Sixth Street Specialty Lending: A Steady Income Play Amid Rising Rates

As the Federal Reserve maintains its "higher-for-longer" rate stance, income-focused investors are scrutinizing fixed-income alternatives for resilience. Sixth Street Specialty Lending Inc. (NYSE: TSLX), a middle-market lender with a fortress-like floating-rate portfolio, offers a compelling case study. With its Q2 2025 earnings conference call on July 31, investors will get a critical update on how the company is navigating rising rates, sustaining dividends, and maintaining its edge in the $3.3 billion portfolio.

Portfolio Resilience: Floating Rates as an Inflation Hedge

TSLX's portfolio is a masterclass in rate-proofing. As of June 2024, 99.6% of its debt investments were floating-rate instruments, with embedded hedges to mitigate inflation risk. This structure ensures that as the Fed raises rates, interest income rises in tandem, shielding net investment income (NII) from compression. Contrast this with peers that hold large fixed-rate exposures; TSLX's model is designed to thrive in environments where rates climb.

The company's $10.4 billion in total originations since 2011—spread across 105 portfolio companies—also underscores its deep middle-market expertise. Borrowers in sectors like software (e.g., Merit Software Holdings), retail ($0.99 Stores), and cybersecurity (ReliaQuest) benefit from TSLX's tailored financing solutions. Importantly, credit quality remains robust, with non-accruals at just 1.1% of fair value and improving risk ratings. This suggests borrowers are managing debt responsibly despite elevated rates.

Dividend Sustainability: A Key Focus for Q3

TSLX's dividend history has been a hallmark of its BDC model. Historically, it has paid a base dividend of $0.46 per share quarterly, supplemented by occasional extras. However, the Q2 2025 base dividend dropped to $0.046 per share, raising questions about sustainability. While this appears alarming, it's critical to parse the context:

• The reduction likely reflects a strategic shift toward capital preservation amid uncertain macro conditions.
• TSLX's net asset value (NAV) remains stable, with pro forma NAV after dividends at $17.13 per share as of Q2 2024.
• Interest income from floating rates should rebound in 2025 as rate hikes fully flow through to loans.

The July 31 conference call will clarify whether the dividend cut is temporary or a new policy. Investors should listen closely to management's guidance on NII trends and the balance between payouts and reinvestment.

Why TSLX Outperforms Peers: The Sixth Street Edge

TSLX's BDC structure and Sixth Street affiliation give it an edge. As a business development company, it can leverage high leverage (targeted at 1.0–1.25x debt-to-equity) to amplify returns, while Sixth Street's $110 billion platform provides deal flow and due diligence support. This is especially valuable in the middle-market, where relationship-driven lending is key.

A comparison would likely show TSLX's dividends as more stable despite market volatility, thanks to its floating-rate buffer and disciplined underwriting.

Investment Thesis: Buy Before the Call, Watch for NII Growth

The July 31 call is a must-attend event. Key metrics to watch:
1. NII per share: Will it hold steady or grow as rate hikes impact loans?
2. Middle-market demand: Are borrowers still seeking capital for growth, or is deal flow slowing?
3. Dividend guidance: Will management signal a return to higher payouts or a new lower run rate?

If NII holds and management reaffirms its income policy, TSLX could surge. Even if dividends stay muted, its 8.5% yield at current prices offers a solid income floor.

Risks to Consider

• Credit stress: Prolonged high rates could strain borrowers, though TSLX's portfolio shows minimal defaults.
• Spread compression: Peers are tightening loan terms, which might reduce TSLX's margins.

Final Take

TSLX's floating-rate moat and Sixth Street's resources position it to outperform in 2025. While the dividend cut is a red flag, it may reflect prudent capital management rather than distress. Investors seeking income should consider a position ahead of the call, with a focus on the $16–17 price range to capture upside. The middle-market's resilience and TSLX's structural advantages make this a top income play for the second half of 2025.

Actionable Advice:
- Buy: Below $16.50 for a 9% yield, with upside to $18 post-earnings.
- Hold: Between $16.50–17.50, awaiting clarity on dividends.
- Sell: Above $18 unless NII growth is confirmed.

Stay tuned for the July 31 call—it could be the catalyst for TSLX to reclaim its status as a top-tier BDC income stock.