Sixth Street Specialty Lending, Inc. 2026 Q2 Earnings Call

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 second quarter ended June 30, 2026, 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 second quarter ended June 30, 2026. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Bo Stanley, Chief Executive Officer of Sixth Street Specialty Lending Inc.

Thank you, Cami. Good morning, everyone. Thank you for joining us. With me today is our Head of Investment Strategy, Ross Bruck, and our CFO, Ian Simmonds. For our call, I will review our second quarter highlights and pass it to Ross to discuss investment activity in the portfolio. Ian will cover our financial performance in detail. I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported second quarter net investment income of $0.43 per share, or an annualized return on equity of 10.6%, and net income of $0.43 per share, or an annualized return on equity of 10.5%. Net asset value per share was $16.24 quarter-end, stable compared to the prior quarter.

Our board has approved a base quarterly dividend of $0.42 per share to shareholders of record as of September 15th, payable on September 30th. Our second quarter operating earnings exceeded the base dividend level we established last quarter. As we discussed on our last earnings call, we expect activity-based fee income to normalize over several quarters following the market volatility experienced in the first quarter. Consistent with that expectation, repayment activity increased sequentially in the second quarter and contributed to $0.08 per share of activity-based fees during the quarter. Although it remained below our long-term historical average. Based on the repayment activity we have experienced thus far in the third quarter, we expect this momentum to continue in our increasingly constructive on activity-based fee income in the second half of the year relative to the first half.

Following the meaningful widening of credit spreads in Q1, LCD first lien spreads were largely unchanged during the second quarter, resulting in limited impact on the fair value of our debt investments from market inputs. The stability of our net asset value per share in Q2 reflects the underlying credit quality of our portfolio, resulting from our consistent focus on disciplined asset selection, structural downside protection, and active portfolio management. Portfolio company performance remains strong, as evidenced by stable non-accruals, improving interest coverage, and consistent revenue and EBITDA trends. We believe this portfolio quality supports the durability of our business' core earnings power and our ability to generate ROEs in excess of our cost of equity capital through changing market environments. Stepping back, we continue to operate in a market environment characterized by elevated interest rates, geopolitical uncertainty, and evolving structural dynamics within private credit.

Notwithstanding these uncertainties, the underlying economy has remained generally stable. Recent labor market data, including unemployment claims hovering near multi-decade lows, reinforces that view. We are also seeing early indications of a general pickup in transaction activity as we move through the back half of the year. As companies and sponsors develop greater conviction around industry fundamentals and operating outlooks, we expect a more active M&A environment. For TSLX, a more active market should support both increased origination opportunities and higher repayment activity. With that, I'll now pass it over to Ross to discuss this quarter's investment activity.

Thanks, Beau. I'd like to begin with the investment environment. Second quarter activity levels reflect the lagged effects of the market volatility experienced in the first quarter Direct lending volumes declined by approximately half sequentially and compared to the second quarter of 2025, while private equity deal activity also slowed materially.

Sponsor-backed M&A, which is an important driver of financing activity in our market, remained constrained as limited exit activity and uncertainty around financing costs continued to suppress transaction volumes. Despite that backdrop, our own investment activity stayed consistent with Q1. During the second quarter, we provided total funding of $137 million across two new investments and capital called by our joint venture Structured Credit Partners. Our Q2 fundings are a result of our platform's reach and our focus on maintaining deep, long-term relationships with our borrowers. Both of our new investments during the quarter were made with borrowers where Sixth Street had longstanding relationships and prior lending experience. We believe this is particularly important in periods when market-wide transaction activity is limited.

Our investment in Photo Holdings, also known as Shutterfly, is a good example of this connectivity. As an investor in the company for several years, we have a deep familiarity with its business model and capital structure. This established relationship with both the sponsor and management enabled us to engage constructively on a refinancing of its existing debt, resulting in a bespoke structured solution that includes significant contractual amortization, robust documentation, and attractive economics for SLX shareholders. We believe this transaction illustrates the core advantage of our platform, the ability to leverage long-term relationships, differentiated conviction, and scale of capital to solve for complexity where traditional sources of capital may be less accessible. Pivoting to payoffs, we experienced stronger portfolio turnover during the second quarter relative to Q1. Total repayments in Q2 were $192 million, which drove net repayment activity of $55 million.

Repayments increased by approximately 70% compared to the first quarter, resulting in annualized portfolio turnover of 23% in Q2 and 18% for the first half of the year. As Bo noted, this activity generated $0.08 per share of activity-based fee income in Q2. We benefit from embedded call protection and unamortized OIDs in our portfolio that provides meaningful earnings upside and stronger repayment periods. The repayment activity we experienced during the quarter was primarily driven by refinancings in either the private credit or broadly syndicated loan markets. An example is our investment in TS Imagine, a global financial technology provider which was repaid in June. The company refinanced its existing senior secured credit facility in the private credit market. Upon repayment, we received call protection which contributed to an unlevered IRR of 15% and a 1.7x multiple of money for SLX shareholders.

While transaction volumes remain muted on a broad basis, we are beginning to see earlier signs of a healthier direct lending market. Capital inflows have slowed and underwriting processes are becoming more disciplined, including with respect to documentation, lender protections, access to management teams, and the depth of diligence lenders can perform. We believe these developments should be beneficial for the sector over the long term. This shapes our view that we are in a period where the market prioritizes credit quality and certainty over pure speed, which aligns with our investor-first approach. The pace of new opportunities in our pipeline is accelerating, and while the timing of a broader recovery remains difficult to predict, we have the flexibility to remain selective.

Our focus remains on leveraging the full breadth of the Sixth Street platform to identify those specific opportunities where we can earn the most attractive risk-adjusted returns for our shareholders. Moving on to portfolio metrics and yields. At June 30th, the weighted average total yield on our debt and income-producing securities at amortized cost was 11.2%, reflecting no change compared to March 31st. Our omni-channel sourcing capabilities enabled us to put capital to work in a disciplined manner, demonstrated by a weighted average spread on new first lien investments of 690 basis points, which compares to a spread of 527 basis points on new issue first lien loans for BDC peers in Q1. Our ability to originate new investments at attractive spreads remains an important differentiator.

Over the trailing 12 months, our investment spread on new commitments, excluding structured credit investments, averaged 6.8%, largely consistent with the 7% spread on all floating rate investments across our existing portfolio. This alignment supports the durability of our forward earnings power and mitigates the potential for spread compression as the portfolio turns over. In addition to maintaining discipline on new investment spreads, we remain focused on the high documentation standards that underpin our downside protection. At quarter end, we maintained effective voting control on 78% of our debt investments, with an average of two financial covenants per investment, consistent with historical levels. Embedded call protection in our loan documents is a critical component of our underwriting process as it allows us to counteract reinvestment risk and drive long-term value for shareholders.