Sixth Street Specialty Lending, Inc. (TSLX) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary shows a mix of positive and stable indicators, such as strong credit performance, stable spreads, and a focus on AI investments. However, there are concerns about software sector disruptions, unrealized losses, and unclear management responses, particularly regarding premium to NAV advantage. The Q&A section highlights a stable outlook but lacks strong catalysts for significant stock movement. Given the market cap of approximately $2 billion, the stock is likely to remain within a neutral range of -2% to 2% over the next two weeks.
Key Financial Performance
Adjusted Net Investment Income (Q4 2025) $0.52 per share, representing an annualized operating return on equity of 12%. This exceeded the base dividend of $0.46 per share, providing a base dividend coverage of 113%. The increase was driven by strong investment performance.
Adjusted Net Income (Q4 2025) $0.30 per share, representing an annualized return on equity of 7%. The difference between adjusted net investment income and adjusted net income was primarily due to $0.12 per share of unrealized losses from idiosyncratic credit impacts and $0.10 per share of prior period unrealized gains that reversed this period.
Adjusted Net Investment Income (Full Year 2025) $2.18 per share, representing an operating return on equity of 12.7%. This exceeded the top end of the guidance range due to disciplined investment allocation and strong portfolio performance.
Adjusted Net Income (Full Year 2025) $1.76 per share, corresponding to a return on equity of 10.3%. The economic return, including movement in net asset value and dividends paid, was 10.9%, marking the 10th consecutive year of double-digit economic returns.
Portfolio Revenue Growth (2025) Approximately 9% year-over-year for core portfolio companies. This growth reflects disciplined capital allocation and strong performance in the portfolio.
Portfolio EBITDA Growth (2025) Approximately 12% year-over-year for core portfolio companies. This growth highlights the resilience and operational efficiency of the portfolio companies.
Net Asset Value (NAV) per Share (Year-End 2025) $16.98, compared to $17.11 in Q3 2025 and $17.09 at year-end 2024. The decline was due to the reversal of net unrealized gains from investment realizations, widening credit spreads, and portfolio-specific events.
Weighted Average Loan-to-Value (LTV) Approximately 41%, remaining stable year-over-year. This stability was due to steady earnings growth offsetting lower equity valuations in the broader market.
Weighted Average Yield on Debt and Income-Producing Securities 11.3% at amortized cost, down from 11.7% in the prior quarter. The decline was primarily due to lower underlying base rates.
Total Commitments and Fundings (Q4 2025) $242.4 million in total commitments and $196.7 million in total fundings. This included investments in 5 new portfolio companies and upsizes to 4 existing investments.
Total Repayments (2025) $1.2 billion, representing the highest annual repayment activity since inception. This was driven by refinancings and improved credit conditions for portfolio companies.
Non-Accruals (Q4 2025) 0.6% of the total portfolio by fair value, unchanged from the prior quarter. This reflects strong credit performance across the portfolio.
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Operating Highlights
AI Integration: The company is leveraging AI to enhance product development and value proposition, focusing on enterprise software. AI is seen as leveling the playing field for development costs, benefiting well-managed companies with limited technical debt.
Market Positioning in Enterprise Software: Approximately 40% of the portfolio is mapped to enterprise software exposure, with strong credit statistics including a weighted average LTV of 40%, LTM top-line growth of 9%, and LTM earnings growth of 15%. The company emphasizes the durability of business models and their ability to withstand AI-driven changes.
Portfolio Performance: Borrowers demonstrated strong credit statistics with consistent revenue growth of 9% and EBITDA margins expanding by 12%. Weighted average LTV within the portfolio is approximately 41%.
Investment Activity: In Q4, $242.4 million in commitments and $196.7 million in fundings were made across 5 new portfolio companies and 4 existing investments. For 2025, $1.1 billion in commitments and $894 million in fundings were achieved.
Repayment Activity: Total repayments in Q4 were $235 million, contributing to a record annual repayment activity of $1.2 billion in 2025. Refinancings were a dominant theme, with 6 of 8 repayments in Q4 being refinanced at lower spreads.
Capital Allocation and Liquidity: The company maintains a strong balance sheet with $246 million of investment capacity and liquidity representing 3% of total assets. It is positioned to capitalize on market volatility and rebalancing of capital.
Joint Venture Formation: A new joint venture, Structured Credit Partners, was formed with Carlyle Group to invest in CLOs. This is expected to generate mid-teen returns on capital invested and enhance earnings.
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Risk or Challenges
Unrealized losses from idiosyncratic credit impacts: The company experienced $0.12 per share of unrealized losses due to idiosyncratic credit impacts, which could indicate challenges in specific investments or sectors.
Reversal of prior period unrealized gains: $0.10 per share of prior period unrealized gains reversed, reflecting potential volatility or instability in investment valuations.
Impact of AI on enterprise software: AI is leveling the playing field in software development, potentially reducing pricing power and revenue growth for software businesses, which could impact the creditworthiness of less prepared companies.
Tight spread environment: The continued imbalance between private capital supply and demand is leading to tight spreads, which could limit risk-adjusted returns and investment opportunities.
Market volatility and uncertainty: Fluctuating macroeconomic conditions, geopolitical changes, and technological advancements create significant cross-currents, complicating asset selection and increasing risks.
High redemptions from non-traded BDCs: The sector is experiencing higher redemptions from non-traded BDCs, which could lead to capital reallocation and impact liquidity.
Widening credit spreads: Widening credit spreads negatively impacted portfolio valuations, contributing to a $0.03 per share decline in net asset value.
Non-accrual exposure: A second lien term loan in Alkagen was added to non-accrual status, representing 0.01% of the total portfolio by fair value, indicating potential credit quality issues.
Decline in weighted average yield: The weighted average yield on debt and income-producing securities decreased from 11.7% to 11.3%, driven by lower base rates, which could pressure earnings.
Refinancing at lower spreads: Several portfolio investments were refinanced at lower spreads, which could reduce income and highlight competitive pressures in the lending market.
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Guidance & Outlook
Investment Environment for 2026: The investment environment for 2026 is expected to be characterized by a continued imbalance between the supply of private capital and the demand for financing, resulting in sustained levels of competition and tight spreads for regular transactions.
Asset Selection and Investment Strategy: The company will focus on businesses with strong positions in their value chain and robust unit economics. It will prioritize thoughtful structuring and deal documentation to actively manage credits and generate incremental economics for shareholders.
Potential Upside Nodes for Accelerated Originations: Two potential upside nodes for accelerated originations include capitalizing on market volatility to finance high-conviction businesses and an acceleration in the market's capital rebalancing.
Portfolio Yield and Investment Spreads: The weighted average yield on debt and income-producing securities decreased from 11.7% to 11.3% quarter-over-quarter. Weighted average spreads on new investments were 691 basis points in Q4, compared to 551 basis points reported by public BDC peers in Q3.
Repayment Activity and Fee Income: Total repayments in Q4 were $235 million, contributing to $0.64 per share of activity-based fee income in 2025, the highest level since 2020. Refinancings were a dominant theme, with 6 of 8 repayments in Q4 driven by refinancings.
Credit Statistics and Portfolio Resilience: The portfolio demonstrates strong credit statistics, with weighted average attachment and detachment leverage points of 0.4x and 5.3x, respectively, and weighted average interest coverage of 2.1x. The weighted average revenue and EBITDA of core portfolio companies were $449 million and $127 million, respectively.
Joint Venture Formation: The company announced the formation of Structured Credit Partners, a joint venture with Carlyle Group-managed BDCs, to invest equity into newly issued broadly syndicated loan CLOs. This partnership is expected to generate mid-teen returns on capital invested.
2026 Return on Equity (ROE) Target: The company targets a return on equity on net investment income for 2026 of 11% to 11.5%, corresponding to a range of $1.87 to $1.95 for full-year 2026 adjusted net investment income per share.
Spillover Income and Dividend Strategy: At year-end, the company had $1.21 per share of spillover income and will monitor this figure closely as part of its ongoing review of its distribution strategy.
Market Positioning and Volatility: The company is well-positioned with significant liquidity and a robust balance sheet to capitalize on opportunities during periods of market retreat and heightened volatility.
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Shareholder Return Plan
Base Quarterly Dividend: $0.46 per share to shareholders of record as of March 16th, payable on March 31.
Supplemental Dividend: $0.01 per share relating to Q4 earnings to shareholders of record as of February 27th, payable on March 20th.
Dividend Framework: Supplemental dividends are capped to ensure any decline in net asset value over the preceding 2 quarters does not exceed $0.15 per share.
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Key Q&A
Q:How much of the portfolio has turned over since 2022, and what years were the majority of these assets originated in?
A:Approximately 20% to 25% of NAV is from pre-2022 vintages, with the majority of the portfolio originated post-2022 during the rate hiking cycle in 2023 and 2024.
Q:How does Sixth Street view the deployment environment evolving with AI and its impact on the portfolio?
A:Sixth Street is focused on thematic investing, rotating capital to businesses benefiting from AI. They see winners with strong data moats and durable business models, while some businesses may be disintermediated by AI. They aim to provide capital to the winners.
Q:What is the structure and purpose of the JV with Carlyle?
A:The JV will focus on broadly syndicated loan CLOs, financed like traditional BSL CLOs. There will be no management fees at the CLO or JV level, differentiating it from typical third-party CLOs. The JV aims to be accretive to shareholders and leverage Sixth Street's core competencies.
Q:How will the JV address spillover income issues?
A:The JV will ramp up gradually, with a $200 million commitment deployed over time. This approach minimizes immediate impact on spillover income, which will be monitored and managed through the supplemental dividend framework.
Q:What is the current investment pipeline and its impact from public software space disruptions?
A:The pipeline is decent, with good activity in Q4 driven by M&A. Disruptions in the public software space have not yet significantly impacted deals, but Sixth Street is prepared to capitalize on dislocations.
Q:What caused the unrealized losses in the portfolio?
A:Unrealized losses were driven by spread changes and specific reversals, including a public equity name's market price decline and a restructuring at IRG Sports.
Q:What are the motivations behind the SCP JV?
A:The SCP JV leverages Sixth Street's structured credit expertise to invest in fee-free CLO equity, providing attractive risk-return within a diversified portfolio context.
Q:What are the current spreads on new investments, and what is the outlook?
A:Spreads have been stable within a 50 basis point band in 2025 and are expected to remain stable in 2026. There is hope for a slight pickup as capital reallocates in the sector.
Q:What is the status of the restructuring for IRG Sports?
A:Sixth Street sold one operating asset above NAV and is marketing the other asset, marked to the midrange of current bids.
Q:What is the trend in software exposure over time, and what is the outlook?
A:Software exposure has marginally decreased over the past few years due to declining unit economics and increased private market capital. Future investments will focus on defensible businesses.
Q:Can BDCs issue convertible bonds, and how does Sixth Street view this option?
A:Yes, BDCs can issue convertible bonds. Sixth Street considers this option alongside other financing tools, assessing it on a quantitative basis against unsecured debt costs.
Q:How does Sixth Street plan to manage its premium to NAV advantage?
A:Sixth Street focuses on maintaining a durable business model, efficient capital use, and strong liquidity. They aim to allocate capital to opportunities that earn their cost of equity.
Q:What is the outlook for credit spreads in the software sector?
A:Credit spreads are expected to remain stable in the near term, despite recent dislocations in the software and BSL markets. Over the long term, spreads may widen as the sector reallocates capital.
Q:How long has AI risk been a part of Sixth Street's underwriting process?
A:Sixth Street has been considering AI risks and opportunities for the past three years, using insights from their platform to position their portfolio accordingly.
Q:What is the sponsor versus non-sponsor breakdown in the software space?
A:The software space likely mirrors the broader portfolio, with approximately 35% non-sponsor and 65% sponsor exposure, though recent activity has been closer to 50-50.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the question about how they plan to lock in their premium to NAV advantage, providing general comments about maintaining a durable business model and efficient capital use without specific strategies.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
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dividend investment
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TSLX Transcript
Sixth Street Specialty Lending, Inc. (TSLX) Q4 2025 Earnings Call Transcript
Unknown2-13
The earnings call summary shows a mix of positive and stable indicators, such as strong credit performance, stable spreads, and a focus on AI investments. However, there are concerns about software sector disruptions, unrealized losses, and unclear management responses, particularly regarding premium to NAV advantage. The Q&A section highlights a stable outlook but lacks strong catalysts for significant stock movement. Given the market cap of approximately $2 billion, the stock is likely to remain within a neutral range of -2% to 2% over the next two weeks.
Sixth Street Specialty Lending, Inc. (TSLX) Q3 2025 Earnings Call Transcript
Unknown11-5
The earnings call summary shows mixed results: stable credit quality and a focus on dividend coverage are positive, but a decline in total investment income and unclear guidance on private wealth expansion are concerning. The Q&A section highlights management's awareness of industry challenges and a cautious approach to new opportunities. However, the lack of clear guidance in certain areas tempers the overall sentiment. Given the market cap, the stock is likely to experience a neutral movement in the next two weeks, as the mixed signals balance out.
Sixth Street Specialty Lending, Inc. (TSLX) Q2 2025 Earnings Call Transcript
Positive8-1
The earnings call highlights strong financial metrics, including a significant increase in net asset value and total economic return, alongside improved nonaccruals and effective risk management. Although there are concerns about declining loan spreads, the company maintains a disciplined capital allocation strategy and anticipates strong demand for its investments. The Q&A session reveals management's cautious approach to diversification and risk management, which is viewed positively by analysts. Given the positive financial performance and strategic outlook, the stock price is likely to experience a positive movement over the next two weeks.
Earnings call transcript: Sixth Street Specialty Lending Q1 2025 sees EPS beat
Unknown5-1
The earnings call reveals mixed signals: decreased net income and investment income, but stable debt and potential for future distributions. Shareholder returns are maintained, but there is a request for issuing shares below net asset value. The Q&A highlights resilience to market pressures but shows negative sentiment on M&A activity and unclear responses on tariff impacts. The market cap suggests moderate sensitivity to these factors, resulting in a neutral sentiment.
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