Sixth Street Latest Earning Report: 13.8% operating ROE for 2024

Sixth Street Specialty Lending's (TSLX) reported strong Q4 and full-year 2024 performance, while also providing insights into the broader direct lending market environment and TSLX's strategic positioning for 2025.

Strong Q4 and Full Year Results

• TSLX reported strong Q4 results with an adjusted net investment income (NII) of $0.61 per share (14.2% annualized ROE) and adjusted net income of $0.54 per share (12.5% annualized ROE).

• Full-year adjusted NII was $2.33 per share (13.8% ROE) and adjusted net income was $1.97 per share (11.6% ROE).

"For the full year 2024, we generated adjusted net investment income per share of $2.33, representing an operating return on equity of 13.8%, and full-year adjusted net income per share of $1.97, a return on equity of 11.6%."

NAV Growth

• Net Asset Value (NAV) per share increased from $17.04 at the end of 2023 to $17.16 at the end of 2024.

"Further, we delivered an increase of 70 basis points on net asset value per share from $17.04 as of December 31, 2023, to $17.16 as of December 31, 2024."

Dividend Coverage

• The base dividend is well-covered by adjusted NII.

"Additionally, our base settlement remains well covered, with adjusted net investment income of $0.61 per share exceeding our base quarterly dividend by $0.15 per share or 33%."

Activity-Based Fees

• Q4 saw a surge in repayment activity, leading to $0.15 per share of activity-based fee income, exceeding the historical average.

"In Q4, we earned $0.15 per share of activity-based fees, including dividend income, representing the highest amount in seven quarters."

Interest Rate Impact

• Higher interest rates have provided a tailwind for the sector. However, the company recognizes that rate movements will continue to be a factor in 2025.

"First and most obvious, interest rates remained higher for longer, providing an earnings boost for the sector...The rate environment in 2024 contributed approximately $0.03 per share of net investment income above our guidance."

Tighter Spreads

• Tighter spreads on new investments, driven by increased capital in the direct lending space and muted M&A volume, negatively impacted NII by approximately $0.07 per share.

"As the market moved tighter in 2024, the impact of tighter spreads on new deals lowered our net investment income by approximately $0.07 per share compared to our forecast for the year."

Disciplined Underwriting & Differentiated Sourcing

• TSLX emphasizes its in-depth underwriting, selective investment approach, and differentiated sourcing channels (both sponsor and non-sponsored) to generate attractive risk-adjusted returns. 37% of fundings in 2024 were to non-sponsored businesses.

Thematic Investment

• TSLX leverages its thematic investment approach, particularly within the sponsor finance market.

"In the sponsor finance market, our thematic investment allows us to provide speed and certainty in the sectors we'd like and know well, thereby positioning us as a differentiated source of capital in what has become the most competitive segment of the direct lending market."

Platform Advantage

• Sixth Street's platform provides origination capabilities and the ability to lead larger transactions.

"This contributed to Sixth Street agenting 88% of the deals funded in TSLX in the fourth quarter. In today's crowded marketplace of direct lenders, we believe our scaled capital base serves as a competitive advantage as we are able to lead transactions, ultimately allowing us to drive shareholder return."

Conservative Credit Metrics

• TSLX's portfolio exhibits conservative weighted average attach and detach points of 0.6x and 5.1x, respectively, with a weighted average interest coverage of 2.1x.

Strong Portfolio Rating

• The portfolio's weighted average rating improved to 1.10 on a scale of 1 to 5 (1 being the strongest).

Non-Accruals

• Non-accruals represent 1.4% of the portfolio at fair value. Two portfolio companies, Astrac Acquisition Corp and Lithium Technologies, were added to non-accrual during the year, negatively impacting net investment income.

First Lien Focus

• 98% of new investments in Q4 were in first lien loans.

Healthcare Expertise

• The company has an established competency in specific themes within the healthcare sector, resulting in strong returns on realized healthcare investments.

Earnings Tied to Portfolio Spreads

• TSLX believes the earnings potential for BDCs is largely tied to portfolio spreads.

"Looking ahead to 2025, we believe that earnings potential for BDCs is largely tied to portfolio spreads. To put it simply, the deals you do today will ultimately be a driver of your returns in the future."

ROEs

• Using the weighted average spread on new first lien in the third quarter of 529 basis points for public BDCs, this generates approximately 5% return to equities for the sector

ROEs Target

• TSLX expects a return on equity on net investment income for 2025 of 11.5% to 12.5%, which corresponds to a range of $1.97 to $2.14 for full-year 2025 adjusted net investment income per share. This guidance assumes spreads on new deals and leverage remain consistent with Q4 2024.

Base Dividend

• The base dividend of $1.84 per share is considered well-protected.

Market Headwinds

• The company anticipates continued competitive pressures and the potential for tighter spreads in the direct lending market.

Anticipated Issuance

• The company anticipates accessing the unsecured market to extend its debt maturity ladder.

Higher Activity Levels Anticipated

• 2024 was a year of lower M&A volume, but the company is optimistic about higher activity levels in 2025 due to narrowing valuation gaps, a more stable macroeconomic backdrop, and sponsors sitting on record amounts of dry powder.

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