Sixth Street Specialty Lending Inc (TSLX) 2014 Q4 法說會逐字稿

Welcome to the TPG Specialty Lending, Inc, December 31, 2014 fiscal year-end and quarterly earnings conference call. Before we begin today's call, I would like to remind our listeners that remarks made during this call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a numbers of factors, including those described from time to time in TPG Specialty Lending, Inc's filings with the Securities and Exchange Commission. The Company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, the Company issued its quarterly earnings press release for fourth quarter and fiscal year-ended December 31, 2014 and posted a supplemental earnings slide presentation to the Investor Resources section of its website, www.tpgspecialtylending.com.

The earnings presentation should be reviewed in conjunction with the Company's Form 10-K filed yesterday with the SEC. TPG Specialty Lending, Inc's earnings release is also available on the Company's website under the Investor Resources section. As a reminder, this conference call is being recorded for replay purposes. I'll now turn the call over to Joshua Easterly, co-Chief Executive Officer and Chairman of the Board for TPG Specialty Lending. Please go ahead, sir.

Thank you, Ashley. Good morning, everyone. Thank you for joining us today. Fair warning, the presentation is slightly dense today. But I'll begin today with a brief overview of our quarterly and annual highlights. Then will turn the call over to my partner, Mike Fishman, to discuss our originations and portfolio metrics for the fourth quarter and full year 2014. Alan Kirshenbaum, our CFO, will then discuss our quarterly and annual financial results in more detail. I will conclude with final remarks and our outlook for market conditions, before opening the call to Q&A.

I'm pleased to report strong originations and financial results for the fourth quarter. Net investment income per share was $0.57 for the fourth quarter for 2014, as compared to $0.43 per share for the third quarter of 2014. The quarter-over-quarter difference in net investment income per share of $0.14 was largely attributable to an elevated level of revenues this quarter related to investment pay downs. Net income per share was $0.26 for the fourth quarter of 2014, as compared to $0.35 per share for the third quarter.

Net asset value per share as of December 31, 2014 was $15.53 as compared to $15.66 as of September 30, 2014. Alan will walk you through these quarter-over-quarter differences in greater detail. But at a high level, these variances were largely driven by unrealized losses of approximately $0.21 per share associated with the impact on the fair value of our investment portfolio of widening market spreads and changes in risk asset prices during the quarter, including energy and commodity price volatility.

Risk mitigation is central to our investment strategy. We believe that fair valuing the portfolio is crucial to this process of managing and mitigating risk. To quote a 2009 Financial Times op-ed piece, "fair market value is the price at which willing buyers and sellers transact, not the (frequently irrelevant) historic value". We believe that fair value is not solely an accounting principle; it is a critical risk management tool, providing early warning signs into our portfolio and also investment opportunities.

As discussed last quarter, though the vast majority of our portfolio is classified as Level 3, illiquid investments, for which there is no observable market price, our illiquid portfolio is not isolated from broader changes in risk premiums. In compliance with GAAP and for 40 Act requirements, we fair value our portfolio taking into account, among other inputs, changes in credit spreads and other risk asset prices.

Further, as energy exposure is a topic front of mind for many this quarter, I'd like to take a minute to discuss our exposure to the sector, which consists of investments in two portfolio companies, Mississippi Resources and Milagro. These investments comprised 8.2% of the portfolio at fair value at quarter-end. Both portfolio companies are exploration and production companies with proven reserves that are situated low on their respective cost curves and are significantly hedged against near-term commodity price risk.

Across our oil and gas exposure, the average cash lifting costs of our portfolio companies' existing producing wells, is approximately $21 per barrel, resulting in high operating margins even in the current price environment. In addition, our borrowers are substantially hedged for an average of approximately 2.4 years of production at an average price of approximately $84 per barrel. These hedges will support cash flows for debt service, and, in the case of Mississippi Resources, capital expenditures that are accretive to our equity investment.

In the case of Milagro, our investment in the Company's $110 million dollar-one, first lien credit facility sits ahead of $250 million of second lien notes that are currently quoted at a price range of 75% to 77%, though there may not be liquidity at that price level, which implies an enterprise value of approximately $298 million versus our $110 million first lien credit facility. Our investment thesis assumes some degree of process risk as it relates to these junior notes that sit behind our investment. However, given the favorable structure of our first lien investment, we believe that our direct commodity risk associated with this investment is mitigated. Given our focus on risk management, in December, we sold down $20 million of our commitment in Milagro to another lender at a price of 99%, reducing our exposure to $62.9 million principal amount invested. Importantly, this sales price was consistent with our Q3 mark despite a 30% decline in oil prices experienced since our loan was originated through the date of our commitment sell down. We believe this transaction, as well as the price at which we transacted, validates the quality of our underwriting and exemplifies our focus on mitigating and managing risk in the portfolio, beginning with appropriately marking our positions.

While we believe the direct commodity price risk associated with our credit investments in Mississippi Resources and Milagro is mitigated, our $8.9 million amortized cost basis preferred equity position in Mississippi Resources is marked based on an asset valuation of the Company's proven reserves taken at net present value based on a discount rate of approximately 14.5%.

Significant changes in commodity prices will therefore impact the valuation of the equity position, as was the case during the fourth quarter. Subsequent to the quarter-end, the Company began production on an additional well, which we expect to contribute meaningful incremental reserve value. While our Q4 equity mark on Mississippi does not include the benefit of this is expected increase in reserve value, we expect the additional well will positively impact our equity mark for the first quarter of 2015.

Turning now to our dividend. As announced on last quarter's call, our Board of Directors increased our dividend in the fourth quarter to $0.39 per share payable to shareholders of record as of December 31, 2014 which we paid on January 30. Our Board has also declared a first quarter 2015 dividend of $0.39 per share payable to shareholders of record as of March 31, 2015, payable on or about April 30, 2015.

Our Board has established a dividend policy reflective of the high quality earnings power of our business over the intermediate term, at a level that we believe can be consistently earned which maximizes cash dividends to our shareholders. During the fourth quarter, we over earned our dividend on a net investment income basis by $0.18 per share. For the full year 2014, we generated net investment income of $2.07 per share, corresponding to a return on equity of over 13%.

We over-earned our dividend on a net investment income basis for the full year by $0.54 per share based on weighted average shares outstanding during the 12-month period. We have over earned our dividend for each of the past three years. With those highlights, I'd like to turn it over to Mike who will walk through our origination and portfolio metrics in more detail.

Thanks, Josh. Q4 was another solid originations quarter for us, with gross originations of over $304 million. During 2014, we generated originations of over $1.1 billion. Of the approximately $304 million originated during the fourth quarter, we syndicated $100 million of these originations, resulting in new investment commitments of approximately $205 million. These investments were distributed across six new portfolio companies and three upsizings of existing portfolio companies. Of the $205 million of new investment commitments made during the quarter, $198 million was funded.

Over the last four quarters, we have generated average quarterly fundings of over $203 million, or $815 million for the full year of 2014. During the fourth quarter, we exited commitments totaling $148 million, due to the full paydowns of three investments, and four partial investment paydowns. As Alan will discuss in greater detail, during the fourth quarter, we generated significant economics as a result of these full paydowns. This level of repayments is slightly above our average quarterly repayments over the past four quarters of approximately $130 million.

Our average quarterly net funded activity is approximately $75 million based upon the past four quarters or approximately $300 million of net funded activity during 2014; a level of growth that we feel is prudent. Since inception through December 31, we've generated gross unlevered IRR of 16.6% on fully exited investments totaling $835 million of cash invested. We continue to believe that our ability to provide flexible, fully underwritten financing solutions and to hold sizable positions is a key competitive advantage benefiting both our borrowers and our shareholders.

During the fourth quarter, the SEC approved our application for exemptive relief. Under the terms of this relief, TPG affiliated funds, primarily our affiliated credit funds, will be able to co-invest alongside TSLX in certain overage opportunities. TSLX will continue to be the first stop for directly originated US-based middle market credit opportunities, and TSLX will receive priority allocation on every such investment opportunity. Co-investments made by affiliated funds will be on the same economic terms and in the same part of the capital structure as TSLX.

The exemptive relief does not allow for TSLX to co-invest alongside any other TPG affiliated funds in transactions sourced outside the BDC's investment criteria, including TPG affiliated equity investments. We believe that the approval of this application for exemptive relief, which has been in process for three years, enhances our ability to provide certainty of execution and to commit to larger underwritings, both of which we believe to be competitive advantages benefiting both our TSLX shareholders and the portfolio companies we partner with.

Through our direct originations efforts, approximately 90% of our current portfolio was originated through non-intermediated channels. This enables us to control the documentation and investment structuring process and to maintain effective voting control in approximately 81% of our debt investments. While control is important to our risk management process and our primary focus is to directly originate illiquid investment opportunities, the private illiquid credit market is generally slower to adjust to changes in risk premiums than the liquid markets. Because of this dynamic from time to time, as was observed during the fourth quarter, there'll be opportunities to invest in liquid markets at favorable premiums relative to our illiquid market. During such periods of market dislocation, we will selectively invest in sectors and companies in which the breadth of our resources and sector expertise allows us to quickly form a differentiated view. Throughout our investment history and including the recent periods of market volatility and opportunity, we have remained steadfast in our approach of selecting and structuring those investments with the highest risk adjusted returns, not simply the highest absolute returns.

Of the more than 3,500 opportunities we've screened since inception, we've closed less than 2% of these investments. As of December 31st, our portfolio totaled $1.26 billion at fair value compared to $1.23 billion at September 30th and $1.03 billion at December 31, 2013. 89% of investments by fair value were first lien and 98% of investments by fair value were secured. At this point in the cycle, we're primarily focused on investing in top of the capital structure and throughout 2014, we reduced our second lien exposure by approximately 35% to end the year with second lien exposure of 9% driven largely by the full realization of Mannington, which I will discuss further.

The portfolio is broadly distributed across 34 portfolio companies and 19 industries. Our average investment size is approximately $37 million. Our largest position accounts for 5.5% of the portfolio at fair value. Our largest industry exposures by fair value were to healthcare and pharmaceuticals, primarily healthcare information technology with no direct reimbursement risk, which accounted for 17.3% of the portfolio at fair value, and business services which accounted for 10.0% of the portfolio at fair value.

The weighted average total yield on our debt and other income producing securities at amortized cost at December 31st was 10.3% versus 10.6% at September 30th and 10.6% at December 31, 2013. This decline is partially due to the full realization on our investment in Mannington, which had a yield at amortized cost of 14.7%. The weighted average yield on new investments in new portfolio companies made during the fourth quarter was 10.0% at amortized cost. This yield will vary quarter-to-quarter as originations in any single quarter are idiosyncratic given our direct originations model.

Our investment process is predicated on mitigating both credit and noncredit risks. We seek to mitigate credit risk by investing in companies that are scaled and relevant to their supply chain, with downside protection features that may include a high degree of contractual recurring revenues and/or hard asset value, depending on the borrower's industry and our investment thesis. Whenever possible, we seek to avoid credit risks that are asymmetrical to the downside. For example, as Josh discussed, our exposure to the oil and gas sector consists of two investments, Milagro and Mississippi Resources. These are upstream exploration and production companies with strong collateral coverage and long-lived proven reserves without development risk. These companies are situated low on their respective cost curves, with average lifting costs of approximately $21 per barrel and are significantly hedged against direct commodity price risk at an average price per barrel of $84 for over two years. Further, these investments are collateralized by proven developed producing reserves.

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. To put this in context, I'll give an example of how our sector selection is informed by the broader economic cycle. Our second lien investment in Mannington, a provider of commercial and residential flooring, was made in March 2012 when housing starts were at near-trough levels. Through our sector expertise and diligence capabilities, we formed a differentiated investment thesis and structured an attractive risk adjusted investment that included a non-callable feature. Since that time, housing starts have recovered and the Company has performed well. As the expiration of our non-call period approached last fall, we opted not to re-underwrite this cyclical industry at what we now believe to be mid-cycle housing starts and at market pricing more than 1,000 basis points lower than our 2012 vintage investment.

Non-credit risks that we seek to mitigate include interest rate, foreign currency and reinvestment risk. We structure our investments to have significant embedded reinvestment protection in the form of call protection on over 96% of our investments. We mitigate interest rate and foreign currency risk by match funding our assets and liabilities. Approximately 97% of our income producing securities are floating rate typically subject to interest rate floors. And because we have swapped our interest rate on our convertible notes from fixed to floating, 100% of our liabilities are floating rate.

As noted last quarter, when we fund investments in currencies other than US dollars, we borrow on our credit facilities in local currency as this provides a natural hedge against foreign currency fluctuations. Consistent with last quarter, as of December 31, 2014, we had no investments on non-accrual status. At quarter-end, 100% of our investments were meeting all covenant and payment requirements.

With that, I'd like to turn it over to Alan to discuss our quarterly results in more detail.

Thank you, Mike. I'll take us through a review of our financial results. We ended the fourth quarter of 2014 with total portfolio investments of $1.26 billion, outstanding debt of $396 million and net assets of $835 million. Our average debt to equity ratio for the three-months ended December 31st was 0.44x, as compared to 0.38xfor the previous quarter. For the 12-months ended December 31st our average debt to equity ratio was 0.50 times. At quarter-end December 31st our debt to equity ratio was 0.51x pro forma for unsettled trades as compared to 0.46x at September 30th.

We expect to continue to progress towards our target debt to equity ratio as the year continues. As it relates to the right side of our balance sheet, in the fourth quarter of 2014, as we noted on our last call, we amended and extended our revolving credit facility reducing pricing 25 basis points from LIBOR +225 to LIBOR +200 and extending the maturity date to October 2019. As it relates to our SPV asset facility, subsequent to quarter-end, we drew down on the remaining commitment prior to the reinvestment period ending in January.

As for other initiatives we're focused on, we continue to evaluate additional ways to diversify our funding sources. We have significant liquidity starting off 2015 with over $650 million of undrawn commitments. We believe we remain match funded from an interest rate and duration perspective. We also believe we have little to no funding risk in our business, which I'll touch on in a few minutes.

On slide 6 of our earnings presentation, you will see our total investments increased $30 million from the third quarter of 2014, and our net funded investment activity was $50 million during the fourth quarter of 2014. The difference is primarily related to unrealized losses on our investments during the fourth quarter, which I will talk more about in a moment.

As you can see on slide 8, during the three-months ended December 31st, we had a number of factors impacting our net asset value per share. In November, our DRIP issuance had a small positive impact on NAV as shares issued under this program were at a price above our net asset value per share. We significantly over earned our dividend again this quarter, adding $0.57 per share to net asset value from net investment income.

Our dividend for the quarter was $0.39 per share reducing net asset value, and we had $0.13 per share from the reversal of unrealized gains from the three investments that paid down this quarter. Remember, that's recognizing what was unrealized gains up to our revenue line- Interest From Investments. These revenues contributed to significantly over earning our dividend this quarter. There were two other factors reducing net asset value for the fourth quarter. $0.11 per share can be attributed to energy-related mark adjustments, almost all of which is related to our preferred equity investment in Mississippi Resources., and $0.10 per share can be attributed to unrealized losses resulting from a widening in credit spreads and credit risk premiums across asset classes experienced again during the fourth quarter. While we believe it is appropriate to reflect this spread widening in our calculation of fair value, we don't believe it impacts our ability to be repaid in full.

On slide 9, we've included a net asset value bridge for the 12-months ended December 31, 2014. As you can see, the activity on the left side of the slide contributes to an $0.08 per share increase in net asset value, bringing net asset value per share from $15.52 at December 31, 2013 to $15.60 per share, which items include our initial public offering last March, our DRIP issuances during 2014, our convertible notes issuance in June 2014, and net investment income significantly over earning our dividend for the year 2014. The energy-related mark adjustments in the fourth quarter reduced net asset value per share by $0.11 for 2014. Finally other changes in realized / unrealized and spread related marks net-net increased net asset value per share by $0.04 for 2014.

Moving on to the income statement on the next slide, total investment income for the quarter-ended December 31st was $45.8 million. This is up $7.4 million from the previous quarter or just over 19%. This increase was driven primarily by the significant Other Fees earned during the fourth quarter. Total investment income for the year-ended December 31, 2014 was $163.2 million. This is up $70.7 million from the year-ended December 31, 2013 or 76%.

It's worth pointing out that while investment income is up 76% year-over-year, our investment portfolio has grown by only 24% over the same period. Revenue growth outpacing portfolio growth means, all in all, we're generating significantly more economics today than we did a year ago, we have other revenue streams adding to our top line and more significant economics being driven both from our existing portfolio and originations than in the past.

Another way to think about this is our revenue for 2014 as a percentage of average investments has grown by approximately 30% as compared to 2013. On an earnings per share basis, net investment income for 2014 was $2.07 per share as compared to $1.66 per share for 2013, a year-over-year increase of 25%. Also our PIK income remains low at less than 2% of total investment income for 2014.

On the next slide, slide 11, you will find a more detailed breakout of our revenues. As you can see, our Interest From Investments-Interest Income was $31.6 million for the quarter-ended December 31. This is up $2 million from the previous quarter or approximately 7%. We experienced another strong quarter of revenues from Interest From Investments-Other Fees and Other Income, earning $11.5 million and $2.7 million respectively during the three-months ended December 31.

It's important to pause for a moment to talk about some of the drivers of our business and how that impacts net investment income. During 2014, we experienced full or partial pay downs that,due to our call protection levels and, combined with accelerated OID, contributed significantly to our Interest From Investments-Other Fees line.

But these pay downs delayed us from getting back into our target debt to equity ratio during 2014. As we think about how our business works, if we continue to receive elevated levels of pay downs, we would expect to continue to see elevated levels of Interest From Investments0 Other Fees. But if we don't see similar levels of pay downs, then we would expect to more quickly leg back in to our target debt to equity ratio, contributing a more rapidly to our Interest From Investments-Interest Income line, either of which should continue to drive strong ROEs for the business. One way to quantify the former is to touch upon important statistic. Our investments at amortized cost as a percentage of call protection which is 93.7% as of December 31st, 2014.

As for expenses, net expenses for the quarter-ended December 31st was $14.6 million. This is down slightly from the previous quarter, primarily due to lower incentive fees as a result of unrealized losses booked during the quarter, which I noted as part of the NAV bridge. Our other operating expense ratio was 74 basis points this year compared to 77 basis points in 2013 and in line with the targeted range we discussed on our first quarter 2014 earnings call.

On slide 16 and 17, we discuss our debt and funding profile. As I noted earlier, we believe there is little to no funding risk in our business. As you can see on the bottom of slide 17, over 60% of our earning asset are funded by permanent equity capital, which we expect will marginally decrease as we leg back into our target debt to equity ratio. Our remaining earning assets have a weighted average maturity of three years versus our debt financings which have a weighted average maturity of five years.

A few final points in closing. We have continued to over earn our dividend. As of December 31st we have an estimated $0.53 per share in undistributed distributions on a tax basis. We continue to generate strong consistent earnings driven by a high quality of income from embedded economics in our portfolio. Josh, back to you.

Thanks, Kirsh. We're rounding the corner here. A central theme underlining the results of this quarter and our successful track record since inception is our focus on identifying, mitigating and managing risk in our portfolio. We believe that the fair valuation of the portfolio, cycle-sensitive capital structure and sector selection, and control features of the portfolio are the foundations of sound risk management in our business. Last quarter, we highlighted a developing trend in liquid markets that persisted in the fourth quarter- a reversal of inflows that otherwise characterize much of the last three years.

This trend persisted in Q4, resulting in widening of risk premiums in the liquid credit markets. Notably, given the increase in credit spreads and the rally in equity markets, an uncoupling of equity and credit risk premiums was observed last quarter. We believe such circumstances represent a considerable opportunity for a scale capital provider with access to liquidity and diversified funding sources. As Mike discussed, we believe the SEC's approval of our application of exemptive relief further solidifies our relevance to the middle market.

To reiterate, the vast majority of our portfolio is classified as Level 3, illiquid investments; however, our illiquid portfolio is not isolated from broader changes in risk premiums. We fair value the portfolio on a quarterly basis, taking into account among other inputs changes in credit spreads and other risk asset prices. During the fourth quarter, LCD first lien composite spreads increased by 37 basis points, and the LCD second lien composite spreads increased by 153 basis points. That being said, given that we are a control lender with operating and financial covenants, we believe the expected duration of our portfolio mitigates some of the broader risk premium volatility on a dollar basis.

As Alan discussed and as is noted in our earnings presentation, the impact to NAV of these widening spreads and volatility in energy prices was approximately $0.21 per share this quarter, or approximately 1.3% of net asset value prior to accounting for the Q4 earnings power of the business. At this point, in the economic cycle, we are primarily focused on investments at the top of the capital structure and industries that will perform well throughout cycles. We remain highly selective and particularly focused on avoiding situations where asymmetrical downside risks, both credit and noncredit , exist.

Mike touched upon our late stage sector selection and the reduction in our exposure to cyclical industries. Since the beginning of 2013, we have reduced our exposure to non-energy related cyclical industries from approximately 31% of the portfolio at fair value to 12% as of the year-end 2014. Our investment strategy is to focus our resources on opportunities that are difficult to source, diligence, execute and manage. We are compensated for this complexity and expertise these situations require in the form of attractive risk adjusted returns that typically exceed those afforded in the broadly syndicated markets. That being said, as was the case in the early part of Q4 2014, we will opportunistically invest in on the run credit with a favorable risk reward characteristics. These are opportunities in which our ability to navigate complexity by leveraging our significant resources for sector and market expertise enables us to form a differentiated view of asset and/or intrinsic value.

In addition to our late cycle sector and capital structure perspective, we believe that our practice of match funding our assets and liabilities positions the portfolio well throughout economic cycles, consistent with our long-term focus. We remain steadfast in our portfolio construction disciplines and believe that our focus on downside protection and generating a high quality of risk-adjusted returns is ever important. As previously stated, we believe that return on equity coupled with the quality and risk profile of our portfolio, is the appropriate measure of our ability to generate high quality risk-adjusted returns over the long-term.

For the three-months ended December 31, 2014, we generated an annualized ROE of 14.6% based on net investment income, and for the 12-months ended December 31, 2014, we generated an annualized ROE of 13.3% based on net investment income. For the 12-months ended December 31, 2014, we generated an annualized ROE based on net income of 11.1%.

Based on our current asset level yields, and as we continue legging into our target leverage ratio, supported by our pipeline of new investment opportunities, our target return to equity is 10.5% to 11.5% over the intermediate-term. This corresponds to $1.63 to $1.79 per share on a net investment income basis and compares to our annualized dividend yield at book value of 10.0% as of December 31, 2014 or $1.56 per share on an annualized basis.

A few final points in closing, of our total outstanding shares of approximately 54 million, less than 1.8 million non-affiliated shares remain under lockup through March 15, 2015.

As I discussed on last quarter's call, in November, the Board approved a $50 million 10b5-1 stock repurchase plan. The Board has approved the extension of this plan through the earlier of June 30, 2015 or such time as the $50 million has been fully utilized. This program it is effectuated on an algorithmic basis by an agent at threshold prices beginning a penny below NAV. Given that our stock price has consistently traded above book value, no shares have been purchased under this program to date.

As we stated on last quarter's call, in certain periods of market dislocation and if we were to trade below book value, the marginal return from reinvesting in our existing portfolio may exceed the reinvestment yields and return on capital that can be obtained in the prevailing investment environment. In those circumstances, we believe it is in the best interest of our shareholders to reinvest through share repurchases in our existing portfolio which we believe to be to be appropriately fair valued and of high quality and which gets us to our target leverage ratio quicker. In a different market environment in which we can earn higher multiples of return on invested capital via non-call features or warrants, we may conclude that even if we were to trade below book value there is greater value in growing the portfolio by making new investments rather than reinvesting in our existing portfolio. To be clear, we do not believe we're in this latter market environment today.

On behalf of myself, Mike Fishman and Alan Kirshenbaum and our Investor Relations team, thank you for your continued interest in TSLX. Thank you for your time today. Ashley, could you open up the call -- line for questions.

(Operator Instructions)

Rick Shane, JPMorgan.

I just want to sort of tie together two themes that came up. One is the outflows from the liquid loan markets and the other is the dynamics in terms of repayments on your portfolio and the ability to capture make whole provisions when that occurs. Obviously, you guys had very strong repayments this year. Given what you're seeing, would you expect that will slowdown in terms of the -- as we head into 2015?

Yes. So I'll take that, Rick. Appreciate the question. So the repayments are really a function of two different things. One is idiosyncratic things happen with our borrowers such as: M&A transactions; they graduate to cheaper cost of capital or the high-yield market; or I think what you're talking about -- the changes in credit spreads allow them to find cheaper cost of capital. So one is idiosyncratic and then one is kind of spread related.

I would suspect that the spread related piece of the repayments will slow this year which will allow us to generate more ROEs from traditional interest income. But the middle market's very active. Companies get bought, sold. They do add-on acquisitions. They have capital needs, which provides a lot of opportunity for us to put additional capital work. But I would suspect that the credit spread, the rate of change of credit spreads decreasing net-net will mean that repayments will be slower this year, as a percentage of our portfolio.

Got it. Okay. That's actually a helpful answer. I appreciate not only the spread driven but the deal activity which I wasn't necessarily considering. Thank you guys.

Yep. No problem.

Doug Mewhirter, SunTrust.

I have two questions. First, how do you expect your syndication activities to evolve over the next two years? It looks like it's stepped-up very slightly. Is it really a case-by-case basis? Or are you actually sort of building that into part of your originations strategy as you might seek out loans that could be more easily syndicated to get that fee income?

Yes. So, what I would say is, we're not generally -- we're not in the syndication business. Right? We're in the storage business, we're not in the moving business, right? We like to store risk. There are two drivers of that opportunity set, which -- or those revenues which TSLX has historically benefited from. One driver which is that our existing portfolio -- as deal activity in our existing portfolio picks up, our borrowers need more capital needs. As they need more capital needs, it outstrips our risk profile to hold those positions on our balance sheet. In that case we'll generate revenues from syndicating the financing needs driven by deal activity.

The second piece of that. As liquid markets take a step back, or high-yield -- the high-yield market and leverage loan market. We typically don't want to compete with those markets. But if they take a step back and they focus on financing larger companies, we'll have the opportunity to finance companies that have capital needs of $150 million to $250 million of needs which the high-yield market is not focused on which, given our hold position targets of $40 million to $80 million, will allow us to drive those type of revenues.

So you saw a whole bunch of that activity in 2012, people didn't follow us pre-listing, but a company, for example, called Federal Signal, who we did a $215 million deal for. But I think it's -- the activity will be driven by two sources, one within our existing portfolio. The second is, as there is less competition from the high-yield market or other BDCs, given their leverage ratio, the capital constraints, they are trading below the NAV, we will have the opportunity to deploy and underwrite larger credit facilities which will drive that revenue. Mike, do you have anything to add?

Yes. I think to touch upon what Josh was saying, the bottom end of the broadly syndicated loan market, which last year was probably dipping down to $200 million to $250 million. I think that floor has been raised probably more to $350 million to $400 million. So there is this larger geography of transaction size that we can look at and create more underwriting and syndication opportunities for us.

Okay. Great. That's a very helpful answer. My second and final question, I haven't gone through your portfolio line by line yet, but did you make any liquid market -- significant liquid market purchases during the quarter?

We did. So, I'm happy to go through those or a couple of those. One was a company called Vivint, or APX, which in my prior life at Goldman, we owned the equity and provided financing and TSLX had provided financing for a couple years back. We know the Company. We bought two securities, one was the secured bond and one was the unsecured bond. Those prices have rallied since we bought those. Then we invested in the FILO of Toys "R" Us which is a -- basically a last out on a receivables inventory loan which is very liquid collateral during the market disruption as well. So those are two examples.

Great. Thanks. That's all my questions.

(Operator Instructions)

Terry Ma, Barclays.

Just wanted to get a sense of how the first quarter's shaping up for investments. Maybe can you just talk a little bit about whether or not the exemptive relief will contribute to the size of your pipeline immediately, given you can write larger check sizes now?

Yes. Great question. Right now our pipeline continues to be very active. As you know, as you've heard us say before, in any individual quarter, transactions that could close in one quarter might slip to the following quarter. So it's probably better to look at originations probably more on a trailing two to four quarter basis. But we're seeing a lot of interesting opportunities right now. As far as exemptive relief, we're certainly seeing opportunities of larger size that the exemptive relief will allow us to underwrite those transactions at levels and bring in affiliated credit funds within TPG. So I think, it's already showing to be something that could be powerful for us going forward.

It only took three years.

Okay. Great. So with the rest of the BDC space trading below book and the implied cost of equity higher there, the valuation of your stock has obviously held up very well. You guys are below the low-end of your target leverage range. So can you maybe just talk about how your opportunity set has increased? Also aside from dislocation in energy, is there anything that looks interesting right now?

Yes. So I'll take a shot at that and let people fill in. Look. You're right in saying -- the BDC, I think, industry last year between -- these are round numbers, between unlisted BDCs and BDCs raised about $8 billion of or $9 billion of capital for the last two years. For the last two years, I think increased their balance -- increased their total balance sheets from about $49 billion to about $77 billion. So I think that the industry probably had a tough year last year and has retrenched a little bit given that capital was raised and people were not meeting their cost of capital. I think, who knows if that continues to play out or if capital continues to flow or doesn't flow.

I think in the short-term, it probably provides a little bit of opportunity. But there's surely capital being raised in the gray market such as the non-traded BDCs. For us, as it relates to us being under levered, we -- our capital is a finite resource which we think has a very high opportunity cost. So we'll continue to really focus on things, not try to take market share, but really try to focus on things that drive what we think are really unlevered attractive risk-adjusted returns. But I know I didn't answer your question. I mean, I feel better going into this year than I did last year as it relates to the opportunity set and competition but that can quickly change. But our capital has a higher opportunity cost.

Okay. Got it. That's very helpful. Thank you very much.

Jonathan Bock, Wells Fargo Securities.

One small one and then maybe a couple bigger picture questions. The first, Josh, I noticed that you purchased a CLO tranche. I think it was Symphony, small amount. But I know you have pretty particular views on CLO equity within a BDC structure given that the two things the BDC can't withstand are both NAV volatility and cash flow volatility, both of which are present in a CLO investment. So can you walk us through why one owns CLOs and structured risk? What you were seeing? How that might be a bit different than most?

So first of all, this is not CLO equity.

Okay.

Just to be very clear. So I think you know, Jonathan, in our credit platform, we have a CLO manager. I've been pretty generally bearish about buying CLO equity or the appropriateness of CLO equity in a BDC for various reasons. One is you're the high cost producer of that risk return, given management fees on management fees. And two, the volatility in cash flows. So this is not CLO equity.

During a period of market disruption, there was a Tier 1 CLO manager, Symphony, with a very low default record which we know the collateral very well. There is a 6% subordination, we're100% of the tranche. Not that we invest on credit ratings but it was a B2 rating that was a non-single name credit portfolio, where we were able to buy at a very large discount at 85 and constant default rates would have to be kind of 6% to 7% at below a 70% recovery rate for us to lose money.

So that risk return, we thought was very good at that moment in time. Again, just to be clear, just it's a $5 million cash position. But that's how we thought about it, which is it was very good risk return with buying it 15 points back you had a lot of convexity. And you had a decent amount of subordination where you would have to be in a very high default rate environment for a sustained period of time with low recoveries so we don't lose money.

Make total sense. I appreciate it. Alan just to -- you mentioned the 15, purchasing 15 points below. Obviously when you see a 6% yield, what is your --what we'll call with OID, your effective yield that you received day one when you purchased that investment? Any --

LIBOR +850.

Okay. Great. Broader question, as it relates to levered lending guidance, we've heard a bit about retrenchment at the banks, which obviously plays into your situational credit favor as well as your just strong position in the middle market. But were also kind of interested in bank appetites to leverage -- to back end leverage deals- to the extent that you originate a credit that either doesn't amort according to leverage lending regs or has leverage -- total leverage I excess to 6 times.

Is there still an appetite for the ABL groups at various banks to be willing to back-end lever? Because we were under the impression that even though banks are lending, that -- even though banks are in an ABL structure which is very, very safe and sound, particularly in one of your investments, that regulators might look at that as a non-passed asset? So how would you describe the back-end leverage environment today in light of tightening regulations and if that's a factor?

Yes. So I think generally, it will probably be a factor on the margin. I'll give you an example. We financed a Company called Insurity, which had $165 million senior credit facility. We brought in two -- Mike, two lenders?

Yes.

In the first-out piece, very low attachment point which was $70 million in the first-out plus the revolver. So we have not felt it. We hear about it. We haven't felt it. Yet. So I think that will also be a little bit of a risk, although, as you know, most of our portfolio, when you look at our total portfolio, we have very, very high attachment points. So we use that kind of -- it's not -- it's core to our strategy, but I wouldn't say, it's not every transaction it's quite frankly a lot less than half of our transactions. And so --

Go ahead, Josh.

So I would say that we hear about it. We haven't felt it. Ultimately, I think it will be an opportunity.

Okay. Then I'm just curious, there is a way to effectively structure the same type of return, perhaps instead of taking idiosyncratic risk at the investment level, pooling, instead of unitranche assets in addition to a partner that is then financed by a bank or others, which would be okay. Any thoughts that if the back-end leverage environment cools slightly, that you would consider some form of a JV which is pretty proven and given your depth of institutional relationships you could pretty easily create?

Yes. I mean, we constantly look at different opportunities, right? We've talked about the SBIC before- where we're constantly looking at opportunities where -- around JVs and other things. What we like about our current strategy is that our portfolio basically has single name financing with a little bit of front leverage versus a pooled where we are adding more risk to our equity investors because we're pooling our investments in a cross collateralized financing construct. So, possibly, but we like what we're doing today.

Okay. Okay. Guys, congratulations on a great year, a great quarter. Thank you so much.

Thanks, Jonathan.

(Operator Instructions)

I'm not showing any further questions in queue. I'd like to turn the call back over to management for any further remarks.

Great. Well, look, we appreciate people's time and support. We have a kind of a history around here of wishing people a happy holiday. There is no real holidays that exist except for, I hope people enjoyed their President's Day and got out skiing or spent time with their family or Valentine's Day with their loved ones. So much appreciated your time and support. We'll talk next quarter if not sooner. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.