KBRA Affirms Ratings for Sixth Street Specialty Lending, Inc.

3 Jun 2024   |   New York


KBRA affirms the issuer and senior unsecured debt ratings of BBB+ for Sixth Street Specialty Lending, Inc. (NYSE: TSLX or "the company"). The Outlook is Stable.

Key Credit Considerations

The ratings reflect the company's ties to Sixth Street, a global investment firm with ~$77 billion of assets under management, SEC exemptive relief to co-invest with Sixth Street's affiliates originating middle market loans, and a $3.4 billion diversified investment portfolio comprised largely of first lien senior secured loans (92%) with a non-cyclical focus to middle market portfolio companies. Furthermore, the company has a long-track record with a solid operating history, one of the longest in the sector having been formed in 2010. As of March 31, 2024, TSLX's portfolio company weighted average EBITDA was $92.5 million with a sector focus on Business Services (17%), Internet Services (15.1%), and Human Resources and Support (10.8%). Credit quality has remained solid despite adding an additional portfolio company to non-accrual in 1Q24, boosting non-accruals as a percentage of total investments at cost and fair value to 2.2% and 1.1%, respectively, from 0.9% and 0.6% as of 4Q23. The ratings are also supported by a strong management team with decades of experience in middle market lending and solid risk management practices that have resulted in high returns.

TSLX's leverage (gross) at 1.19x is appropriate given its high percentage of first lien senior secured loans, including unitranche first lien last out, and is well within the company's targeted net leverage range of 0.90x to 1.25x. Asset coverage was 184.5%, providing an adequate cushion to regulatory minimum of 150% in volatile and uncertain markets. The company's liquidity remains strong with $1.1 billion of available bank lines and $6.8 million of unrestricted cash set against $347.5 million near term unsecured debt maturity and $260 million of available unfunded portfolio company commitments. The company issued $350 million of senior unsecured notes in January 2024 in anticipation of the upcoming November maturity. The company's unsecured debt to total debt ratio is one of the highest in the industry at 69% providing financial flexibility and solid asset unencumbrance for the benefit of the unsecured noteholders. TSLX has one of the longest histories of trading above NAV and hence has been able to raise equity. In 2024, the company raised ~$94 million of shares excluding its DRIP. 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 Investment Act of 1940. Also, the company has elected to be subject to tax as an RIC. The company is managed by Sixth Street Specialty Lending Advisers, LLC, an affiliate of Sixth Street Partners.

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 action.

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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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