Sixth Street Specialty Lending Inc
NYSE:TSLX
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Sixth Street Specialty Lending Inc
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Good morning, and welcome to Sixth Street Specialty Lending, Inc.’s Second Quarter Ended June 30, 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. As a reminder, the conference is being recorded on Friday, August 4, 2023.
I will now turn the call over to Ms. Cami VanHorn, Head of Investor Relations.
Thank you. 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 statements of historical facts made during this call may 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 a result of a number of factors, including those described from time to time in Sixth Street 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, we issued our earnings press release for the second quarter ended June 30, 2023, and posted a presentation to the Investor Resources section of our website www.sixthstreetspecialtylending.com.
The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc.’s earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today’s prepared remarks are as of and for the second quarter ended June 30, 2023. As a reminder, this call is being recorded for replay purposes.
I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.
Thank you, Cami. Good morning, everyone, and thank you for joining us. With us today is my partner and our President, Bo Stanley; and our CFO, Ian Simmons. For our call today, I will provide highlights for this quarter’s results and then pass it over to Bo to discuss activity levels in the portfolio. Ian will review our quarterly financial results in detail, and I will conclude with final remarks before opening the call to Q&A.
After market closed yesterday, we reported second quarter financial results with adjusted net investment income per share of $0.59, corresponding to an annualized return on equity of 14.2% and adjusted net income per share of $0.64 corresponding to an annualized return on equity of 15.4%. From a reporting perspective, our Q2 net investment income and net income per share, inclusive of accrued capital gains incentive fee expenses were $0.58 and $0.63, respectively. The $0.01 per share difference between the adjusted and reported metric of the noncash expense related to accrued fees and unrealized gains from the valuation of our investments.
This quarter’s net investment income continues to reflect the strength in the core earnings power of our portfolio as we over earned our quarterly base dividend by 28%. As we’ve discussed in prior periods, our portfolio turnover remains lower in this environment with only 4% of total investment income this quarter coming from activity-related fees.
Net investment income was largely a result of sustained elevated portfolio yields driven by higher underlying reference rates. Based on the current shape of the forward curve, we expect that the interest rate environment will continue to support core earnings in excess of our base dividend through 2024 without any activity-related income. We believe the BDC sector is near peak earnings given the current forward curve is now we’re sloping from here.
With that being said, we think the value proposition of return on equity on a spread basis remains strong. The difference between this quarter’s net investment income and net income of $0.05 per share was $0.03 per share from net unrealized gains and $0.02 per share from realized gains on investments.
Through the first six months of 2023, we have generated an annualized return on equity on adjusted net investment income and adjusted net income of 13.9% and 16%, respectively. We are pleased with these results; particularly given we increased operating earnings on a per share basis during the period in which we raised incremental equity through a share issuance.
Ian will speak through the framework of our approach to raising capital in a moment. Based on our results for the first half of the year, we believe we will outperform relative to the guidance we provided on our year-end 2022 earnings call of 13% to 13.2% return on equity for 2023. As the macroeconomic environment remains more complex related to lever credit, the importance of sector selection, asset mix and financial leverage becomes more significant. Each of these elements convey the risk – levels of risk in the portfolio. We believe our portfolio reflects a conservative path across all these sectors.
In terms of sector selection, we are thematic investors and generally avoid industries that have outsized risk of loss for creditors. Our asset mix is 91% first-lien, representing a significant lower risk of loss given default compared to second-lien and sub debt exposures. And finally, we remain well within our target leverage range with significant cushion to the regulatory limit. As a reminder, the use of leverage cuts both ways as it magnifies both returns and losses. We believe that our conservative approach across these vectors will help us continue to deliver industry-leading returns to our shareholders cycle [ph].
In today’s market environment, we are focused on the health of our existing portfolio companies. We’ve seen reference rates increase significantly since March of 2022. Borrowing costs have risen dramatically and could present a challenge for many businesses. We are closely monitoring certain key metrics across our portfolio companies such as interest coverage, which has declined at 2.1 times on a weighted average basis across our core portfolio companies, but is not materially different from 2.2% we reported last quarter. As a reminder, our interest coverage metric assumes we apply reference rates at the end of the quarter to steady-state borrower EBITDA. We believe that our metric is a better representation of the position of our borrowers as opposed to a look-back metrics such as LTM.
More importantly than the weighted average portfolio metrics that we track are the tails which we can be hitting in the averages. We believe the tails within credit portfolios are increasing, which can be a sign of potential issues to come. Using the levered loan index as a proxy – the percentage of the index components with a bid price below 70 has more than doubled over the last 12 months from 2.8% as of June 2022 to 6% as of June 2023. Despite the material increase in loans trading below 70, the weighted average bid price of the index has actually increased over the same period from 92.1% to 94.2%, thereby disguising the tails.
Although the leverage loan index is not a perfect comparison to private credit portfolio – in private credit portfolio, we do believe that data illustrates the dispersion that may exist within some private credit portfolios. The tails are where the issues will arise, which are minimal in our portfolio.
Based on the methodology I described a moment ago, less than 5% of our core portfolio companies, which represent 91% of the portfolio by fair value, have interest coverage below 1.0x. Additionally, nonaccruals remain less than 1% of the portfolio by fair value and amortized cost. With only one portfolio company on nonaccrual status and no new investments added to nonaccrual status during the quarter.
At quarter end, net asset value per share was $16.74, up $0.15 per share or 90 basis points from net asset value per share at March 31 of $16.59. The growth was primarily driven by continued over earning of our base dividend, the accretive equity raise and net unrealized or realized gains from investments. Yesterday, our Board approved a base quarterly dividend of $0.46 per share to shareholders of record as of September 15, payable on September 29. Our Board also declared a supplemental dividend of $0.06 per share related to our Q2 earnings to shareholders of record as of August 31, payable on September 20.
Our Q2 2023 net asset value per share adjusted for the impact of the supplemental dividend at $16.68. We estimate that our spillover income per share this quarter is approximately $0.90. As always, we will review the level of undistributed income as the year progresses to ensure we minimize potential return on equity drags from the excise tax.
With that, I’ll pass over to Bo to discuss this quarter’s investment activity.
Thanks, Josh. I’d like to start by sharing some observations on the broader market backdrop, in particular, the activity levels across both public and private markets. Credit issuance was primarily driven by refinancing and M&A activity, which has both declined in 2023. Refinancings have dropped off as the higher spread environment essentially represents an asset for issuers holding a lower spread than the market level today.
As for M&A activity, there continued to be a bid-ask spread where sellers want yesterday’s price and buyers want today’s price. With fewer issuers coming to market at the top of that originations funnel is narrower, but this is offset for us by the shift towards private credit over the past few quarters.
Our pipeline has remained robust, given the increased market share we are seeing as alternatives for borrowers are generally as constrained as ever before. Access to the broadly syndicated loan and high-yield markets has generally only returned for near investment-grade credits. This limited access to public markets has increased the number of high-quality credits we are seeing as direct lenders. We believe the opportunity set continues to be interesting with plenty to take advantage of while remaining selective. As Josh mentioned earlier, the operating environment for borrowers right now is challenging, which has highlighted the importance of credit selection and disciplined underwriting.
Turning to this quarter’s activity. We had $260 million of commitments and $240 million of fundings across six new investments, and upsizes to four existing portfolio companies. Of the $260 million and $240 million of commitments and fundings for the quarter, $248 million and $227 million, respectively, were in new investments, which we believe to be a better vintage than we’ve seen in some time. As an illustration of the high-quality borrowers in the opportunity set across the Sixth Street platform, we aided and closed on a $2.6 billion senior secured credit facility of which $75 million was allocated to SLX to support Advent International’s take private of Maxar Technologies.
Maxar is a scaled and differentiated enterprise with clear reason to exist in a competitive mode. In addition to the strong unit economics, high free cash flow conversion and low leverage of the business, the structure of the deal reflected approximately 35% funded loan to value at close with attractive pricing and terms.
On the repayment side, we had three full and four partial investment realizations totaling $114 million in Q2. Our two larger payoffs during the quarter, GTreasury and Modern Hire were driven by acquisitions, which included refinancings. Since our initial investment in GTreasury in 2019, SLX has supported the company through its growth via amendment facilities and follow-on investments. The company was ultimately acquired and generated a gross unlevered asset level IRR in MOM of 15.1% and 1.5%, respectively, for SLX shareholders. At the time of exit, GTreasury was the 10th largest investment in our portfolio resulting in $67 million of recycled capital to deploy in new investment opportunities.
I’d like to also highlight our payoff from Modern Hire as the incumbency in this investment assisted Sixth Street and winning an opportunity to redeploy the capital in a larger, more scaled business with less leverage and at a wider spread. Sixth Street proceeded to agent and closed on a new $310 million credit facility issued by HireVue, a portfolio company of Carlyle to acquire Modern Hire and recapitalize the combined business. SLX generated a gross unlevered asset level IRR and MOM of 14.5% and 1.3x, respectively, on the payoff.
Since the update we provided on our last earnings call regarding our investment in Bed Bath & Beyond, we have received approximately 40% of our total investment back through the liquidation process as of July 28. There have been several puts and takes throughout this ongoing process with key milestones achieved along the way such as – reaching a deal with the unsecured creditors committee. Based on these developments, we believe the band of outcomes has become more narrowly defined. We anticipate continuing to receive capital back as this case progresses.
As it relates to the rest of our portfolio, given the challenges presented in today’s investment landscape, the health of our existing portfolio companies hold significant importance. Across our borrowers, we have generally observed softness in bookings and slowing growth given the demand destruction triggered by the higher interest rate and persistent inflationary environment. However, we have not seen an increase in amendment activity related to PIK conversions in the last quarter.
The nature of our portfolio investments gives us confidence in the ability of our borrowers to stand the macro headwinds, as the vast majority of our exposure is to software and business services companies. These business models are inherently more resistant to economic slowdown due to their embedded customer base and high variable cost structures. We favor the cost structures of these business models given their ability to maintain and oftentimes expand margins in decelerating growth environments. Despite the general slowdown of the top-line and sales, the weighted average EBITDA of our portfolio companies have increased 13.3% quarter-over-quarter, further highlighting the strength of our sector selection and portfolio construction. From a portfolio yield perspective, yields were up to 14.1% from 13.9% quarter-over-quarter and are up about 320 basis points from a year ago.
Moving on to portfolio composition and credit staff. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points on our loans of 0.9 times and 4.9 times, respectively, and our weighted average interest coverage declined marginally from 2.2 times to 2.1 times driven by the impact of rising interest rates on the cost of funds for our borrowers. As of Q2 2023, the weighted average revenue and EBITDA of our core portfolio companies was $205 million and $67 million, respectively.
Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 1.16 on a scale of 1.5 with one being the strongest. As Josh referenced earlier, we continue to have minimal nonaccruals at 0.6% of the portfolio at fair value with no new portfolio companies added to nonaccrual status from the prior quarter.
With that, I’d like to turn it over to Ian to cover our financial performance in more detail.
Thank you, Bo. For Q2, we generated adjusted net investment income per share of $0.59 and adjusted net income per share of $0.64. Total investments were $3.1 billion, up from the prior quarter as a result of net funding activity. Total principal debt outstanding at quarter end was $1.7 billion and net assets were $1.5 billion or $16.74 per share, prior to the impact of the supplemental dividend that was declared yesterday.
Our debt-to-equity ratio decreased from 1.2 times as of March 31 to 1.16 times as of June 30, and our weighted average debt-to-equity ratio for Q2 was 1.22 times. The decrease was primarily driven by proceeds from the equity raise, combined with over earning of the base dividend, which offset our net funding activity during the quarter. We continue to have ample liquidity to $659 million of unfunded revolver capacity at quarter end against $190 million of unfunded portfolio company commitments eligible to be drawn.
As Josh referenced earlier, we executed a small equity raise during May, soon after our Q1 earnings call. Given our ongoing commitment to transparency, I’d like to take a moment to explain the framework of value creation we established for the issuance of new equity in our business. This framework requires the satisfaction of two criteria. The first is that we follow our historical approach of issuing equity at a premium to net asset value per share. TSLX shares have traded at a premium to the most recently reported NAV per share on 98% of such trading days over the almost nine and a half years that we have been listed.
On the day we executed the equity offering, the stock closed at an 11% premium to the most recently reported NAV per share. After the applicable discount, the price paid by such investors represented a 6% premium to NAV per share. The first criterion was therefore satisfied. The second criterion requires us to have conviction that we are deploying new capital raised into assets generating estimated returns that exceed our calculated cost of capital. In other words, the return on equity available to us on new equity exceeds the marginal cost of that new equity.
Let’s walk through the math, noting that there are many ways to look at it, but let’s assume that our cost of equity is 8.6%, which was sourced from Bloomberg. Based on this premise, we can back into the required return on new assets by applying the cost structure of our business, including the marginal cost of leverage fees, estimated credit losses and other expenses to our unit economics model. This calculation results in a 10.1% return on assets required to generate an 8.6% return on equity. In our case, we deployed the new equity capital into investments with an average asset level yield to maturity of 12.6%, resulting in estimated ROEs of 13.1% for the capital deployed, well above our estimated equity cost of capital. This illustration indicates that the second criterion was satisfied. We note that the return assumptions exclude the incremental benefit we may receive through additional activity-related fees associated with these assets.
In addition to confirming that the equity raise exceeds our cost of capital, we also eliminated any material risk of a so-called J-curve effect on the earnings power of the business, are successfully deploying the capital post quarter end into new investments. In other words, this was not a case of requiring a visible future pipeline. We had already executed on the immediate opportunity set and the equity raise was a tool to bring our financial leverage profile back within our stated targets. Since we established this business in 2010, we have operated with the fundamental premise of doing right by our shareholders. We believe our approach to raising equity during the second quarter this year is an example of applying that philosophy.
Turning now to our liquidity and funding profile we enhanced both this quarter through the extension of the maturity of our revolving credit facility. This amendment increased total commitments from $1.585 billion to $1.71 billion extended the maturity and added two new banks to the syndicate. Tighter capital constraints did, however, result in two new non-extending lenders with the maturity in 2027 rather than 2028. Our ability to maintain pricing and grow commitments during the recent credit contraction in the banking sector, highlights the importance of the size and scale of the Sixth Street platform as a key relationship for banks, in addition to our track record of avoiding credit losses. The upside of the facility further improved our liquidity profile, which represents three and a half times the amount of unfunded commitments eligible to be drawn.
In terms of our debt maturity profile, we have satisfied two maturities in the last 12 months through unused capacity on our secured revolver. Our nearest maturity does not occur until November 2024, however, we are focused on normalizing our unsecured funding mix by continuing to target incremental funding through the unsecured market. We have been and remain a floating-rate borrower, and swap all of our fixed rate liabilities to floating to maintain a spread-based lending approach. This allows us to evaluate the debt capital markets for incremental opportunities without being deterred by the significant increase in treasury yields or volatility in underlying base rates.
Moving to our presentation materials. Slide 8 contains this quarter’s NAV bridge. Walking through the main drivers of NAV growth, we added $0.59 per share from adjusted net investment income against our base dividend of $0.46 per share. As Josh mentioned, there was $0.01 per share of accrued capital gains incentive fee expenses related to this quarter’s net realized and unrealized gains. The equity raise, including the overallotment shares issued provided $0.04 per share of accretion to NAV. There was a $0.13 per share positive impact to NAV, primarily from the effect of tightening credit market spreads on the fair value of our portfolio. And finally, other changes resulted in a $0.10 per share decline in NAV from net unrealized losses on investments, partially offset by $0.02 per share of realized gains largely from the sale of equity investments.
Moving on to our operating results detailed on Slide 9. We generated a record level of total investment income for the quarter of $107.6 million, up 12% compared to $96.5 million in the prior quarter. Walking through the components of income, interest and dividend income was $102.6 million, up from $92.2 million in the prior quarter, driven by higher all-in yields and net funding activity.
Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns was slightly lower at $0.9 million compared to $1.6 million in Q1, given the slowdown in repayment activity we continued to experience in Q2. Other income was $4.1 million compared to $2.8 million in the prior quarter.
Net expenses, excluding the impact of a noncash accrual related to capital gains incentive fees were $57.2 million, up from $51.4 million in the prior quarter. This was primarily due to the upward movement in reference rates, which increased our weighted average interest rate on average debt outstanding from 6.7% to 7.1%, coupled with marginally higher average debt outstanding in Q2.
For the year-to-date period, we’ve generated an annualized return on equity on adjusted net investment income of 13.9% and on adjusted net income of 16%. Net investment income has increased due to the asset-sensitive nature of our business and the rise in reference rates and net income has benefited from both net realized and unrealized gains on investments from company-specific events as well as the positive valuation impact of tightening credit market spreads. We believe we remain on track to meet or exceed the high end of our previously stated guidance range of $2.13 to $2.17 of adjusted NII per share for full year 2023, which corresponds to a return on equity of 13.2% plus.
With that, I’ll turn it back to Josh for concluding remarks.
Thank you, Ian. I’d like to close our prepared remarks today by emphasizing the importance of being an efficient user and allocator of capital. Capital to invest in this moment, the publicly traded BDCs is extremely limited in our sector, given the regulatory limits on leverage and the slowdown in portfolio churn from the higher spread environment. The only way to participate in this environment is by holding capital to lower leverage or raising new capital by issuing equity.
In terms of holding capital, we started the second half of 2022 at 1.06 times debt-to-equity compared to an average of $1.20 for our peer set. As capital became limited by leverage ratio constraints across the sector, our leverage profile allowed us to remain highly active in the second half of 2022 and the first half of 2023 despite the slowdown in repayment activity. Some people refer to this as a golden age for private credit, which we have also been able to participate by issuing equity, which requires you to trade at a premium and net asset value.
We believe that our track record for avoiding losses and efficiently using shareholders’ capital, including a sound understanding of our own cost of capital within our – within a BDC framework have been rewarded by our stock trading above book value. Our positioning characterized by holding more capital and trading at a premium to book value has allowed us to give SLX shareholders access to this vintage defined by some of what we believe are the best investment opportunities we have seen in recent history.
Over the LTM period, we funded $763 million into new investments, representing 25% of the credit portfolio. We believe that access to this vintage is a benefit to our shareholders and will continue to differentiate our returns from the industry.
With that, thank you for your time today. Operator, please open up the line for questions.
Thank you. [Operator Instructions] And our first question comes from Finian O’Shea from WFS. Your line is now open.
Hey everyone. Good morning. I appreciate the outline of the equity framework and the ability to invest in today’s vintage. With putting all that together, does that mean you’ll be looking to issue equity more often?
Hey, Finian, how are you? Good morning. I wouldn’t go that far. I think we’ve done TSLX has been public since March of 2014, we’ve done four primary equity deals. We’ve been very disciplined in how we’ve raised capital. So I think the answer is when there’s an opportunity to deploy capital that exceeds our cost of capital, we will issue equity, but we’ll be disciplined doing that.
So it’s environment-dependent, and we – it’s a very high bar for us to issue equity capital. So I don’t think our approach is changing. We decided to put the math out there because I think it’s important to have a framework that people understand and a framework for the industry. So we wanted the math to be clear. And so we just wanted to do that. But hopefully that helps. I don’t think our framework is changing. And also, as Ian pointed out, I think we have to view that it is a near-term visible pipeline that meets that criteria. We don’t want to do things where we create an earnings drag by deleveraging significantly deleveraging the leverage profile of the business.
Sure. Thanks. That’s helpful. And then can you – on the pipeline as you mentioned, can you kind of touch on the sort of quantity and quality of that? Obviously, things are good as you mentioned right now, but are they still really good as the pipeline builds and how big or along is the pipeline? Thank you.
Yes. Thanks. I think the pipeline, I think, is still actually pretty good although I think we’re seeing a couple more payoffs in Q3 that were older vintage payoff. So I’m not sure we’ll drive that much activity level fees given core protection has probably run off on some of them, but not all of them.
So I don’t think – I think the way we kind of look at it is we’re going to be – we’re going to – at least as of now, we think we’re going to be kind of flattish on that portfolio activity, maybe up a little bit. But the portfolio – the pipeline is still good. I would say that you have to think about competition really both mentioned as activity levels are down. Market share is up and competition is really coming from not publicly traded BDCs, given their capital constraints for the most part, but coming from either private BDCs or GPLP structures. I would say there’s a little bit more competition on the margin and so – but I hope that helps.
Yes, absolutely. And thanks so much.
Thanks, Finian. Have a good day.
Thank you. And one moment for our next question. And our next question comes from Robert Dodd from Raymond James. Your line is now open.
Hi congrats. Morning. Congrats on the quarter. Obviously, first, I really appreciate the color about the tails. So one question about that. You said less than 5% have interest coverage below one currently, what or on go-forward rate? What percentage of those were underwritten to be below one, if that makes sense? I mean are those of you who recurring revenue businesses that you’ve already expected them to be below one or what percentage have gotten below one because of underperformance.
Yes. It’s a good question. Obviously, American Achievement wasn’t underwritten to be that was a COVID impacted business. And so there’s a handful of names. There’s, I think, four names or four or five names. I would say half of those were kind of underwritten and below one and the other half work – in the sense that they were rapidly investing in their business.
Yes, understood. And then last one for me. On Bed Bath & Beyond, last quarter, you gave us some can – last quarter and things have changed since then, you said you expected to collect the fair value at that time plus potentially some fairly significant fee income. What do you still expect to collect the full fair value that’s left this quarter? And what are the prospects for fee income from that?
Yes. So what I would say is there’s been push and takes in the liquidation. For example, real estate came in better, inventory a little bit less. There’s large pools of assets and litigation claims are still outstanding that have higher volatility of outcomes that I think will be determined of and it’s hard to tell about the make whole in this moment.
So I think it’s – the structure, I think, as people know, is public out there, with the committee is that we get evolved our principal interest and feedback and then we start splitting proceeds past that. So I think it’s – I wouldn’t expect us to get our – I think our – we have 15 points or 16 points that unless the litigation ends up, well, I don’t think that’s the case, but it’s going to be dependent on those outcomes.
Got it. Thank you. Appreciate it. And again, congrats – a great quarter.
Thanks.
Thank you. And one moment for our next question. And our next question comes from Ken Lee from RBC Capital Markets. Your line is now open.
Hi, good morning. Thanks for taking my question. Just one on potential ABL opportunities, given where the macro backdrop is now, how do you see these opportunities shaping up over the near term? Thanks.
Yes. I remain really bullish on the opportunity set, honestly, going forward. I think when you think about what’s happened is – and I think I’ve said this before, but pre-COVID, a lot of both cyclical and secular issues on brick-and-mortar retail. During COVID, you had a moment of uncertainty, but then consumers got a lot of money in their pocket and there was a whole bunch of excess savings, and they had nowhere to spend the money, except for hard and soft goods versus experiences.
And so retail overearned significantly, which made our capital not needed. And now the consumers’ wallet shares now being moved to experiences, and away from buying stuff. So I would expect that general retail credit gets worse, and they’re going to look for opportunities to enhance their liquidity profile. So I think we’ll be active. But I think that takes some time. But I think it’s going to be – it should be a pretty good opportunity set. And then when you overlay banks having constrained balance sheets, I think it means that that’s probably even a better opportunity for us. But time will tell. But we are – continue from a platform perspective, invest in resources around here that allows us to see that flow and underwrite that flow in asset management and asset manage those deals.
Got it. Very helpful there. And just one follow-up, if I may, in terms of the pay downs, a nice pickup in paydowns in the quarter. Do you see a more sustainable pickup in pay downs, realizing it’s obviously very difficult to forecast, but just wondering whether the backdrop could spell a more sustained pickup in paydowns over the near term. Thanks.
Yes. So the paydowns in the quarter, what was the exact number, Ian? I think it was three, four realize…
Three, four realize.
And one of those we rolled into a larger deal. So the paydown is still really, really muted. I expect this quarter because we have a little bit of visibility that they will pick up, like I said, on Robert’s question a little bit, but not materially. I think historically, the book turned over 30% to 40% a year. I think that’s an LTM period. I think it’s half that or less.
And so I think what changes that is really – there’s two components that change it. One is the absolute level of interest rates going down will help bridge the gap between buyers and sellers and we’ll probably spur some M&A activity. The – and then if spreads obviously tighten, that will create turning the book from refinance activity. And then the third piece of it is that if capital markets generally reopen, which they haven’t for lower rated credit, then obviously, that will – you have repayments from migration of larger companies into the capital markets, that one seems to be most out of the money. But I think that’s kind of the framework.
Got it. Very, very helpful color there. Thanks again.
Thanks.
Thank you. And one moment for our next question. And our next question comes from Melissa Wedel from JPMorgan. Your line is now open.
Good morning. Appreciate you taking my questions today. Actually, most of them have already been asked, but I was hoping you could elaborate a little bit on how you’re seeing existing portfolio companies deploying capital? I think you mentioned you had, I think it was four existing companies to add-ons. How are they using that capital? Are people taking share right now? What are they looking to do?
Yes. Look, I would say most companies in generally are not deploying capital. They’re actually doing just the opposite, which they’re increasing – trying to increase margin profile. I think – I don’t really pay attention to because of this to the non-par payrolls this morning. But I think the headline was that is slowing. And so that’s kind of been our experience. The add-ons this quarter, my guess were some small investments in their business and maybe one or two tuck-ins. Yes, the add-ons were actually, I think, strategic M&A. I think there were basically three of those that were strategic M&A, which was trading screen accordance and one other one. So – but I think a little bit of M&A but small.
Thanks, Josh.
And our next question comes from Mark Hughes from Truist. Your line is now open.
Hey Mark, good morning.
Good morning. Any reflections you amended your credit facility in mid-June. What was your impression of the appetite of the banks to kind of maintain or grow their BDC exposure?
Yes, it’s a great question. We’ve been doing this now. What amendment was that in?
Fourteen.
Fourteenth amendment. So we’ve done this. And look, we try to amend every year. We want to make sure that we have is kind of our part of our risk management philosophy. I would say this was probably our hardest submit amendment maybe or our second hardest amendment.
Yes.
Like up in the top two at least, RWAs are constrained in banks. The large non-extending commitment was a U.S. subsidiary and reform bank that we understand exited all their BDC exposure. And so we were lucky enough, I think, which is different from the rest of the space to get additional commitments. But – and we grew our facility. I think others have actually had to shrink their facility. But it is – banks are most definitely capital constraints. You – it’s hard not to miss Jamie Dimon out there over the last couple of weeks, screaming from the rooftops about the regulatory environment and capital requirements. And then with a whole bunch of cash sorting that’s happened from deposits to treasuries, I think it’s very, very hard for banks right now.
I think the good thing is, generally, that means that the asset side is better. But I think it really shows the power of the platform that we were able to grow our facility. And – but it was most definitely harder. Ian, anything to add there?
I think you captured at all. That’s good.
And if anybody else is not feeling that I would love to talk to them. I can’t imagine people are not having the general comments. And six weeks like, look, we’re lucky, we’re the benefit of a broad $70 billion alternative asset manager that is meaningful to Sixth Street, and we have good relationships, and it most definitely – I think that most definitely helped us, but it was most definitely harder.
Yes, I appreciate that. And this may just be quirk of the – your industry mix, but it looks like human resources support services moved up to third, financial services dropped down a little bit. Is that just some of the investments you made this quarter? Or is there any intentionality there?
No. I mean look, human resources, when you think about human resources, I can tell you, that’s HireVue, which is a software business that support human resource managers in the hiring process. And so I think that position probably grew on the margin, which shifted it.
Yes, yes. Understood. Okay, thank you.
Thank you. [Operator Instructions] And our follow-up question comes from Ryan Lynch from KBW. Your line is now open.
Hey, Ryan, I think it’s your first question. You get as many as you want.
All right. Thanks, Josh. I just had two this morning. You talked about kind of the environment being much better, which is pretty obvious. We’ve heard that a lot from other BDCs of just very attractive deals. I’m just curious, have you noticed then from that, the attractive deals in the environment as well as not a lot of deal activity going on? Has your close rates that you guys have, all BDCs have the famous funnel slide that they put on of close rates. Has your close rates substantially increased over the last six months to nine months versus where it has been from a historical standpoint?
Yes. Look, it’s a great question. The answer is, yes. Although I would say in the last three months or four months, we’ve said we’re kind of saying, no more. Either things don’t hurdle because of the BDC’s cost structure, and we’ll kind of have a lower cost structure than the industry or we don’t like the credit I think we were – our close rate, if you look at it probably was higher at the end of last year. In the beginning of this year, and is kind of – and close rate meaning, I kind of look to book kind of ratio. But I think most definitely, it’s stepped up just because higher quality credits became available and large credits and you like. So, I think that’s true. Most separately for the industry, although I would say that’s kind of normalized back in the last couple of months. Bo, anything to add?
No, you hit it. We’ve seen increasing competition over the last few months. That’s – we’ll continue to be super selective. And I think on the credits that we like, that close rate has remained higher than in historical times, but we are seeing pockets of competition and we’re going to continue to just pick our spots on what we think are the higher quality names and the structures that make sense.
Fish, do you have any different view – you’re on the front line every day on this stuff.
No. It’s the same view. Nothing really to add on that. Yes.
All right. I appreciate everybody, comments on that. The other question I had is probably for Ian. You mentioned you guys are always looking at your capital structure from the liability side. You guys do have some notes due in 2024, which had some time. I’m just curious, if you were to issue new notes today, I’m assuming you guys on to you, guys issued new notes today and then swap out the rate on those as you guys have done in the past? What sort of pricing would you guys expect to get?
Look, Ian gave me the shrug of the shores, which the market is going to tell us. I think the way to think about it is, a, we have $650 million of liquidity. Our next note due is 300 – $347 million in November of the year, so year and a half-ish – there, it would affect generally, what I would tell you with confidence that is going to be dilutive to earnings because of the funding mix. And so we’ve kind of got a little bit of a lift on earnings because the growth in the portfolio, because we refinanced those with lower marginal cost of financing, that marginal cost of financing has been about LIBOR 150 when you think about it on a marginal basis, because you’re getting rid of your commitment fee. And so the funding the drawn funding spread minus your commitment fee is about $150 [ph]. And so everything has been accretive as the funding mix has shifted.
I think you could think about it’s going to be higher on an absolute basis it’s going to be dilutive. And I don’t know if that’s $0.01 a quarter or something – it’s marginally a 0.015 [ph] a quarter, but we’re most definitely committed to – by the way, I know you’re doing the math of what a $0.01 in quarter is, and then you can figure out what we think the spread should be. But it’s in that range. From a $0.01 to $0.015 a quarter dilutive if we do an index-eligible deal. Is that? Yes. But look, the market is going to tell us what that is. It ultimately is still a relatively small part of our cap structure. And so it’s not massively dilutive. But funding mix is important to us. We’ve committed to have a funding mix. But it’s a good question, but the market is going to tell us the exact spread.
Gotcha. That’s helpful. Appreciate the comments today. That’s all for me.
Thank you. And I am showing no further questions. I would now like to turn the call back over to Josh Easterly, CEO for closing remarks.
Great. Well, thank you for your support. I know we spent a lot of time with people in the last couple of months. We were having those conversations with dialogue. Please feel free to reach out to the team if you have any questions. And I hope everybody has a good end of the summer and Labor Day, and we’ll for sure see you in the fall. Thanks, everybody.
This concludes today’s conference call. Thank you for participating. You may now disconnect.