TSLX reduces European exposure as Brexit begins to bite

The BDC’s exposure to European base companies was down from 10.7% to 7% as the firm also continues its strategy of reducing the amount of risk in the portfolio.

TPG Specialty Lending reduced its exposure to European companies in the run up to the UK’s vote on membership of the EU. As of 30 June, the BDC’s portfolio in European base companies dropped from $173 million, around 10.7 percent of the portfolio, to $119 million, which stands at 7.3 percent, the firm said on its second quarter earnings call.

Total assets under management hit $1.61 billion, up from $1.56 billion on the previous quarter and the firm continues to pursue a strategy of de-risking the portfolio. Senior executives on the call reported that the number of loans in the portfolio that were first lien were 93 percent as exposures to investments in the junior side of the capital structure were reduced from 11 percent to 7 percent. The portfolio comprises of investments in 50 companies across 19 industries with the largest position accounting for 4.6 percent of the portfolio.

Across the first quarter, TPG completed three investments in companies in transactions with a total value of $170 million and further $14.7 million in three add on investments with existing portfolio companies. It also reported that the Sports Authority’s chapter 11 proceeding went ahead smoothly.

Upon being asked about the difficult environment for borrowers, Bo Stanley, president of TSLX, said the firm was in advantageous position compared to a number of bigger funds. “Having a portfolio of $1.6 billion means we maybe have to originate around $200 million every quarter. If I was managing a $14 billion fund and had to compete in the leveraged loan and high yield market, I’d quite frankly throw myself out of the window,” he said.

Rick Shane, analyst at JPMorgan, raised the issue of whether TSLX had been caught up in the modest trend of firm’s seeking larger ticket sizes in the US market over the last 12 – 18 months. Joshua Easterly, TSLX chief executive, responded that, on the contrary, the firm’s average position has gone down even though it has participated in larger transactions. “We have a diversified portfolio where our average position has come down and part of that is because of where we are in the current stage of the economic cycle,” he said.

Last month, TPG Special Situations Partners, which includes the BDC, participated in the $1 billion unitranche financing in Thomas Bravo’s acquisition of Qlik Technologies. Led by Ares, the deal is expected to close in the third quarter. Jonathan Bock, a senior analyst at Wells Fargo Securities, said that the deal shows that the firm is “capable of generating substantial deal flow” and reiterated his “outperform rating”.

Easterly also renewed calls for shareholders to dump the existing TICC board and vote in a new qualified candidate on the second quarter earnings call. He expressed dismay at the delay of the annual shareholder’s meeting.

“TICC’s management continues to adopt what I believe is poor governance measures to preserve the internal manager’s position at the expense of shareholders. For the first time in the history of the company, they have delayed the meeting until September even though it has never been later than mid-June,” he said on the call.

A letter sent to TICC chairman Steven Novack from Easterly ahead of the call and published on TSLX’s website on 2 August, complained of the board’s unsustainable dividend.

“The fact is that your board has shown a shocking misunderstanding of investment fundamentals mixed with a craven focus on personal interests. You have delivered abysmal total returns, halved the core of your stockholders’ investment and are now paying a dividend independent analysts almost universally call unsustainable,” Easterly wrote.

TICC is a $1 billion BDC that had been underperforming for some time. Three suitors, including TSLX, tried to buy out its management or stock last year and failed to do so.