Sixth Street's Q3 2025: Contradictions Emerge on Credit Quality, Spreads, and Strategic Focus

Business Commentary:

• Leadership Transition:
• Sixth Street Specialty Lending announced Bo Stanley as the new Co-CEO, effective immediately, following years of collaborative leadership with Joshua Easterly.

• The transition aims to preserve the company's culture and maintain its investor-focused mentality, with Joshua Easterly stepping down from the CEO role by year-end.

• Strong Financial Performance:

• The company reported a third-quarter adjusted net investment income of $0.53 per share, with an annualized return on equity of 12.3%.

• This performance was attributed to the company's disciplined investment strategy and thematic sourcing, which includes investments in areas like structured credit and ABL financing.

  

• Credit and Market Dynamics:

• The company acknowledged the ongoing supply-demand imbalance in the private lending market, with tight spreads and elevated competition, particularly in refinancing activities.

• Despite these conditions, TSLX continues to focus on thematic investments and off-the-run transactions, leveraging industry expertise for differentiated opportunities.

• Investments and Portfolio Strategy:

• TSLX executed total commitments of $388 million and total fundings of $352 million across four new investments and five upsizes to existing portfolio companies.

• The company's thematic sourcing strategy is highlighted by its role as an administrative agent in the $2.5 billion term loan to support Walgreens' U.S. retail business.

• Transparency and Industry Concerns:

• The company emphasized the importance of transparency in the non-traded perpetually offered space to address misaligned supply and demand of capital in the sector.
• This is aimed at constraining further capital raising and improving the alignment of investor expectations with the underlying assets.
  

Contradiction Point 1

Credit Quality and Industry Concerns

It involves differing perspectives on the overall credit quality and concerns within the BDC industry, which could impact investor confidence and regulatory oversight.

Can you address concerns about credit quality in the BDC industry and whether there are specific areas of weakness? - Melissa Waddell(JPMorgan)

2025Q3: Credit issues generally seem to be behind the industry. The idiosyncratic issues that have surfaced are more related to the broadly syndicated loan market and bank balance sheets. Private credit, with its idiosyncratic risk focus, has shown resilience. - Joshua Easterly(CEO)

Why do you think credit issues are behind us, and is this idiosyncratic? - Finian Patrick O'Shea(Wells Fargo Securities)

2025Q2: The lag in credit issues due to a shock in the rate hiking cycle in mid-2022 is now showing up. Most credit issues are believed to have unfolded, and the focus is now shifting to dividend coverage. Idiosyncratic credit issues like in the Lithium case were not related to broad factors but specific business model changes. - Joshua Easterly(CEO)

Contradiction Point 2

Spreads and Macroeconomic Factors

It involves differing views on the impact of macroeconomic factors on spreads, which is crucial for investment strategies and risk management.

Have spreads widened due to macroeconomic factors, and has the government shutdown affected the portfolio? - Mickey Schlien(Unidentified Company)

2025Q3: Spreads have not materially widened; minor changes are due to flows. The government shutdown has not had a material impact on the business. - Joshua Easterly(CEO)

What impact do nontraded BDCs and private credit funds have on narrowing loan spreads, and do you expect debt liability spreads to compress? - Mickey Schleien(Unidentified Company)

2025Q2: The growth in nontraded BDCs and interval funds impacts spreads due to increased competition and backward-looking focus on LTM metrics. However, Sixth Street expects the trend to change as investors realize that forward-looking returns are lower. - Joshua Easterly(CEO)

Contradiction Point 3

Spread Widening and Market Conditions

It involves differing perspectives on the reason behind minor changes in spreads, impacting market perceptions and investment strategies.

Have macro factors caused spreads to widen, and did the government shutdown affect the portfolio? - Mickey Schlien (Clearstreet LLC)

2025Q3: Spreads have not materially widened; minor changes are due to flows. - Joshua Easterly(CEO)

How likely are spreads to remain tight if activity rebounds? - Robert Dodd (Raymond James)

2024Q4: The market mechanism should provide feedback on spreads as the front book converts to the back book. Capital misallocation may adjust the cost curve, potentially stabilizing spreads. - Joshua Easterly(CEO)

Contradiction Point 4

Origination Outlook and Strategic Focus

It reflects differing views on the company's strategic focus and origination outlook, which affects investment decisions and expectations.

How is Sixth Street planning to expand into the private wealth channel, and what opportunities and challenges exist? - Brian McKenna (Citizens)

2025Q3: Thoughts are being debated, but there is no conclusion yet. If we do enter this space, it would be to provide institutional experience to small investors, similar to the democratization of alts. The key challenge is to deliver this experience while maintaining the quality and return standards. - Joshua Easterly(CEO)

Is there interest in expanding the TSLX BDC as the platform grows? - Mickey Schleien (Ladenburg)

2024Q4: The model is investor-first, and the focus is on providing returns to shareholders. The platform will grow direct lending based on opportunity, but the core of the BDC is investor-focused. - Joshua Easterly(CEO)

Contradiction Point 5

Credit Quality Concerns and Market Resilience

It highlights differing perspectives on the credit quality concerns within the BDC industry and the resilience of private credit investments, which are crucial for investor confidence.

Can you assess the credit quality concerns in the BDC industry and identify specific areas of weakness? - Melissa Waddell(JPMorgan)

2025Q3: Credit issues generally seem to be behind the industry. The idiosyncratic issues that have surfaced are more related to the broadly syndicated loan market and bank balance sheets. Private credit, with its idiosyncratic risk focus, has shown resilience. - Joshua Easterly(CEO)

How are you pricing risk given increased market uncertainty and volatility? - Brian McKenna(Citizens)

2025Q1: We are deep fundamental investors with a clear view of our cost curve and required equity returns. This allows us to price risk effectively even in volatile moments. Our platform's diversified asset classes and large platforms enable us to see relative value in different areas. - Bo Stanley(President)