Good day, and thank you for standing by. Welcome to the Sixth Street Specialty Lending, Inc. Q3 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Cami VanHorn, Head of Investor Relations. Please go ahead.

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, 2025, 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, 2025. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Co-Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Good morning, everyone, and thank you for joining us. I assume everybody has seen my most recent letter and the 8-K posted last night with our earnings. I'm joined by our newly announced Co-CEO, Bo Stanley; and our CFO, Ian Simmonds. Before covering our Q3 2025 results, I wanted to discuss the leadership changes that were announced yesterday. We are excited to announce that Bo has been named Co-CEO, effective immediately. Bo and I have been working together for the better part of the past 25 years. As an early member of the Sixth Street team, Bo possesses an unparalleled understanding of our industry and is a tremendous leader and investor. As a key member of the management team, Bo has also been a driving force in preserving and strengthening the investor first mentality that defines the Sixth Street culture. After 15 years of leading the business and what is now my 47th public earnings call, I'll be stepping down from the CEO seat at the end of the year. This decision is made with considerable optimism for the future of the company. Bo has been integral in the investment leadership of the business for several years, and this transition formalizes our existing collaborative structure. Going forward, I'll continue to serve as Chairman of SLX and Co-President and Co-Chief Investment Officer of the broader Sixth Street platform. As part of this evolution, Bo has joined SLX's Board of Directors. It has been a privilege of a lifetime to lead the company. I'm incredibly proud of what we have accomplished together and even more excited about what lies ahead under Bo's leadership. With that, let's turn to this quarter's results. After the market closed yesterday, we reported third quarter adjusted net investment income of $0.53 per share or an annualized return on equity of 12.3% and adjusted net income of $0.46 per share or an annualized return on equity of 10.8%. As presented in our financial statements, our Q3 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gain incentive fee expense were $0.01 per share higher than the adjusted figures. The difference between adjusted net investment income and adjusted net income of $0.07 per share was largely related to the reversal of net unrealized gains on the balance sheet related to investment realizations. Yesterday, our Board approved a base quarterly dividend of $0.46 per share to shareholders of record as of December 15, payable on December 31. Our Board also declared a supplemental dividend of $0.03 per share related to our Q3 earnings to shareholders of record as of November 28, payable on December 19. Net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday is $17.11. Since the start of the interest rate hiking cycle in early 2022, our net asset value per share has grown by 1.9%, representing a significant outperformance compared to the average decline of 8.5% for our public BDC peers through Q2. Focusing specifically on the last 12 months, this outperformance has continued with SLS delivering NAV stability while other public BDC peers experienced an average decline of 2.8% through Q2. While dividend policies vary across industries, SLX's outperformance remains largely consistent, whether measured by reported net asset value per share or net asset value adjusted for supplemental and special dividends. Before passing it to Bo, I wanted to touch on one topic addressed in our letter, which is the stock market performance of the BDC sector. We view the September sell-off as a net positive for our industry. Let me be clear, we do not believe the market move is credit-related for us or the sector broadly. As we said in our last earnings call, we think credit issues are generally behind the industry. Our view is that the market woke up to the reality that the sector has been allocating capital based on a backward-looking view of higher-yielding back books in an elevated interest rate environment. This was the premise of our letter to shareholders in April, which illustrated forward ROEs falling below the industry's cost of equity capital. While we believe this capital misallocation will have both near- and long-term effects, in the short term, we expect to see dividend cuts across the industry as net investment income falls below dividend levels. For SLX, we continue to overearn our base dividend with 114% coverage in Q3, allowing us to pay another supplemental dividend based on this quarter's overearning. Long term, we believe downward pressure on BDC stocks will constrain further capital raising, specifically in the nontraded perpetually offered vehicles. For a number of managers, investors can simply buy the same or very similar product in a listed format at a discount to net asset value with daily liquidity. While this will take time to play out, we see this as an effective market correcting mechanism to address the imbalance between supply and demand of capital that we have been talking about for several quarters. Ultimately, we believe this will create net negative flows for direct lending, similar to the experience in the listed and non-traded REIT products that occurred following the rate hiking cycle beginning in late 2022. There is more on this in my letter, but to wrap it up, we are optimistic that this environment will underscore the critical importance of manager selection and driving long-term shareholder value. With that, I'll now pass it over to Bo to discuss this quarter's investment activity.

Thank you, Josh. It's a pleasure to be your long-term partner in our business, and I'm energized by the opportunity to serve as co-CEO. My focus is simple to continue executing the same disciplined strategy and uphold an investor-first culture that has defined our success from day one. Turning now to the operating environment during the quarter. Competition in direct lending markets remained elevated, fueled by persistent oversupply of capital and historically tight spreads in the liquid credit markets. With broadly syndicated loan spreads reaching their lowest level since the great financial crisis, borrowers have been active refinancing into public markets to capture lower funding costs. Heightened BSL competition and muted M&A activity have led to sustained spread compression across the private credit landscape. Against that backdrop, we provided total commitments of $388 million and total fundings of $352 million across 4 new investments, 5 upsizes to existing portfolio companies, and through selective deployment into structured credit investments. A key differentiator for SLX is that all 4 of our new investments were thematic off-the-run transactions, which we define as uniquely sourced opportunities that require a combination of deep sector expertise, a differentiated capital solution, and the ability to commit in size to drive the transaction. These investments, which are driven by our thematic sourcing engine, create a unique portfolio for SLX shareholders relative to the sector, which largely focuses on conventional sponsor-backed direct lending transactions. An example of a thematic nontraditional transaction in Q3, which was also our largest funding for the quarter, was our investment in Walgreens. Sixth Street acted as an administrative agent and joint lead arranger on a $2.5 billion term loan to support the financing of Walgreens U.S. retail business as part of Sycamore Partners' broader $23.7 billion take-private of Walgreens Boots Alliance. Our decades-long relationship with the sponsor, built on a track record of successful retail ABL deals, was instrumental in us leading the transaction. Our expertise in the retail ABL space made us a credible partner to deliver a successful execution for what we believe was the largest nonbank ABL deal ever and also the largest retail buyout of all time. This transaction exemplifies our ability to create value for shareholders through differentiated investment opportunities. Our second largest investment during the quarter was a thematic investment in Velocity Clinical Research. Velocity is the world's largest fully integrated site management organization, which provides clinical trial facilities and site-based trial management services. The opportunity was driven by a cross-platform effort across Sixth Street and our long-standing relationship with the company's sponsor. It aligns with our pharma services sub-theme and followed an extended engagement in which we iterated on multiple structures to deliver a bespoke capital solution for the business. Our dedicated health care sector team continues to differentiate our ability to source and underwrite these off-the-run transactions. This investment extends a track record that has been a key contributor to SLX's returns, including prior investments in Arrowhead Pharmaceuticals and Biohaven that have generated alpha for shareholders. During the quarter, we opportunistically invested $100 million in BB-rated CLO liabilities. These investments, while representing a compelling use of capital at the time given the return profile, are not reflective of a change in the core investment approach or long-term strategy. We view these investments as an effective way to deploy capital, particularly given that in the current tighter spread environment, we can purchase BB CLO liabilities at wider spreads than regular way direct lending loans, which are also subject to refinancing risk. Our Q3 CLO investments reflect a weighted average spread of 554 basis points. To the extent we see a shift in the relative value, the liquid nature of these investments allows us to rotate out of the positions. Our expertise in the structured credit market is underscored by our track record of investing in CLO liabilities, which has generated a weighted average IRR and MOM of 27.1% and 1.24x, respectively, for SLX shareholders. This track record is driven by Sixth Street's deep expertise in liquid credit markets, demonstrated by having deployed approximately $16 billion in structured credit investments with an additional $13 billion in 30 CLOs managed by a team of 27 investment and research professionals. We believe this capability further highlights the benefits of the broader Sixth Street platform in terms of providing SLX with differentiated deployment opportunities. Looking ahead, we do not foresee a broad-based recovery in M&A activity in the near term. We expect spreads to remain tight as the supply of capital continues to outpace demand. In this environment, our thematic sourcing continues to drive origination, and the breadth of Sixth Street's platform helps mitigate the effect of market tightening. This is evidenced by our weighted average spread on new floating rate investments, excluding structured credit investments of 700 basis points in Q3. While we do not have Q3 peer data available, this compares to a spread of 549 basis points on new issue first lien loans for public BDC peers in Q2. Moving on to repayment activity. We continue to experience elevated payoffs during the third quarter. Total repayments in Q3 were $303 million across 9 full and 1 partial investment realization. This repayment activity was the main driver of the $0.14 per share of gross activity-based fee income earned during the quarter, which compares to our 3-year historical average of $0.08 per share. To characterize this quarter's repayment activity, 75% of repayments were driven by refinancings at lower spreads in the private credit or broadly syndicated loan markets. The spread on refinance deals ranged from 325 to 525 basis points. We continue to adhere to our ongoing message of disciplined capital allocation, demonstrated by only 12% of our investments by fair value as of quarter end having a contractual spread below 550 basis points. To put this into perspective, as of Q2, 59% of BDC portfolios by count had spreads below 550 basis points, and we anticipate this percentage will increase further this quarter. As it relates to portfolio metrics and yields, at September 30, the weighted average total yield on debt and income-producing securities at amortized cost was 11.7% compared to 12% as of June 30. The decline primarily reflects the impact of change in the base rates from lower reference rates resets and from payoffs of higher-yielding assets, excluding the yields on new investments funded during the quarter. From a vintage mix perspective, our exposure to pre-2022 vintage assets is less than half of the BDC sector. 22% of our portfolio is represented by these investments compared to 56% for the public BDC sector. We believe this is a positive differentiator for our business as the vast majority of our portfolio was originated at the start of the interest rate hiking cycle, positioning us well for the current environment. Moving on to portfolio composition and key credit stats. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points of 0.3x and 5.2x, respectively. And our weighted average interest coverage increased to 2.3x. As of Q3 2025, the weighted average revenue and EBITDA of our core portfolio companies were $376 million and $113 million, respectively. Median revenue and EBITDA were $150 million and $46 million, respectively. Finally, overall portfolio performance is strong with a weighted average rating of 1.12 on a scale of 1 to 5, with 1 being the strongest. We have 2 portfolio companies on nonaccrual status, representing 0.6% of the portfolio by fair value, reflecting no change from the prior quarter. Both of these investments included in the 5 rated category. With that, I'd like to turn it over to my partner, Ian, to cover our financial performance in more detail.

Thank you, Bo. For Q3, we generated adjusted net investment income per share of $0.53 and adjusted net income per share of $0.46. Total investments were $3.4 billion, up slightly from $3.3 billion in the prior quarter as a result of net funding activity. Total principal debt outstanding at quarter end was $1.9 billion and net assets were $1.6 billion or $17.14 per share prior to the impact of the supplemental dividend that was declared yesterday. Our average debt-to-equity ratio was 1.1x, down from 1.2x in the prior quarter. Our ending debt-to-equity ratio increased from 1.09x to 1.15x quarter-over-quarter. We continue to have significant liquidity for the size of our balance sheet with nearly $1.1 billion of unfunded revolver capacity at quarter end against $174 million of unfunded portfolio company commitments eligible to be drawn. As of September 30, our funding mix was represented by 67% unsecured debt, and we have no near-term maturities with our nearest obligation being $300 million of unsecured notes not occurring until August 2026. Consistent with previous quarters, we did not issue any shares through our ATM program during Q3. While SLX trades at a meaningful premium to net asset value, which presents the opportunity to grow our asset base by issuing equity, we remain steadfast in our commitment to disciplined capital allocation. We will only seek to access the ATM program when we identify compelling near-term investment opportunities that allow us to maintain our target leverage and when issuance is accretive to both NAV and earnings per share. Our guiding principle is to do what we should do rather than simply what we can do. We believe this disciplined approach as it relates to capital management has earned the trust of our investors and delivered consistent performance. We are committed to upholding that trust by prioritizing accretive growth and responsible capital management. Pivoting to our presentation materials. Slide 8 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added $0.53 per share from adjusted net investment income against our base dividend of $0.46 per share. There was an $0.08 per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognized these gains into this quarter's income. The reversal of unrealized gains this quarter was primarily driven by early payoffs resulting in accelerated OID and call protection. There was a small $0.01 per share positive impact to NAV primarily from the effect of tightening credit market spreads on the fair value of our portfolio. And finally, there was $0.01 per share of net realized gains, mainly from our equity realization in Clarience Technologies. Moving on to our operating results detail on Slide 9. We generated $109.4 million of total investment income for the quarter compared to $115 million in the prior quarter. Interest and dividend income was $95.2 million, down slightly from the prior quarter, primarily driven by the decline in interest income from lower base rates. Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were lower at $6.8 million compared to $10.2 million in the prior quarter, driven by the elevated prepayment fees, including Arrowhead in Q2. Other income was $7.4 million, down slightly from $7.6 million in the prior quarter. Net expenses, excluding the impact of the noncash reversal related to unwind of capital gains incentive fees, were $58.4 million, down from $61.4 million in the prior quarter, primarily driven by lower interest expense. Our weighted average interest rate on average debt outstanding decreased from 6.3% to 6.1%. This was the result of a slight decline in base rates quarter-over-quarter and lower average debt outstanding in Q3. While liability sensitivity is limited for BDCs, we believe SLX is best positioned to benefit in a falling interest rate environment given our liability structure is entirely floating rate in nature. We estimate undistributed income of approximately $1.30 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 comply with the RIC distribution requirements, minimize potential return on equity drag from the excise taxes and prioritize returns to our shareholders. We believe there is a misconception that spillover income protects the dividend. However, using spillover to cover the dividend simply reduces net asset value. This is a return of capital, not a return on capital and ultimately diminishes shareholder value if earnings don't support the payout. Philosophically, if we can generate a return on that retained capital that is in excess of the cost of that capital, our shareholders will benefit through greater economic return. If we were below our leverage target, which we are not, and the cost to fund the distribution was lower than the excise tax rate, which it is not, we could theoretically create more value for shareholders by distributing that spillover income. Given these conditions are not present today, and we continue to meet our distribution obligations through our existing dividend framework, we believe retaining this capital remains the most appropriate way to generate value for our shareholders. Before turning it back to Josh, I'd like to briefly provide an update on our ROEs. At the beginning of this year, we communicated an annualized ROE target range of 11.5% to 12.5% based on our expectations over the intermediate term for our net asset level yields, cost of funds, and financial leverage. Based on our performance this year through Q3, we expect adjusted NII per share for the full year to be at the top end of our previously stated range of $1.97 to $2.14 per share for the full year. The potential to exceed the top end of that range will be driven by activity-based fees. With that, I'll turn it back to Josh for concluding remarks.

Thank you, Ian. That's pretty long-winded in my letter, but I still encourage all of you to read it. And as a result, I'll keep my conclusion brief and pass the baton to Bo. As a proud shareholder, we're in the right hands to drive our platform forward. Our heartfelt thank you to all of our stakeholders has been an honor. The greatest pleasure of the seat was learning from all of you. It made me and SLX better. A special thanks to my co-founding partners who trusted me with our public vehicle, our pre-IPO shareholders, and all of our shareholders over the last 11-plus years. I wanted to say thank you to Mike Fishman. I've worked with Mike for the better part of 25 years. Mike has been a mentor, a partner, and most importantly, a friend. Thanks, Mike. With that, over to Bo.

Thanks again, Josh. I'll close where we started. Today's leadership update doesn't change how we run the business or our capital priorities. We remain focused on disciplined underwriting, proactive portfolio management, and delivering consistent investor-first results. We have great continuity with Ian and Craig Hamrah and of course, the next generation of talent. I have immense confidence in our team and the platform we've built, and I look forward to driving the next chapter of value creation for our shareholders. Thank you for your continued support. With that, thank you for your time today. Operator, please open the line for questions.

Our first question will be coming from Brian Mckenna of Citizens.

First off, Bo, congrats on the new role. And Josh, I just want to say thank you for all the genuine perspectives and insights on these calls over the years. So my first question is on the theme of evolving businesses over time. I wasn't totally shocked by the announcement last night, although it also wasn't on my bingo card for third quarter results. But Josh, it would just be helpful to get your perspective on why it's so important to have a deep bench to always be thinking about the next generation of leaders, why it's critical to have such a strong culture, and really how all this has played into the natural evolution of Sixth Street over the past 15-plus years.

Yes, Brian, that's a great question. These changes may seem sudden or surprising to outsiders, but I believe this process began eight years ago. Bo was named President in 2016, and Ian has been with us for ten years. We initiated this transition eight to nine years ago. It's only fair to Bo and the team to continue along this path and give them the freedom to lead. Ultimately, this is a people-centric business, and culture is important. We've built a strong culture focused on our franchise and our shareholders, which Bo represents and will continue to uphold. I'm really excited as a shareholder and as Bo's partner to see him and, in the future, the next generation that he will choose. I'm confident he will make that decision collaboratively with me and our other partners. Our shareholders have provided us with permanent capital, and with that comes the responsibility to cultivate a culture that supports leadership transitions. Unlike a limited partnership model, which typically lasts five to ten years and doesn't prioritize succession, we must ensure we have a plan for succession and create an environment where people can step up. We've achieved that, and I think it's vital because these are permanent capital vehicles owned by our shareholders, who trust us to manage this effectively.

Got it. That's really helpful. And then just a question on private wealth. I know this is extremely topical. But how is Sixth Street thinking about expanding into this channel? I'm assuming this is something you and your partners are thinking about a lot. And I know if you ultimately roll out a dedicated strategy, it will be in typical Sixth Street fashion. But what could this look like? I'm assuming you'll have to figure out a way to solve and really be able to prudently raise and deploy capital. But is there a way to create a strategy that caps quarterly or annual inflows, and then you're also able to invest across asset classes depending on the current risk rewards in the market? Any thoughts here would be helpful.

Yes, I've discussed this in detail in my letter. Currently, we are still debating the idea and have not reached a conclusion. However, if we were to pursue it, I would want to approach it differently. I appreciate the concept of democratizing alternatives to provide small investors with access to great management and their returns. I'm uncertain if the market has adequately figured out how to offer these investors an institutional experience. If we were to proceed in this area, it would need to be aimed at delivering that institutional experience, but honestly, we haven't determined exactly how to achieve that yet.

Congratulations again on the promotions and leadership changes. I have a quick follow-up on that. Can you discuss how the focus might shift, Josh? Will you continue as CIO or co-CIO of the platform? Are you still concentrating on direct lending, or will your focus change? And Bo, if I'm correct, you’re dividing your time between the growth business and this. Will you be fully engaged in this area, or is there anything else of interest affecting your day-to-day responsibilities?

I don't expect any changes in our daily operations, and I'll let Bo speak for himself. Personally, I am passionate about investing and plan to remain actively involved in the direct lending investment committees. I don't foresee any significant changes. From the outside, it might be difficult to see, but our day-to-day operations are quite consistent. If I were to be self-critical, I might say I've had a more prominent voice than usual in our operations. However, the way we run the business now is how it will continue going forward. My focus will still be on investing, helping with investment decisions, and considering risk and return. I don't believe there will be any major changes. As for Bo, he can address how his responsibilities related to growth might evolve, but I don't expect that to change significantly either.

Thanks, Josh, and thanks for the question, Fin. As Josh mentioned, I don't expect a significant change in my daily responsibilities. The framework for this transition has been established for quite some time, beginning 9 years ago. I will continue to divide my time between growth and other areas. The good news is that, Fin, I believe there are many synergies between those portfolios, and there is much to gain from being involved in both businesses. I will be spending more time with all of you and am eager to drive the business forward while continuing our long-term journey. However, I do not anticipate a major change in my daily activities.

Yes, I mean this is a little bit of a joke, and it's surely not going to show up well in the transcript, but Bo's getting the worst part of the transition, which is public earnings calls and talking with you all, which makes us better ultimately. But I'm glad Bo is taking that off my plate, and I'm sure he'll do a better job than I have.

We'll see who will handle the shareholder letters as well. I'm happy to take that on. Just to follow up, Bo, you mentioned the CLO liabilities. Are you still focusing on that, especially since it doesn't appear that direct lending spreads are recovering anytime soon? You noted they were in the 50s, which isn't exceptional. If we connect that with the spillover math you provided, does it make sense to support the marginal dollar of the CLO debt investment through the additional capital that's spillover income? I'll stop there.

Yes, let me take a step back because I think it's helpful. We have a large, dedicated structured credit team and a broadly syndicated loan team. The performance of both teams has been impressive, and we have a structural edge in these markets since we have invested in this asset class over time within the BDC. Our average return in this area is in the 20s. While we don't expect a 20% return on every investment, it's important to note that our options are quite favorable. The marginal economics are significantly better than the spread, which helped fill an investment income gap and positively affected earnings this quarter by about $0.01. Currently, we are at about $100 million in this segment, which is a small fraction of our $3.5 billion balance sheet and a minor part of our capital. I don't anticipate significant growth in this area, but it serves as a good placeholder and relative value trade. We want to avoid tying up capital in long-term, illiquid investments that don't allow us to drive value and create resilience over time. The advantages here include higher spreads and liquidity, allowing us to adjust our strategy when new opportunities arise. Finally, I want to acknowledge you and Wells Fargo, along with your predecessors, for your longstanding coverage of this sector. Your work has significantly contributed to the need for transparency in the market, and I want to thank you for making us and the sector better.

And our next question will be coming from Melissa Wedel of JPMorgan.

Congratulations to both Bo and Josh on formalizing roles that have been evolving for a long time. I wanted to follow up on credit. There have been many concerns about credit quality across the industry, particularly in the last month. We've heard a lot from investors regarding worries about potential weaknesses in the auto sector, especially given recent headlines. It seems you're not particularly worried about specific areas of weakness, but rather about the pricing and availability of capital in the market. Is that an accurate assessment?

Yes, I believe that’s a reasonable view. Generally, we have moved past credit issues. While some unique situations may arise, I think your boss was making a general comment about credit rather than specifically addressing private credit. One of my peers may have taken that statement and interpreted it differently, leading to some misunderstandings. However, the cases highlighted in the news were not related to private credit; they involved the broadly syndicated loan market, which has existed for 30 to 40 years. Additionally, the focus was more on bank balance sheets. Private credit, in general, tends to perform well because its model differs; it resembles private equity. I cannot speak for everyone, but the industry typically manages risks in a more concentrated manner rather than treating them as fractional risks. They emphasize idiosyncratic risk through private equity-style due diligence. Where issues can arise is when individuals neglect the idiosyncratic nature and lose sight of thorough credit underwriting and diligence, instead focusing on the fractional aspect of their portfolios, which can lead to problems. Therefore, I believe this serves as a positive indicator for private credit, especially concerning the two names that were publicly discussed.

You just mentioned transparency, which you also discussed in your shareholder letter. I'm curious about what that looks like in your opinion. Do you believe there is room for greater transparency across the industry? What does that entail, and could TSLX be in a position to lead in this area?

I believe there is a significant level of transparency within the public BDC ecosystem, supported by rating agencies and equity research analysts. However, when it comes to the nontraded and private offerings, that level of analysis is missing. Unlike mutual funds, these products lack the coverage of analysts who provide buy/sell recommendations and don't have rating agencies like Morningstar assessing fund managers. My hope is that this area will see improvements in transparency, evolving from products that are currently being sold to products that are actively being purchased. Transparency is essential for this shift. While I've heard skepticism about my findings related to the nontraded space, it's important to note that while management fees may be lower at the entity level, there are other costs incurred by investors, such as trailers on dividends. My calculations hold true in that market, but it operates differently. This transformation will take time—it won’t happen as quickly as we might like. Ultimately, transparency will be crucial for understanding the economics and risk-to-reward dynamics that investors face. In our sector, we already see that engagement from investors through inquiries and challenging questions, which is not as prevalent in the nontraded space.

Maybe we could talk a little bit about the balance of, I guess, seeking yield. You have a few kind of unique investments this quarter in CLOs and ABL with the traditional part of your business. And I don't know, historically, when I think about spreads getting tight and loan yields getting tight, as folks are looking to maintain that yield, you take on more credit risk. Maybe you could just talk a little bit about the balance of kind of the types of deals you're doing and what the risk profiles are relative to doing your kind of more plain vanilla.

I'll start and then pass it to Bo. We're not making any changes. ABL has consistently been part of our portfolio, similar to realized returns. It has been a source of alpha without adding credit risk. That's how it's always been. We are managing complexity, which has been our approach. The middle market and investment space remain quite inefficient, allowing for opportunities. For instance, SLX shows higher asset-level returns and lower losses. Our losses are significantly lower than the industry average, and our unlevered returns are between 100 and 300 basis points above the industry benchmark. Therefore, I disagree with the idea that we have taken on more risk in structured credit, which has a weighted average rating factor significantly better than that of average idiosyncratic credit in the middle market. So, I believe that assumption is incorrect. We have focused on risk-adjusted returns rather than simply seeking higher risk. In fact, regarding structured credit investments, we have reduced risk, not increased it. Bo, do you have anything to add?

Like Arren, thanks for the question. The only thing I would add is we have not changed anything. I highlighted our 2 of our larger thematic originations during the quarter. Those are both themes that we've been pursuing for quite some time, 5 years plus on each of these themes. Our other 2 originations were deeply thematic. We continue to be very disciplined in this environment. It's with supply-demand imbalance, but we're not changing how we underwrite credit, how we think through credit and how we structure credit.

Echo the congrats Bo on the new role. And Josh, it's been great working with you. And I hope you'll continue to be an outsized voice and continue to share your industry insights going forward. One question I had and what's really interesting from the letter here, you highlight that TSLX has a much lower beta than the BDC peers. Wondering if you have any thoughts on what could have been contributors historically for that lower beta, especially given the outsized returns TSLX has been generating.

Yes. I think it's a function of credit losses. The beta on stock price, my guess comes with blow-ups on credit. And we've had 20% less beta in the space, 20% less beta than the public equities and beta comes from surprises. Those surprises are asymmetrical in credit. And we've done a good job of not having surprises.

Got you. Very helpful there. And one follow-up, if I may. Wondering if you could just give us any kind of updated thoughts around expectations for prepayments, especially given your expectations for M&A activity.

Sure. I'll address that. Thank you for the question. As I noted in my prepared comments, last quarter saw increased repayment activity, which has been the trend for a few quarters now. We generated $0.14 per share in activity-based fee income compared to a historical average of $0.08 per share. It's still early in the quarter to have a complete view, but I expect activity-based fee income to approach the norm this quarter. However, as I mentioned, it's a bit early to be certain. We typically have 30 to 60 days of visibility on future repayment activity. The good news is, as observed in our historical earnings, during quarters with lower activity-based income and repayment activity, we're able to grow our interest income through the P&L.

Congratulations on the new title and I sympathize with you regarding the earnings calls. Josh, congratulations on finding your rhythm again. I hope your coach’s advice is beneficial. Regarding the largest deal this quarter, as you mentioned, it was Walgreens, but it was actually ABL. If there are credit concerns in the current market, they seem to be more about collateral monitoring and quality. For instance, when is a vehicle asset double pledged, and is a receivable genuine? When assessing an asset-based structure, how do you ensure the authenticity of your collateral? This has been an issue in several idiosyncratic credit cases we've observed over the past few months.

Yes, sure. I'll take that one and then Josh or even Mike can add in. First of all, I would say this is a core competency of the platform. We've been doing this for over 20-plus years, monitoring ABL collateral, understanding ABL collateral, and understanding how it would liquidate. Our team is very focused on inventory counts, inventory appraisals, having those in a timely fashion, and monitoring that borrowing base on a monthly, if not more frequent, basis to understand where we're at in the collateral picture. We have an excellent track record in the sector. I believe we have over 20% IRRs historically in the retail ABL. You don't do that by happenstance; you do it by understanding who your borrowers are, what that collateral picture is, and monitoring that on a day-to-day basis. But it is a core competency. We have a whole team that this is what they're focused on, and we have a lot of confidence in them. Josh, Mike, anything to add?

We're clearly a part of those names, which highlights our core competency. Bo is correct that this ABL loan primarily involves inventory as collateral in the stores where audits are conducted to align inventory counts with general ledger accounts, ensuring there are no discrepancies. These are tangible items. If people were reconciling cash to receivables, as we would have done, they would have identified any issues quickly. Fraud typically arises from the creation of receivables that have no cash collections associated with them. If the necessary work was being done, it would have been evident that there were no cash collections or unusually high dilution, allowing one to uncover the situation.

Regarding your optimum pipeline, how quickly do you think that sector of the market can expand over time? Clearly, people are enthusiastic about the perpetuals and the market opportunity, projecting significant growth; however, that often leads to substantial spread compression. In contrast, for your off-the-run deals where higher spreads and more unique assets are involved, as well as increased fee income, how penetrated are you in that market? Additionally, what opportunities do you see for TSLX to continue growing in a controlled way?

Yes. We're not focused on growth; our priority is shareholder returns. It's important to emphasize that we're dedicated to maximizing shareholder value by managing the right amount of capital for the available opportunities. Many people mistakenly believe that the number of opportunities remains the same, and because we don't need to prioritize growth, they overlook key aspects. The crucial factor for our industry is growth in earnings relative to economic interest, like a share. If revenues and earnings both increase by 20% while the share count also rises by 20% or 25%, we haven't actually created shareholder value. Therefore, our focus is on creating shareholder value, which may mean we don't pursue growth.

And our next question will be coming from Paul Johnson of KBW.

Not to sound redundant on any of the management changes, I think they've been pretty well covered. But I just wanted to ask, as a part of those changes, were there any changes to the overall credit committee, investment committee and any of the processes around that?

No.

Got it. And I'd be curious to get your thoughts. I mean, just you guys have obviously made a lot of thematic investments in the software space and been very active there. Maybe it would be just good to hear kind of your thoughts on just the overall AI risk and concern and whether that's kind of the risk or opportunity that you see within the portfolio.

Yes, I'll take that one. I'm going to start off by saying the portfolio continues to perform very well, both in software and non-software areas. We have not seen any impact today regarding AI on any of the software names. I believe the impact of AI is nuanced and still developing. There will likely be more questions than answers in the sector at this time. Personally, I think it will be a net positive for the sector overall, but it will have many complexities. There will be winners and losers, similar to the transition from on-prem to cloud-native businesses. It's important to focus on sectors where we've been active for more than 20 years, starting with Mike Fishman, who originally theorized about their credit quality. We concentrate on businesses that have high switching costs, strong data advantages, and provide significant downside protection by owning their customer base and distribution, creating a high barrier to entry. However, as I mentioned, this will continue to evolve. The key is to think about the future rather than the past, and that's what we are concentrating on in both portfolio management and new opportunities. Those are my thoughts on the space. Mike, do you have anything to add, or Josh?

AI will equalize developer costs, but there are other factors that create barriers to entry. While AI has made software creation less capital-intensive, capital itself is not a long-term advantage for a business. The real advantage comes from data integration and workflow. To summarize, AI has lowered the capital requirements, but that has never been the main competitive edge, and our focus has always been on the true advantages.

I appreciate the response. One last question for me. I’m curious to know if, despite the spreads remaining relatively stable in October, the negative credit news and bankruptcy announcements during the month revealed any bad balance sheet opportunities or resulted in unique deal flow for the fourth quarter.

Yes. I mean I think there are things in our pipeline that are like very unique and that are thematic and complicated. We committed to a large financing for a company that's coming out of a bankruptcy that is in the energy infrastructure sector that like in that at some point will fund in Q4, Q1 of next year. And so there's some unique stuff that we continue to find that is consistent with our model, which is to find things that are less trafficked, which require industry knowledge, where we have an edge or where we have a theme. And so you'll see some of that stuff in the next quarter or 2.

And our next question will be coming from Mickey Schleien of Clear Street LLC.

And like everyone else, congrats to Bo and Josh, I miss talking to you regularly.

I'm always around. You have my number.

Yes. I appreciate that. Josh, touching on spreads, I think there was a question recently about that. But my understanding is they actually did widen a little bit in October, which sort of makes sense given what we've seen in the market in terms of the macro and political backdrop. Do you foresee that to be sustainable? Or is the large amount of capital available still just going to overwhelm the market and keep this equilibrium in place?

Yes, spreads will depend on flows in both directions. I don't believe we observed a significant change in spreads. We've discovered some really interesting opportunities, which resulted in a higher spread for us. However, syndicated loan spreads are tighter in October, possibly by 5 basis points, and the private credit market also saw a similar change. Overall, it's going to depend on the flows, but we've structured our platform to be somewhat insulated.

Sorry, that broke up a little bit, but I think I got most of it. I apologize, but I had to jump on late into the call. Did you mention anything about the impact of the government shutdown on the portfolio?

We did not. It's a good question. There was no material impact on our business.

Okay. Good to hear. And lastly, has Sixth Street discussed or considered listing SSLP to give those investors some liquidity?

It is kind of not on the table. We're still investing in that fund. We're halfway through the fund. We're focused on making great investments and driving returns for those investors.

Those are my questions this morning. Again, congratulations.

This will be my last earnings call that I'm participating in. Thank you to everyone. I'm very excited about Bo and the leadership team. During this call, we've addressed a lot of management changes in the industry. I want to emphasize that we had an excellent quarter and a fantastic year. We discovered higher spread investments and increased net interest income. The team has performed wonderfully. While I know people are focused on headlines, the truth is our business is in great shape, and we continue to deliver returns for our shareholders, which is something I'm really excited about. Bo, congratulations; it's well deserved. I may have stayed in the role too long, but I'm thrilled for you and for the platform. This is how we've worked together, and I’ll still be around. Thank you, Bo, for your patience with me. I wish everyone a wonderful Thanksgiving with their families.

Thanks, everybody.

This concludes today's program. Thank you for participating. You may now disconnect. Goodbye.