. And conscionable 1 much speedy 1 from maine - I'm conscionable funny wherever floors are coming for caller commitments? Were you capable to put those in?

Joshua Easterly

They are astir decidedly - unfortunately, I don't deliberation they - we've been capable to push them up. They're - astir decidedly successful nan 75 ground points to 100 ground points. I deliberation 80 ground points - 75 to 100. I wish we've looked up and we will beryllium capable to push them up, but nan marketplace is not location yet.

Erik Zwick

Thanks for taking my questions today.

Operator

Thank you. And 1 infinitesimal for our adjacent question. And our adjacent mobility comes from nan statement of Melissa Wedel pinch JPMorgan. Your statement is open. Please spell ahead.

Melissa Wedel

Thanks, bully morning, a batch of my questions person been asked already. But I thought it would beryllium absorbing to touch connected conscionable benignant of nan activity levels successful 4Q. Certainly, we were amazed by nett exits during nan quarter. So fixed that you're expecting a fewer larger exits already that you had talked astir during nan 3rd 4th call. I'm funny if location - pinch immoderate arsenic woody slippage into nan first 4th aliases if that benignant of commentary connected really you're seeing nan opportunities astatine correct now?

Joshua Easterly

So look, look - I didn't wholly get nan question. I deliberation truthful - put astir of our exits successful Q4, we knew successful Q3, and we tried to thief group connected our Q3 net call, which was beforehand line...

Ian Simmonds

Biohaven.

Joshua Easterly

Biohaven, and I deliberation location was a mates much - but those were nan large drivers of nan Q4 exit.

Melissa Wedel

Right.

Ian Simmonds

And Melisa - nan prepayment fees and amortization of upfront fees.

Melissa Wedel

Yes apologies if - my mobility wasn't clear. I conjecture what was looking to research a small spot much was nan level of superior deployment during nan quarter, particularly since you knew astir immoderate of nan larger exits. So nan truth that it was a slower 4th fourth for you guys compared to erstwhile years. Is that a usability of woody slippage into nan first 4th aliases is that really commentary connected nan opportunity side?

Joshua Easterly

I sewage it. It's really - erstwhile you look astatine our activity levels successful Q4, I would opportunity they were – it's importantly up. The money truthful - nan committedness we made successful Q4 are measurement complete humanities levels. They hap to beryllium related to mostly return privates that person clip periods connected that will adjacent successful nan first half of - 2023.

So - nan opportunity that it was arsenic beardown arsenic it's ever been. It conscionable happens to beryllium that they were shaded large-cap return privates, which person debased regulatory process for that inventory to beryllium turned into backing truthful - that committedness to beryllium turned into funding.

Melissa Wedel

Got it, acknowledgment Josh.

Operator

Thank you. And 1 infinitesimal for our adjacent question. Our adjacent mobility comes from nan statement of Ryan Lynch pinch KBW. Your statement is open. Please spell ahead.

Ryan Lynch

Hi, bully morning. I conscionable person 1 question. You talked astir connected 1 manus benignant of large picture, you're cautious fixed nan dynamics of ostentation and displacement successful monetary argumentation and really that impacts growth. And connected nan different hand, you talked astir your portfolio being mostly successful package business pinch precocious adaptable costs structures and pricing power. So I'm conscionable curious, arsenic you study your portfolio and show it intimately astatine this benignant of existent changing move environment, what are immoderate of nan cardinal metrics aliases trends that you guys are monitoring? And is location thing that you guys are seeing frankincense acold that is benignant of a concerning trend?

Joshua Easterly

No. So I deliberation gross maturation was for illustration 7% for nan quarter. We evidently look astatine gross maturation connected an annualized basis. So gross maturation has astir decidedly slowed, though still positive. We look astatine things specified arsenic some margin, churn, customer acquisition costs.

I would opportunity connected nan churn side, level quarter-over-quarter. We grew successful nan customer acquisition costs by a small bit. But nan portfolio, I think, has is successful beautiful bully shape. And by nan way, group talk astir things successful averages. It's benignant of a agelong measurement to deliberation astir it because you're benignant of stuck pinch nan tails. And truthful I deliberation erstwhile you look astatine our portfolio and look astatine nan tails, we consciousness beautiful bully that there's nary important tails. But Bo, do you person thing to adhd connected that?

Bo Stanley

The only point I would adhd is we besides look astatine bookings. This is an suggestive for early gross growth. We saw a existent request obstruction successful Q3 and we're intimately monitoring Q4 crossed our portfolio, particularly crossed nan business services side. Early returns connected nan bookings crossed nan portfolio has been really comparatively beardown successful Q4. Now there's a mobility if that was conscionable a batch of pull-through request that group are trying to get their budgets spent this year. But that was -- nan early indications are beautiful affirmative connected nan bookings broadside crossed nan portfolio successful Q4.

Ryan Lynch

Okay. That's bully to hear. The different -- conscionable connected that point, person you seen -- I guess, has your package companies person guidelines started to -- I conjecture if nan fundamentals are fine, possibly this is not a concern. But person they started to trim those fixed charges successful their business? So we've evidently seen a batch of layoffs happening successful nan nationalist package companies, which evidently shows nan spot of nan business. Has your portfolio institution started to make those shifts yet? Or is nan business performing good capable that, that's not really been an impact?

Joshua Easterly

Yes. I deliberation successful nan tail, we person immoderate that are starting to look astatine their costs, we for illustration that and promote that. Look, I deliberation if you deliberation astir nan situation we're in, post-COVID, up until past twelvemonth successful a zero complaint environment, everything benignant of economically hurdled.

And truthful you tin make nan mathematics activity for anything. And truthful location was a batch of dollar spent and investments made that should person astir apt not been made crossed some nationalist and backstage markets, some connected nan finance broadside and wrong companies. And truthful I deliberation connected nan margin, you're seeing a small spot of group looking astatine their costs structure, obviously, not nan levels that you spot successful large tech, but astir decidedly -- and that's a motion of bully guidance team.

Bo Stanley

So trying to get much efficient. We would expect that. The awesome point astir nan businesses. They person a very unspeakable business model.

Ryan Lynch

Okay. That's each for maine this morning. I admit it.

Joshua Easterly

Ryan, conscionable connected 1 topic, which I deliberation you did deed connected a small bit, which is, I deliberation we talked astir script, but I deliberation nan abstraction gets -- I deliberation group get incorrect which is package businesses mightiness person higher financial leverage, but they person little fixed charges fixed nary CapEx spend. And truthful you benignant of person to look astatine leverage successful an EBIT ground aliases an EBITDA minus CapEx ground aliases operating rate travel minus CapEx. And erstwhile you look astatine that metric, I deliberation those businesses person -- are connected a leverage ground aliases successful statement aliases little than for illustration nan business abstraction aliases specialty chemic successor. So I deliberation you person to load rate travel by each fixed charges, conscionable not fixed charges related to financial leverage.

Ryan Lynch

Got you. Understand nan point. I admit nan clip today.

Joshua Easterly

Thank you.

Operator

Thank you. And 1 infinitesimal for our adjacent question. And our adjacent mobility comes from nan statement of Robert Dodd pinch Raymond James. Your statement is open. Please spell ahead.

Robert Dodd

Hi, everyone. I've sewage 2 questions, if I can. The first 1 is connected -- it goes backmost to nan guidance and benignant of travel up to Mark Hughes, and your reply to that. I mean -- truthful nan guidance embeds $0.22. I mean if look backmost nan lowest four-quarter play you guys person ever had was 35, which still 50% higher than nan 22.

And you've only had 3 quarters successful your history of little than five, right? So is it that you're being highly conservative? Or is your position that there's a precocious consequence that 2020 -- nan marketplace successful 2023 is moreover much disrupted than it was successful in '22, which lawsuit very debased activity levels would make sense? So is it a marketplace position that's informing that? Or is it conscionable being very conservative?

Joshua Easterly

Yes, it's a bully question. I deliberation you've asked this mobility past twelvemonth to immoderate different mobility possibly past year. Look, we don't exemplary activity. We don't really exemplary activity level we've ne'er historically -- we've updated guidance passim nan twelvemonth based connected activity level, but we ne'er modeled astatine nan opening of nan year. It's conscionable excessively hard, based connected in installments spreads, efficaciously based connected in installments spreads aliases immoderate idiosyncratic things that hap successful our portfolio. And if those are known, we will decidedly exemplary them. But fixed that nary of those are known and we don't exemplary directional in installments spreads that thrust portfolio churn, we've conscionable ne'er historically modeled it.

And truthful -- and it's not modeled really this twelvemonth arsenic well. I deliberation erstwhile you look astatine activity levels specified arsenic OID and prepayment fees, I deliberation nan presumption is we usage benignant of 2 to 3 portfolio turnover connected an individual basis, which drives immoderate level of those fees. And past tightening marketplace environment, mean portfolio life will beryllium overmuch debased aliases activity level will beryllium overmuch higher. And truthful we conscionable don't exemplary it. So I don't deliberation it's a marketplace view. I deliberation it's conscionable really we build our models that we grew, that's nan upside successful nan exemplary because it's very difficult to model.

Robert Dodd

I admit that. I really admit that comment. It's not an earlier marketplace view, which unfastened much [indiscernible].

Joshua Easterly

Just existent quick, if you inquire maine to for illustration springiness you my best. I would opportunity that that we're -- that location are -- nan marketplace will beryllium bifurcated, which will beryllium bully companies will person entree to superior successful '23 and '24, which will astir apt thrust immoderate activity level. And group will person to woody pinch nan tails. But in installments spreads are starting to travel successful a small bit. You've seen it successful Q4. I deliberation you've seen it year-to-date. And truthful that is simply a starring parameter of activity levels, astir apt -- aliases portfolio turnover summation successful our book.

Robert Dodd

Understood. And you don't person a batch of tails successful your portfolio. So fantastic. On nan different question, aft nan repayment of nan unsecured successful January, you're astatine astir 40% unsecured of your superior stack, which is acceptable for illustration towards nan little extremity of what you've historically run. And it's towards nan little extremity of what nan standing agencies want, et cetera. It's not going to spell down again until November 2024, right? But -- what's your consciousness connected wherever you'd really for illustration that to beryllium understand that correct now it's a beautiful costly situation for unsecured, but are you comfortable astatine $40?

Joshua Easterly

Well, I deliberation we are. I deliberation we built our equilibrium sheet, we built our -- it's a usability of really overmuch revolver capacity 1 has. And we person a ton of revolver capacity and liquidity. And truthful we've paid for that. And it's hurting our economics. It' hurting our economics successful nan consciousness that we salary committedness fees connected that connected nan unused portion, we paid upfront fees connected that. And so, it's hurting our economics. And we for illustration paying for nan security to let america to thrust retired moments for nan unsecured marketplace is not arsenic attractive. Although spreads person started coming successful importantly successful nan past 2 to 3 months.

And truthful we'll beryllium opportunistic. We're astir decidedly astatine nan debased end. If portfolio grows, it will creep a small spot little because our operation will beryllium -- nan marginal portfolio maturation will beryllium funded connected nan revolver connected nan secured side. So I want to opportunity it will beryllium level from present connected retired because that assumes nary portfolio growth. The portfolio maturation connected a marginal ground would beryllium funded pinch nan revolver.

But we astir decidedly will beryllium backmost successful that market. We for illustration that market. I deliberation we're 1 of 2 group successful abstraction who person astatine slightest a BBB level rating. I deliberation it's america successful areas. And truthful we were 1 of nan 2 higher rated group successful nan space. And truthful we for illustration that market. We person entree to that market, and we'll astir decidedly beryllium opportunistic. But we paid for an security and since we salary for it, we're going to usage it, and we priced that into our economics for our shareholders. So I dream that answers your question, Ian, I don't cognize if you person thing to add?

Ian Simmonds

I deliberation it does reply nan question. Just possibly much directly, Robert, we're beautiful comfortable conscionable fixed nan options that we person disposable to us.

Robert Dodd

Got it. It answered my question. Appreciate it. Thank you.

Operator

Thank you. And I americium showing nary further questions, and I'd for illustration to move nan convention backmost complete to Josh for immoderate further remarks.

Joshua Easterly

Great. So convey you truthful overmuch for nan interactive call. We admit group getting connected nan caller format of nan telephone vis-à-vis web aliases nan alteration of for illustration of that one. But we really admit it. And we look guardant to chatting group pinch group successful nan spring, and I dream everybody has a ray extremity of nan wintertime and successful nan opening of nan spring, we'll beryllium backmost for our Q1 net telephone soon. Thanks truthful much.

A - Bo Stanley

Thanks, everyone.

Operator

This concludes today's convention call. Thank you for participating. You whitethorn now disconnect. Everyone, person a awesome day.

Editor: Naga



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