KBRA Assigns Rating to Sixth Street Specialty Lending, Inc.'s $300 Million Senior Unsecured Notes Due 2028

8 Aug 2023   |   New York


KBRA assigns a rating of BBB+ to Sixth Street Specialty Lending, Inc.’s (NYSE: TSLX or “the company”) $300 million 6.95% senior unsecured notes due August 14, 2028. The Outlook for the rating is Stable.

Key Credit Considerations

The rating and Stable Outlook reflects the company’s ties to Sixth Street, a global investment firm with over $65+ billion of assets under management, a $3.1 billion diversified investment portfolio comprised almost entirely of first lien senior secured investments (91%) with a non-cyclical sector focus, appropriate leverage of 1.16x with regulatory asset coverage of 186.1% (150% regulatory minimum), and a diversified funding structure that includes senior unsecured notes and secured bank lines. The company’s portfolio company weighted average annual EBITDA was $67.3 million and had a weighted average revenue of $205.3 million as of June 30, 2023. The top three sector concentrations included Internet Services (15.7%), Business Services (15.6%) and Human Resource Support Services (11.8%). The company also has a relatively high proportion of portfolio companies in the Retail and Consumer products sector (11%). However, the majority of these investments fall under the company’s special situations business which are asset based (high collateralization with downside protections) and the strategy has generated in excess of 20% gross IRRs on fully realized positions.

TSLX’s liquidity is adequate with $659.2 million of available committed bank lines with $190 million of available unfunded commitments and its earliest maturity of $347.5 million in November 2024. The company’s percentage of unsecured debt to total debt is boosted by the $300 million issuance, which on a pro-forma basis comprises 56% of total debt compared to 38% as of June 30, 2023. KBRA believes that unsecured noteholders have sufficient unencumbered assets due to its high proportion of investments highest in the capital structure. Increasing short-term liquidity, the company issued shares for gross proceeds of $79.2 million in May. Furthermore, the ratings are supported by the company’s solid 13-year operating history with minimal non-accruals, which includes only one portfolio company that accounted for 0.9% and 0.6% at cost and fair value of total investments, respectively, as of June 30, 2023. A strong management team with decades of experience in middle market lending and solid risk management practices have resulted in high returns, which also support the ratings. The strengths are counterbalanced by the illiquid nature of the assets and retained earnings constraints as a Regulated Investment Company (RIC).

Formed in 2010, Sixth Street Specialty Lending, Inc. is a publicly traded closed-end externally managed non-diversified investment management company regulated as a business development company under the Investment Company Act of 1940. Also, the company has elected to be subject to tax as a RIC. The company is managed by Sixth Street Specialty Lending Advisers, LLC, an affiliate of Sixth Street Partners (“Sixth Street). The company maintains exemptive relief order from the SEC that allows it to co-invest, subject to certain conditions with its affiliates.

Rating Sensitivities

The ratings for TSLX are unlikely to be upgraded in the intermediate term. A rating downgrade and/or Outlook change to Negative could be considered if a prolonged downturn in the U.S. economy has a material impact on credit metrics including liquidity, leverage, and earnings. An increased focus on riskier investments or a significant change in the current management structure and/or risk management policies could also lead to negative rating actions.

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