Sixth Street Specialty Lending, Inc. Q3 FY2023 Earnings Call

Good morning and welcome to Sixth Street Specialty Lending Inc.'s Third Quarter ended September 30, 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Friday, November 3, 2023. I will now turn the call over to Ms. Cami VanHorn, Head of Investor Relations.

Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the third quarter ended September 30, 2023, and posted a presentation to the Investor Resources section of our website www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending Inc.'s earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the third quarter ended September 30, 2023. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending Inc.

Thank you, Cami. Good morning, everyone, and thank you for joining us. With us today is my partner and our President, Bo Stanley; and our CFO Ian Simmonds. For our call today, I will provide highlights of this quarter's results and then pass it over to Bo to discuss activity levels in the portfolio. Ian will review our quarterly financial results in detail and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported strong third quarter financial results with adjusted net investment income per share of $0.60, corresponding to an annualized return on equity of 14.4%, and adjusted net income per share of $0.77, corresponding to an annualized return on equity of 18.5%. From a reporting perspective, our Q3 net investment income and net income per share inclusive of accrued capital gains incentive fee expenses were 57 and 74 respectively. The $0.03 per share difference between the adjusted and reported metrics is a noncash expense related to accrued fees on unrealized gains from the valuation of our investments. As a reminder, we exclude the $0.03 per share in the presentation of our adjusted results. If this year were to have ended on September 30, and we were to calculate the capital gains incentive fee as payable to the adviser and cash, it would have been zero given the gains driving the fee accrual are unrealized. Our net investment income this quarter continued to be a function of robust net interest margin attributable to the asset sensitivity of our floating-rate portfolio in this higher rate environment. The difference between this quarter's net investment income and net income of $0.17 per share was driven by $0.11 per share from unrealized gains largely from the impact of credit spread tightening on the values and $0.06 per share from net realized gains. As many of you will recall, market volatility increased last year at the start of the rate hiking cycle. And during Q2 2022, LCD first lien second lien credit spreads widened by 123 and 206 basis points respectively, creating downward pressure on the fair value marks across our portfolio and resulting in a $0.40 decline in net asset value per share related to spread movement alone. Over the five quarters since that time, net asset value per share has increased by $0.70 from $16.27 to $16.97 and now is above our Q1 2022 net asset value per share of $16.88 for two primary reasons. First, the underground portfolio from Q2 2022 has experienced fair values that have pulled towards par as first lien credit spreads have tightened 78 basis points. This has resulted in approximately $0.26 of uplift to net asset value per share. Second, we have generated net investment income in excess of our quarterly base and supplemental dividends which has contributed $0.31 to net asset value per share over the five-quarter period. This overearning is driven by our disciplined approach of deploying capital into investment opportunities that exceed our cost of capital inclusive of any credit losses. With substantial levels of both capital and liquidity available, we were able to deploy capital into a better environment in terms of both economics and underwriting standards. This has led to a successful deployment of nearly $1 billion of capital into new investments over the last five quarters representing approximately 30% of the in-ground portfolio today. The remaining increase is attributable largely to accretion of OID from new investments, company-specific valuation marks, and net realized gains. Shifting now to the macro landscape. The overriding theme this year has been the realization that we are in a higher-for-longer scenario and the potential impact that brings to the economy. Zooming in on this topic for levered corporate credit, the higher-for-longer backdrop is twofold, including one that is immediate and the other one is delayed. Over the last 12 months, BDCs, for example, have experienced higher portfolio yields from the rise in base rates contributing to elevated operating return on equity relative to historical averages. This outperformance has been largely universal across the sector given the floating rate asset sensitivity of these vehicles. The real differentiation will become evident when we start to see the lagged impact of higher rates play out across portfolios. This will likely be in the form of increased defaults followed by losses. We believe that in the long run the strength of our asset selection and portfolio management capabilities will differentiate our returns for shareholders. These competencies are deep within our culture, built over decades, and give us confidence in our ability to continue to provide top-tier results for shareholders for the foreseeable future. At quarter end, net asset value per share was $16.97, up $0.23 per share or 1.4% from the June 30th figure of $16.74. This growth was primarily driven by the continued overearning of our base dividend and net realized and unrealized gains from investments as discussed earlier. Yesterday, our Board approved the base quarterly dividend of $0.46 per share to shareholders of record as of December 15th payable on December 29th. Our Board also declared a supplemental dividend of $0.07 per share related to our Q3 earnings to shareholders of record as of November 30th payable on December 20th. Our Q3 2023 net asset value per share adjusted for the impact of the supplemental dividend is at $16.90. With that, I'll now pass it over to Bo to discuss this quarter's investment activity.

Thanks, Josh. I'd like to start by sharing some thoughts on activity levels in the public and private markets followed by observations on the competitive environment. Activity levels have picked up in the back half of 2023 as we continue to see a steady trend of private credit taking share from the broadly syndicated loan market. The total amount of outstanding in the leveraged loan index has declined by $23 billion or 1.6% over the last 12 months, and 2023 is on track to be the first year to show a year-over-year decline since the global financial crisis. This shift has brought increased deal flow to the direct lending market, which we expect to continue as a broader reopening of the BSL market is largely dependent upon CLO creation, which remains challenged. Until the CLO machine resumes, which represents the largest buyer base of leveraged loan markets at roughly 65%, private credit is expected to continue to dominate as a leading credit provider to fund M&A transactions. Notably, approximately one-third of CLOs are now out of their investment period, with that total increasing to approximately 40% by year-end. Without substantial and unexpected new CLO volume, this amount of the vehicles and harvest would imply a potential decline in the participation for longer maturity credit financings. That being said, the return of the BSL market in the future is inevitable, but we do believe there's been a more permanent structural shift to direct lending that will persist. Under this lens, we expect to see a portion of the $130 billion of leverage loans maturing by the end of 2025 to come to private credit, creating opportunities to put capital to work when interesting opportunities arise. While activity levels have picked up in the pipeline building, we are in a much different investment environment today than we were 12 months ago. At this time last year, capital was generally constrained across the sector as funding activity in 2021 in the first half of 2022 peaked post-COVID, and repayment activity started to slow. Today, available capital has increased as a result of low M&A activity through the first three quarters of the year combined with a significant amount of dry powder from fundraising efforts in the private credit space. This dynamic has increased the amount of capital and the number of players chasing and competing for new deals. With competition generally higher today compared to a year ago, deal terms are shifting as lenders are eager to deploy capital. As always, we are remaining true to our core underwriting tenets and are focused on investment opportunities that present the best risk-return for our shareholders. Despite the moderately more competitive backdrop, we continue to see borrower demand for financing partners with deep sector expertise and a broad range of underwriting capabilities. For the third quarter, we had $206 million of commitments and $152 million of fundings. These fundings were across eight new and two upsizes to existing portfolio companies. Our new investments this quarter were primarily first lien loans across six diversified user industries. New investment opportunities represented 97% of total fundings for the quarter with just 3% of funding activities supporting upsizes to existing portfolio companies. Consistent with the moderate uptick of M&A activity in the third quarter, the majority of new investments were to support acquisitions. To highlight one of the largest fundings, Sixth Street closed a senior secured credit facility to support Boumview Capital's acquisition of SmartLynx solutions. Our expertise in the healthcare IT space provided a competitive advantage in their ability to act with speed and certainty within a tight timeline to support the sponsor's acquisition in a competitive process. Consistent with many of our other investments in the software services space, SmartLynx has a highly recurring revenue base combined with multiyear contracts providing long-term visibility into revenues. On the repayment side, we had seven full and 11 partial investment realizations totaling $159 million in Q3. For our three largest payoffs, one was driven by an acquisition while the other two were driven by refinancings. For both refinancings, the successful growth of the underlying portfolio companies allowed them to access a lower cost of capital in the bank market, thereby providing a positive outcome for both our borrowers and our shareholders. Although the higher rate environment generally yields less portfolio turnover, we expect to continue to see opportunistic repayment activity in our portfolio providing us with incremental capital for new deployment opportunities. Shifting now to the health of our existing portfolio. The portfolio remains in good shape despite the higher for longer macro environment that Josh mentioned earlier. Management teams across our portfolio companies have shown an increased focus on liquidity management and are placing a much higher importance on capital allocation decisions today, similar to last quarter. We are continuing to see top-line growth slowing as general slowdown and uncertainty in the economy has led to softness in bookings. However, we are still seeing revenue and EBITDA growth year-over-year and quarter-over-quarter across our portfolio. Although we have yet to see the demand destruction that we might have expected by this stage in the rate hiking cycle, we are starting to see signs of the consumer weakening at the margin, as wage growth has slowed and consumer confidence is on the decline. Despite these developments, our portfolio is generally insulated from consumer discretionary trends given the B2B nature of the majority of our portfolio companies. Moving on to portfolio composition. In Q3, our portfolio's weighted average yield on debt income-producing securities at amortized cost increased from 14.1% in the prior quarter to 14.3%. This increase was driven by the impact of higher interest rates. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment points on our loans of 0.9x and 4.7x respectively, and their weighted average interest coverage declined marginally from 2.1 times to 2.0 times driven by the impact of higher cost of funds for our borrowers. As of Q3 2023, the weighted average revenue and EBITDA of our core portfolio companies was $209 million and $69 million respectively. In terms of portfolio underwriting and credit quality, we continue to be thoughtful about our loan structuring process with utmost focus on protecting our principal against losses from credit risk and other market factors. At quarter end, we had approximately two financial covenants per loan agreement and had effective voting control on 91% of our debt investments. In addition, we have meaningful call protection across our debt portfolio. From a credit quality standpoint, we continue to see stable deposit performance trends across a significant majority of our portfolio. The performance rating of our portfolio remains strong with a weighted average rating of 1.17 on a scale of one to five with one being the strongest. Non-accruals are minimal at 0.7% of the portfolio at fair value, with no new portfolio companies added to non-accrual status from the prior quarter.

Thank you, Bo. For Q3, we generated adjusted net investment income per share of $0.60 and adjusted net income per share of $0.77. Total investments were $3.1 billion, up slightly from the prior quarter. Total principal debt outstanding at quarter end was $1.7 billion, and net assets were $1.5 billion, or $16.97 per share prior to the impact of the supplemental dividend that was declared yesterday. Our debt-to-equity ratio decreased slightly from 1.16 times as of June 30 to 1.15 times as of September 30, and our weighted average debt-to-equity ratio for Q3 was 1.18 times. We continue to have significant liquidity for the size of our balance sheet with $952 million of unfunded revolver capacity at quarter end against $197 million of unfunded portfolio company commitments eligible to be drawn. At quarter end, our balance sheet and funding profile were in excellent shape. Shortly after our Q2 earnings call in August, we capitalized on what proved to be a small execution window and raised unsecured debt in the investment-grade capital markets. We priced a $300 million, five-year bond offering at treasuries plus 295 basis points consistent with our overall risk management framework to have floating rate assets and liabilities we used interest rate swaps matching the principal amount and maturity of the bonds and converted the effective cost of these new notes to SOFR plus 299 basis points. We were very pleased with the strong reception we received from investors for our offering. We continue to view the unsecured market as an important component of our debt capital stack, irrespective of underlying base rates. The issuance also rebalanced our funding mix to 56% unsecured debt. In terms of our debt maturity profile, the issuance of the 2028 notes essentially pre-funded our nearest maturity, which does not occur until November of 2024. With nearly $1 billion of liquidity on our secured revolver, we have plenty of capacity to satisfy this maturity. Moving to our presentation materials. Slide 8 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added $0.60 per share from adjusted net investment income against our base dividend of $0.46 per share. As Josh mentioned, there was $0.03 per share of non-cash accrued capital gains incentive fee expenses related to this quarter's net realized and unrealized gains. The impact of tightening credit spreads on the valuation of our portfolio had a positive $0.20 per share impact. Net realized gains added $0.06 per share to NAV, primarily from the exit of our equity investment in ClearCompany, which generated an unlevered 19.7% IRR and 2.5 times multiple on money upon pay-off. Other changes represented a $0.08 per share NAV reduction, which includes $0.06 per share as we reversed net unrealized gains on the balance sheet related to investment realizations, and $0.02 per share primarily from net unrealized losses on investments from company-specific events. Shifting to our operating results detailed on Slide 9. We generated a record level of total investment income for the second consecutive quarter of $114.4 million, up 6% compared to $107.6 million in the prior quarter. Walking through the components of income, interest and dividend income was $107.5 million, up from $102.6 million in the prior quarter, driven primarily by higher all-in yields. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were also higher at $2.5 million compared to $0.9 million in Q2, given the slight increase in repayment activity we experienced in Q3. Other income was $4.4 million compared to $4.1 million in the prior quarter. Overall, fees remained relatively muted during Q3, relative to historical trends as many of our payoffs were older vintage investments, including our largest prepayment ChiroTouch, which was in the portfolio for over six years and generated an unlevered 14.9% IRR and 1.7 times multiple on money for FLX shareholders. Net expenses excluding the impact of the non-cash accrual related to capital gains incentive fees was $61.4 million, up from $57.2 million quarter on quarter. This was primarily due to the upward movement in reference rates, which increased our weighted average interest rate on average debt outstanding from 7.1% to 7.5%. We estimate undistributed income of approximately $1.01 per share at quarter end. As always, we will continue to review the level of undistributed income as the tax year progresses to ensure we minimize potential return on equity drag from the excise taxes while prioritizing returns to our shareholders. Through the first three quarters of the year, we've generated an annualized return on equity on adjusted net investment income of 14.2% and on adjusted net income of 17%. We are pleased with these strong results driven largely by higher underlying reference rates, tighter credit spreads on the valuation of our portfolio, and most importantly, the avoidance of losses on our investments. Based on our performance through Q3, we expect to meaningfully outperform the top end of our previous guidance range of $2.17 of adjusted net investment income per share for full year 2023 and exceed the corresponding return on equity based on adjusted net investment income of 13.2%. With that, I'll turn it back to Josh for concluding remarks.

Thank you, Ian. In closing, I'd like to take a minute to discuss how we're thinking about the future of private credit. It sounds like a big topic. As Bo mentioned earlier, the massive shift towards private credit has significantly increased the dry powder and a number of players in the space. While there are more firms in today's market, we continue to be one of the few who can drive structure and terms given our ability to write sizable checks with speed and certainty of execution. In addition to the significant capital base across the Sixth Street platform that provides attractive investment opportunities for us, we believe that our long-term success in today's growing market will be a product of two key differentiators. First, we benefit greatly from the shared resources of the Sixth Street platform. We just returned from our Annual General Meeting of Momenta Partners in San Francisco last week. Our leaders in each of our business units across the franchise came together to provide insights and updates on different segments of the market. The broad range of sector expertise, combined with cross-platform collaboration, enhances the deployment opportunities available to us as evidenced by higher all-in returns net of losses relative to the sector. Secondly, is our continued focus on the shareholder experience. Since our first investment in 2011, we have worked to uphold a distinguished return profile for investors by working to avoid credit losses and being disciplined allocators of our shareholders' capital. This has been our commitment to shareholders since inception. As a final note, and probably to end on a somewhat somber topic in our prepared remarks, the world feels very much in a dark place right now. There's a lot of pain and suffering. Risks and instability are elevated both economically and from a geopolitical standpoint. With this in mind, what we can do is focus on aspects that are within our control, including active portfolio management and optimal capital allocation. With that, thank you for your time today. Operator, please open up the line for questions.

Our first question comes from Finian O'Shea with Wells Fargo Securities. Your line is open.

Hi everyone, good morning. Josh, first question on the direct lending platform. It looks like your headcount jumped up a bit this quarter. So seeing if you could double-click on that, particularly if it relates to adding a new strategy or if this is part of your build-out to larger market origination.

Thanks. Good morning. First of all, thanks for the question. Look, we always continue to add resources across the platform. Some of that has been in general sponsor coverage given the opportunity in the direct lending market due to the challenges in the broadly syndicated loan market. In addition to that, we've added other expertise, for example, in the health care side with the senior hire that used to work with us at Goldman, so we continue to add resources for stakeholders and shareholders.

Great. And just another high-level question. You mentioned that you expect the lag impact of rates to play through. That sounded like it related more to the economy, but obviously direct lending borrowers have already been feeling this sort of on the front line of experiencing the higher base rates. And as we know, most have sort of treaded water so far at very low interest coverage. So can you talk about the sort of state of the union on the sponsor side dealing with this? Is there maybe fatigue setting in? Or is there dry powder running off or anything that would say finally catalyze a wave of keys being handed over? Or is there still a lot of runway in your view? Thanks.

I appreciate your question. What has been surprising for us, and is a key reason for the current prolonged situation, is that the economy remains fairly strong. Our portfolio has seen approximately 6% growth from one quarter to the next, and our earnings align with that growth rate, with year-over-year revenue increasing by about 12%. While fixed charges have risen, the overall strength of the economy and the US consumer, although starting to show slight signs of weakening, remains relatively strong historically. This has provided a solid background for both revenue and earnings growth, despite the slight decline in coverage not causing significant impacts. On the sponsor and capitulation fronts, we haven't observed notable changes. For instance, in lithium investments, which I believe includes Cronos in our investment schedule, while there are some unique challenges, the sponsor has invested substantial capital to extend support for the business for an additional year. As a result, we have a yield to maturity that resembles market standards. This quarter saw only one or two credit amendments, suggesting that sponsors continue to back the business. The fundamentals appear fairly solid, although we are noticing a decline in coverage.

Thanks so much.

One moment for our next question.

I just want to quickly mention the uptick related to our European direct lending team. We see significant opportunities in that area. While it's part of the challenging sector, we have executed some European deals within the US fund. This team's involvement has now been included in our disclosures, addressing part of your initial question.

Yeah, that makes sense. And just to clarify, did that team exist at Sixth Street previously?

No, most have existed, although we got into it.

Awesome. Thanks so much.

Thanks, Finian.

Our next question comes from Mark Hughes with Truist Securities. Your line is open.

Yeah. Thank you. Good morning. Related to the last question, any specific numbers you can share in terms of the percent of the portfolio maybe at or below one times in terms of interest coverage and kind of how you're modeling that progressing through 2024, if we do stay higher for longer?

The non-accrual portion of the American achievement is about 5%. Two of those businesses are performing well, still making investments and maintaining significant liquidity, which keeps the level reasonably low. Companies are clearly concentrating on capital allocation and cash flow management. While I'm not certain this represents the peak, companies are definitely very focused on it. Regarding interest coverage across the portfolio, it's approximately two times, which is slightly down, likely due to annualized LQA figures. We're at peak rates now, and it essentially decreased by 0.1% from the previous quarter.

I appreciate that. Bo, you mentioned only a 3% increase this quarter. Is that indicative of pressure on the companies, meaning they aren't in a position to raise more capital? Or could it just be some normal variation?

Yeah, I think it's really more driven by a rather anemic M&A market. So when we see a lot of upside as the portfolio companies, it's generally M&A related or it can be an investment related. As Josh just mentioned, I think companies have been focused on capital allocation; they are investing heavily prior, when interest rates were lower, and cost of capital is lower, now folks in terms of people investment, in terms of the capital investments are really focused on areas that drive high ROIC. So you're seeing less of that and more focus on getting super efficient driving more cash flows. But the big driver for this would be M&A.

Understood. Thank you.

One moment for our next question. Our next question comes from Robert Dodd with Raymond James. Your line is open.

Hi, guys. Good morning. So going back to one of your comments, Josh, on Tim's question. I mean, when you look at what's going to be the differentiator for private credit businesses and obviously, long-term you normally buy out to credit. Your comment being that the sponsors are stepping up. The economy is only really weakening at the margin. So what kind of time frame do you think the credit differentiation between portfolios, between managers, between shareholder returns? What kind of time frame do you think that's going to manifest?

Yes, thanks. Let me clarify the question. If I understood correctly, you're asking when we might see differences in shareholder experience as a result of credit losses. Is that right, Robert?

Yes.

Let me start by saying that we should have clarified that there will be more differentiation. If you examine the data, even in the stable credit environment over the last eight to ten years, there has already been significant differentiation in terms of investor experience, primarily driven by credit losses. This differentiation already exists. For instance, since our IPO, the average return on equity for the sector has been about 7%, while the top quartile has been around 9%. We have reached 13.3%, largely due to our credit line. Therefore, there has been a vast range of experiences. Interestingly, credit losses and defaults tend to lag behind the economy, so I anticipate this will occur within the next 12 to 15 months, if it does happen. Additionally, I expect that private credit will exhibit a dispersion of experiences. On the whole, private credit should outperform broadly syndicated credit. The key advantage of private credit has been its flexibility to invest in various industries, which has historically led to financing higher-quality sectors. Excluding healthcare services, which we do not have exposure to, they have been able to select better industries without being confined to index-related limitations. As a result, I expect private credit to perform better in terms of losses and total returns compared to broadly syndicated credit. Moreover, I anticipate that there will be additional differentiation within private credit, which is already evident at this point in time.

I understand, thank you. Historically, your fee income has been a key factor in your return on equity performance, and you tend to have more core protections than the average private credit lender. However, your current core protections in the portfolio compared to principal are at their lowest level in a year. While fee income increased this quarter, what remains appears to be lower than expected. Is this due to some aging in the portfolio, or is it merely a random fluctuation?

I believe we should revisit this point specifically, but in terms of fair value as a percentage of core price, I think…

I'm taking the ratio of that versus the fair value as a percentage of principal to get the fair value as a percentage of the core price…?

The fair value of the percentage of core prices definitely increased because fair value increased. However, the portfolio is stuck around longer than usual due to a wider spread environment, which has led to slower repayments. There's been a gradual decline in core price within the portfolio. If you examine the fair value aspect, you'll see that fair values have gone up slightly while repayments have also slowed down a bit.

Got it. Thank you.

One moment for our next question. Our next question comes from Melissa Wedel with JPMorgan. Your line is open.

Good morning. Thank you for taking my questions today. Many have already been addressed, so I wanted to discuss a couple of the new investments made during the quarter. There were a few larger ones, particularly Skylark and Marcura, which are in the manufacturing and transportation sectors, respectively. Could you share your thoughts on whether those sectors are more cyclical and how you feel confident about those investments? I would appreciate it.

Marcura is primarily a software company that offers software and outsourcing services, focusing on support solutions, cost management, and payments for the maritime and shipping industry. It operates as a business services software provider within that sector. While it may experience some cyclical trends, we believe it is a high-quality business. As for Skylark, it is also a European investment in the software ERP sector primarily serving the manufacturing end markets, which are less cyclical.

Thank you.

And our next question comes from Ryan Lynch with KBW. Your line is open.

Hey, good morning. First question I had was just kind of a long maybe kind of bolted question regarding your comments on…

We're excited about that, Ryan. That's a good leeway.

All right. Well, it kind of has to do with just your comments on the broadly syndicated loan market, a lot of deals maturing by the end of 2025, and that as a potential opportunity. There’s already been a decent amount recently of direct lenders taking out some broadly syndicated loans. Look at PEXA Highland, Fenestra. I don't believe that fire has kind of been an active participant in that market but please correct me if I'm wrong in that. So, I would just love to hear a couple of questions on how do you view those kind of because I'm sure you've looked at those deals? How do you view those current deals that have been refinanced out of the broadest loan market? The quality of those deals are those deals in the future that potentially could come out? Would those be deals that would go into the BDC? Or would that go more your perpetual private BDC that maybe has a little bit more of an upper middle market focus? And then one of the critiques or the fears is that investors have is that the broadly syndicated loan market is a little challenged right now but the fact maybe changes a little bit and that could open back up. There's a fear of why are these investors going to private credit versus payment it's already in the broadly syndicated loan market why not stay in there when potentially you could get better term. So, why would they go to the private credit market unless if they are guys who cannot finance in the broadly syndicated loan market so kind of like adverse credit selection. So kind of you can go over some of that at all.

I want to clarify that we do not manage a perpetually non-credit BDC. It's important for people to understand this. We do have a private vehicle backed by institutions, but its structure is very different. I appreciate the direction of the conversation. Regarding specific credits, I prefer not to discuss those. The advantage of our business is that each day, we have the opportunity to underwrite and make decisions we believe are best for our shareholders' capital. We have evaluated the names you mentioned and chose not to participate, which illustrates the value of a marketplace where differing opinions exist regarding required returns, cost of capital, documents, and momentum. Different risk tolerances and incentives influence how money is allocated, and we are not currently deploying capital in those areas. This is a beneficial aspect of the marketplace and what our investors rely on us for. Additionally, concerning the broadly syndicated loan market, it is undoubtedly facing structural challenges. Currently, 60% of that market is comprised of CLOs, predominantly AAA-rated, which are hard to find today, especially outside of unique buyers like those in Japan. That market is beginning to amortize. My expectation is that the fundamentals will weaken, as downgrades are exceeding upgrades and recovery rates are low. Many existing CLOs will start amortizing, and those involved will need to adhere to weighted-average life tests. This indicates that fundamentals are slightly deteriorating, and technical aspects are not favorable. Consequently, capital will need to be reallocated, and part of it may present new opportunities in the private market. Not all of this should be viewed as adverse selection; perspectives on pricing and credit quality will vary. I also want to emphasize that the deals we've opted out of are not necessarily bad credits, and I don't believe all potential issues indicate adverse selection. Furthermore, sponsors and companies have diverse business models and may require new capital that isn't accessible in the broadly syndicated loan market. Therefore, it is not a linear process where all poor credits will transition into the private credit market. Lastly, while there has been talk about a maturity wall in the broadly syndicated loan market, as seen during the global financial crisis, it never fully materialized. Unlike in 2009 and 2010, policymakers can lower rates to encourage risk asset investment, but today, they don't have that flexibility. As a result, managing the maturity wall will likely be more challenging.

Okay, that's helpful background for my response. Ian, you mentioned some declines in NAV in 2022 due to spread widening, and it appears there has been some spread tightening this quarter that has led to an uplift from spreads. I'm curious if you could provide any insights on how much of that spread, indicating an increase in loan values, you believe is still left to recover, or do you think we've mostly reached the end of that process?

Well, I think we're a little over halfway done, Ryan. So there's a little bit more to come. Some of that will come back to us through natural repayment activity. But we're probably, let's call it two-thirds of the way on that particular pool of assets that was in place back in June of 2022.

Yes, I think we are making a solid effort to analyze our portfolio on a consistent basis since the onset of the Fed's rate hiking cycle. We've assessed it on a per-share basis regarding how much has returned, and the assets we invested in during the wire spread environment have certainly benefited as the spreads have narrowed. Additionally, when I consider the fair value being around 98.5%, I believe that estimate is likely accurate.

Okay. Understood. I appreciate the time today. That's all for me.

Thanks.

And I'm showing no further questions at this time. I would now like to turn the conference back to Josh for closing remarks.

Great. Well, first of all thank you for your participation. We'll keep working hard for you. Obviously, as I said in my final remarks, it feels dark out there in the world with elevated risk. We'll keep working hard. And I hope everybody enjoys their Thanksgiving and holiday season to come, and we'll talk to people after Q4 in Q1 if not sooner. Thank you so much.

Thanks, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.