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 the Sixth Street Specialty Lending, Inc. Fourth Quarter and Fiscal Year ended December 31, 2022, Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, February 17, 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 number of factors, including those described from time to time in Sixth Street Specialty Lending, Inc. 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 fourth quarter and fiscal year ended December 31, 2022, 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-K 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 fourth quarter and fiscal year ended December 31, 2022. 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.
Thanks, 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 Simmonds.
For our call today, I will review our full year and fourth quarter highlights and pass it over to Bo to discuss our originations activity and portfolio metrics. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening the call to Q&A.
After the market closed yesterday, we reported fourth quarter adjusted net investment income of $0.64 per share or an annualized return on equity of 15.5% and adjusted net income of $0.56 per share or an annualized return on equity of 13.6%. As presented in our financial statements, our Q4 net investment income and net income per share, inclusive of the unwind of the noncash accrued capital gains incentive fee expense, were both $0.01 per share higher at $0.65 and $0.57, respectively.
For the full year 2022, we generated net investment income per share of $2.01 or return on equity of 12% and a full year adjusted net income per share of $1.27 or return on equity of 7.6%. The difference between net investment income and net income for the year was driven overwhelmingly by unrealized losses as we incorporated the impact of wider credit market spreads on the valuation of our portfolio. The impact of increased risk premiums was presented throughout nearly every asset class in 2022.
During the calendar year, LCD's first and second lien spreads widened by 135 and 686 basis points respectively. There has been a lot of talk about the lack of volatility in private asset marks. In this regard, we agree with Cliff Asness's description of this as volatility laundering.
As we said in the past and for the reasons we outlined in our previous public shareholder letter, we believe that using inputs from the market is not only critical but required and determining fair value of assets. Of the $0.75 per share difference between our net investment income and net income results for 2022, the majority, or 57%, was related to unrealized losses from credit spread movements alone that we expect to recover over time as credit spreads tighten or investments are paid off and 20% was driven predominantly from the decline in equity valuations.
The remaining difference between net investment income and net income is primarily related to: one, the unwind on our interest rate swaps that are not subject to hedge accounting; and two, the reversal of unrealized gains that flow through net investment income upon realization. The overall health of our portfolio remains strong with no changes in nonaccruals from the last quarter.
For the third consecutive quarter, our Board has increased our quarterly base dividend, raising the figure by $0.01 per share to $0.46 per share to shareholders of record as of March 15 and payable on March 31. Year-over-year, we've increased our base dividend by 12.2%. We are also pleased to share that our Board declared a supplemental dividend of $0.09 per share related to our Q4 earnings to shareholders of record as of February 28, payable on March 20. In the near term, we expect that net investment income will exceed our newly established base level due to our increased earnings power.
However, we determined $0.46 per share to be an appropriate level based on looking at the forward interest rate curve through 2025, which is subject to changes in the market. 2022 was a year characterized by spread income as a driver of earnings given repayment activity slowed in the wake of increased market volatility. Portfolio turnover, which is calculated as total repayments over total assets at the beginning of the year, was 26% in 2022 compared to 43% and 41% in 2021, 2020, respectively. The wider spread environment naturally caused a slowdown in repayment activity.
As a result, fee-generating income represented a smaller portion of our total investment income for the year relative to historical trends. We generated a return on assets, calculated as total investment income divided by average assets, of 11.6% for 2022 compared to 11.3% in 2021, which was a year defined by a record level of repayment activities. This further highlights the positive impact on the rise in reference rates and driving incremental returns for our shareholders.
Our year-end net asset value per share, adjusted for the impact of the supplemental dividend that was declared yesterday, is $16.39, and we estimate that our spillover income per share is approximately $0.77. We would like to reiterate that our supplemental dividend policy is motivated by: one, rig distribution requirements; two, not burning our returns with the excess friction costs incurred through excise tax; and three, the goal of steadily building net asset value per share over time.
Before passing it to Bo, I'll spend a moment on how we're thinking about the broader macroeconomic environment. Big picture, we're cautious. But when we think about our portfolio, we are constructive on how we are positioned for the road ahead. The U.S. economy faces a number of headwinds in 2023 that are largely the result of inflation and the resulting shift in monetary policy in 2022. The restrictive monetary environment will surely have an impact on growth. The idea of a near-term Fed pivot remains challenging until job growth slows and the consumer weakens.
In summary, it feels like we're living in a transitionary period, with restrictive Fed policy that will continue to dampen growth until we see an increase in unemployment and further demand disruption. A broad-based slowdown in the economy, coupled with current rate environment, will cause some stress for borrowers.
This highlights the importance of why we are focused on business models with high variable cost structures and with those that have pricing power. 82% of our portfolio by fair value was comprised of software and business services companies at quarter end and are generally characterized by high levels of recurring revenue, predictable cash flows, variable cost structures and pricing power.
Our portfolio has shown resiliency to date, and we believe the underlying business models of our bars are robust and durable. However, we believe economic cycles do exist. As such, we will continue to focus on staying on top of the capital structure and operate in middle of our target leverage range.
With that, I'll pass it over to Bo discuss this quarter's investment activity.
Thanks, Josh.
I'd like to start by laying on some additional thoughts on the direct lending environment, and then more specifically, how it relates to the positioning of our portfolio in a way we're thinking about current opportunities in the market.
2022 was a year that underscored the value proposition of private credit for borrowers. New issued leverage loan volume reached a 12-year low and was down 63% from 2021 as public credit markets were largely unavailable. As a result, private credit providers stepped in as a main source of financing solutions, given the ability to provide speed and certainty of execution despite instability in the broader markets.
One of the main themes over the last few quarters has been the growing market share of direct lenders and the large syndicated sponsor financings. Direct lenders, with the ability to write sizable checks, are benefiting from the opportunity to participate in larger transactions, which otherwise would have been financed in the broadly syndicated loan market.
Notably, these investment opportunities present attractive risk reward dynamics as deal terms have moved in a more lender-friendly direction, indicated by wider spreads, tighter documents and lower leverage. We believe this shift in the underwriting terms reflects the appropriate compensation to lenders given the uncertain environment we're investing in today.
We are well positioned to take advantage of this opportunity in the market, given our ability to invest - alongside affiliated Sixth Street companies. As capital has generally become more constrained, the power of the Sixth Street platform has allowed us to finance larger, more established companies, while remaining selective. We believe this creates a competitive advantage in today's investing environment as the number of direct lenders willing and able to participate in larger transactions is limited.
In addition to the strong originations activity supporting this opportunity in the market in Q4, we have a robust pipeline for the first half of 2023, including several large financings that have already been publicly announced. As we have the ability to co-invest with Sixth Street affiliated funds on these transactions, we have flexibility to determine the optimal final hold sizes for our balance sheet.
Turning now to our investment activity for the quarter, Q4 was productive, with total commitments of $241 million and total fundings of $212 million across seven new portfolio companies and upsizes to five existing investments. We experienced $282 million of repayments from seven full and three partial investment realizations.
The increase in repayment activity was largely driven by idiosyncratic payoffs of our two largest investments by fair value as of 9/30 that we discussed on our last earnings call, violating the front line, which represented 58% of repayments for the quarter. For the full year of 2022, we provided $1.1 billion of commitments and closed $864 million of fundings.
Total repayments were $654 million for the year, resulting in net portfolio growth of $210 million. Year-over-year, our portfolio grew by 11%, which reflects our deliberate effort to grow responsibly. We were able to remain selective in the investments that we make, given the size of our capital base, but not require us to be asset gatherers, but rather bottoms up fundamental investors and focus on driving return on capital for our investors.
82% of total commitments this year were sponsored transactions within our specialized sector sub-teams. We continue to execute on our software and business services themes, where we believe we have a competitive advantage and where the underlying companies have attractive revenue characteristics, high-quality customer bases and robust business models. At December 31, our top industry exposure by fair value was to business services at 14.4%.
We'd like to take a moment to provide an update on one of our retail ABL investments that has recently been in the press, Bed Bath & Beyond. As mentioned during our Q3, 2022 earnings call, we had aged a FILO term loan commitment in September of 2022 to support the operational turnaround by the company and provide additional liquidity. As a result of this transaction, we hold a $55 million paramount commitment as of 12/31 of the FILO term loan, which represents less than 2% of our total assets as of year-end.
On February 6, the company announced it was raising up to $1.025 billion of new equity capital through a public offering. This offering allows the company to avoid bankruptcy found in the near term, which is a positive for all the company's stakeholders, including employees. Along with the capital raise, Sixth Street made an additional investment in a more senior position in the capital structure.
Our position, which is already underwritten to liquidation value, is improved as a result of the new capital raise and our more senior position in the capital structure. Obviously, this remains an ongoing situation that at this moment, we feel good about the security. Our retail ABL capabilities have been a distinguishing feature of our investment strategy since we began the company back in 2011.
We have executed over 25 transactions and invested over $1 billion of capital through TSLX. On these investments, we have taken 9 through the bankruptcy process without any losses. From a performance perspective, gross unlevered return on fully realized retail ABL investments is 20.8% as of 12/31. We have a core competency in managing these types of investments, and we'll look to continue to execute on this strategy through the same playbook we established years ago.
Moving on to the repayment side, one realization that we'd like to highlight is our investment in TherapeuticsMD, which demonstrates the positive impact of proactive asset management for our shareholders. Since our initial investment in 2019, the company faced multiple challenges, including impacts from COVID-19, resulting in underperformance relative to expectations.
As the situation evolves, Sixth Street worked with the company as advisers toward a path asset, including multiple amendments and a large partial paydown prior to our exit.
In December 2022, Sixth Street's debt was fully repaid when the company licensed full commercial rights of its products. TXMD will continue to be a public company receiving milestone payments and 20 years of royalties on sales. Through active portfolio management and extensive experience in the healthcare space, TSLX generated approximately 15.5% IRR and 1.4x MOM on the investment with a beneficial outcome for both parties.
From a portfolio yield perspective, our weighted average yield on debt and income-producing securities at amortized cost increased to 13.4% from 12.2% quarter-over-quarter. The increase primarily reflects a rise in the weighted average reference rate reset of 115 basis points over the quarter. The weighted average yield at amortized cost on new investments, including upsizes for Q4, was 12.6% compared to a yield of 11.9% on exited investments.
Looking at the year-over-year trends, our weighted average yield on debt and income producing securities at amortized cost is up about 320 basis points from a year ago. The significant increase in our yields in 2022 illustrates a, positive asset sensitivity for our business from increased base rates beyond our floors in addition to our selective origination approach across themes and sectors.
Moving on to the portfolio composition and credit stats across our core borrowers for whom these metrics are relevant. We continue to have conservative weighted average attach and detach points of 0.9 times and 4.5 times respectively. And weighted average interest coverage decreased from 2.6x to 2.2x. The decrease in interest coverage is in line with our expectations from the impact of rising rates on the cost of funds for our borrowers.
Our interest coverage metric assumes we apply reference rates as at the end of the year to the run rate borrower EBITDA, we believe this is a better representation of our position of our borrowers as opposed to a look back metric, such as LTM. One additional nuance, we'd like to highlight on interest coverage relates to the positioning of our portfolio towards software and business services.
These businesses generally see more limited fixed charge requirements, such as capital expenditures. Other more capital-intensive industries experienced higher fixed charges in addition to financing costs, meaning interest coverage metrics likely understate fixed obligations of those businesses. As of Q4, 2022, the weighted average revenue and EBITDA of our core portfolio companies was $152 million and $46 million, respectively, representing an increase in both metrics from Q3.
Finally, the performance rating of our portfolio continues to be strong, with a weighted average rating of 1.12 on a scale of one to five, with one being the strongest, representing no change from last quarter's ratings. We continue to have minimal non-accruals with only one portfolio company on non-accrual representing less than 0.01% of the portfolio at fair value and no new names added to non-accrual during Q4.
With that, I'd like to turn it over to Ian to cover our financial performance in more detail.
Thank you, Bo.
We finished the year with a strong quarter from an earnings and investment activity perspective. In Q4, we generated net investment income per share of $0.65, resulting in full year net investment income per share of $2.13. Our Q4, net income per share was $0.57, resulting in full year net income per share of $1.38. There was $0.11 per share unwind of previously accrued capital gains incentive fees in 2022, which is a non-cash reversal.
Excluding the $0.11 per share unwind for this year, our adjusted net investment income and adjusted net income per share for the year were $2.01 and $1.27, respectively. At year-end, we had total investments of $2.8 billion, total principal debt outstanding of $1.5 billion and net assets of $1.3 billion or $16.48 per share, which is prior to the impact of the supplemental dividend that was declared yesterday.
Our ending debt-to-equity ratio was 1.13x, down from 1.16x in the prior quarter, and our average debt-to-equity ratio also decreased slightly from 1.15x to 1.14x quarter-over-quarter. For full year 2022, our average debt-to-equity ratio was 1.03x up from 1x in 2021 and well within our previously stated target range of 0.9 to 1.25x.
Our liquidity position remains robust with $866 million of unfunded revolver capacity at year-end against $178 million of unfunded portfolio company commitments eligible to be drawn. Our year-end funding mix was represented by a 53% unsecured debt. Post quarter end, we satisfied the maturity of our $150 million January 2023 unsecured notes through utilization of undrawn capacity on our revolving credit facility. The settlement marginally decreased our weighted average cost of debt and had no impact on leverage.
Moving to our presentation materials. Slide 10 contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, we added $0.64 per share from adjusted net investment income against our base dividend of $0.45 per share. There was $0.11 per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognized these gains into this quarter's income.
The reversal of unrealized gains this quarter was primarily driven by the early payoff of Biohaven, which resulted in an unwinded $0.12 per share from unrealized gains to net investment income for the quarter. There were minor positive impacts from changes in credit spreads on the valuation of our portfolio and a positive $0.01 per share impact from portfolio company-specific events.
Pivoting to our operating results detailed on Slide 12, we generated a record level of total investment income for the quarter of $100.1 million, up 29% compared to $77.8 million in the prior quarter. The increase was driven by a rise in the contractual interest income earnings power of the business, as well as other income related to the Biohaven payoff specifically.
Walking through the components of income. Interest and dividend income was $85.8 million, up 15% from the prior quarter. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled pay down, were $11 million, up from $429,000 in the prior quarter due to higher portfolio repayment activity. Other income was $3.4 million, up from $2.7 million in the prior quarter.
Net expenses, excluding the impact of noncash reversal related to unwind of capital gains incentive fees, were $47.5 million, up from $40.3 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 4.3% to 5.6% and higher incentive fees as a result of this quarter's over earning.
During 2022, base rates increased by approximately 425 basis points. And the impact on earnings became evident in the back half of the year given lag in reference rate resets for borrowers. Given the low financial leverage embedded in BDCs, asset sensitivity has a larger impact than liability sensitivity and proved to be a tailwind for our business as we saw increased asset level yields drive return on equity.
For a year characterized by spread income, the rise in interest rates and wider spreads resulted in the business exceeding the upper end of our beginning year ROE adjusted net investment income target of 11.5% or $1.92 per share for 2022. Net unrealized losses, largely from the impact of spread widening experienced in Q2 on portfolio marks, had a significant impact on our net income for the year, which we expect to unwind as credit spreads tighten or investments are paid off.
Based on our expectations for our net asset level yields, the movement in reference rates, cost of funds and financial leverage, we expect to target a return on equity for 2023 of 13% to 13.2%. Using our year-end book value per share of $6.39, which is adjusted to include the impact of our Q4 supplemental dividend, this corresponds to a range of $2.13 to $2.17 for full year 2023 adjusted net investment income per share. As we said, we expect to over earn our $1.84 per share annualized base dividend in the near term, and we'll continue to distribute overearnings to shareholders through our supplemental dividend framework.
With that, I'd like to turn it back to Josh for concluding remarks.
Thank you, Ian.
We believe we are transitioning from an era of easy money to a new macro super cycle that we believe will magnify volatility relative to recent history. With such volatility, we'll come to spurge and returns and will elevate the importance of management's capabilities and skills.
The ironies, however, even in low volatility and low rate environment, returned this version has already existed. Now we can only expect it to increase. Our rates for the foreseeable future will most definitely cause stress for certain borrowers, followed by an uptick in defaults from the historical low levels we've experienced more recently.
That being said, we anticipate credit issues to be heavily related to borrowers with weaker underlying business models, and we are confident in the durability of our portfolio companies. We believe our track record over the past 12 years since inception, supports our ability to continue to generate industry-leading returns for our shareholders. We have generated an annualized return on equity on net income since our March 2014 IPO of 13.1%.
We attribute a large portion of our success that our shareholders have enjoyed to ability to over earn our cost of capital by avoiding credit losses and appropriately pricing spreads on investments that take into account the cost embedded in operating our business. We remain constructive on the opportunity set ahead of us.
We continue to experience elevated all-in yields on our assets, and we expect credit costs to remain low given our investment selection discipline and the health of our existing portfolio. We began the year with significant liquidity and capacity to drive incremental ROEs, and are optimistic about opportunities to enhance our capital structure through the course of the year.
With that, thank you for your time today. Operator, please open the line for questions.
[Operator Instructions] Our first question comes from the line of Mark Hughes with Truist. Your line is open. Please go ahead.
Hi, Mark.
Mark, your phone might be on mute.
Yes, my phone is on mute. I'm so sorry. Good morning.
Good morning, Mark.
My question was, how are you thinking about fees -- fee revenue in 2023? You've given some good guidance on NII. Just curious what you think the fee environment is going to be like.
Yes, it's a good question, Mark. It's really hard to tell because it's a function of kind of repayment velocity. But to just give you some numbers, in 2000, when we think about fees, if we think about it and basically I would say two categories or three categories, which is accelerated OID, prepayment fees and amendment fees and other income. That's historically been -- I think, in 2022, those fees were, let's do the math, about $0.37 per share. In 2021, those fees were 47 - about $0.54, $0.56 per share.
In 2023, we actually - in our guidance numbers, they're significantly below those levels, and we anticipate to be significantly below those levels that are embedded in our guidance. So in our guidance numbers, they are about $0.22 per share. So that's heavily weighted towards, again, another year of spread income. If you see velocity in the book, obviously, it's going to be much, much higher, but it's significantly below '22 levels and '21 levels.
Yes. No, I appreciate the specifics there. And then when you look at the curve, talked about keeping the base dividend at the $0.46 informed by your lookout to 2025. How much cushion, just generally speaking, would you -- do you still have over the dividend over those next couple of years?
Yes. Significant -- look, I think we just went through the math on 2023, which 2023 has, again, is mostly spread income our per share guidance is --
2013.
2013 and 2017. The base dividend level is?
A $1.84.
$1.84. So there's really a lot of cushion. In 2024, similarly, again, we don't really model significant level. We think about upside in fee income as kind of be an upside to our guidance. So in 2024, those levels of fee income are basically the same. And again, our base dividend is $1.84 and we think we're significantly above that as well.
So we knew we're going to over for the next couple of years, but we don't want to put ourselves in a position where we would have to cut the dividend. And so we set dividend where we see a significant cushion in the next couple of years. We were just looking at the curve.
Thank you very much.
Thank you. And one moment for our next question. Our next question comes from the line of Finian O'Shea with Wells Fargo. Your line is open. Please go ahead.
Hi, everybody. Good morning. A question on the large club deals. It looks like we have one this quarter with Avalara not signaling in on that name. But I don't think those are too typical for you to partake in. Can you talk about the threshold for what makes that kind of deal compelling? Is it company quality or terms as to why you so seldom invest in those? And then on the downside, perhaps, can you talk about structural elements you do give up? How much less control you might have and so forth? Thank you.
First all, good morning Fin. I hope you're doing well this point. So look, we've talked a lot about this. On the upper middle market and that large cap space has significantly changed given the environment we're in. And so pre-12 months ago, obviously, we thought was competitive and offered little relative value compared to the broadly syndicated market, that's completely changed.
Quite frankly, that upmarket we find that the marginal capital fuels are able to drive better terms and you can finance larger companies that are at scale. So as I think people know, we've been involved in most of those deals that have been announced including Emerson, which is as yet to close, which we've led, [Max Car] is yet to close, which we've led and other ones.
So we find there's a lot of value. The -- and that the marginal capital is able to drive pricing and structural enhancements -- and so -- and then obviously, given the macro, you're financing those businesses in an environment where you are -- you have a low rate environment and kind of a known growth environment compared to historically. So we like the value that's being offered in that market. The trade-off is that they're clubs and you got to see that you're at likeminded people and if that document works, and we think it does.
So Bo, anything to add there?
The only thing I'd add is you had a specific question on what we give up. I think given there's a serious value of capital, a lot the terms and document specific terms have gotten much tighter in these upper middle market deals over the past six months, and frankly, are not all that different from what you're seeing your middle market document. So you have a large margin of safety at low LTV, a scale business [indiscernible] market at very attractive adjusted returns in this current environment.
Makes sense.
Sure. That's helpful. Thanks so much.
Thank you. And one moment for our next question. And our next question comes from the line of Mickey Schleien with Ladenburg. Your line is open. Please go ahead.
Yes, good morning everyone. Josh, in the fourth quarter, we continue to see middle market loan spreads widen, which is obviously good for your financial performance, assuming the credit quality holds up, but it is stressing borrowers, as you mentioned in your remarks, with interest coverage declining to 2.2.?
So I'd like to understand, when we think about those trends, what is your outlook on how private lenders will behave this year in terms of spreads and the amount of leverage they're looking for on deals?
Yes, so Mickey, I think when you look at the LCD first lien LCD second lien spreads, they actually tightened in Q4 slightly. So - but year-over-year, they're significantly widened, which we've hit. So I just want to - want to frame up. We did not see - so when you look at unrealized gains and unrealized losses, they were negligible given that you actually had spreads tightened quarter-over-quarter slightly.
Look, credit quality is top of mind. At what points - it looks like historically driven performance or outperformance or underperformance it's credit losses for the industry. It's been the biggest piece that - when you think about the unit economics of the sector, return on assets, is a point of differentiation. Fees and expenses are basically all pinned near each other. Financial leverage is pinned near each other. Cost of leverage is pinned near each other.
So it's really return on assets and credit costs that, ultimately, drive returns to the sector. And that's going be a function of the portfolio that were built in, their own place now. And we think our portfolio is differentiated and as robust given the nature of those businesses. But it is - in this economic environment where you have slowing growth and higher rates, you are most definitely going to have tails in credit.
We have yet to see those in our portfolio, but they are most definitely emerging and they are accepting and most definitely emerging in the broadly syndicated loan market. So it's all about credit. I hope I answered your question.
Appreciate that Josh, that's it from me this morning.
Thanks Mickey.
Thank you. And one moment for our next question. And our next question comes from the line of Kevin Fultz with JMP Securities. Your line is open. Please go ahead.
Hi, good morning, and thank you for taking my questions. As Bo mentioned in his prepared remarks, volatility in the public markets and the pullback from banks has created an increased opportunity for direct lenders to finance larger deals. I'm just curious what your appetite is to act as a syndication provider to potentially generate additional fee income?
Yes look, when there's an opportunity, surely, we'll take advantage of that. And so, we'll surely take advantage for that. That's historically been a relatively low level of attribution of our income. I think over the years it's been somewhere between, at the high end, if you look back $0.05 since 2013 in the low end zero, and this year $0.01. So I mean, there surely will be an opportunity. I wouldn't lean in - as a massive driver of outperformance of earnings.
Okay, that's fair. And then last one, you utilized the revolver to repay the 2023 notes. I'm just thinking about the right side of balance sheet and your funding mix. Do you see additional opportunity to further optimize or diversify your funding profile in this environment? And I guess if so, what structure is the most appealing?
Yes, so credit - let me take a step back. And I think we've done a really good job of this, which is we've always built into the economics of our business, holding more liquidity than the rest of the space. And when you look at revolver size compared to assets or as a metric or availability compared to unfunded commitments. We've always created flexibility, so we were never a force issuer.
And so when you look at our business model this year, we have a lot of flexibility about when we issue or if we issue in the unsecured market, which quite frankly, we think is the most attractive way to access markets, additional capital outside the revolver - and but we have the flexibility to do so given how much liquidity that we hold. And then we burden the unit economics for and our shareholders - have paid for.
What's really amazing when you take a step back is, that we generated outsized return on equity compared to the space. We're holding more liquidity and paying for that liquidity option than everybody else in the space. And I think that gives us a lot of flexibility. It gives us flexibility not to be a force issuer. It gives us the flexibility in COVID to actually have liquidity to be able to invest in the market, which created outsized return on equities for the following two years.
And so we will most definitely be opportunistic. But how we've built our balance sheet, just we've created a whole bunch of flexibility that we think benefits our shareholders, Ian anything to add there?
I think the flexibility and being willing to pay for that flexibility just really proved its worth. I guess it's now three years ago, and we like that model. And we're comfortable with what that cost burdens us with, given the flexibility it affords us.
Okay that all make sense, Ian I will leave it there, congratulations for a really nice quarter.
Great, thank you so much.
Thank you. And one moment for our next question. And our next question comes from the line of Ken Lee with RBC Capital Markets. Your line is open. Please go ahead.
Hi, good morning, and thanks for taking my question. Just wonder if you could talk a little bit more about the asset-backed lending opportunities that you see over the near-term. And whether you could either be taken more offensive or defensive stance around such opportunities given the macro backdrop? Thanks.
Yes. We like that space a lot, the asset-based lending space. If you look at retail specifically, we thought in COVID, there was going to be a significant opportunity. That opportunity went away very, very quickly. We did a couple of deals in COVID. And then post-COVID, given kind of what happened on the macro level, consumer is very strong.
Consumers only could spend money by buying goods versus services or experiences. In the retail space, that segment - that those companies had better earnings and better balance sheets than they ever had that is changing. The consumer is starting to weaken. And the retailers who have goods and services - I mean who have goods and sell goods and have inventory they have less market share of the consumer's wallet.
And so, we expect that sector to continue weakening, which will provide an opportunity for us to provide capital into that space. And so, we like that. It's asset management intensive. It's - which you have to have a core competency in doing it, which we think we do. But we think that opportunities that will grow and we'll continue to allocate capital to it where we find good risk-adjusted returns.
Got you, very helpful there. And then just one follow-up, if I may within the portfolio, non-accrual rates are still deminimis. I wonder if you could talk a little bit more about what you're seeing in terms of amendment activity in the, portfolio? Thanks.
Yes, I would say it picked up slightly, but still really, really benign compared to COVID so no really significant material amendments. We are seeing amendments, related to software transition, which we think is most definitely positive from LIBOR. All the new loans or LIBOR our software base, but I would say, from a credit perspective, it's picked up a little bit, but nothing material to speak off.
Got you, very helpful there, thanks again.
Thank you. And one moment for our next question. Our next question comes from the line of Erik Zwick with Hovde Group. Your line is open. Please go ahead.
Thanks, good morning. Just a question on the pipeline, it sounds like you've got pretty good visibility for at least the next six months. Curious if you could provide a little color into the industry mix in the pipeline today? And if it's fairly consistent with the current portfolio if there's any, industries or sectors that you are targeting or staying away from today?
Yes look, so I would say it's consistent with some outliers. Emerson is an industrials business, which is a little bit of an outlier for us. So we like that business a lot. We think Blackstone did a great job in buying that business. I think it's really, really interesting, which we led. And we think it's kind of mid-cycle earnings and the capital structure both for this time. Maxo also a public to private, I think private is again, slightly in different businesses - is a satellite business.
We like that business model. We like the visibility of revenues. We like to sponsor a lot. And then, we'll always mix in kind of our small energy stuff. But other than that, we're mostly focused on business services and software, but we have pretty good visibility in the pipeline in the next six months as you mentioned.
Thanks, I appreciate that detail there. And just one more quick one from me - I'm just curious where floors are today for new commitments? Were you able to put those in?
They are most definitely - unfortunately, I don't think they - we've been able to push them up. They're - most definitely in the 75 basis points to 100 basis points. I think 80 basis points - 75 to 100. I wish we've looked up and we will be able to push them up, but the market is not there yet.
Thanks for taking my questions today.
Thank you. And one moment for our next question. And our next question comes from the line of Melissa Wedel with JPMorgan. Your line is open. Please go ahead.
Thanks, good morning, a lot of my questions have been asked already. But I thought it would be interesting to touch on just sort of the activity levels in 4Q. Certainly, we were surprised by net exits during the quarter. So given that you're expecting a few larger exits already that you had talked about during the third quarter call. I'm curious if there - with some as deal slippage into the first quarter or if that sort of commentary on how you're seeing the opportunities at right now?
So look, look - I didn't totally get the question. I think so - put most of our exits in Q4, we knew in Q3, and we tried to help people on our Q3 earnings call, which was front line...
Biohaven.
Biohaven, and I think there was a couple more - but those were the big drivers of the Q4 exit.
Right.
And Melisa - the prepayment fees and amortization of upfront fees.
Yes apologies if - my question wasn't clear. I guess what was looking to explore a little bit more was the level of capital deployment during the quarter, especially since you knew about some of the larger exits. So the fact that it was a slower fourth quarter for you guys compared to previous years. Is that a function of deal slippage into the first quarter or is that really commentary on the opportunity side?
I got it. It's actually - when you look at our activity levels in Q4, I would say they were – it's significantly up. The fund so - the commitment we made in Q4 are way over historical levels. They happen to be related to mostly take privates that have time periods on that will close in the first half of - 2023.
So - the opportunity that it was as strong as it's ever been. It just happens to be that they were shaded large-cap take privates, which have low regulatory process for that inventory to be turned into funding so - that commitment to be turned into funding.
Got it, thanks Josh.
Thank you. And one moment for our next question. Our next question comes from the line of Ryan Lynch with KBW. Your line is open. Please go ahead.
Hi, good morning. I just have one question. You talked about on one hand kind of big picture, you're cautious given the dynamics of inflation and shift in monetary policy and how that impacts growth. And on the other hand, you talked about your portfolio being mostly in software business with high variable cost structures and pricing power. So I'm just curious, as you study your portfolio and monitor it closely at this kind of current changing dynamic environment, what are some of the key metrics or trends that you guys are monitoring? And is there anything that you guys are seeing thus far that is sort of a concerning trend?
No. So I think revenue growth was like 7% for the quarter. We obviously look at revenue growth on an annualized basis. So revenue growth has most definitely slowed, although still positive. We look at things such as both margin, churn, customer acquisition costs.
I would say on the churn side, flat quarter-over-quarter. We grew in the customer acquisition cost by a little bit. But the portfolio, I think, has is in pretty good shape. And by the way, people talk about things in averages. It's kind of a long way to think about it because you're kind of stuck with the tails. And so I think when you look at our portfolio and look at the tails, we feel pretty good that there's no significant tails. But Bo, do you have anything to add on that?
The only thing I would add is we also look at bookings. This is an indicative for future revenue growth. We saw a real demand obstruction in Q3 and we're closely monitoring Q4 across our portfolio, especially across the business services side. Early returns on the bookings across the portfolio has been actually relatively strong in Q4. Now there's a question if that was just a lot of pull-through demand that people are trying to get their budgets spent this year. But that was -- the early indications are pretty positive on the bookings side across the portfolio in Q4.
Okay. That's good to hear. The other -- just on that point, have you seen -- I guess, has your software companies have base started to -- I guess if the fundamentals are fine, maybe this is not a concern. But have they started to reduce those fixed charges in their business? So we've obviously seen a lot of layoffs happening in the public software companies, which obviously shows the strength of the business. Has your portfolio company started to make those shifts yet? Or is the business performing well enough that, that's not really been an impact?
Yes. I think in the tail, we have some that are starting to look at their costs, we like that and encourage that. Look, I think if you think about the environment we're in, post-COVID, up until last year in a zero rate environment, everything kind of economically hurdled.
And so you can make the math work for anything. And so there was a lot of dollar spent and investments made that should have probably not been made across both public and private markets, both on the investment side and inside companies. And so I think on the margin, you're seeing a little bit of people looking at their cost structure, obviously, not the levels that you see in big tech, but most definitely -- and that's a sign of good management team.
So trying to get more efficient. We would expect that. The great thing about the businesses. They have a very terrible business model.
Okay. That's all for me this morning. I appreciate it.
Ryan, just on one topic, which I think you did hit on a little bit, which is, I think we talked about script, but I think the space gets -- I think people get wrong which is software businesses might have higher financial leverage, but they have less fixed charges given no CapEx spend. And so you kind of have to look at leverage in an EBIT basis or an EBITDA minus CapEx basis or operating cash flow minus CapEx. And when you look at that metric, I think those businesses have -- are on a leverage basis or in line or less than like the industrial space or specialty chemical successor. So I think you have to burden cash flow by all fixed charges, just not fixed charges related to financial leverage.
Got you. Understand the point. I appreciate the time today.
Thank you.
Thank you. And one moment for our next question. And our next question comes from the line of Robert Dodd with Raymond James. Your line is open. Please go ahead.
Hi, everyone. I've got two questions, if I can. The first one is on -- it goes back to the guidance and kind of follow up to Mark Hughes, and your answer to that. I mean -- so the guidance embeds $0.22. I mean if look back the lowest four-quarter period you guys have ever had was 35, which still 50% higher than the 22.
And you've only had three quarters in your history of less than five, right? So is it that you're being extremely conservative? Or is your view that there's a high risk that 2020 -- the market in 2023 is even more disrupted than it was in in '22, which case very low activity levels would make sense? So is it a market view that's informing that? Or is it just being very conservative?
Yes, it's a good question. I think you've asked this question last year to some other question maybe last year. Look, we don't model activity. We don't really model activity level we've never historically -- we've updated guidance throughout the year based on activity level, but we never modeled at the beginning of the year. It's just too hard, based on credit spreads, effectively based on credit spreads or some idiosyncratic things that happen in our portfolio. And if those are known, we will definitely model them. But given that none of those are known and we don't model directional credit spreads that drive portfolio churn, we've just never historically modeled it.
And so -- and it's not modeled really this year as well. I think when you look at activity levels such as OID and prepayment fees, I think the assumption is we use kind of two to three portfolio turnover on an individual basis, which drives some level of those fees. And then tightening market environment, average portfolio life will be much low or activity level will be much higher. And so we just don't model it. So I don't think it's a market view. I think it's just how we build our models that we grew, that's the upside in the model because it's very difficult to model.
I appreciate that. I really appreciate that comment. It's not an earlier market view, which open more [indiscernible].
Just real quick, if you ask me to like give you my best. I would say that that we're -- that there are -- the market will be bifurcated, which will be good companies will have access to capital in '23 and '24, which will probably drive some activity level. And people will have to deal with the tails. But credit spreads are starting to come in a little bit. You've seen it in Q4. I think you've seen it year-to-date. And so that is a leading indicator of activity levels, probably -- or portfolio turnover increase in our book.
Understood. And you don't have a lot of tails in your portfolio. So fantastic. On the other question, after the repayment of the unsecured in January, you're at about 40% unsecured of your capital stack, which is acceptable like towards the lower end of what you've historically run. And it's towards the lower end of what the rating agencies want, et cetera. It's not going to go down again until November 2024, right? But -- what's your feel on where you'd really like that to be understand that right now it's a pretty expensive environment for unsecured, but are you comfortable at $40?
Well, I think we are. I think we built our balance sheet, we built our -- it's a function of how much revolver capacity one has. And we have a ton of revolver capacity and liquidity. And so we've paid for that. And it's hurting our economics. It' hurting our economics in the sense that we pay commitment fees on that on the unused portion, we paid upfront fees on that. And so, it's hurting our economics. And we like paying for the insurance to allow us to ride out moments for the unsecured market is not as attractive. Although spreads have started coming in significantly in the last two to three months.
And so we'll be opportunistic. We're most definitely at the low end. If portfolio grows, it will creep a little bit lower because our mix will be -- the marginal portfolio growth will be funded on the revolver on the secured side. So I want to say it will be flat from here on out because that assumes no portfolio growth. The portfolio growth on a marginal basis would be funded with the revolver.
But we most definitely will be back in that market. We like that market. I think we're one of two people in space who have at least a BBB flat rating. I think it's us in areas. And so we were one of the two higher rated people in the space. And so we like that market. We have access to that market, and we'll most definitely be opportunistic. But we paid for an insurance and since we pay for it, we're going to use it, and we priced that into our economics for our shareholders. So I hope that answers your question, Ian, I don't know if you have anything to add?
I think it does answer the question. Just maybe more directly, Robert, we're pretty comfortable just given the options that we have available to us.
Got it. It answered my question. Appreciate it. Thank you.
Thank you. And I am showing no further questions, and I'd like to turn the conference back over to Josh for any further remarks.
Great. So thank you so much for the interactive call. We appreciate people getting on the new format of the call vis-à-vis web or the change of like of that one. But we really appreciate it. And we look forward to chatting people with people in the spring, and I hope everybody has a light end of the winter and in the beginning of the spring, we'll be back for our Q1 earnings call soon. Thanks so much.
Thanks, everyone.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.