2023-07-28 09:15:00 ET
Summary
- Sixth Street Specialty Lending yields 9.2% on its regular quarterly distribution, plus 0.8% for its supplemental payout, for a total yield of ~10%.
- NII jumped 20% in Q1 '23.
- Strong distribution coverage of 1.22X.
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Profile:
Sixth Street Specialty Lending ( TSLX ) is a BDC focused on providing flexible, fully committed financing solutions to middle market companies principally located in the US.
TSLX provides senior secured loans (first-lien, second-lien, and unitranche), unsecured loans, mezzanine debt, and investments in corporate bonds and equity securities and structured products, non-control structured equity, and common equity to companies with an enterprise value between $50M and $1B or more, and EBITDA between $10M and $250M, with an average of $165M.
It's part of the Sixth Street $65B platform, and is externally managed by Sixth Street Specialty Lending Advisers, LLC. Total investments were $2.9B, as of 3/31/23.
TSLX's debt investments are 91% 1st Lien and 99% floating rate, with an average 32% loan to value, and an overall yield of 13.9%. Like other BDC's, it also has financial covenants for its debt investments.
TSLX site
Its top 10 holdings include IBM Watson, food retailer Tops/Price Chopper, and Bed, Bath & Beyond, and range from 2.3% to 2.7% of its portfolio. Bed, Bath & Beyond filed for bankruptcy in late April 2023.
TSLX has funded $76M related to Bed Bath & Beyond to date since its initial investment in September 2022. Management feels confident about the recovery of its investment at fair value, and anticipates the liquidation process to take ~16 to 20 weeks.
TSLX site
TSLX's top six industry exposures are Business Services, Internet Services, Retail & Consumer Products, Financial Services, Human Resource Support Services, and Healthcare, totaling ~70% of its portfolio:
TSLX site
Portfolio Ratings:
TSLX had a weighted average portfolio holding rating of 1.16, on a scale of 1 to 5, with one being the strongest. As of 3/31/23, non-accruals were less than 0.7% of the portfolio at fair value, with no new portfolio companies added from the prior quarter.
Earnings:
The total yield has been rising steadily since Q1 '22, when it was 10.3%, to 13.9% as of Q1 '23.
TSLX site
Q1 '23: TSLX had new commitments and funding totaling $176M and $139M, respectively. This was distributed across seven new and five upside to existing portfolio companies. There was one full and three partial investment realizations totaling $51M.
Total investment income soared 43%, while NII jumped ~20%, and NII/share rose 12.8%. As with most other companies, interest expenses rose - they were up 197% in Q1 '23.
The share count was roughly flat, but management announced a public offering of 4,500,000 shares of TSLX common stock for total gross proceeds of ~$79M in early May '23.
2022: TSLX had topline growth of 11% for the full year of 2022, with NII rising ~17%, and NII/Share rising 4.4%, as the share count rose nearly 8%. Interest expenses rose 62%.
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Dividends:
Thus far in 2023, TSLX has paid two quarterly base distributions of $.46, plus a supplemental payout of $.09 in Q1 '23, and a $.04 supplemental in Q2 '23.
Based upon its 7/26/23 closing price of $19.96, TSLX regular distribution yields 9.22%. If management declares another $.04 supplemental, that would bring the dividend yield to a total of ~10%. The five-year dividend growth average is 7.45%, including special/supplemental payouts.
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TSLX has one of the strongest distribution profiles in the BDC industry - its trailing average is 1.22X , as of 3/31/23:
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That strong coverage is in line with TSLX's past distribution history, which has steadily been well over 1X since 2012, on an NII basis:
TSLX site
Profitability and Leverage:
Based upon net income, ROA and ROE both decreased in 2022 vs. 2021, whereas the EBIT margin increased a bit. Debt/NAV leverage increased, a trend we've seen in most BDCs, as managements ramped up debt to increase portfolios. EBIT margin has increased since Q4 '21, hitting 76%-plus in Q1 '23.
TSLX's ROA, ROE and EBIT margin were all higher than BDC industry averages, as of 3/31/23, and its debt/NAV leverage was lower than average.
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Management uses NII, not net income, to measure ROE, and shows an average ROE of 13.2% since the company's IPO.
TSLX site
The assets/debt ratio improved to 1.9X in Q1 '23, cs. 1.66X in Q4 '22, while the EBIT/interest ratio declined to 3.15X.
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Debt and Liquidity:
TSLX's next debt maturity comes due in 2024, with $348M in unsecured Senior Notes that mature on Nov. 1, 2024. Its $1.585B credit revolver, which can be expanded to $2B, matures in April 2027, with the revolving feature ending in April 2026.
The weighted average remaining life of TSLX's investments funded by debt is ~2.6 years.
TSLX site
As of March 31, 2023, TSLX had $25.7M in cash and cash equivalents (including $16.2M of restricted cash), total principal value of debt outstanding of $1,629.4M, and $603.1M of undrawn capacity on its revolving credit facility, subject to borrowing base and other limitations. The company’s weighted average interest rate on debt outstanding was 6.7%.
Performance:
TSLX has outperformed the BDC industry over the past year, and so far in 2023, while slightly outperforming the S&P over the past year on a total return basis, and outperforming it over the past month.
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Analysts' Targets:
At $19.96, TSLX is ~5% below Wall Street analysts' average price target of $21.00, and ~9% below their $22.00 highest price target. It received a BUY rating in June From B. Riley, with a $21.00 price target.
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Valuations:
TSLX has a long history of receiving a premium price above its NAV/share, with an average of 1.19X. That big dip in the early 2020 COVID pullback shows what a deal that savvy buyers who gritted their teeth and jumped in received, buying it at a deep discount. "Be greedy when others are fearful" indeed.
TSLX site
At $19.96, TSLX is selling at a 20.3% premium price to NAV/share, very close to its long-term average, vs. the average 1% discount for the BDC industry. Its other valuations, P/sales, and EV/EBITDA are roughly in line with BDC averages, while its price/NII is a bit lower than the BDC average.
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Parting Thoughts:
TSLX will report its Q2 '23 earnings on Thursday, Aug. 3, 2023, after the market closes, with a conference call on Friday, Aug. 4. We recommend waiting for the earnings report before buying.
All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.
For further details see:
Sixth Street Specialty Lending: 10% Yield, Strong Q1 Earnings