KBRA Assigns Rating to Sixth Street Specialty Lending, Inc.'s $350 Million Senior Unsecured Notes Due 2029

Rhea-AI Summary

KBRA assigns a rating of BBB+ to Sixth Street Specialty Lending, Inc. (NYSE: TSLX) with a Stable Outlook. The company is tied to Sixth Street, a global investment firm with $75 billion of assets under management. TSLX has a $3.1 billion diversified investment portfolio, 91% of which are first lien senior secured investments, and a diversified funding structure. The company's portfolio company weighted average annual EBITDA was $69.2 million with a weighted average revenue of $209 million as of September 30, 2023. The top three sector concentrations included Internet Services (15.7%), Business Services (14.9%), and Retail & Consumer Products (10.9%). TSLX's liquidity is adequate with $981.5 million of combined cash and available committed bank lines. The company's percentage of unsecured debt to total debt is boosted by the $350 million issuance. The ratings are supported by the company's solid 14-year operating history with minimal non-accruals and a strong management team with decades of experience in middle market lending and solid risk management practices. However, the company is counterbalanced by the illiquid nature of the assets and retained earnings constraints as a Regulated Investment Company (RIC).

Insights

Credit Analyst

The recent rating assigned to Sixth Street Specialty Lending, Inc. (TSLX) by Kroll Bond Rating Agency (KBRA) reflects a solid investment grade status (BBB+) with a Stable Outlook. This is indicative of a robust credit profile, which is critical for investors assessing the risk associated with TSLX's senior unsecured notes. The rating takes into account the company's strong ties with Sixth Street, a sizable global investment firm, which provides a layer of confidence in TSLX's operational backing and strategic direction.

From a credit perspective, the company's leverage ratio of 1.15x and asset coverage of 187.3% are particularly noteworthy, as they comfortably exceed the regulatory minimum. This suggests a conservative approach to leverage, which is a positive signal for debt holders. Moreover, the portfolio composition, heavily skewed towards first lien senior secured investments, implies a preference for positions that are higher in the repayment hierarchy, thereby reducing potential credit losses in case of defaults.

The liquidity position, bolstered by a combination of cash and available committed bank lines totaling $981.5 million, provides further assurance of the company's ability to meet its short-term obligations. Additionally, the high proportion of investments at the top of the capital structure is a safeguard for unsecured noteholders, ensuring a pool of unencumbered assets that can be liquidated in a downside scenario.

Investment Analyst

The issuance of $350 million in senior unsecured notes by TSLX is a strategic move that alters the company's capital structure, increasing the percentage of unsecured debt to total debt to 76% on a pro-forma basis. This shift may be seen as an attempt to optimize the cost of capital and reflects confidence in the company's ability to service its debt without the need for collateral. The company's solid operating history and minimal non-accrual rates support this confidence.

Investors might also be interested in the sector concentration of TSLX's investments, with Internet Services, Business Services and Retail & Consumer Products being the top three. The focus on non-cyclical sectors and special situations business with high collateralization suggests a strategic effort to mitigate risk through diversification and asset-based downside protection.

The long-term growth prospects may be shaped by the company's performance in generating gross IRRs in excess of 20% on fully realized positions, which is a testament to the management team's expertise in middle market lending. However, the illiquid nature of TSLX's assets and the constraints of operating as a Regulated Investment Company could pose challenges in terms of flexibility and responsiveness to market changes.

Risk Management Expert

The Stable Outlook on TSLX's rating is underpinned by the company's disciplined risk management practices and experienced management team. A strong track record of high returns and a history of minimal non-accruals reflect the effectiveness of these practices. However, the company's resilience will be tested by potential downturns in the U.S. economy, which could impact credit metrics and trigger a reassessment of the risk profile.

Investors should note the rating sensitivities that could lead to a downgrade. These include a shift towards riskier investments or significant changes in management structure and risk management policies. The current conservative investment approach, focusing on senior secured investments and maintaining a diversified portfolio, is a key factor in the current rating and any deviation from this strategy could alter the risk assessment.

Lastly, the company's ability to co-invest with affiliates, thanks to the exemptive relief order from the SEC, provides an additional layer of flexibility in investment decisions, which could be beneficial in navigating market conditions while adhering to the company's risk appetite.

NEW YORK--(BUSINESS WIRE)-- KBRA assigns a rating of BBB+ to Sixth Street Specialty Lending, Inc.’s (NYSE: TSLX or “the company”) $350 million 6.125% senior unsecured notes due March 1, 2029. The Outlook for the rating is Stable.

Key Credit Considerations

The rating and Stable Outlook reflect the company’s ties to Sixth Street, a global investment firm with ~$75 billion of assets under management, a $3.1 billion diversified investment portfolio comprised largely of first lien senior secured investments (91%) with a non-cyclical sector focus, appropriate leverage of 1.15x with regulatory asset coverage of 187.3% (150% regulatory minimum), and a diversified funding structure that includes senior unsecured notes and secured bank lines. For companies that fall within TSLX's typical borrower profile (92.8%), the company’s portfolio company weighted average annual EBITDA was $69.2 million and had a weighted average revenue of $209 million as of September 30, 2023. The top three sector concentrations included Internet Services (15.7%), Business Services (14.9%), and Retail & Consumer Products (10.9%), with the majority of Retail & Consumer Products falling under the company’s special situations business which is asset based (high collateralization with downside protection) while the strategy has generated in excess of 20% gross IRRs on fully realized positions.

TSLX’s liquidity is adequate with $981.5 million of combined cash and available committed bank lines 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 $350 million issuance, which on a pro-forma basis comprises 76% of total debt compared to 56% as of September 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 2023. Furthermore, the ratings are supported by the company’s solid 14-year operating history with minimal non-accruals, which include only one portfolio company that accounted for 0.9% and 0.7% at cost and fair value of total investments, respectively, as of September 30, 2023. A strong management team with decades of experience in middle market lending and solid risk management practices has 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 action.

To access rating and relevant documents, click here.

Methodologies

Financial Institutions: Finance Company Global Rating Methodology
ESG Global Rating Methodology

Disclosures

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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240109188542/en/

Analytical

Teri Seelig, Managing Director (Lead Analyst)

+1 646-731-2386

teri.seelig@kbra.com

Kevin Kent, Director

+1 301-960-7045

kevin.kent@kbra.com

Joe Scott, Senior Managing Director (Rating Committee Chair)

+1 646-731-2438

joe.scott@kbra.com

Business Development

Constantine Schidlovsky, Senior Director

+1 646-731-1338

constantine.schidlovsky@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What rating did KBRA assign to Sixth Street Specialty Lending, Inc.?

KBRA assigned a rating of BBB+ to Sixth Street Specialty Lending, Inc. (NYSE: TSLX) with a Stable Outlook.

What is the company's ties?

The company is tied to Sixth Street, a global investment firm with $75 billion of assets under management.

What is the company's portfolio composition?

TSLX has a $3.1 billion diversified investment portfolio, 91% of which are first lien senior secured investments.

What were the company's portfolio company weighted average annual EBITDA and revenue as of September 30, 2023?

The company's portfolio company weighted average annual EBITDA was $69.2 million with a weighted average revenue of $209 million as of September 30, 2023.

What are the company's top three sector concentrations?

The top three sector concentrations included Internet Services (15.7%), Business Services (14.9%), and Retail & Consumer Products (10.9%).

What is the company's liquidity?

TSLX's liquidity is adequate with $981.5 million of combined cash and available committed bank lines.

What is the company's percentage of unsecured debt to total debt?

The company's percentage of unsecured debt to total debt is boosted by the $350 million issuance.

What supports the ratings?

The ratings are supported by the company's solid 14-year operating history with minimal non-accruals and a strong management team with decades of experience in middle market lending and solid risk management practices.

What counterbalances the company's strengths?

However, the company is counterbalanced by the illiquid nature of the assets and retained earnings constraints as a Regulated Investment Company (RIC).