TPG’s BDC focuses on first lien loans

TPG Specialty Lending, the business development company of alternative investment firm TPG, has been concentrating more on first lien investments and reducing its second lien exposure, citing a preference for the former in this point in the credit cycle. The vehicle has also earned consistent 10 percent returns on its lending over the past two quarters, TPG Specialty Lending’s first quarter earnings report showed.

At the end of the quarter, the vehicle had 90 percent of its investments in first lien debt of which 98 percent were secured. “At this point in the cycle, we’re primarily focused on investing at the top of the capital structure. And in keeping with our focus over the past year, during the first quarter of 2015, we further reduced our second lien exposure, 93 percent of our new investment commitments made during the quarter were first lien securities,” said Josh Easterly, chairman and co-chief executive of the BDC, on the earnings call. Year-over-year, the vehicle’s second lien exposure dropped from 17 percent to 8 percent.

Since inception through to 31 March, the TPG vehicle, which trades under ‘TSLX’ on the New York Stock Exchange, looked at 3,900 opportunities, executing 2 percent of those. The vehicle’s assets were reported to total $1.33 billion at fair value at the end of March, compared to $1.26 billion as of 31 December and $1.2 billion as of the end of March 2014. The portfolio had investments in 35 portfolio companies across 19 industries at the end of the first quarter. The average investment size was about $38 million with the largest position equating to 5.2 percent of the portfolio.

“At this later point in the economic cycle, we are focused on industries with low exposure to cyclicality and the ability to perform throughout credit cycles. Our largest industry exposures by fair value were to healthcare and pharmaceuticals, primarily healthcare information technology, with no direct reimbursement risk, which accounted for 16.2 percent of the portfolio at fair value, and business services, which accounted for 10.5 percent of the portfolio at fair value,” Easterly said on the call.

The weighted average yield on these investments at amortized costs on March 31 was 10.3 percent. It was the same on December 31 and similar (10.4 percent) at the end of the first quarter in 2014. TSLX has generated a gross unlevered IRR of 16.3 percent on fully exited investments totaling about $900 million of cash invested, since inception through 31 March.

The vehicle declared a dividend $0.39 cents per share that was paid to stockholders on 30 April. Its net investment income was $0.39 cents per share compared to $0.57 cents per share at the end of last year. “The quarter-over-quarter variance in net investment income per share of $0.18 was largely driven by an elevated level of revenues during the previous quarter related to investment pay downs,” said Easterly. Net investment income for the quarter was $20.8 million, compared to $21.2 million at the end of the first quarter in 2014.

Although TSLX has been trading above book value, unlike many BDCs lately, TPG decided not to raise new equity capital as it could have created a drag on earnings. “I think our stock closed above book value every day of [last] year and so we always had the opportunity to raise capital, but we didn’t because it wouldn’t have been accretive in our earnings basis given that we were below our target leverage ratio and we would have been creating earnings drags on our business,” Easterly said.