TSLX - Sixth Street Specialty Lending: Still Solid Prospects After Q1 2024
2024-05-15 12:46:15 ET
Summary
- TSLX was one of my favorite BDC picks going into 2024.
- So far the BDC has generated flat performance, while the overall BDC market has surged higher.
- The deviation here is mostly attributable to TSLX's stagnating results driven by margin compression and one extraordinary non-accrual.
- Yet, going forward, the momentum in portfolio growth should boost the net investment income generation.
- Since the internal risk rating profile remains very robust and the new investments are still made in a conservative manner, we should not expect any major headwinds at the write-down front.
As we entered 2024, I wrote an article on Sixth Street Specialty Lending, Inc. (TSLX) and Main Street Capital (MAIN) comparing both BDCs from the fundamental and valuation perspective. The conclusion was clear to me that TSLX had a better risk to reward ratio than MAIN simply because the valuation discount between these two names was roughly ~40% (driven by MAIN's extraordinary multiple), while the underlying fundamentals were not that different. More specifically, these were the main drivers that motivated me to label TSLX as an attractive investment play:
- The lion's share of TSLX's external debt proceeds is subject to rather back-end loaded maturities, which help keep the investment spreads attractive, given that most of these borrowings were attracted at lower interest rates than what can be currently obtained in the market.
- TSLX's portfolio yield is close to 14.5%, which is not that typical for BDCs that have a huge focus on the first lien structures that are underpinned by rather defensive companies with a favorable track-record in terms of keeping the non-accrual events rare.
- The bulk of portfolio investments are connected to the SOFR component, which enables TSLX to directly capture the benefits of very favorable market conditions.