TSLX slow but steady as potential volatility looms

The BDC showed a relative drop in Q4 originations while increasing its net asset value per share.

TPG Specialty Lending (TSLX) reduced its investment activity last quarter, as both heightened competition in the mid-market and unpredictability stemming from the Trump administration threaten to dampen private credit, executives said on the firm’s Thursday earnings call.

Robert Stanley, president at the business development company, said that the TSLX’s “relatively muted” activity last quarter was due to the “uncertain M&A environment given the US election” and an “increasingly competitive lending environment”.

The firm did a gross origination of $79 million in the three-month period ending 31 December, down from the $399 million the company originated in Q4 2015 and $305 million in Q4 2014, according to an investor presentation. 

Joshua Easterly, co-chief executive, added TSLX’s outlook for the year “remains cautions,” especially given the “protectionist rhetoric” and the potential changes to fiscal policy in the US, like a border adjustment tax on imported goods.

“Policy developments will continue to dominate headlines in 2017 and drive periods of market volatility,” Easterly said. “We are careful to not let short-term noise drive the long-term orientation of our business.”

He added that the business will continue to prioritise its direct lending on “less liquid credit” with risk-adjusted returns. 

Stanley said the company was “primarily focused on top of capital structure” last year. The proportion of junior debt – including second lien, mezzanine, and other products – in the company’s portfolio dropped from 12 percent at the end of 2015 to 3 percent at 31 December. 

As of that date, the portfolio consisted of almost 97 percent first-lien debt and only 1.2 percent second-lien and 0.6 percent mezzanine or other unsecured debt.

Though origination activity might have been relatively slow compared to previous quarters, the firm’s net asset value per share remained steady throughout the year, as did its investment activity.

The BDC’s NAV per share reached $15.95 at the end of last quarter, an uptick from $15.15 it reported at the end of 2015. Michael Fishman, co-chief executive, attributed the increase in NAV to tightening credit spreads that positively impacted the firm’s investments.

TSLX made a total of $562.7 million in new investments last year, including $492.7 million in 14 new portfolio companies and $70.0 million in 9 existing portfolio companies. The firm’s net investment income for last year was $107.3 million, compared to $95.3 million in 2015.

The company ended 2016 with investments in 52 portfolio companies, with total assets of $1.67 billion.