Sixth Street Specialty Lending Inc
NYSE:TSLX
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
19.79
22.26
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Sixth Street Specialty Lending Inc
You don't have any saved screeners yet
Good morning, and welcome to TPG Specialty Lending, Inc.'s March 31, 2020 Quarterly Earnings Conference Call. 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 the statements of historical facts made during this call 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 result of a number of factors, including those described from time to time in TPG Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.
Yesterday after the market closed, the company issued its earnings press release for the first quarter ended March 31, 2020, and posted a presentation to the Investor Resources section of its website, www.tpgspecialtylending.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. TPG Specialty Lending, Inc.'s earnings release is also available on the company's website under the Investor Resources section. Unless otherwise noted, all performance figures mentioned in today's prepared remarks are as of and for the first quarter ended March 31, 2020. [Operator Instructions]
I will now turn the call over to Josh Easterly, Chief Executive Officer of TPG Specialty Lending, Inc.
Thank you. Good morning, everyone, and thank you for joining us. With me today is my partner and our President, Bo Stanley; and our CFO, Ian Simmonds. First and foremost, all of us at TSLX and our broader Sixth Street organization hope that you and your loved level ones are safe and healthy. We particularly want to express our gratitude to all the health care professionals, first responders and essential business workers for serving our communities during this challenging time.
In this environment, one of our top priorities has been the health and well-being of our people, which in turn allows us to be to best protect and serve our shareholders' capital. Post-implementation of our business continuity plan in early March, we and our broader Sixth Street platform have been operating at full capacity with nearly all of our global team members working in moment.
Our organization has quickly adapted to this new environment, maintaining a high level of collaboration and communication, both internally and externally that is essential to the success of our business. Over the past few months, we have proactively issued public letters to our stakeholders with real-time updates on our business, balance sheet and preliminary financial results. We hope you found them to be helpful and consistent with our culture and transparency and maintain an ongoing dialogue with our stakeholders.
While no one could have predicted the timing and nature of events leading to this sudden economic downturn, we believe we are entering the next phase from a position of strength, given the actions we have taken over the past few years. As Bo and Ian will each discuss later in more detail, our forward planning and risk management framework resulted in what we believe to be a defensive portfolio and robust liquidity, funding and capital position that we have today.
In the immediate days and weeks following the market unraveled, we shifted our focus to building out a daily roll forward of our balance sheet, capital and liquidity positions as part of our risk management discipline in this environment. We believe only with a clear understanding of these in constraints, are we able to make sound capital allocation decisions on behalf of our stakeholders. I'm sure with hindsight, which is always 2020, we would have done things differently. But those insights will provide us valuable earnings that will benefit us and our shareholders.
With that context, let me turn to our first quarter results, which are consistent with the preliminary earnings results we provided on April 16. After the market closed yesterday, we reported first quarter net investment income per share of $0.51, which corresponds to an annualized return on equity of 12% and a net loss per share of $0.80. Our net loss this quarter was driven by unrealized losses as we reflected the impact of credit spreads widening on the valuation of our portfolio.
Note that this practice follows the fair valuation of security requirements for BDCs under the '40 act, which in my which in our mind includes incorporating markets spreads and for valuation of portfolio of securities and is therefore, something we expect all BDC peers will be doing as well. Since March 31, LCD first lien and second lien spreads have tightened by 108 and 91 basis points, respectively, retracing 28% of the Q1 spread widening for first lien and 13% for second lien. Assuming this holds an absent permanent credit losses related to the Q1 unrealized losses from the spread widening, we would expect to see reversals of these unrealized losses over time, effectively pushing earnings into future periods, holding all else equal.
In Q1, our net asset value per share declined by approximately 7.1% from $16.77, which includes the impact of the Q4 supplemental dividend to $15.57. Inclusive of the impact of the $0.5 aggregate special dividends that were previously declared in payable in Q2, pro forma net asset value per share at quarter end was $15.07.
As mentioned, the primary driver of the decline was $1.21 per share of unrealized losses from the impact of credit spread widening on the valuation of our portfolio. Ian will walk through the other drivers for the scores and asset value bridge in more detail, but I'd like to reiterate our process in arriving at this quarter's portfolio mark given the importance of the risk management tool for our business. As we shared in detail in our recent letters, our valuation framework begins by incorporating quarterly market spread movements into the valuation of all of our investments.
The next step overlays additional adjustments to the valuation for each investment as applicable reflecting the respective sector, the existence of a LIBOR floor, expected weighted average life and other bar-specific factors such as over or underperformance.
Let me walk through each of these in more detail. And the first and most significant factor mitigating the impact of the market spread movement is the relative short weighted average life of our portfolio. At quarter end, compared to the approximate five-year weighted average remaining contractual life of the broadly syndicated loan market, our portfolio's weighted average remaining contractual life was 35% shorter at approximately 3.2 years.
The features we underwrite into our loan agreements, such as approximately two financial covenants per loan agreement on a weighted average basis, effective volume control of 83% of our debt investments and other indebtedness and restricted payment limitations have the effect of making the actual life of our investments even shorter. By contrast, approximately 80% of the broadly syndicated market is covenant-light, along with greater indebtedness and restricted payment flexibility in underlying loan agreements.
Note that approximately 8% of our portfolio this quarter, namely Ferrellgas and Nektar had a very short weighted average life, given either contractual maturity or visibility on expected payoff post quarter end. All these factors combined resulting in a weighted average life of our portfolio that was shorter than 3.2 years remaining contractual life at March 31, consistent with our expectations, Ferrell and Nektar were both fully repaid post quarter end.
On to sector mix. At quarter end, approximately 70% of our portfolios were in less credit spread sensitive sectors of the overall loan market. Therefore, by incorporating sector adjustments to the market spreads that we applied to each of our investments, this mitigated the overall decline in the fair value of our portfolio. Finally, we have LIBOR floors across 95.1% of our debt investments, which averaged 1.2% at quarter end compared to a floor of approximately 35 basis points for the broadly syndicated market.
As discussed, these floors also help us allow us to mitigate, to a degree, the impact of spread widening on the fair value of our investments, reflecting on our valuation process, which is the same it has been since our inception. We believe that we have in place a framework that allows us to incorporate market signals regarding risks and opportunities in our portfolio, which help us guide overall investment and risk management decision-making process. Moving back to this quarter's highlights.
Yesterday, our Board declared the second quarter base dividend of $0.41 per share to shareholders of record as of June 15, payable July 15. Given the decline in net asset value this quarter, in accordance with the existing mechanics of our dividend framework, no supplemental dividend was declared related to Q1 earnings. This was determined by the NAV limiter on our supplemental dividend formula, which allows for no more than $0.15 decline in net asset value per share over the current and preceding quarter, inclusive of the impact of any supplemental or special dividend.
As it relates to our base dividend, which we increased at quarterly level from $0.39 to $0.41 per share at the beginning of this year, we determined this new levels by stress testing the earnings power of our portfolio across a variety of economic and operating scenarios. We do this because we do have base dividend as ongoing cash liability in a world that can shift sometimes unpredictably as it did this past March.
Therefore, we have a strong level of confidence that our base dividend can be supported by the core lease type of a portfolio in the near to medium term. And we currently have no plans to change our previously articulated dividend framework.
With that, I'd like to turn the call over to Bo to walk through our portfolio activities.
Thanks, Josh. Given the rapid market downturn in March and low visibility surrounding the duration of the economic shutdown, middle market M&A activity has since come to a halt. In the liquid loan markets, there was significant volatility during March as retail loan funds looked to liquidate assets in order to meet daily redemption requests. This supply surplus drove significant price declines across both higher quality and low-quality credits and resulted in the steepest monthly price decline in leveraged loan markets since the 2008, 2009 financial crisis.
Against this backdrop, our Q1 originations activity was light as expected, with $134 million of commitments and $80 million of fundings across three new and four existing portfolio companies. Of the three new investments, which comprise 88% of the fundings this quarter, two were completed in January prior to the market turbulence. The other new investment was Vertafore, a small opportunistic secondary market purchase that we made in late March at a price of $78 that is now trading around $91.
Similar to the market volatility we experienced in late 2015 to early 2016, we believe there will be outsized risk return opportunities with respect to the secondary markets and companies and sectors where we have a differentiated view. You may recall that following the 2015, 2016 period, we had approximately $260 million of liquid debt and holdings in our portfolio as we purchased certain loans in the secondary markets at a weighted average price in the high 80s and rotated out of them as they pull back to par.
Different from the 2015, 2016 period, we think the opportunity set for both opportunistic liquid investments and our direct origination strategy in this downturn will be longer term in nature given the amount of capital and economic destruction this pandemic will ultimately inflect. We believe there will be significant need for us to provide capital to companies and management teams as the full impact of COVID-19 rolls through different parts of the U.S. economy at variant speeds and time horizons.
Based on our observations, the leveraged loan market is currently only open for select issuers. And most of our BDC peers have limited ability to deploy capital into new investments. Given our strong liquidity and capital position combined with the significant dry powder across our Sixth Street platform, we are very optimistic about our ability to create highly attractive risk adjusted returns for our shareholders in the periods ahead.
Moving to this quarter's activity. There were $212 million of paydowns across four full and two partial realizations. This combined with our Q1 fundings, resulted in net portfolio repayments of $132 million for the quarter. Our repayments in Q1 included our first lien loan for Curriculum Associates at a price of $103, our ABL FILO term loan for Sears at a blended price of $101.3, and the majority of our ABL DIP loan for Forever 21 along with the recognition of our contractual economics.
Activity-related income for these repayments supported the overearning of our base dividend this quarter. As Josh mentioned, post quarter end, we received the full repayment of our $85 million principal value investment in Ferrellgas at a price of $106.1 compared to a fair value mark of $104.4 at March 31. Our $75 million principal value investment in Nektar was repaid at par.
This quarter, the weighted average total yield on our debt and income-producing securities at amortized cost was 9.9%, a decrease of approximately 80 basis points from the prior quarter. Approximately 50 basis points of this was related to the movement in rates during the quarter as central banks lowered target interest rates to near 0 to help stem the financial impact of COVID-19. Quarter-over-quarter, the 3-month LIBOR decreased by 46 basis points from 1.91% to 1.45% and the 1-month LIBOR decreased by 77 basis points from 1.76% to 0.99%.
The remaining 30 points of downward impact to this quarter's portfolio yield was primarily driven by new versus exited investments. While this quarter's weighted average total yield on new investments at amortized cost was relatively robust at 11.7% supported by higher weighted average spread, this was offset by effective yield of 12.4% on exited investments due to Forever 21. Excluding Forever 21, yield on exited investments and amortized cost would have been 9.8%.
I wanted to take some time to review our portfolio's retail ABL and energy exposures. Quarter-over-quarter, our retail ABL exposure decreased from 13.8% to 9.1% on the portfolio on a fair value basis due to a full repayment of Sears and a partial paydown of Forever 21. 44% of our retail ABL exposure at March 31 as represented by 99 Cents, Save A Lot and Staples are generally deemed as essential businesses given the nature of the products they provide, and therefore, were performing well in this environment.
Neiman Marcus represents 3.5% of the portfolio on March 31, continues to face challenging operating environment, which has been exacerbated by the economic shutdown. Challenging operating scenarios were contemplated in our underwriting process and our base case going forward is that we will continue to be well secured and receive current interest on our principal position.
As for energy, our exposure at quarter end was limited to 3.9% of the portfolio at fair value on March 31. Our largest energy position Verdad Resources, representing 1.9% of the portfolio at fair value was approximately 50% of our total energy exposure. It's a first lien reserve-based loan and an upstream company with significantly hedged production volumes through 2023 and hedged collateral value.
Our second largest energy position, Energy Alloys represented 0.9% of the portfolio at fair value is an asset-based loan secured by working capital collateral, which we believe provides more downside protection than the typical energy services loan. Mississippi Resources representing 0.1% of the portfolio at quarter end was our only investment on nonaccrual status.
While the company made its regularly scheduled cash interest payment, during the quarter, we elected to apply it to the loan principle instead of recognizing it as income. For reference, Mississippi Resources contributed approximately $0.02 per share or 1.0% to our net investment income in 2019.
Moving on to our overall portfolio composition and credit stats. We believe our portfolio continues to be defensively positioned with approximately 97% of our portfolio on a fair value basis comprised of first lien loans at quarter end. We continue to have limited cyclical exposure at 2.8% of the portfolio on a fair value basis, which we classify based on end markets and excludes our retail ABL and energy investments that we just discussed.
Our portfolio's top industry exposures were to business services at 20% of the portfolio at fair value followed by financial services and health care at approximately 16% and 11% of the portfolio at fair value, respectively. We'd like to reiterate that our financial services portfolio companies are primarily B2B integrated software payments businesses with limited financial leverage and underlying bank regulatory risk. And our health care portfolio companies are primarily information technology providers with no direct reimbursement risk.
Given our efforts in derisking the portfolio over the past few years and based on the 12/31/2019 financial results of our borrowers, we feel that the credit profile of our portfolio was in good shape headed into this downturn. At quarter end across our core portfolio companies, our average net attachment point was 0.3 times. Our average last dollar leverage was 4.1 times. And our average interest coverage ratio was 3.2 times.
To date, based on our ongoing engagement with our borrowers, we do not expect any defaults on debt service obligations in the near term. But we do expect an increase in amendment activity in order to provide our borrowers with additional flexibility on certain covenants. Until there is visibility on when the shutdown will be lifted, we cannot pinpoint with a strong level of certainty what the full impact of COVID-19 will have to our borrowers.
In the meantime, we continue to have frequent dialogue with C-suite executives to proactively identify and manage risk as well as be solution providers in the challenging environment. We believe our long-standing practice of conservative late cycle portfolio construction and high underwriting standards have positioned us well to navigate the period ahead.
With that, I'd like to turn it over to Ian.
Thank you, Bo. I'll begin with an overview of our balance sheet. Given net repayment activity and the impact of valuation marks on our portfolio this quarter, total investments at fair value decreased from $2.25 billion to $2.05 billion. Total principal amount of debt outstanding was $987 million, and net assets were $1.04 billion or $15.57 per share, which is prior to the $0.50 per share of aggregate special dividends that will be paid during Q2.
Our average debt-to-equity ratio was 0.99 x, and our ending debt-to-equity ratio was 0.96 times, down from one times in the prior quarter. At quarter end, we had meaningful cushions over all financial covenant thresholds under our revolving credit facility.
Before turning specifically to our results, I would like to reiterate the strength of our liquidity, funding profile and capital position. To review a concept shared in our recent letter, we think about liquidity as the sum of our cash and freely accessible committed credits that together are available to fund our operations and make investments. Note that unlike typical corporate issuers, BDCs have limited ability to create liquidity from cash flow from operations given RIC distribution requirements.
At quarter end, we had $1 billion of undrawn capacity on our revolving credit facility against only $66 million of unfunded portfolio company commitments available to be drawn based on contractual requirements in the underlying loan agreement. As of today, given the net repayment activity we've experienced quarter-to-date, our liquidity stands at $1.08 billion with an estimated $61 million of unfunded portfolio company commitments available to be drawn. And our leverage is approximately 0.86 times.
We also think about our liquidity in the context of our ability to service our liabilities in future periods across a variety of operating environments. This has informed our objective to maintain a diverse and flexible funding profile. We do this by extending the maturity of our five-year revolving credit facility every 12 to 15 months, accessing funding through the unsecured markets and creating staggered maturities on our debt obligations.
As a reminder, in January, we upsized the commitments and extended the maturity of our revolving credit facility and opportunistically added $50 million to our existing 2024 unsecured notes. As a result, we feel very good about our liquidity and funding position.
At quarter end, our funding mix was comprised of approximately 68% unsecured and 32% secured debt, and the average remaining life of our investments funded with debt was approximately 2.3 years compared to a weighted average remaining maturity on our debt commitments of approximately 4.4 years. Our earliest debt maturity is more than two years away in August 2022 and relatively small at $172.5 million.
On the capital side, we have long been preparing for potential scenarios where exogenous shocks could impact our liquidity needs and our view of expected losses across our portfolio. We designed our financial and capital allocation policy specifically to preserve our capital flexibility in potential periods of volatility.
Our target leverage range of 0.9 times to 1.25 times and is set well below the regulatory leverage limit of two times, and our current leverage of approximately 0.86 times provides us with ample cushion to absorb potential losses as well as to capitalize on attractive investment opportunities for our shareholders. Likewise, our dividend framework is centered on the sustainability of our base dividend via the core earnings power of our portfolio across varying operating scenarios.
This March, purchases of our stock were triggered under our 10b5-1 program, totaling approximately 207,000 shares at an average price of $14.15. Given the significant market volatility, lag in the timing of reported net asset value and uncertain impact of macro events on the valuation of our portfolio, we took the decision to temporarily suspend purchases until we have greater visibility on the current net asset value of our portfolio and the liquidity needs of our existing borrowers.
This decision is consistent with our objectives of allocating capital to accretive opportunities for our shareholders as well as preserving our capital flexibility in volatile operating environment. Yesterday, upon the approval and release of our financial results, our Board reauthorized our 10b5-1 stock repurchase program.
Turning to our presentation materials. slide eight is the NAV bridge for the quarter. As Josh mentioned, the impact of credit spread widening on the valuation of our portfolio was by far the most significant driver of NAV movement this quarter with unrealized losses of $1.21 per share. Again, absent permanent credit losses related to these unrealized losses, we would expect to see a reversal of these unrealized losses over time as our investments approach their respective maturities.
Walking through the other drivers of NAV movement this quarter, we added $0.51 per share from net investment income against a base dividend of $0.41 per share. There was a $0.10 per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognized the gains into this quarter's net investment income. There were $0.14 per share of net mark-to-market gains on the interest rate swaps on our fixed rate securities due to movements in the forward LIBOR curve during the quarter.
Other changes in net realized and unrealized losses resulted in an $0.11 per share impact to this quarter's NAV. This was primarily due to our investment in Mississippi Resources. Note that there was a positive $0.01 per share impact to NAV from the investments we made in our stock during March. Inclusive of the impact of the $0.50 per share aggregate special dividends that were previously declared and payable in Q2, pro forma NAV per share at quarter end was $15.07.
Moving to the income statement on slide nine. Total investment income was $66.3 million, relatively stable compared to $66.5 million in the prior quarter. Breaking this down, interest and dividend income was $55.9 million, down $1.8 million from the prior quarter primarily due to the decrease in effective LIBOR across our debt portfolio. Other fees, which consist of prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns was elevated this quarter at $7.6 million compared to $1.8 million in the prior quarter.
This was primarily due to the prepayment activity Bo mentioned. Other income this quarter was $2.8 million compared to $7.1 million in the prior quarter. Net expenses decreased slightly from $31.9 to $31.6 million quarter-over-quarter primarily driven by lower interest expense from a lower effective LIBOR on our debt outstanding.
Given the approximate one quarter timing lag on the LIBOR reset date on our interest rate swaps, the approximate 20 basis point decline on our weighted average cost of debt outstanding this quarter was consistent with the decline in LIBOR during Q4 2019. Therefore, given this timing lag and the movement in LIBOR during Q1, we would expect to see an even more meaningful benefit to our cost of debt outstanding in Q2, holding our funding mix and leverage constant.
If we were to apply the spot LIBOR today, which is below our average floors, on our Q1 asset yields and overlay our expected Q2 weighted average cost of debt outstanding, we would expect to see a net interest margin expansion of approximately 55 basis points from Q1. Further, if we were to reset the effective LIBOR on our debt outstanding as of today, we would expect over 100 basis points of net interest margin expansion from Q1, holding all else equal.
At quarter end, 100% of our debt liabilities were effectively floating rate obligations, given the interest rate swaps we implemented at issuance on our fixed-rate debt. We believe our risk management policy is matching the interest rate exposures of our assets and liabilities in combination with our practice of underwriting LIBOR floors into our assets will provide meaningful downside earnings protection in what we expect to be an extended low interest rate environment.
As of today, LIBOR has fallen below the average LIBOR floor of our portfolio. And based on the current three-month LIBOR curve, all else equal, we would expect an estimated net interest margin expansion a year from now of approximately $0.09 per share. Let me wrap up with our current thinking on our ROEs. On our last call in February, we communicated a year 2020 ROE target of 11% to 12%, which implied a full year net investment income per share of $1.84 to $2.01 based on Q4 2019 pro forma NAV of $16.77.
In the near term, we expect economic uncertainty to persist, which will likely result in a low interest rate, higher credit spread environment. As a result, we would expect the spread-related driver of repayments to moderate, which will allow us to maintain our balance sheet leverage and support our ROEs through interest and dividend income. As Bo mentioned, we think the prospective opportunity set for us to generate outsized risk returns will be longer term in nature, given the unprecedented economic destruction of COVID.
In light of these updated views, we would expect our full year 2020 net investment income per share to be closer to the lower end of our previously communicated range.
With that, I'd like to turn it back to Josh for concluding remarks.
Thank you, Ian. Before moving to Q&A, there are a few housekeeping items I'd like to wrap up on. On May 1, our broader platform, Sixth Street Partners, completed our previously announced agreement with TPG to operate as independent unaffiliated businesses. As you know, Sixth Street has already been operating autonomously so it's been business as usual for us.
Sixth Street today has over $34 billion in assets under management with more than 275 team members in nine locations around the world. With our platform's diversified investment platforms and flexible long-term capital base, we believe we are well positioned to serve our LPs and stakeholders' capital in the same prudent and creative manner that's been the hallmark of our partner group for over the last 20 years. Again, Sixth Street will continue to operate the same partners, the same investment strategy and same decision-making process.
Likewise, TSLX will continue to be led by the same dedicated management personnel. And our stakeholders will continue to benefit from the same sourcing, underwriting and operational capabilities on the Sixth Street platform that they have since our inception. As part of the evolution of our platform, we will be changing our name from TPG Specialty Lending to Sixth Street Specialty Lending, Inc. Our ticker symbol on the New York Stock Exchange will continue to be TSLX. The legal process for our name change is expected to be completed in June, upon which we will make an official announcement.
Moving on to our upcoming annual and special meeting of TSLX shareholders that will be held on May 28. Consistent with the past three years, we will be seeking shareholder approval to issue shares below net asset value effective for the upcoming 12 months. To be clear, we have no plans to issue equity under the authority and dilute our existing shareholders.
However, as stewards of our shareholders' capital, we believe it's our responsibility to secure all tools available for financial flexibility and value creation in present market volatility. This is a responsibility that we take seriously with all capital allocation decisions we make on behalf of our stakeholders. We urge our shareholders to please reach out to us with any questions or concerns.
Finally, on behalf of everyone on our team, we would like to thank all of our stakeholders for their engagement over the past few months. As we collectively navigate these historical and uncertain times, we have been humbled by our stakeholders and confidence in our ability to create long-term value in this economic disruption. Our current view is that the market is underestimating the full long-term economic disruption of COVID-19 given the widening gap between asset prices and underlying fundamentals of the real economy.
We're confident we'll be that there will be opportunities that generate significantly high risk-adjusted returns for our shareholders, but we are being patient and prudent to ensure that we have the capital to deploy at the appropriate time.
With that, I'd like to thank you for your continued interest and for your time today. Operator, please open line for questions.
[Operator Instructions] Our first question comes from Rick Shane of JPMorgan.
Hey guys, thanks for taking my questions and I hope everybody as well. It's all sort of tied together. When we think about the way that this is going to play out, we think it's going to play out in three stages. There was initially the liquidity stage that we're we seem to be emerging from. The second is the transition phase where we are right now. And I think the real key is going to be how sponsors behave as buffers between the short-term slowdown and the longer-term impact?
And then finally, we'll move into sort of the cards on the table, what plays out within portfolios and within companies. I'm curious, in your conversations with sponsors right now, what types of behaviors you're seeing. And if you could specifically talk about, you have a couple of significant maturities this year, MedeAnalytics and Nektar Therapeutics. I know you can't necessarily speak specifically to those credits, but conversations around near-term maturities and the risk of maturity defaults.
Sure. Rick, hopefully, you and your family are safe. And I apologize in advance I can't control the lawnmowing schedule in the suburbs. So if you hear the noise in the background, I apologize. So on Nektar, in our prepared remarks, I don't know if you caught it, it's actually paid off at previous to quarter end. I mean, after quarter end, so paid off in early April.
On Mede, that company is performing very well. We had proactively extended the maturity for Mede after quarter end as that company is performing well. And obviously, the sponsors view, it's not the best time to sell the business. And so as it relates to those two near-term maturities, one is fully paid in cash and one we extended given the performance of the business. And Bo, anything to add on those 2?
No, nothing to add. I mean, MedeAnalytics, we actually started that process pre-COVID. The business is performing well. It's HCIT business that has actually seen some benefits in this market. And we're at a really nice leverage position. So we extended the maturity there.
On generally, look, for us, it's all about being a having transparent and constructive dialogues with both management teams and sponsors. We're having those dialogues on a regular basis, most of the time on a weekly basis. We have asked most of our portfolio we've asked all of our portfolio companies to provide 13-week cash flow and try to be a partner with them and giving them tools to think about how to operate in this environment, which is measuring KPIs and measuring DSOs and DPOs and think about what can happen to cash and liquidity. And so those have been very constructive dialogues.
At some point, the rubber will hit the road if the capital if there needs to have capital put in the business, and we expect to have constructive dialogues. And the more people can be transparent today about where companies are operating and the challenges they face, I think the easier those conversations will be in the future. And to date, it's been very, very constructive. Bo, anything to add, or Mike?
No. I think the point on transparency, we really encourage that. We have good relationships with our borrowers and with our sponsors. And that transparency allows us to be solution providers as issues arise in any environment including this one. So that those conversations are frequent and we feel like all of our relationships are being very transparent with us.
A couple of other things to note. Look at we had, at the end of obviously, the numbers are a little delayed, but at the end of Q4, our risk we were kind of derisking the portfolio or our borrowers were delevering significantly. So KPIs were generally up.
Leverage or last dollar attachment point went from 4.2 times the previous quarter to 4.1. The average between 2017 and 2019 was 4.5. And so you've seen interest coverage was up. And so overall, the portfolio in Q1, quite frankly, the portfolio was performing pretty well across much of the portfolio pre-COVID. And so you I think there are fortunately, there's going to be more degrees of freedom, given the nature of the portfolio and the performance up to COVID.
Obviously, the violence of COVID and the relatively if it will impact, to different degrees, all businesses and all business models will be felt, but we feel like the position the portfolio is positioned pretty well given its typically asset-light services businesses with high free cash flow and robust business models.
Great. Thank you very much guys.
Our next question comes from Kenneth Lee with RBC Capital Markets.
Hi, thanks for taking my questions and good morning. Just wondering if you could just further expand upon your outlook for potentially seeing more amendments versus debt defaults. Wondering specifically whether there were any specific factors driving this for you?
Yes. Look, I think the great thing about our portfolio that we've constructed for our shareholders is that we're typically a control lender. We have very tight baskets regarding indebtedness and restricted payments, which don't provide the opportunity for issuers to do liability management trades without working with us. And we have two financial covenants.
And so we're going to be in a position to have conversations with companies and to be solution providers and protect risk. And so I think you can expect a decent amount of dialogue, quite frankly, as small as they have to come to us to incur a PPP loan because they don't have the debt incurrence basket to meeting some relief on financial covenants. But given we actually think it's a positive thing, it keeps effectively the portfolio to a shorter weighted average life, it allows us to manage risk and give us optionality to do many things to enhance our risk position. So I think pre quarter end, I think there was only two to three amendments related to COVID.
But I think generally, there were like eight in the quarter and that's a typical cadence given how our docs are constructed. And so I would expect that we're constantly in dialogue given our the structure of our loan agreements in place. And I think that will ultimately benefit our stakeholders and will also allow us to be constructive solution providers with sponsors and management teams. Bo or Fish, anything to add there?
No. I think that was pretty well said. All these we've been talking about the importance of tight loan documentation over the past few years. And all of these are guardrails to get us back to the table to reevaluate risk, and to often times be solution providers as well to our portfolio companies. And we're seeing beginning of that, but activity levels have been relatively muted given the backdrop.
Great. Very helpful. And just one follow-up, if I may. It looks like leverage ratios are closer to the lower end of the target range. And granted, I realize that the leverage ratios could move around depending on the investment valuation changes, but wondering over the near term, would you be targeting closer to that lower end of that target range?
Yes. So and I'll let Ian speak about it. So right now, debt-to-equity is 0.86. That's kind of on the pressed asset values. And so we actually have a whole bunch of capital and a whole bunch of flexibility to expand into what we think is going to be a much more lender friendly environment, less competitive from the leveraged loan market, less competitive from the high-yield market for kind of issuers that are in our target range, less competitive from the private credit markets, given people are inwardly focused or liquidity or capital constrained.
And so we have from both a capital perspective and a liquidity perspective, we are in a, I think as well positioned as we could be to kind of create find good risk-adjusted returns going forward. The other thing I would say is the actual existing book in these times.
And these moments tend not given credit spreads have widened, tends to stay in place and the existing book, given the combination of our floors and our hedges and our liability actually have a decent amount of net interest margin expansion on a go-forward basis as being discussed. And so the existing book is pretty well positioned from a net interest margin perspective.
We have a ton of capital and some liquidity to make smart capital allocation decisions to drive economic return for our shareholders on a go-forward basis. And so we're pretty happy with as we're pretty happy with how it's played out. Given just a little color around that to color it up, we have $1 billion of unfunded commitments $1 billion of liquidity. We have about $68 million of contractual unfunded commitments.
So I think we're like 16 times coverage. We only have a the nearest term maturity is $172.5 million in August of 2022. And so we basically have $1 billion plus liquidity and for against very small amount of unfunded commitments and $172 million in maturity, that's going to be over two years away. So I mean, from a capital and liquidity perspective, we're, I feel, pretty good in really good shape. And from an opportunity standpoint, Ian, is there anything to add there?
I think you captured it, Josh. It's all about just giving ourselves putting ourselves in a position where we have options, and it feels like we've got to that stage.
Great, very helpful. Thanks again and everyone stays safe.
Our next question comes Finian O'Shea with Wells Fargo.
Hi, everybody. Good morning, everyone. Just to follow on the last question. Actually, it was more related to leverage, but I wanted to ask on equity issuance. I think you should be officially above book again if the market opens here today. Does that change your position? And if not, what conditions are holding you back from raising more equity, given you're one of the few companies that can accretively do so. Is it more your liquidity position or the lack of good deal flow?
So look, that's a great question. We've always been I think we've always thought of ourselves as very prudent allocators of capital. We've never raised there's always this agency principal issue kind of that exists in all businesses, but people tend to think about in the asset management business where there's the virgin interest between the manager and the people actually providing the capital.
And for us, we've always put our capital before our interest, and we'll continue to operate that way. And so when you look at where we sit today, we have we're overcapitalized. We're at 0.86 times debt-to-equity on what's relatively, we think, are depressed asset prices. And so if you actually normalize that for spreads tightening or at some point, that those unrealized losses rolling through as we get to maturities on underlying investments.
We actually have more capital than that and so we're less levered. And we have a ton of liquidity. So there is no need or desire to raise capital because we have a lot of capital, and we quite frankly, we don't need to raise capital because we have a lot of liquidity. So I think we are we'll take the position we always have is, which is we'll only raise capital when it's accretive from a book value basis, an ROE basis.
And hard to imagine it's accretive from an ROE basis, given that we have a whole bunch of excess capital to deploy in what we think to be a pretty good investment opportunity set. As that as we have line of sight into that investment opportunity set and how quickly it comes and how good we think it is, our view might change on raising equity capital, but quite frankly, raising equity capital given the liquidity position and given the capital position is not even close to top of our list. Ian, is that do you have anything to add, or Bo?
Yes. I think the thing was just making sure we stay true with the discipline that we've articulated in the past about being accretive to NAV and on an ROE basis, and that's important to us.
So any equity capital we've raised today, look, we had massively grown the book would be dilutive, given that we would be deleveraging the business and so I it's as I can see as the opportunity that evolves and where there's clear line of sight to be liquidity and capital providers to the middle market and middle market sponsors that we might be we might raise equity capital, but we have a ton of liquidity and capital. So I don't see that as a near-term process.
Very helpful. And just one more if I can. You remind us on the mechanics of first out leverage. And specifically, if you talked a lot about having to potentially provide amendments. Would that require typically consent from your first out lenders? And would that perhaps trigger a diversion of the waterfall? Is that an issue that you grapple with going forward?
Zero. So typically not. In addition to the I think the average attachment point on our first lien last dollar positions is about half a turn in our detach is less than four turns. And so we're typically the big part of those capital structures control rec lenders. We have and typically, diversion is triggers on payment defaults. That's not even close to being an issue. Bo, anything to add there?
No, correct. Everything well said.
Okay, thank you guys so much.
Our next question comes from Chris York with JMP Securities.
Good morning, guys and thanks for taking my questions. So Josh or maybe, Bo, we understand a secondary form of repayment supporting your extension of the ABLs with a discount to net orderly liquidation value. Now that support seems reasonable in orderly markets, but clearly, this environment is anything but ordinary. So the question posed to you is, do you still feel comfortable about the collateral supporting your retail ABL strategy that may be approaching bankruptcy at a time when there could be an abundance of inventory available?
Yes. So it's a great question. So you have to have to you kind of have to have to put it in two different vectors. One is the value of your inventory and the second is the liquidity of the underlying company. And so what was on top of our worry list would have been a Sears, for example, which had no liquidity and that you were liquidating you would have been forced to liquidate into an environment where there were a whole bunch of closed stores or mandated closed stores.
So that was our kind of the scenario you're talking about was Sears was our highest risk position that got paid off in the middle of the quarter when they sold a series of logistics assets that they were forced to repair a loan. The next one and then when you look at kind of everything else in our book, you have the essential businesses, Staples, 99 Cents, Save A Lot, those businesses are performing well. The secondary source of repayment is not effective actually, given the turnover in inventories probably have increased.
And those businesses are performing well and have liquidity and have more free cash flow than they ever had. So put those aside. There's really two that are in kind of that vector you're talking about. One is maurices was just relatively small and the next is Neiman. And so on maurices, what I would say is ton of liquidity, had been performing very, very, very well.
We feel very good about where we sit on maurices given that there is a reasonable time period for malls to open back up, which is called late summer or early fall. On Neiman, obviously, the overlevered balance sheet, very public. We actually feel and this will, I think, come ahead in the next probably today or tomorrow.
So it's hard to talk about. But what I would say is that, that my sense is that will be a going concern business that the fulcrum and I think it's been reported that the fulcrum is putting up that today we're oversecured and being in that we will not face a liquidation in that business and the fulcrum we're putting up capital in that business for being capital to create liquidity and to get it to other side, which was the existing first lien term loan group, so non-ABL lenders.
So my sense is that, that we'll be fine there. That is the vector that we were concerned about, which is liquidity. But quite frankly, the liquidity issue is being solved by my expectation is that business will be recapitalized with a debt and will be a going concern business. I think [Indecipherable] being consistent in the news as well. And so the way bankruptcy works is if you're oversecured day one, you get a you get interest, and then you get an admin claim for any degradation in your collateral. And we don't expect there will be degradation in or collateral, given that there will be liquidity to buy new inventory that will support our collateral base.
Perfect. That color is very helpful. And you got where I was going with maurices and Neiman. On the topic of retail, I noticed you did mark down your JCP loan meaningfully. This investment was not an ABL so what drove the write-down there? And why do you feel this one retail investment was supported by enterprise value when you underwrote it as opposed to hard assets?
Yes. So actually, JCPenney, so it wasn't an inventory loan, but it was a it is a collateralized loan. It has a whole bunch of fee simple and leaseholds. And so obviously, the value of the fee simple and leaseholds has changed. It's a level two loan. We may think it's cheap or we may think it's expensive, but we mark it to where it's trading. I think it's traded up post quarter a little bit. But to be clear, it is a it does have a collateral package.
It happens not to be inventory. I think it actually has a second line inventory, but quite frankly, that's going to be absorbed by the existing ABL or the value will be absorbed by the existing ABL, but it was a fee simple and leaseholds primarily as collateral. And so obviously, that's a little different situation.
Okay. You feel pretty good about the mark there?
Yes. We it's a level two mark. I think it's up a little bit. Ian said up a little bit post quarter, I think, a little bit. But it's a level two mark. And so we choose to rebuy it every we could choose to rebuy it every day, which we have.
Got it. Yes. Okay. And then Bo talked a little bit about the expansion in the opportunity set in the secondary markets, very helpful there. But I'm curious if this environment has had any impact on your allocation of capital towards your investable themes? Or alternatively, has it created any new sector themes for which you plan to invest?
Yes. I mean, most definitely so look, I think the liquid market was really interesting for a period of a couple of weeks. Quite frankly, we were getting we spent our time making sure that we had enough capital and liquidity to support our existing portfolio companies. And so we had our head down.
We did one small secondary trade. My guess is that there's going to be divergence in the secondary market, which will probably create a lot of opportunities over time, but we're going to be patient there. The quite frankly, the themes as the big theme as being a capital and solution provider in complicated situations, I think that is plentiful in a post-COVID world.
And that is where our skill set that is our skill set that I think we do best at and have historically done best at and have created a ton of value. And to put this in perspective, we are in kind of special sets, kind of rescue-oriented financings. We've originated $4.5 billion since inception. That's about 35% to 40% of the total originations. The gross IRRs on those investments in and in more benign investment was benign investment environment was about 24%. 35% of our originations post 35% of our origination since inception has been nonsponsor.
The gross IRRs unrealized investments were 23%. And so in a world where we were not focused much of the world was focused either on sponsor finance or focused on growing market share, we were focused on really trying to drive and create value for our shareholders.
And in a world where it's going to be very complicated both from underwriting from both from a balance sheet perspective for companies and from an operating environment and really the devil in the detail is understanding the forward earning power of the business, which probably have been massively diverged from the historical earnings power of the business and what their unit economics are is kind of our this is kind of what we do and what we do best and where our skill set lies.
And so on the go-forward opportunity set, we're really excited given that the opportunity set matches up with our capabilities very, very well. And with the Sixth Street platform very well. That being said, obviously, given that the world we're in today was kind of set off by health care crisis. On a personal level and every other level, it's very upsetting to us, given the amount of destruction and amount of loss of lives and that people were and amount of uncertainty people are feeling both about their economic personal economic situation and their health. But I would say the go-forward opportunity set matches up pretty well with our skill set.
Got it. Again very helpful. Last question is, I noticed you said you temporarily suspended your buyback program intra-quarter. What's the thought process there because it appears you had a line of sight to an abundance of liquidity, especially with Ferrell and Nektar coming back to you. So presumably, that shouldn't cause you the need to hold maybe a couple million bucks for buybacks.
Yes. So, look, I mean, it was obviously very fluid in March. Credit spreads were like credit spreads, there was not a bottom of in credit spreads. So we mark our book to fair value. And the buyback program is backward-looking, not forward-looking.
So it set off of the historical NAV. And as credit spreads are widening every day, every moment, you really don't know where there's a bottom. And you really we wanted to get our arms around making sure that get our arms around our debt-to-equity, get our arms around and quite frankly, make sure that we were being thoughtful users of capital, given that we didn't know what the new net asset value was going to be in the moment, given the violent move in credit spreads.
So I think in the hindsight is always 2020. And given how the quarter ended, I probably wish we wouldn't have done that. But we were in a multivariable situation regarding the falling of credit spreads, talking to rate agencies every day, making sure that we protected our investment-grade ratings. And so we did what we thought was best in the moment and hindsight is always 2020, and it will be a lesson. Ian, anything to add there?
You captured all, Josh.
Great. That's it for me. And obviously, the market knows that you are a good allocator of capital.
Our next question comes from Ryan Lynch with KBW.
Hey, good morning. Thanks for taking my questions and hope you guys are all well. My first question has to just do with the opportunity set. I mean this is kind of unknowable question going forward, but I'd just love to hear your opinion. I mean, right now, the primary issuance market has come to a grinding halt. Secondary market has kind of snapped back pretty quickly.
But as you guys sit here in a really good capital position for the remainder of the year, how do you guys view yourselves as far as allocating capital when it seems that the primary market may be held up for a pretty long time as there seems to be fears about second and third waves of potential spikes as the economy starts to reopen. Do you think you guys are going to be more tracking in the secondary market opportunities looking for dislocations there to deploy capital? Or just kind of how are you thinking about that kind of for the remainder of the year?
Yes. So we surely have there are opportunities. I think there are a lot of opportunities, both in our own capital structure, i.e., if the stock trades below book value. I think given the work we've done on our capital and liquidity, we think that will be a good investment. I also think that when you you're exactly right. The M&A market has come to a halt and will be very, very slow.
The good news was our business wasn't that levered to sponsor M&A. Again, I think 45% of our originations from inception were more kind of special fits oriented and so and refinancing related. And so I think that opportunity set will massively grow and, quite frankly, lines up with our skill set very, very well. But the and then quite frankly, if you do see M&A, you're going to see M&A that's more strategic in nature.
So it's going to be sponsored portfolio companies or nonsponsored portfolio companies and it's going to be strategic where I think given that there's not that much supply of capital both from the BDC market because I don't think generally [Indecipherable] is well positioned from a capital liquidity perspective or from the private fund market where people are inwardly focused either on their portfolio or solving liquidity issues themselves. There's no CLO creation.
The high-yield market is open for big issuers and highly rated issuers but for kind of our core business, I think there's going to be a decent amount of opportunity. It's not going to be levered to M&A, but it's probably more connected to our existing skill set. Bo, do you have anything to add there?
No. Listen, I think we'll see an evolution of the opportunity set, as I've mentioned in our prepared remarks. With the high volatility, new issuance froze. We're starting to see the unthawing of that in the back end of the pipeline for opportunities where our set matches, as Josh mentioned, complex situations, special situations, good companies, bad balance sheets. Those type of opportunities are appearing, and we are well positioned to be liquidity providers in those environments.
Okay. That makes sense. As we kind of look into this oncoming downturn, I think one of the differentiators could be in the BDC space besides the liability structure that the BDCs have set up and you guys seem to be set up really well there and the quality of the asset book. Could be just the size, scale and the depth of the platform as BDCs work through challenged credits and try to get the best optimal outcomes for some of these credits.
So can you just talk about your confidence in the size and the scale of your platform to work through both challenging credits in your own existing portfolio, find new opportunities, and then particularly in light of the finalization of the split with TPG?
Yes. So look, the like we have one of the biggest private credit platforms in the world. So $34 billion of AUM, that will, my guess, probably grow. We have a ton of dry powder across our platform, where we were going to be a active participant in providing solutions for companies and issuers that, quite frankly, the TSLX platform will benefit from.
And so I think people saw that we were involved in the financing for Airbnb, given the structure of that loan and the ability of the company to pick it wasn't really appropriate for the BDC, but I think that's a good example of the how the platform at work, the scale of the platform our ability to see large opportunities. The amount of resources we have in our platform, we have 275 people.
The partner group, I think we have like 18 partners now in the partner group. Much of us has been working together for somewhere between 12 and 20 years. And so as it relates to the scale, the skill set and our historical and our investment process, and our ability to protect and create value for both shareholders and LPs and the brand we have, I feel I could not feel better about how we're positioned and situated for the environment we're coming into.
Those are all my questions. I appreciate the time and hope you guys are all safe.
Next question comes from Robert Dodd with Raymond James.
Just one. Mine some of mine have already been answered. When you look at the capital allocation going forward, can you give us any color on the relative difference in hurdle rate, if you will, for new deployment versus reserving capital for existing portfolio companies?
Obviously, if you put a follow-on investment into an existing portfolio company, even if the yield is lower, it's protecting the already invested capital, so the potential IRR can be materially higher versus new, where the yield might be higher but if asset life stretch the excess IRR, you've got from some of those where things have repaid quickly, may come in. So there's new risk versus existing opportunity cost IRR savings, etc. I mean, how is that going to be balanced over, say, the next three months versus the next year?
Yes. So first of all, look, we mark all of our investments to fair value. And so I think and I think I understand the question. But the as it relates to our existing investments, and given that we mark at the fair value, like the I'm not sure the hurdle rates differ that much given that where there was a sunk cost and so you I'm trying to think through your question on the fly, but like the sunk cost as it relates to the existing investment is, it is what it is.
And so we mark at we're going to say here's the cost of here's our opportunity to invest in our stock, here's the investment opportunity to invest in the new loan, here's an opportunity to invest into existing loan. And like those things should all line up where and we should that's how we're going to allocate capital.
But I don't I'm not sure there's a different cost of I'm not sure we're going to allocate capital at a lower cost to our existing portfolio company versus making new investments. You might do that, but you would look at the return of the fair value, effectively the incremental value you're creating when you mark the investment to mark it on your existing investment.
Okay, I appreciate that. Just when we can resolve up on that, that later as well. Thanks a lot.
Our next question comes from Mickey Schleien with Ladenburg.
Yes, good morning everyone. Josh, just one sort of high-level question. Obviously, your company has had a great experience and solid returns in the retail segment. Now we see airlines completely dislocated for reasons greatly out of their control. But you have blue-chip names with and in some cases, with very high-quality assets.
And there will be a day when you and I and everybody else on this phone call are getting back on airplanes and traveling and visiting companies and visiting clients. So I'm curious whether you're thinking about that sector, something in which the BDC could invest. I realize you're not investing there now. But it would seem that there would be opportunities there, which could generate some really outsized IRRs if the deals are structured correctly.
Yes. Look, so the challenge with the airline industry, first of all, I think the some of that opportunity set has been displaced from in the short term through public policy. And so they've got a decent amount of support through the existing policy programs. And so I think the challenge generally with airlines is that we always thought asset value was a little bit illusionary.
Given that the time you needed your asset value was where the it was typically correlates to an environment where there was a time where it was oversupplied and there was given that if it was oversupplied, there would be no bid for your underlying asset value. So I think the airline industry, given the amount of I think amount of kind of permanent demand destruction and given the operating leverage, I think it makes it very, very challenging to invest broadly.
There might be opportunities in the future to do things. But you're looking at an industry where it's going to have there's real demand destruction. I think it took six years post 9/11 for demand to fully come back. I would expect this is actually longer. This relates to people who have internalized their personal health. You might see that you might see it come back a little bit quicker with the if you do see a antiviral or a vaccine, especially a vaccine.
But I quite frankly, I'm not given that there's been a lot of public resources devoted to the airline industry, and given the amount of the demand destruction and the asset values are tied to effectively how much what the supply is, I think, is very challenging not as noninvestable, but that you might find several opportunities, but I'm very happy that we're not long either airline credits or not long underlying assets in the airlines today.
I think when you take a big step back, I think there are the travel industry, especially the asset-heavy models which I think differentiates from kind of the Airbnb models, the and real estate, I think there is will be long tail demand destruction both for real estate and for the transportation industry, especially those people who own assets will be very much affected.
Josh, how do you feel about education? And I'm not talking about online products or for profit universities, but I'm hearing about just enormous liquidity constraints that across the university system. I imagine some of those are actually your clients. Are there opportunities developing there that we haven't thought about that might be interesting?
Yes. So first of all, most of when you say our clients, you mean in our LPs or portfolio company customers?
The endowments as partners.
Yes. Look, I think the I think I mean, we're always going to be or want to be a solution provider to whoever our client is, if it's endowments or pension plans, etc. There are as it relates to trying to find good assets for their balance sheet. And so I do think the education industry is going to be under a ton of pressure. But we're always a solution provider for our clients. Where we if we can find good assets that help them either meet their liabilities such as pension plans or grow their assets as it relates to endowments.
But I don't see us being providing loans to either private universities or private endowments. I don't think that's an opportunity set for us.
I was hoping for a structured credit question.
Those are all my questions today. I hope everyone stays safe and healthy. Thanks for your time.
I'm not showing any further questions at this time.
Great. Thanks, Mickey. Very much appreciate everybody's well wishes. And please feel free to reach out to the team with any questions. Obviously, Memorial Day is going to be very different this year, but I hope people take the moment to spend time with their families and friends and enjoy the time they have with their loved ones and people be safe and wish only health and happiness. Thank you so much.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.