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 TPG Specialty Lending Inc.'s Fourth Quarter and Full Year Ended December 31st, 2019 Earnings Conference call.
Before we begin today's call, I would like to 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 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 fourth quarter and full year ended December 31st, 2019 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-K 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 noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the fourth quarter and full year December 31st, 2019. 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 TPG Specialty Lending Inc.
Thank you. Good morning everyone and thank you for joining us today. Let me start off by reviewing our full year and fourth quarter 2019 highlights and then I'll hand it off to my partner and our President, Bo Stanley to discuss our portfolio activity and metrics. Our CFO, Ian Simmonds will review our financial results in more detail, and I will conclude with final thoughts before opening the call to Q&A.
After the market closed yesterday, we reported fourth quarter net investment income per share of $0.51 and net income per share of $0.57. This resulted in full year net investment income per share of $1.94 which corresponds to a return of equity of 12% and the full year net income per share of $234 million, which corresponds to a return on equity of 14.5%.
Supported by the earnings power of our portfolio, we generated earnings in excess of our base dividend; more on this in a moment. The difference between this quarter's net investment income and net income per share was primarily driven by unrealized gains from both the impact of net tightening credit spreads on the valuation of our portfolio and portfolio company-specific events.
At year end, our reported net asset value per share reached another high record of $16.83 compared to $16.72 in the prior quarter and $16.25 at year end 2018. Yesterday, our Board approved a 5% increase from our quarterly base dividend from $0.39 to $0.41 per share to shareholders of record as of March 13th payable on April 15th.
Our Board also declared a Q4 supplemental dividend of $0.06 per share to shareholders of record as of February 28th payable on March 31st. Finally, our Board declared aggregate special cash dividend of $0.50 per share that will be paid to shareholders during Q2. Specifically, $0.25 per share will be payable on April 30th to shareholders of record as of April 15th and $0.25 per share will be payable on June 30 to shareholders of record as of June 15th.
There's been a couple of changes to our dividend policy this quarter. So, let me take a few moments to discuss these in detail starting with the increase in our base dividend. As we've said many times in the past, we view base dividend as an ongoing cash liability and therefore, we said it at a level that we believe with a high degree of confidence will be supported by the earnings power of our portfolio. This is evidenced by our track record of strong base dividend coverage to net investment income which through the end of 2019 has averaged 127% since our March 2014 IPO.
Nearly three years ago in May 2017, we introduced a variable supplemental dividend framework as a way to enhance cash distributions to our shareholders and slow the growth of our excise tax, while preserving the stability of our net asset value.
Since that time and given the change of the regulatory framework in the form of lower asset coverage requirement, we believe the fundamental earnings power of our business has increased slightly offset by the decrease in LIBOR over the course of 2019.
Taking into account our go-forward expectations for balance sheet leverage, asset level yields, and potential for credit losses, we believe again with a high degree of confidence that our portfolio will support a higher base dividend.
As for the $0.50 per share special dividend that our Board had just declared, those who know we've historically stayed away from paying specials given our focus on building net asset value and aggregate long term shareholder base.
While our philosophy hasn't changed, our consistent overearning of our dividends combined with our expectation of near-term capital gains from portfolio realizations will likely result in RIC distribution requirement issues that we wanted to proactively address.
While these special dividends were a tax-driven decision, holding all else equal, we expect that our return on equity will experience a slight uplift as a result of capital efficiency gains from the reduction in excise tax on our undistributed income and a slight increase in financial leverage.
Since we've recalibrated our base discipline to correspond with our view of earnings power of the portfolio in the intermediate term, we don't expect any RIC distribution requirement issues for the foreseeable future.
For avoidance of doubt, there will be no changes to the calculation of our quarterly variable supplemental dividends except to note that the impact of the special dividend will be excluded from the purposes of the NAV constraint which ensures that our NAV declines by no more than $0.15 per share over the current and preceding quarter pro forma for the impact of the supplemental dividends.
Before passing it over to Bo to talk about our portfolio activity, I'd like to quickly highlight the broader market backdrop and its impact on how we think about our business. This past year was characterized by periods of volatility and divergence in sector performance and their corresponding credit spreads.
Investor preference for high-quality paper was driven by a mixed macro backdrop, deteriorating underwriting standards, and growing concerns around loan downgrades. A flight to quality was observable in rising LCD spreads deltas between first lien and second lien loans between BB and B credits -- rated credits in between cyclical and non-cyclical industries. This trend was particularly notable in the second half of the year. It is the peak in November before moderating at year-end.
As shared on our last call, given the low cyclical exposure in our portfolio, the volatility in credit spread movements throughout the year had a relatively muted impact on the valuation of our portfolio where we took in account -- we took into industry specific comps for each of our investments.
Looking ahead, although we may see positive volatility related to the U.S. presidential election and the unfolding economic impact of the coronavirus. Fundamentally, we think the near-term U.S. economy remains in good shape supported by deescalating trade tensions, accommodative monetary policy and low inflation.
However, we believe economic cycles do exist as such we will continue to focus on staying at the top of the capital structure, limiting our exposure of cyclicals and finding strong risk-adjusted returns for a secondary source of repayment.
As it relates to our financial policy, given the competitive late cycle environment, we expect that we will continue to operate below the top end of our target leverage range of $0.9 million to $1.25 million. This allows us to preserve our reinvestment option to create higher risk-adjusted returns in the next market dislocation.
As a result of our recent efforts on the liability management side, which Ian will discuss in detail, we have ample and diverse funding sources with long-dated maturities to support our capital needs across market cycles.
With that, I'd like to turn the call over to Bo, who will walk you through our portfolio activity and metrics in more detail.
Thanks Josh. The competitive environment for direct lending in 2019 continue to be challenging though we're starting to see signs of stabilization. Compared to record 2018 levels, capital raised for middle-market direct lending in 2019 was down over 35% and private debt dry powder at year-end, albeit still elevated at nearly $260 billion was down over 10% from the prior year.
Given this ample dry powder in the credit bifurcation in the broadly syndicated market that Josh mentioned, one of the main themes over the past few quarters has been the growing market share of direct lenders and large syndicated sponsor financings.
Our decision on whether to pursue a particular opportunistic investment strategies informed by the risk reward dynamics in that market. For us, we found that in the current environment the best risk-adjusted returns continue to transpire from our sector themes. By partnering with sponsors and companies only in situations where we have a differentiated view of the business or the sector or the ability to provide creative solutions for complex situations, we've been able to command better pricing and terms compared to the broadly syndicated markets.
To give you a flavor of our investment activity, over 25% of total commitments this year on a dollar basis were in retail asset-based loans that we underwrite based on liquid collateral values instead of enterprise values, which tend to fluctuate with market cycles.
Our robust deal activity in retail ABL in 2019 is reflective of the particularly challenging year for brick-and-mortar retailers, which saw a record high 9,300 store closings. We believe there will be -- continue to be disruptions in the traditional retail model and therefore the ongoing need for capital solutions in the space.
Given our platform's relationships and core expertise in retail ABL as illustrated by an average gross unlevered IRR of 23% on fully realized retail ABL investments, we expect this to continue to be one of our investment themes for the period ahead.
Outside of retail just under 50% of total commitments in 2019 were sponsored transaction within our specialized sector sub-themes such as business services and fintech where we believe we have a competitive advantage and where the underlying businesses have attractive revenue characteristics, high-quality customer bases and strong returns on invested capital.
Overall, we had a productive Q4 with total commitments of $329 million and total funding of $289 million across nine new investments and upsizes to four existing investments.
This quarter we were agent on eight of nine of our new investments, which we believe is valuable in our ability to control the loan structuring and monitoring process. Compared to the record repayment activity of $383 million in Q4 of last year, this quarter was relatively quiet with a $104 million of repayments from one full and six partial investment realizations, resulting in net portfolio growth of $185 million for Q4.
For full year 2019, we generated $1.2 billion of commitments and $1.1 billion of fundings. We had total repayments of $575 million for the year resulted in net portfolio growth of $512 million.
To get a more accurate snapshot of our portfolio's growth trend, it's best to look at it over a longer 18-month period given the strong repayment levels we experienced in late 2018. Over the last 18 months, our portfolio grew by $291 million or a modest 10% on an annualized basis.
Looking at the year-over-year portfolio trends as the portfolio grew in 2019, we kept our average investment size steady, resulting in an improvement in the diversification of our portfolio.
Our top 10 borrower exposure decreased to 33% of portfolio at fair value down from 39% in the prior year. Similarly our portfolio of cyclical exposure, which excludes our asset-based loans in retail and our reserve and asset-based loans and energy decreased from 4.1% to 2.9% of the portfolio year-over-year on a fair value basis.
At December 31st, our top two industry exposures on a fair value basis were business services at 16.8% and retail and consumer products consisting predominantly of retail asset-based loans at 14.9%.
From a credit statistic standpoint, we continued to improve the interest coverage and net leverage profile of our portfolio. At year-end, across our core portfolio companies, our average net attachment point was 0.2x and our average last dollar leverage was 4.2x compared to 0.4x and 4.4x a year ago. And the average interest coverage ratio for our core portfolio companies improved from 2.8x to 3.2x year-over-year.
We had no investments on non-accrual status at year-end and the overall performance of our portfolio remained steady at 1.15 on our assessment scale of 1 to 5 with one being the highest compared to 1.14 in Q4 of last year. We continue to have limited junior capital exposure with 96% first lien exposure at year-end.
On the underwriting side, we source 99% of our portfolio through non-intermediated channels. This has supported our ability to structure effective voting control on 80% of our debt investments and an average two financial covenants per credit agreement. It has also supported our ability to structure call protection across our debt portfolio, which provides fee income in periods of high portfolio turnover to support our ROEs.
As for portfolio year – yields at year-end, the weighted average total yield on our debt and income-producing securities at amortized cost was 10.7% compared to 10.8% in the prior quarter. Breaking down the drivers of this yield movement, there was 30 basis points of downward impact from the decrease in the effective LIBOR across our debt investments, which was partially offset by 20 basis points of uplift from the yield impact of new versus exited investments. The yield at amortized cost on new investments this quarter was 12.3% compared to 12.0% on exited debt investments.
With that, I'd like to turn it over to Ian.
Thanks, Bo. As Josh and Bo mentioned, this quarter was strong from both an earnings and originations perspective. In Q4, we generated net investment income per share of $0.51, which put our 2019 full year net investment income per share at $1.94. At year-end, we had total investments of $2.2 billion, total debt outstanding of $1.1 billion, and net assets of $1.1 billion or $16.83 per share, which is prior to the impact of the $0.06 per share supplemental dividend that will be paid during Q1.
Given our increased net funding activity this quarter, our average debt-to-equity ratio moved into our revised target leverage range for the first time, increasing from 0.86 times in the prior quarter to 0.97 times. Our average debt-to-equity ratio for the full year was 0.84 times consistent with our prior year and our leverage at December 31 was 1 times.
Following our inaugural index eligible unsecured notes offering in Q4 that we discussed on our November earnings call, last month we made further enhancements to our capital structure and liquidity profile by increasing the commitments under our revolving credit facility from $1.245 billion to $1.315 billion, and extending the final maturity by approximately a year to January 2025.
In addition, in January, we opportunistically reopened our 2024 notes, increasing the total principal amount outstanding from $300 million to $350 million. We were able to execute the reopening at a price above par, which implied a spread to five-year treasuries of 195 basis points, 50 basis points tighter than the implied spread on our original transaction. This reopening allowed us to increase our unsecured funding mix with negligible impact on our weighted average cost of debt and therefore our ROE.
Given our risk management principle of mitigating interest rate risk across our floating rate portfolio, we entered into a fixed to floating interest rate swap on the $50 million of new notes consistent with the rest of our fixed-rate debt. Pro forma for the revolver amendment and the use of net proceeds from the notes reopening we had $870 million of undrawn revolver capacity at year-end. We feel very good about our capital position and the significant amount of liquidity we have to support our reinvestment option in environments, where we can generate outsized ROEs for our shareholders.
Turning to our presentation materials. Slide 9 is the NAV bridge for the quarter. Walking through the main drivers of this quarter's NAV growth, we added $0.51 per share from net investment income against the base dividend of $0.39 per share. There was a positive $0.04 per share impact from credit spread movement on the valuation of our portfolio and a negative $0.03 per share impact from net unrealized mark-to-market losses on the interest rate swaps on our fixed rate securities given movements in the forward LIBOR curve. Other changes in net realized and unrealized gains, primarily driven by portfolio specific events contributed a positive $0.07 per share impact to this quarter's NAV.
Moving onto our operating results detailed on slide 11. Total investment income for the fourth quarter was $66.5 million, compared to $70.1 million from the previous quarter. Breaking down the components of income, interest and dividend income was $57.6 million, up $1.5 million from the previous quarter as a result of the increase in the average size of our debt portfolio.
Other fees which consists of prepayment fees and accelerated amortization of upfront fees from unscheduled pay downs were lower at $1.8 million compared to $11.2 million in Q3 given quite pre-payment activity this quarter.
Other income was $7.1 million compared to $2.7 million in the prior quarter. Net expenses excluding management and incentive fees for the quarter was $16.5 million, up from $16.1 million in the prior quarter due to higher interest expense from an increase in the average quarterly debt outstanding.
Our weighted average interest rate on average debt outstanding decreased 24 basis points quarter-over-quarter, primarily from the decrease in the effective LIBOR across our debt instruments. Given the one quarter timing lag on the LIBOR reset date on our interest rate swaps and the downward movement in LIBOR during Q4, we expect a continued tailwind to our weighted average cost of debt in next quarter's results.
Let me take a moment to wrap-up on the ROEs of our business. After record repayments at the end of 2018, we steadily rebuilt the portfolio increasing our financial leverage from 0.59 times to 1 times, while maintaining a strong return on assets of 12.5%. With an average debt-to-equity ratio that was consistent with the prior year at 0.84 times, we generated ROE on net investment income of 12% and an ROE on net income of 14.5%.
Looking at year-over-year trends, our ROE on net investment income decreased from 14% in 2018 mostly resulting from record 2018 repayment levels which corresponded with elevated activity related fees. The increase in our ROE on net income from 11.6% in the prior year to 14.5% was partially driven by an increase in portfolio valuations resulting from a reversal of the Q4 2018 credit spread widening. It was also driven by net unrealized gains related to certain portfolio investments and net unrealized gains on our interest rate swaps, resulting from changes in the shape of the forward LIBOR curve.
I'd like to quickly flag that per our adoption of recent hedge accounting guidance, we've applied hedge accounting treatment to our 2024 unsecured notes and the related interest rate swaps. As a result, changes in the fair value of this particular interest rate swap will be offset by changes in the carrying value of the 2024 notes. There will be no unrealized gains or losses recognized in our income statement related to this hedging relationship, and therefore changes in the fair value of the swap will not impact our ROE on net income going forward.
As we look ahead to full year 2020, based on our expectations over the intermediate term for our net asset level yields, cost of funds and financial leverage we expect to target a return on equity of 11% to 12%. Based on our pro forma year-end book value per share of $16.77, which includes the impact of the Q4 supplemental dividend; this corresponds to a range of $1.84 to $2.01 for full year 2020 net investment income per share.
With that, I'd like to turn it back to Josh for concluding remarks.
Thank you, Ian. Our fourth quarter results supported another year of strong ROEs for our shareholders. For the year ahead, our objective continues to be generating attractive risk-adjusted returns for our shareholders for our direct origination strategy, the differentiated human capital expertise across our platform and capital allocation decisions that serve in the best long-term interest of our stakeholders.
Before moving to Q&A, I'd like to address the pending topic regarding our broader TPG Sixth Street Partners investment platforms relationship with TPG Holdings. Our Sixth Street business was started in 2009 as a strategic partnership with TPG. Sixth Street currently manages $33 billion across the platform with over 250 people and nine global offices.
In the past 10 years, our Sixth Street business and TPG have each grown and evolved thoughtfully and in productive ways. Likewise, so has a relationship with TPG. My partners and I at Sixth Street have been having a series of discussions with TPG about the next step in the evolution of our relationship, including the option of operating the independent organizations with TPG continuing to maintain a minority stake in the Sixth Street business. Given Sixth Street scale, sector expertise, market presence and the fact that we have already been operating autonomously, a potential next phase as an independent organization is going to be business as usual.
For TSLX, there would be no changes to the dedicated management personnel of our business and our shareholders will continue to benefit from the same sourcing, underwriting and operational capabilities of the platform they have experienced with TSLX since inception. As of today, no formal agreement has been finalized and there's no guarantee that one will be reached, in either case, or we business as usual for us. Those who know us know that our NorthStar has always had -- make decisions in the best interest of our shareholders.
With that, I'd like to thank you your continued interest and for your time today. Operator, please open up the line for questions.
[Operator Instructions] Our first question comes from Rick Shane with JP Morgan. Your line is open.
Hey, guys. Thanks for taking my questions this morning. Josh, you partially addressed, my first question in your final comments related to the separation of Sixth Street from TPG. But I am curious, do you think -- one of the things that has worked well at TSLX over the years is good response to incentives? Do you think your incentives are going to change as you separate from TS -- or from TPG?
No. Hey, Rick. Thanks for the question. I think we're both on the same time schedule, which is pretty early in the morning. So, excuse, I'm down with a little bit of the cold. Look we tend to remain exactly the same. All the team's economic group based in the Sixth Street business. And the focus of the team has always been able to create long-term value for both our private LPs and our public shareholders. And we effectively had very limited economics coming from the activities across the firm.
So I think the incentives remain exactly the same and actually probably a little bit stronger on a go-forward basis. If we come to a conclusion that we're going to operate as independent entities, but it's basically business as usual and the focus was again has always been if you take care of your shareholder, you take care of your private LP, everything else kind of falls in place, focus on your client, focus on your customer.
Got it. Thank you for that. And then sort of on a more portfolio-related question. When we look at the portfolio on a year-over-year basis of the top 10 investments today for our new investments, two of those being ABLs which typically are shorter -- have a shorter time on the balance sheet. Is that the type of rotation that we should continue to expect on an ongoing basis? And the reason I asked that, is that as you -- as the company continues to scale, do you expect to do slightly larger transactions and drive a higher rotation of that top 10?
Yeah. Those are very good questions. So I -- let me break it down. I think there's been a -- and part of our late cycle focus has always been that you can manage being the late cycle in our mind kind of four different ways. One is to move up the capital structure. The second is, being defensive industries where you have sources of repayment that are not related to the economic cycle. The third is to create more diversity in your portfolio. And the fourth is, to have run lower balance sheet leverage.
So, I think, the -- we've created, year-over-year, a lot more diversity in our top 10 investment. And you'll also see things that have less correlation to the economic cycle. And that could be things that have strong secondary sources of repayment from asset values that are not related to the economic cycle or shorter duration investments. So I think that will be a continued theme for us on managing how we think about beating the late cycle. So I don't know if I answered your question, I hope I did.
No, you did. I mean, I think, I would have in some ways expected greater concentration of new investments in the top 10, typically that sort of ratchets up over time. But I was in part curious if it was not increasing is a function of that sort of late cycle defense -- more defensive approach?
That is correct.
Correct.
That’s it for me. Thank you, guys.
Great. Thank you.
Our next question comes from Fin O'Shea with Wells Fargo. Your line is open.
Hi. Good morning. Thanks for taking my question. Just a couple on portfolio names. I'll start with a small investment AvidXchange, which was recapitalized this quarter; you're in the debt/equity now. But can you give context on how this fits into your platform structure.
There was a post quarter announcement that you had a funding round. I don't know if that news was in January, I don't know if that was the same deal. But I'm mainly asking in the purpose of, is this a name that sort of migrates to your -- from the debt platform to the capital solutions strategy?
Yes. Hey, Fin, let me start off first with the industry and then I'll put -- I'll turn it over to Bo to talk about the investment. So at exchange we've been around, I guess, probably for four or five years. It fits squarely in our theme of B2B payments and payment ecosystems. So it provides -- it's a company that has an ecosystem that provides payments across that ecosystem, mostly in property management and the property management sector. So it fits squarely in our theme.
The business has continued to grow significantly. It continues to reinvest and grow at a significant rate. The latest investment we did, quite frankly, have a larger structured equity investment. And so we de-risked, because it was less appropriate to fit inside the change of platform. In that series of transactions where they raised junior equity to our structured equity, they also redeemed out of our original equity investment. I'll turn it over to Bo if I missed anything.
No, I think, you touched on everything. This has been a long-term relationship and part of the theme that we've been pursuing over the last five years and the numbers of B2B payments. You picked up the announcement of the junior capital raise, a series upraise of $125 million in late December, in addition to our debt and our prep solution. So that's what was picked up in the press.
Okay. Thanks for the context on that. And so some -- a question on Forever 21 being an ABL. That’s a very rich spread you attained. And I think as we speak, it might have been paid off, given the acquisition of the brand by strategic. But can you give us context on was that -- again, we don't see an ABL spread that these days? How much of that was for just the short amount of time you would hold it, or the risk of going probably a deep stretch second lien ABL, for example?
Yes. So, great question. And Forever 21, I would say, is at this point 97%, 98% result. But I'll walk through it. So, first of all, you can't beat IRR. And people don’t understand when I say that. But, look, if you hold -- if you have a 30% IRR and you hold for a day, you really have no MOM to compensate you for risk to the downside.
So the spread was to compensate for a minimum return, given that we were actually allocating real capital to the situation. It was a DIP financing and where our thesis was you had asset value in the brand, you had two core real estate warehouses in the center of L.A. that we thought were very, very valuable and that we had a real view on. And then, you had the inventory.
What I would say is, Forever 21, is pretty well noted in the press, had a very, very rocky December. As of December 31, we actually had kept our mark basically consistent with our -- with the cost basis, versus what you would have expected. You would have expected it to migrate up to the -- effectively the coal price or coal plus the access fee.
That would, obviously – that we will get our active fee and we would get all of our economics. And in retrospect, that mark was very conservative, but it was a very difficult December for the company. But, look, our thesis was, it was a little bit too big to fail. It was one of they biggest rent payers in the mall ecosystem. I think Calvin centers was 2.5% or 2%, 2.5% of the rents. And so it was a little bit too big to fail that it had a real brand name and then it had real underlying asset value in the form of inventory and real estate.
As of yesterday with the proceeds we have about $9 million outstanding against a real estate property that's basically under contract for I think $19.5 million. So again it's basically revolved. But in December was -- it was -- we had a very conservative mark. And again it goes to the expertise of our platform of understanding component parts of underlying asset values of these companies.
Okay. Got it and that’s all from me. Thanks so much.
Thank you. Our next question comes from Mickey Schleien with Ladenburg. Your line is open.
Yes. Good morning, everyone. And Josh thanks for getting up early and battling through your cold. I wanted to ask a high-level question. To what extent do you believe the volatility and the more liquid loan markets may benefit your direct lending platform going forward given that we're hearing more and more borrowers are migrating away from BSL toward direct lending?
Yes. So it's a great question, Mickey. Look I think that the -- out processing that the there's been some volatility in the broadly syndicated market that the broadly syndicated markets have been really differentiated by the have and have not. That kind of diverse course so the correlations will no longer won across credit spreads. That has reversed course a little bit. And there's -- the correlations are getting tighter.
My deep overall concern is that for the industry is that given where the industry sits on the cost curve i.e. when you look at our base management fees and our incentive fees. That we better be a little careful that will be a lot careful of being a pure substitute to the broadly syndicated market where people can access the broadly syndicated market at 50 basis -- 25 basis points to 50 basis points through a closed-end fund or a CLO structure and us effectively creating the same risk return, and -- because we sit so much higher on the cost curve.
This has actually been a theme for me Mickey that you and I have discussed probably now over five or six years which was my problem with TICC, which was they basically brought broadly syndicate loans and brought other people's CLO equity and didn't manufacture their own and so where they send the cost curve they were basically taking $1 and destroying -- the $1 providing something we less than $1 value shareholders given where they on the cost of.
So my hope is that if the industry will be volatility as a way to create solutions and certainty and get paid for that providing that certainty to issuers if the industry is effectively substituting and providing the theme risk reward at higher on the cost curve the industry is going to be in deep trouble.
I understand. And I thank you for that color. That's really helpful. Josh, your firm is well-known for doing deep dives on a sector basis and obviously with some particular specialties. I'm curious to understand what you're thinking in terms of the alternative energy sector? We get -- everybody talks about oil and gas. And how to favor it is but there's a flip side obviously as to what's going to replace that. So are there borrowers in that space that are of the right size with the right balance sheets and cash flow profiles that are starting to look interesting to you?
Yes. So good question. So as you -- I think, you're exactly right. I think there's going to be quite frankly given the disruption in energy and how much capital has been destroyed and upstream E&P and quite frankly the demand probably for traditional carbon products going down. There's going to be opportunity for people who have deep knowledge on where assets in the cost curve, what their decline is, what the unit economics are. There's going to be opportunity given the lack of capital of the industry the energy industry will attract over time for people who are net debt return.
As it relates to the alternative energy space, the answer is -- we actually have a very -- we have a great team sitting in New York focused on all energy and infrastructure project – run on energy. They typically fit better in a private fund format because they typically -- were typically buying assets or cash flow from assets versus winding the corporate borrowers, and so we've done a lot of stuff in renewables in Spain and Italy where the take-or-pay contracts. And so they typically have not hit the typical corporate loan that is required under the 40 Act is a good asset.
And they've typically taken another form, which is buying street cash flow or buying asset with little or no merchant risk. That being said we have the expertise and so if a corporate loan does pop-up that will be a great opportunity for us. But your entities again are I think are right. I think generally the energy space is a little bit of a mess start back in 2015, I guess, but it's continued most forward and structured enough, people got the decline goes wrong. Demand for carbon products are going down. The equity markets and high yield markets [indiscernible]. And then you have emerging disruptive technologies in all synergy.
And so I think over a period of time that it can be a unique spot for us to take the expertise of our platform and create value. That being said, we have – you have some commodity price risk. And so we're going to be very careful when we do that.
Thank you for that. And if I could just finish with a couple of sort of housekeeping questions. Just to gauge risk in the portfolio, can you give us a sense of what the portfolios average debt-to-EBITDA ratio is?
Yes. I think Bo covered in the prepared remarks I think it's gone down year-over-year. Our last on average the last dollar attachment point is 4.2 times. That compares to that on average last year of 4.5 times. On an interest coverage basis it's I think also got better that's effectively – and I'm giving exact numbers. I think it was 3.2 this year compared to 2.8 last year. I mean and some of that quite frankly is earnings grow a mix between earnings growth and that continues to be having a commented.
Okay. And lastly maybe for Ian. Just at a high level Ian on a portfolio company basis. What were the main drivers of the realized loss and the unrealized gains this quarter?
On the unrealized – there's no major driver. It's – I don't want to describe as cats and dogs but there's probably about 12 names that contribute to that overall. So nothing specific stands out. There’s a small realized gain on a liquid name that we have but it's less than $0.05. There's really nothing major to highlight.
Yes. I mean look I think curriculum, which I think has publicly announced that got refinanced in Q1, so the remarkable update basically up to the call price that was $0.02. But there was nothing that will contribute more than $0.02 on a single basis, right?
And that's also the case with the realized loss?
Yes.
Okay. That’s great. That’s all for me this morning. I appreciate your time. Thank you very much.
Great. Thanks, Mickey.
Thanks, Mickey.
Our next question comes from Chris York with JMP Securities. Your line is open.
Good morning, guys and thanks for taking my questions. This one may be for Ian. So other income was a record this quarter. Can you break down some of the drivers there? Whether that was led by higher structuring or syndication fees?
Yes. So we actually didn't have any syndication fees in the quarter Chris. And I'll just give you a little bit of context, if you look at our call it an activity basis fee so accelerated OID from prepayments which there wasn't that much of this quarter. And obviously we didn't have that many prepayments in general.
If you look at that plus syndication fees, which was zero and then our other income. Collectively those items were $0.14 per share for the quarter. If I look at what those items collectively have been over the last four years, the average has also been $0.14 per share.
So in aggregate, we're basically the same as what we've experienced historically. In the other income items this particular quarter, it was really driven by an amendment that I think was known to the market with Ferrellgas and then we had a couple of other items that we're calling them work fees could be involved some service and input on our part that drove that other income line.
Very helpful. I noticed that you did put in the K that it was an amendment fee. So how much was that amendment fee, specifically in the fourth quarter?
Look Ferrellgas is publicly traded company. I don't want to get into details. I think the total other income is dollar-wise ...
$7 million.
$7 million and Farrell was a own pay – it was a smallest piece of that. So, but people should look at the Farrell K or they're public reporting and what they disclosed.
Got it. Okay. And then in your prepared remarks you said that some of your decision to issue a special dividend this year was driven by expected gains I think in maybe the first half of this year, does that include Ferrellgas or curriculum, or what are the specific drivers there?
Let's take a – if we take a step back and I mean it turns a little the greatest tax person. But I do kind of play on every once a while. We had about $1.60 per share in undistributed income. And we barely made – and by the way this is all manageable. But our tax year ends in March and we were basically only had about $1.8 million or $2 million of room against the minimum distribution requirement of $0.90 [ph] we got 90%.
And so – and again that could have been – that's all solvable and would have been solved. But if you look forward at where our base seven is and where our kind of recurring special – not we don't call special…
Supplemental
Supplemental dividends are through the year, effectively on an accrual basis in Q1, we would have been out of compliance with the minimum distribution requirements. Now we have until March 20 to March 21 [ph] to solve that. But on an accrual basis, we would no longer be – and that's a function of both net investment income and cap gains.
And so that played a big part of it, which is we knew we are going to have to make a large special dividend by March 28th, 2021. It was known we are in an effective accrual basis we would have been out of compliance. In Q1, we barely made it in Q -- for this tax year. So, that's one piece of it.
The second piece of it is that the excise tax was continuing to grow and continuing to burden shareholder returns and was just a pure friction cost. And so we were able to minimize -- we basically are reducing that by a third on a pro forma basis. And that will grow again quite frankly, but we're reducing that by a third.
And so -- and then the third piece of it was that there is capital efficiency in that we're saving -- we're effectively reducing our equity and that has an associated cost of capital and borrowing which has an associated cost of capital that's a lot.
And so when you put all those three things together which is we knew we were going to have to be in compliance on a rig basis in 2021. We knew we weren't going to be in compliance in 2021 that the -- that this is actually on a net income basis accretive because you're saving the excise tax, you're saving a little bit of management fee given that you go into the break which has been reduced by interest expense and reduced by a little bit of Infinity, but it's positive about $0.01 a share on a net income basis given the excise tax. And you're generating higher ROEs it seems like although it was not consistent with the past actions the fact that circumstances have changed.
Color is extremely helpful. And Josh you played the role well as a RIC expert--
The only thing I would add Chris and we read your report that came out last night and you referenced the growth in undistributed income year-over-year. And I think that was actually pretty good as a way to think about one of the inputs into how we sized the special dividend.
So, this time last year, our undistributed income was we estimated at about $1.22, top for the year, we're now at $1.60. So, there's $0.38 of growth over that period. So that was one of the inputs into how we size that Josh referenced the potential to say excise tax which is important to us because that's loss to the system and then we're also very focused on preserving NAV.
And so the other way we thought about sizing of specialists. They looked at a year-on-year growth that we had achieved through operating results in 2019. We backed off the impact of the swaps with the tailwind that we got from mark-to-market movements in the swaps. So, that's sort of triangulated to $0.50 special dividends. That's what we're thinking behind it as we had discussions with the public.
Sure, it makes a lot of sense. I was just trying to -- I mean when I was looking at undistributed income growth, the comments you had in the prepared remarks were just what I was focused on. So, I'll switch gears.
The last one was on your potential separation agreement. So, I think investors had generally thought the BDC and then TSSP had received some halo benefits from its association with TPG. So, given the recent change at the adviser with TPG, why would it be wrong for investors to think either the informational advantages or maybe even the future capital raising with LPs seem to be consolidating relationships could be impacted going forward?
Yes. Look I mean I think if there was a halo benefit if you look back nine years ago. Today, the TFS 3 platform is $33 billion of AUM. These conversations we had conversations obviously with our private LPs. They've known about the changing relationship over the last nine years.
When we started the business, there was 10 people, today, there's 250 people. We've built out industry expertise. We haven't relied on the firm for any informational advantages for years. So, I don't -- again I think business as usual that cap -- again, I would say that nothing is done. But it was in the press and surely that our revolver lenders the minimum was done post the being impressed the revolving lenders didn’t care our cost of capital and change.
We did a tap on the bond deal, our cost of capital didn't change quite frankly went down and so it is -- and it's been very well-known in both the LP market and I think with our shareholders, this has really been a JV controlled by the TSSP class picture partners and manage -- nobody's ever done our investment committee -- nobody's ever referred to deal to us in the BDC. And so it is really the business as usual.
Yes, that's a good answer. And obviously your comments on the debt capital mitigate our concerns there. So, good perspective. Last one just following up on that. So, I know the fee was very nominal but -- and the separation agreement is pending right now. But will there be a suspension of the licensing fee to TPG for the use of your name, would that expire?
Yes. So, there is -- look again there is no -- there hasn't been any actual fee-related to the TPG Specialty Lending. So, -- and that either -- the management company has paid or the shareholders have paid obviously.
On a go-forward basis, I think to be determined, but quite frankly, it's really Sixth Street Partners branded business Sixth Street Partners managed business and again there hasn't been a deal. We haven't come to a deal with all that reflects.
Got it. That's it for me. Thanks guys.
Thank you. Our next question comes from Kenneth Lee with RBC Capital. Your line is open.
Hi, thanks for taking my question. Wondering if you could talk about the key factors driving the -- you mentioned an increase in the potential earnings power that is supporting the increase in the base quarterly dividends this year? And how much of that would be dependent on any movement within the LIBOR rates? Thanks.
Yes, it's a good question. So first of all, let's take a step back. I don't think the increase in the dividend from $0.39 to $0.41 is more of a resetting what the dividend should have been years back. I think on a last year in supplemental dividends, we paid out $0.19. And so, there was -- and by the way and we grew NAV even though we paid out $0.19.
And so if you divide to simple math 19x4, that's what $0.47, $0.46 a quarter and on $0.39. And so the business last year which was slightly a little bit of a higher LIBOR environment. Would have supported with still growing NAV a basically a dividend around $0.44 to $0.45 per share.
We're still over-earning…
With growing NAV that so I -- it's more a function of that the dividend was undersized for years and years and years. And then, there was a change in the asset coverage ratio which would allow for greater financial leverage which obviously boosted ROEs. And so, it's the combination of those two things.
When we look at the -- when we look at our ability to earn the dividend or even our ability to earn the dividend with coverage, which is how we think about it take the dividend as a cash liability, we don't look at spot LIBOR today. We look at the forward LIBOR curve. That will be a headwind.
But the earnings as a business we've already massively over-earning the dividend. And so even if you walk or a year or two years out and look at the spot LIBOR curve you still feel very good about the newly-sized dividend for the existing power of the business.
Got you. That's very helpful. Just one follow-up, if I may. You mentioned within your prepared remarks seeing a slight uplift in asset yields on new investments. Wondering if you could just elaborate what's driving the uplift in yields despite the movement in LIBOR rates in the quarter? Thanks.
Yes. Look I think it's pretty idiosyncratic quarter-to-quarter things bump around. So what I would say is the overall trend of the industry continues to remain super competitive. I mean, I think yields on new investments were 12.3% in Q4 that a large function of that was little over 21% in Q3 was 10.4% and Q2 was 11.4% and Q1 was 10.7%.
So again I think the -- as idiosyncratic the industry continues to be very, very competitive. But my hope is that the industry is going to start trying to take spread back as label falls and realize that they need to provide an acceptable return given where we've seen the cost structure to shareholders.
Understand, very helpful. Thank you.
Thank you. Our next question comes from Robert Dodd with Raymond James. Your line is open.
Hi guys, good morning. And thought was exactly the point you just made Josh in terms of the industry -- the hope maybe the industry will try and take spread back. For lack of a better term is you intend to kind of put a stake in the ground on spread on your front because right now, it looks like the industry really isn't doing that.
Forward curve is down -- spreads don't really seem to be widening and that broader markets are still tightening. So I mean any color you can give us on your willingness to hold that ground if everybody else loses their minds around you, if you will?
Yes. Look we're willing to give up low for the manager and for the platform to protect shareholder economics. And the -- again it has to work for shareholders and have to work for private LPs that the watch out is that, I think people are ignoring the forward LIBOR curve. Either they're ignoring it or they're making a bet against the forward LIBOR curve.
The -- overall the industry earnings power if they don't take back spread is going to go down absent massive changes of leverage given the forward LIBOR curve. That compounded with a lot of people fix their funding costs. And so, that's going to compound the issue.
And so you can't manage the business here. In the moment, you've got to manage the business and look at your cost of capital and look at shareholders' expectations and what the market is telling you about interest rates and your cost of funding.
And quite frankly, we're positioned much better because we have we have LIBOR floors and floating rate LIBOR floor assets and floating rate liabilities and so at some point, if you continue to see LIBOR drift below our floors we’ll have net interest margin expansion. But I think the watch up or the industry is people better -- people should start thinking about that forward LIBOR curve and thinking about what that means for their economic reality and overlay that into what their funding mix looks like.
Got it. I appreciate that so. One more if I can sort of that, on the ABL side obviously you've got a ton of experience. The ABL brick-and-mortar problem has been going on a while. You've gotten great returns out of that.
One of the newer areas of softness, if you will, I think is in grocery, food retail things like that where I think people thought grocery stores were more defensive and against some of the brick-and-mortar retail trends and that's not working out. Can you give us any color on your appetite do those kind of deals, given a perishable versus nonperishable collateral if that changes the dynamic? So if you'd be willing to look at those kind of deals?
Yes. So look you're exactly right that they -- it's a very good point. So, we did great American and Pacific Tea Company back in 2014 which was a grocery store deal and there are packing considerations typically don't impact grocery, but there are packing consideration. There are also the perishable and so, you have to be much more conservative and be more -- much more constructive in the borrowing day -- in the borrowing base and how that works.
Right now, we have to save a lot. But that has some of those similar dynamics. But -- well, I think people never realize about the grocery segment was. It was much -- it was levered to inflation given the large fixed cost structure. And so, I think people proportionally what that inflation would come in and when you have a fixed cost structure that's good. You've had deflation and you've had a lot of disruptive competition. And so, there will be some opportunities, but I think, we'll be very careful.
Appreciate it. Thank you.
Thank you. Our next question comes from Ryan Lynch with KBW. Your line is open.
Hey good morning. Thanks for taking my questions. Just have a couple remaining. As part of -- at least from my understanding, is part of the partnership engine between TPG and Sixth Street. From my understanding, you guys are not able -- each of the parties are not able to start-up competing businesses or overlapping strategies for one year. But then after that you are free to do such. Just curious, has Sixth Street thought about once that one year clock period lapses that you guys will look to pursue other strategies besides credit?
Yes. Thanks, Ryan. Again, there's been no agreement reached. And so, I know there's been stuff reported out there. I think it's a little bit premature. I think your construct is probably roughly right. I don't think this decision was driven by the desire to free to already expand into white space that belongs to the other party. And so, I think this decision if it does come to fruition, it was just about the natural evolution and that people will have their own relationships with LPs and people were managing their own separate businesses and there were synergies that existed any one given the evolution of both businesses. So, I think your concept is roughly right, although no agreement has been reached. I would also say that that wasn't the primary factor of this process.
Okay, makes sense. And then I wanted to follow-up on your response to Chris' question regarding the dividend and the special dividend payment. I think you mentioned three reasons. One of the reasons were for paying a special dividend, is that you guys were potentially going to bump up to some of these RIC payout requirements in 2021. You also mentioned that you don't love paying special dividends. So, I'm curious as you guys still kept the supplemental dividend policy at a 50% payout ratio. It feels like you guys could run into the same issue again a year or two from now as you guys have put up really strong results. So, is there any consideration to increasing the supplemental payout ratio to something higher like 75% or 100% to avoid these special dividends, which you guys said you don't really love paying?
Yes were you at the board meeting by the way? I mean, yes you hit it on the head which was, look, we're only to have a RIC rich problem, even if we had running the supplemental at 75%. We're at 100% quite frankly because, how the supplemental was calculated was based on NII and did it pick up realized cap gains. And so, we were going to have the RIC issue no matter what. And quite on an accrual basis although you had until 2021 to solve that, you were going to have it effectively in Q1 this year.
So, we just think about the other levers increasing it to 75%. That's on the table. Quite frankly, if the business continues to perform, we'll have this issue again. The excise tax kills me because it's pure friction. And so, those things will continue to be on the table as we go forward. But quite frankly, it was a combination of the size of the special, not if you could -- if you needed to do the special, the percentage of the supplemental and the base dividend. And what we did was we hit two of the three. We want to continue to build NAV. And so, we didn't change the percentage, but we hit two of the three levers.
Okay. That makes sense. Those are all my questions. I appreciate the time today and really nice quarter guys.
Great. Thanks, Ryan.
Thank you. And I'm clearly show no further questions at this time. I'd like to turn the call back over to Joshua Easterly for closing remarks.
Great. Well, thank you very much for people's continued interest. The funny thing about the Q4 earnings call, given the additional time we had to get out of our 10-K, we will be talking to you soon for Q1. Feel free to reach out, if people have any questions and please enjoy the spring holidays with your family. And again, please feel free to reach out with any questions. Thanks.
Thanks all.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.