KBRA assigns a rating of BBB+ to Sixth Street Specialty Lending, Inc.’s (NYSE: TSLX or “the company”) $350 million 6.125% senior unsecured notes due March 1, 2029. The Outlook for the rating is Stable.

Key Credit Considerations

The rating and Stable Outlook reflect the company’s ties to Sixth Street, a global investment firm with ~$75 billion of assets under management, a $3.1 billion diversified investment portfolio comprised largely of first lien senior secured investments (91%) with a non-cyclical sector focus, appropriate leverage of 1.15x with regulatory asset coverage of 187.3% (150% regulatory minimum), and a diversified funding structure that includes senior unsecured notes and secured bank lines. For companies that fall within TSLX's typical borrower profile (92.8%), the company’s portfolio company weighted average annual EBITDA was $69.2 million and had a weighted average revenue of $209 million as of September 30, 2023. The top three sector concentrations included Internet Services (15.7%), Business Services (14.9%), and Retail & Consumer Products (10.9%), with the majority of Retail & Consumer Products falling under the company’s special situations business which is asset based (high collateralization with downside protection) while the strategy has generated in excess of 20% gross IRRs on fully realized positions.

TSLX’s liquidity is adequate with $981.5 million of combined cash and available committed bank lines and its earliest maturity of $347.5 million in November 2024. The company’s percentage of unsecured debt to total debt is boosted by the $350 million issuance, which on a pro-forma basis comprises 76% of total debt compared to 56% as of September 30, 2023. KBRA believes that unsecured noteholders have sufficient unencumbered assets due to its high proportion of investments highest in the capital structure. Increasing short-term liquidity, the company issued shares for gross proceeds of $79.2 million in May 2023. Furthermore, the ratings are supported by the company’s solid 14-year operating history with minimal non-accruals, which include only one portfolio company that accounted for 0.9% and 0.7% at cost and fair value of total investments, respectively, as of September 30, 2023. A strong management team with decades of experience in middle market lending and solid risk management practices has resulted in high returns, which also support the ratings. The strengths are counterbalanced by the illiquid nature of the assets and retained earnings constraints as a Regulated Investment Company (RIC).

Formed in 2010, Sixth Street Specialty Lending, Inc. is a publicly traded closed-end externally managed non-diversified investment management company regulated as a business development company under the Investment Company Act of 1940. Also, the company has elected to be subject to tax as a RIC. The company is managed by Sixth Street Specialty Lending Advisers, LLC, an affiliate of Sixth Street Partners (“Sixth Street"). The company maintains exemptive relief order from the SEC that allows it to co-invest, subject to certain conditions with its affiliates.

Rating Sensitivities

The ratings for TSLX are unlikely to be upgraded in the intermediate term. A rating downgrade and/or Outlook change to Negative could be considered if a prolonged downturn in the U.S. economy has a material impact on credit metrics including liquidity, leverage, and earnings. An increased focus on riskier investments or a significant change in the current management structure and/or risk management policies could also lead to negative rating action.

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Methodologies

Financial Institutions: Finance Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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