Sixth Street Specialty (NYSE:TSLX) released first-quarter financial results and hosted an earnings call on Wednesday. Read the complete transcript below.
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Summary
Sixth Street Specialty reported a net investment income of $0.42 per share for Q1 2026, but a net loss per share of $0.27 due to unrealized losses from market volatility.
The company’s net asset value per share decreased by 4.3%, largely due to the impact of wider market spreads and lower market valuations.
Announced a reduction in base dividend from $0.46 to $0.42 per share, aligning with current market conditions and forward earnings expectations.
Investment activity included $338 million in commitments and $135 million in fundings, with notable investments in two new portfolio companies and a joint venture.
Management expressed confidence in the company’s strong balance sheet and positioning to capitalize on future investment opportunities amid market volatility.
Full Transcript
OPERATOR
Good morning and welcome to 6th Street Specialty Lending Inc. first quarter ended March 31, 2026 earnings conference. this time, all participants are in a listen only mode. As a reminder, this conference is being recorded on Wednesday, May 6, 2026. I will now turn over to Ms. Kami Senator, head of Investor Relations. Please go ahead.
Kami Senator (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 6th Street Specialty Lending Inc. 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 first quarter ended March 31, 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. 6th 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 first quarter ended March 31, 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 6th Street Specialty Lending, Inc.
Bo Stanley (Chief Executive Officer)
Thank you, Kami. Good morning, everyone and thank you for joining us. With me today is our Head of Investment Strategy, Ross Bruck, and our CFO, Ian Simmons. Before I begin, I’m pleased to announce that effective May 21, Mike Fishman will become Chairman of our Board of Directors following our previous announcement regarding Josh Easterly’s retirement from the role. Mike is a respected industry veteran with decades of experience in credit investing and asset management. As an early member of 6th Street Mike and a director of 6th Street Specialty Lending Inc. since 2011, including tenure as CEO, he has been instrumental in building our business. His combination of deep industry expertise and platform understand him make him uniquely qualified for this position and we look forward to his contributions as Chairman. For our call, I’ll review our first quarter highlights and pass it to Ross to discuss investment activity and the portfolio. Ian will review our financial performance in detail and I will conclude with final remarks before opening the call to Q&A. Yesterday, we reported first quarter net investment income of $0.42 per share or an annualized return on equity of 9.9% inclusive of our movement in fair value of our investments, we reported a net loss per share of $0.27. Our net loss per share this quarter was largely driven by unrealized losses on our investments as we incorporated the impact of wider market spreads and lower market multiples in our fair value determinations. More on that in a moment. At quarter end our net asset value per share declined by approximately 4.3% from 1697, which includes the impact of the Q4 supplemental dividend and to 1624. Of this decline, $0.58 per share or nearly 80% was attributable to the movement in fair value from the market inputs which are unrealized. That included $0.40 per share from unrealized losses in our debt portfolio tied to credit spread widening seen in the broader market and $0.18 per share from lower market valuations. In our limited equity portfolio, $0.08 per share of the decline is related to portfolio company specific performance and the remainder from the payoffs and realized gains. Ian will walk through the NAV bridge in more detail. These results reflect a period of market driven volatility rather than a change in the underlying strength of our business. Our portfolio remains healthy, our balance sheet is strong and we are well positioned to capitalize on opportunities as the market continues to evolve. Volatility in Q1 was driven by several factors including market concerns around the impact of artificial intelligence on software investments, increased redemption requests from shareholders of non traded BDCs and heightened geopolitical uncertainty, the latter of which was not something we anticipated and at the time of our last earnings call. These dynamics contributed to spread credit spreads widened in a subdued transaction environment. LCD first lien spreads widened by 48 basis points and second lien spreads widened by 256 basis points during the quarter. I want to reiterate our approach to valuation which incorporates changes in market wide credit spreads when determining the fair value of our investments. Our process is designed to reflect the price in an orderly transaction at the measurement date. That’s not just our perspective, it’s the regulatory requirement designed to maintain the integrity of the balance sheet. For additional detail regarding our valuation framework, we encourage you to read our stakeholders letter on the topic from August 2022 available on our website. We have consistently applied this valuation framework since inception, including periods of volatility such as Q1 2020 related to Covid and Q2 2022 related to the interest rate hiking cycle. During those quarters, net asset value per share declined by approximately 7.4% and 3.6%, respectively, driven primarily by the impact of wider credit spreads. These unrealized losses reflected in earnings in NAV are noncash in nature and do not reflect our view of permanent credit losses. As such, we expect these unrealized losses related to credit spread movement to reverse over time as market conditions change and our investments approach realization or maturity. Our track record of long term value creation is demonstrated by the 4.7% cumulative growth in our net asset value per share since our 2014 IPO through March 31st. This compares to an average NAV decline of 7.3% for our public BDC peer group from our IPO through the end of 2025, representing significant outperformance irrespective of the volatility we experienced in any quarterly period. Market volatility also impacted net investment income through lower activity based fee income. In Q1, we earned 5 cents per share of activity based fees which is below our three year historical average of $0.09 per share. As we’ve discussed in prior periods, activity based fees, which are primarily driven by early repayments, are inherently episodic during periods of heightened market volatility. Our experience is that many borrowers and asset owners defer capital markets activity. As a result, both funding and repayment volumes typically contract and as valuation gaps widen and transaction activity slows. While we recognize that the current environment will take time to fully play out as the market undergoes a period of price discovery, our experience has consistently shown that these periods of volatility create some of the most attractive investment opportunities. We believe we are well positioned to capitalize on that opportunity set in our earnings release. Yesterday we announced a change in our base dividend level from $0.46 to $0.42 per share. This decision was informed by what we believe is a responsible and sustainable dividend policy. As we assess the current environment, we have always believed it is appropriate to align our base dividend with the forward earnings power of the business. That forward view reflects the level of uncertainty we see around near term activity, including the rate and spread backdrop and also the market volatility caused by geopolitical uncertainty that has occurred since our last call. Our perspective is also informed by historical periods of dislocation, which suggests that activity based fee income can take several quarters to normalize following a market dislocation. While this may differ, history reinforces our decision to take a measured and prudent approach. Today, the pre-2022 environment provides a baseline for where our dividend level stood before rates began to increase. We had a base dividend of $0.41 per share. Our earnings power increased with higher base rates and wider spreads. We raised the base dividend to $0.42 in Q3 2022, $0.45 in Q4 and $0.46 in Q1 2023, representing a total increase of 12.2%. While we see potential for an increase in transaction activities as the year progresses, the timing and magnitude of that pickup resulting impact on our activity based fee income remains difficult to forecast with conviction.. That said,, our view of base rates through the forward curve and new issue spreads is more visible. This adjustment establishes a distribution level that is sustainable across a range of potential activity outcomes. At quarter end, we had approximately $1.57 per share of potential activity based fee income embedded in the portfolio, including unamortized OID and call protection. If activity accelerates, that embedded income, provides meaningful upside. Our supplemental dividend framework captures and distributes that upside to shareholders. As it’s realized, yesterday our board approved a base quarterly dividend of $0.42 per share to shareholders of record as of June 15, payable on June 30. This corresponds to an annualized dividend yield of 10.3% on our March 31 net asset value per share, which we believe is aligned with the core earnings power of the portfolio and with our target return on equity for the year. Ian will speak more on that in a moment. With that, I’ll pass it to Ross to discuss this quarter’s investment activity.
Ross Bruck (Head of Investment Strategy)
Thanks Beau. In Q1 we provided total commitments of $338 million and total fundings of 135 million across two new portfolio companies, upsizes to four existing investments and an initial investment in our previously announced joint venture, Structured Credit Partners or scp. A key advantage for SLX is our deep integration with the broader Six street platform which manages over 130 billion in assets. This connectivity allows us to leverage the collective expertise of hundreds of investment professionals to conduct the deep proprietary diligence required for today’s complex investment landscape. By combining this expertise, the firm’s platform wide sourcing engine and our disciplined underwriting, we remain well positioned to execute on investments that we believe create long term value for our shareholders. Our recent investment in Mindbody is a good example of how the platform comes together in practice. Given our history with the business dating back to 2021, we had a differentiated understanding of the company and were well positioned to lead the new financing. This was a cross platform and cross border effort with our direct lending teams working closely with our consumer team to deliver a bespoke solution. The business benefits from significant network effects with a scaled two sided ecosystem across consumers and wellness partners that we believe supports growth and strong underlying business quality, ultimately driving attractive risk adjusted returns for our shareholders. Our other new investment was Labrie, a leading North American manufacturer of premium refuse collection vehicles and related aftermarket parts. Labrie operates in a recession resistant market with predictable demand and structural tailwinds. The company’s sticky dealer and customer base combined with a consistent high margin and capital light financial profile make this a compelling investment aligned with our approach of lending to businesses with attractive unit economics on repayments payoffs moderated versus levels seen throughout 2025 we experienced 113 million in repayments from four full and four partial investment realizations resulting in $22 million of net fundings for the quarter. Of the four full payoffs in Q1, two were refinancings and two were sales of liquid investments. Of the two refinancings, both were completed at lower spreads with one executed in the private credit market and the other in the broadly syndicated loan market. Our largest payoff was Galileo Parent, which refinanced its senior secured credit facility originally structured to support Advent’s 2023 take private transaction. Sixth street served as agent on the original deal and the company refinanced with a broadly syndicated loan priced at SOFR +450 basis points compared with SOFR +575 basis points on the existing facility. SLX was repaid with call protection, generating AN asset level IRR and momentum of 15% and 1.4 times respectively. Our other refinancing was Madcap, a provider of authoring, publishing and content management solutions, which refinanced its existing credit facility in March. Sixth street originally provided capital in December 2023 to support an acquisition with an underwriting thesis centered on MadCap’s robust product offering, granular blue chip customer base and strong unit economics. Having executed on its business plan, the company was able to transition to the bank market for a lower cost of capital. SLX was repaid in full, generating an asset level IRR and MOM of 16% and 1.3x respectively. During the quarter we had one addition and one removal from non accrual status resulting in no change to the total number of investments on Non accrual at three names representing approximately 1.4% of the portfolio at fair value and 1.9% at amortized cost. The addition was our investment in Bed, Bath and Beyond. While the path of this credit has not followed our original expectations we have driven recoveries through secondary sources of repayment and have received approximately 85% of our cost basis through March 31st. While we believe we are well positioned to realize meaningful additional recoveries over time, uncertainty around the timing and ultimate resolution of remaining claims led us to place the investment on non accrual, effective January 1st. The removal was our investment in Astra Acquisition Corp. Which was reorganized in Q1 following the company’s Chapter 11 process. This had no impact on the quarter’s nav, as the position was already fully marked down. Moving on to portfolio yields, our weighted average yield on debt and income producing securities at amortized cost decreased slightly quarter over quarter from 11.3% to 11.2%. The decline primarily reflects the decline of reference rates during the quarter across our core borrowers for whom these metrics are relevant. We continue to have conservative weighted average attachment and detachment leverage points of 0.4x and 5.2x, respectively, down from 5.3 times in the prior quarter with weighted average interest coverage of 2.3 times as of Q1. 26 the weighted average revenue and EBITDA of our core portfolio companies was $425 million and $127 million, respectively. Median revenue and EBITDA were $174 million and $54 million. Before turning the call over to Ian, I’d like to provide an update on our existing portfolio companies, highlighting key metrics. The performance rating of our portfolio continues to be strong with a weighted average rating of 1.19 on a scale of 1 to 5 with 1 being the strongest. We continue to see stable top line growth and earnings durability which signal a healthy demand environment across our end markets. Across our core portfolio companies, LTM revenue and ebitda growth were both 9%. The overall stability in these metrics continues to reflect proactive actions by management and sponsor teams. With that, I’d like to turn it over to IAN to cover our financial performance in more detail.
Ian Simmons (Chief Financial Officer)
Thank you Ross. For Q1 we generated net investment income per share of 42 cents and net loss per share of 27 cents. Our reported and adjusted metrics converged this quarter as there was no impact related to capital gains incentive fees. Total investments were $3.3 billion in line with prior quarter as a result of net funding activity offset by lower valuations. Total principal debt outstanding at quarter end was 1.8 billion and net assets were 1.5 billion or $16.24 per share. Our average debt to equity ratio decreased slightly quarter over quarter from 1.17 times to 1.14 times and our debt to equity ratio at March 31 was 1.18 times. The increase in this ratio was largely due to the impact of widening spreads on fair value versus net funding activity. We continue to have ample liquidity with $1.1 billion of unfunded revolver capacity at quarter end against $249 million of unfunded portfolio company commitments eligible to be drawn post quarter end. We further enhanced our debt maturity profile by closing an amendment to our revolving credit facility maintaining the pricing and key terms of the facility while extending the final maturity through May 2031.. All of the 19 banks in our syndicate were supported by and participated in the amendment, an extension that closed on May 1. Adjusted for the revolver extension, our weighted average remaining life of Debt funding is 3.9 years compared to a weighted average remaining life of investments funded by debt of only 2.5 years. At quarter end, our funding mix was represented by 68% unsecured debt. Moving on to upcoming maturities, as we mentioned on our last earnings call, we have reserved for the 300 million of 2026 notes due in August under our revolving credit facility. After adjusting our unfunded revolver capacity as of quarter end for the repayment of those notes and our Revolver amendment, we have liquidity of 649 million representing 2.6 times our unfunded commitments eligible to be drawn at quarter end. Our balance sheet remains well positioned allowing us to play offense in the current market environment. We believe the ability to invest capital opportunistically in what we’re seeing as a wider spread environment today …
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