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Edited Transcript of TSLX earnings conference call or presentation 1-Aug-19 12:30pm GMT

Q2 2019 TPG Specialty Lending Inc Earnings Call

Fort Worth Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of TPG Specialty Lending Inc earnings conference call or presentation Thursday, August 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joshua Easterly

TPG Specialty Lending, Inc. - Chairman of the Board & CEO

* Ian Simmonds

TPG Specialty Lending, Inc. - CFO

* Bo Stanley

TPG Specialty Lending, Inc. - President

* Michael Fishman

TPG Specialty Lending, Inc. - VP & Director

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Conference Call Participants

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* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Terry Ma

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning and welcome to TPG Specialty Lending, Inc. June 30, 2019 Quarterly Earnings Conference Call. Before we begin today's call, I would like to remind our listeners that remarks made during the 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 number 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 earnings press release for the second quarter ended June 30, 2019 and posted a presentation to the Investor Resources section of its website www.tpgspecialtylending.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. TPG Specialty Lending, Inc. earnings release is also available on the company's website under the Investor Resources Section. Unless otherwise noted, all performance figures mentioned in today's prepared remarks are as of and for the second quarter ended June 30, 2019. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Josh Easterly, Chief Executive Officer of TPG Specialty Lending, Inc.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [2]

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Thank you. Good morning, everyone, and thank you for joining us. I will start with an overview of our quarterly results and hand it off to my partner and our President, Bo Stanley to discuss our originations and portfolio metric. Our CFO, Ian Simmonds will review our financial results in more detail. I will wrap up the call with some concluding remarks before opening the call to Q&A.

After market closed yesterday, we reported strong financial results for the second quarter. Net investment income per share was $0.47 and net income per share was $0.72, both in excess of our second quarter base dividend per share of $0.39. The difference between this quarter's net investment income and net income was primarily driven by net unrealized gains specific to individual portfolio companies and net unrealized mark to market gains related to our interest rate swaps given the change in the shape of the forward LIBOR curve. This quarter's results corresponded to an annualized return on equity on net investment income and net income of 11.6% and 17.7% respectively.

Reported net asset value per share at quarter end was our highest level since inception at $16.68. An increase of $0.35 from the prior quarter after giving effect to the impact of the Q1 supplemental dividend. Ian will walk through the drivers behind this quarter's net asset value movement in more detail.

Yesterday, our Board announced the third quarter base dividend of $0.39 per share to shareholders of record as of September 13, payable on October 15. Our Board also declared a $0.04 per share supplemental dividend to shareholders of record as of August 30, payable September 30. This marks the 10th consecutive supplemental dividend since we introduced this framework in Q1 of 2017. To date, we have declared a total of $0.58 per share in supplemental dividends to our shareholders, or an increase of 15% over our base dividend level, while also growing net asset value per share by 4% over this period.

We believe our dividend framework, which has been an effective way to enhance our shareholders' cash returns while satisfying RIC-related distribution requirements and preserving the stability of net asset value. Given our continued overearning of the base dividend, we'll closely monitor our dividend framework to ensure we satisfy our ongoing distribution requirements. With that, I would like to turn the call over to Bo to walk through our portfolio activity.

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Bo Stanley, TPG Specialty Lending, Inc. - President [3]

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Thanks, Josh. We had a very active quarter with record high originations, commitments, and gross fundings of $1.5 billion, $396 million and $344 million, respectively. This was distributed across 12 new investments and upsizes to two existing portfolio companies. On the repayment side, there were $128 million of pay downs across four full realizations and four partial investment realizations and sell downs, which resulted in strong net portfolio growth for the quarter of $216 million.

With dry powder for private debt funds at all-time highs, we continue to experience strong competition in the direct lending space. In this environment, differentiating our capital and creating our own transactions are critical to our ability to generate consistent returns for our shareholders. This quarter's portfolio activity highlights the distinct competitive advantage that our platform offers from a sourcing and scale perspective. Let me take a moment to provide a few examples.

We were active on our retail ABL team during the quarter with new investments in Barneys, Maurice's and Save-A-Lot. Together, these three names comprised $200 million of originations, $85 million of which were allocated to affiliated funds or third parties. As we've said on our previous earnings calls, we continue to like being a solution provider in this space, given the ongoing secular trends for brick and mortar retailers and our platform's human capital expertise. Inclusive of this quarter's repayment of the Payless DIP loan, we've generated an average gross unlevered IRR of 22% across our fully realized retail ABL investments.

Another transaction this quarter that highlights our platform's capabilities is the $225 million term loan facility that we sole-led and agent for the Verdad Resources, an upstream E&P company with primary operations in the DJ Basin. This opportunity was sourced with our energy team and coincided with our opportunistic approach of providing first lien reserve-based loans to upstream companies situated low on their cost curves at current price levels. Our platform's sector expertise and ability to act in size allowed us to structure a customized one-stop solution for the company and its sponsor at pricing and terms that provide a strong risk return profile on our investment. Inclusive of the $42.2 million par value loan that we funded for Verdad, our portfolio's total energy exposure for the quarter remained low at 3.8% of portfolio at fair value.

On the repayment side, one of our largest realizations this quarter was our debt investment in Validity. For background, Validity is a sponsor-owned provider of data integrity solutions, and in May of last year, we funded a $36 million last-out term loan along with a $3.8 million convertible preferred equity investment. This May, the company raised a new debt facility and equity financing to support an add-on acquisition. Since new lenders were willing to provide -- willing to price the debt facility at a tighter spread than our view of what was required, we chose not to participate and were repaid on our last-out term loan with call protection prior to quarter-end. We continue to hold our convertible preferred equity investment and updated the fair value mark to reflect the valuation from the recent equity investment. We expect to realize our investment at the current fair value mark in the near term.

Before I pass it over to Ian to discuss this quarter's financials, let me provide a quick snapshot of our portfolio. At quarter-end, 97% of our portfolio was first lien on a fair value basis, consistent with the prior quarter. The weighted average total yield on our debt and income producing securities at amortized cost was 11.4% compared to 11.6% at March 31. The decrease was primarily driven by the movement in LIBOR during the quarter on our floating rate debt portfolio.

Shifting to credit quality, the health of the portfolio remained stable with no investments on non-accrual status. Our portfolio's diversification profile benefited from this quarter's funding activity. Quarter-over- quarter, the number of portfolio companies increased from 48 to 56, our average investment size decreased slightly from $38 million to $37 million, and our top 10 borrower concentration decreased from 37.8% to 34.0% of the portfolio at fair value. We continue to be late cycle minded with our exposure to non-energy cyclical industries at an all-time low of 3% of the portfolio at fair value. As a reminder, this figure excludes our retail asset-based loan investments, which are supported by liquid collateral values and are not underwritten based on enterprise value, which tends to fluctuate in economic cycles.

Given our direct origination strategy, 99% of our portfolio by fair value was sourced through non-intermediated channels. At quarter end, we maintained effective voting control on 83% of our debt investments and averaged 2.1 financial covenants per debt investment, consistent with historical trends. And we continue to have meaningful call protection on our debt portfolio of 103.4 as a percentage of fair value as a way to generate additional economic should our portfolio get repaid in the near term. With that, I'd like to turn it over to Ian.

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Ian Simmonds, TPG Specialty Lending, Inc. - CFO [4]

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Thanks, Bo. As a result of this quarter's net funding activity, our portfolio grew 13% quarter-over-quarter. With total investments at quarter end of $2.06 billion. Our ending debt to equity ratio was 0.86x compared to 0.69x in the prior quarter. And our average debt to equity ratio, during the quarter was 0.85x compared to 0.66x for Q1.

Total debt outstanding at quarter end was $947 million and net assets were $1.1 billion or $16.68 per share, which is prior to the $0.04 per share Q2 supplemental dividend that was declared yesterday. As Josh mentioned, our net investment income was $0.47 per share and our net income was $0.72 per share.

Turning to our presentation materials. Slide 8 is the NAV bridge for the quarter. Walking through the various components. We added $0.47 per share from net investment income against the base dividend of $0.39 per share. And there was a $0.02 per share reduction to NAV, as we reversed net unrealized gains on the balance sheet from investment realizations. Given the change in the shape of the forward LIBOR curve during the quarter, there was a positive $0.09 per share impact to NAV from net unrealized mark-to-market gains on the interest rate swaps on our fixed rate security. "Other changes," primarily net unrealized gains from portfolio companies, had a positive $0.19 per share impact to this quarter's NAV. Note that the increase in the fair value mark on our convertible preferred equity investment in Validity, which Bo touched upon, contributed a positive $0.13 per share to this quarter's net unrealized gains. If realized, any gains on our equity position at the time of exit would be unwound from the balance sheet and recognized into net income, but won't flow through to net investment income.

Moving to the income statement on Slide 9. Total investment income was $62.4 million, up from $52.5 million in the prior quarter. This was due to an increase in the average size of our investment portfolio and higher activity related fees. Interest and dividend income was $55.5 million, up $6 million from the prior quarter. And other fees. which consist of prepayment fees and accelerated amortization of upfront fees from unscheduled pay downs, were $5 million compared to $0.8 million in the prior quarter.

Net expenses for Q2 were $30.3 million, up from $25.5 million in the prior quarter primarily due to higher interest expense and management fees from a larger average portfolio and higher incentive fees from an increase in earnings. Interest expense increased as a result of higher average debt outstanding during the quarter, while our weighted average interest rate on average debt outstanding decreased slightly from 4.7% to 4.6% given the shift to a lower unsecured funding mix and a decrease in the effective LIBOR across our debt instruments. We did want to highlight that there is an approximately one quarter timing lag on the LIBOR reset date on our interest rate swaps, and therefore, the decline in LIBOR during Q1 rolled through this quarter's cost of debt. Similarly, we expect the impact of Q2's LIBOR movement to benefit Q3's cost of debt.

Shifting to the right side of our balance sheet, during the quarter, we upsized our revolving credit facility by $75 million to $1.245 billion with the addition of a new lender to our bank group. At quarter end, we had significant liquidity with $735 million of undrawn revolver capacity. Given the ample liquidity and low marginal cost of funding under our revolver, our base case is to repay the $115 million of convertible notes that mature in December with this facility. We continue to be patient and disciplined about accessing the unsecured debt market. As a spread lender, we are focused on the swap adjusted pricing for a new notes issuance, not just the absolute coupon rate, given our risk management policy of implementing fixed to floating interest rate swaps on our unsecured debt to match the floating rate nature of our assets. While funding efficiency and ROEs remain important, we are also conscious of maintaining an appropriate funding mix in order to maximize flexibility under different market environments.

Before turning it back to Josh. I'd like to briefly provide an update on our ROEs. At the beginning of this year, we communicated an annualized ROE target of 11% to 11.5% based on our expectations over the intermediate term for our net asset level yields, cost of funds and financial leverage. For the first half of the year, we generated an annualized ROE on net investment income and net income of 10.8% and 16.2%, respectively. The difference between these measures, amongst other drivers, include net unrealized gains from portfolio companies, such as those where we have visibility on collecting contractual prepayment fees. Based on the strength of our investment pipeline, the earnings power of the portfolio and our expectations for fee related activity for the remainder of the year, we believe we remain on pace to achieve our 2019 NII per share target of $1.77 to $1.85.

With that, I'd like to turn it back to Josh for concluding remarks.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [5]

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Thank you, Ian. We are pleased with our strong Q2 results and we continue to build strong momentum heading into the second half of the year. Over the trailing 12-month period, we've generated an ROE on net income of 12.9%, compared to an annualized ROE on net income of 11.8% since our IPO. We believe the strength of and consistency of our returns is a direct result of our commitment to thematic sourcing and direct originations, our continued investment in the capabilities and human capital across our platform, and our capital allocation policies that serve the long-term interest of our shareholders.

We've deliberately set up the business to perform across economic environments and cycles. We do this through our interest rate hedging policy, our focus on increasing the LIBOR floors across our portfolio, and by operating in a leverage range that provides us with an reinvestment option to create high risk-adjusted returns in periods of market volatility.

As a reminder, by swapping our fixed rate debt to floating rate, we provide net interest margin expansion for our business in falling rate environments once LIBOR dips below the floor on our portfolio. This is because the cost of our liabilities will decrease in line with the drop in LIBOR, while asset yields will only decrease to the point LIBOR reaches the average floor we've structured into our investments.

Since the falling rate environment and its potential impact on BDC earnings is top of mind, I'd like to conclude by discussing the potential impact of declining rates on our returns. If we apply today's spot LIBOR rate across our investment assets and outstanding debt, holding constant our Q2 asset level spreads and fee income, average balance sheet leverage and operating expenses, we would expect to see a 10 basis point uplift to our reported Q2 annualized ROE on net investment income. This is due to the one quarter timing lag that we experience on our LIBOR reset dates on our interest rate swaps that Ian discussed earlier. If we look further out the LIBOR curve and perform the same analysis using the 1 year implied forward rate, lower interest rates translated to approximately 30 basis points of compression to reported annualized return on equity on a net investment income basis. This potential compression could be mitigated entirely through a modest increase in our financial leverage from a Q2 average of 0.85x to 0.95x, which remains near low end of our targeted range of 0.9x to 1.25x. In other words, based on our business unit economics, we don't believe the expected impact of a lower rate environment on our earnings profile is significant, in particular when taking into account the positive impact that a marginal increase in financial leverage will provide.

With that, I'd like to thank you for your continued interest and your time today. Operator, please open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Finian O'Shea with Wells Fargo Securities.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

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First just a 2-part question on the very robust originations this quarter. First, were there any explanatory factors such as perhaps the ripeness of your pipeline -- and then can you talk about the placement of the originations internal versus external to the extent that your -- it's over 1 billion. I think that was placed. Did this approach the upper bound of the platforms' appetite for direct lending TSLX BDC originations?

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [3]

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Hey, Finian, good morning, thanks for the question. So I think the first part of your question is, what explains the increase in originations quarter-over-quarter? Some of it's just timing. I think, last quarter, we -- originations slipped into Q2 and you had some payoffs that happened in Q1. And so, some of it's just flat out timing. The second piece is -- is that we're really seeing the fruits of the labor of the strategy of thematic sourcing with the continued challenges -- secular challenges in retail. For example, we saw a significant increase in our ABL retail activities with I think three investments or four investments actually during the quarter, so that's part of it. On the thematic side, in addition to that, we've had a theme in SaaS-based software for treasury management systems for corporates. GTreasury was I think funded last year and then Kyriba Corp, which is an industry leader, clearly fits into that space.

So you really seen thematic sourcing kind of benefit the platform across, but a lot of that had to do just with timing between [Q1 and Q2] (corrected by company after the call). The second piece is what we've always said about the unique thing about our exemptive relief order is TSLX, across the Sixth Street platform, has the ability -- it effectively gets a first look on all the U.S. direct originated middle market loans. And we have a relatively small balance sheet, but we have a very large credit platform, and so we have the ability to size up when opportunities come our way where we can provide certainty to the issuers. And so there was a significant amount of co-invest across the platform and again, how it works is, TSLX gets its share first whatever it wants, and then co-investment is offered to affiliated funds in the same part of the capital structure, on the same basis. And so, there -- we have significant unfunded capital across the platform, so I don't think we're reaching the bounds of our -- of the appetite on affiliated funds thus, but the affiliated funds really provide us this flex up capital when the opportunity set is needed. But we always fill TSLX first given kind of the -- the duty to -- the soft duty to offer that exist in our disclosure with our shareholders, and given the exemptive relief.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [4]

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Sure. Appreciate the color, and then just one more on the allocation, does the advisor or any affiliate take any or receive any fee for service upon the origination of a credit before allocating to TSLX and those other funds?

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [5]

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Yes. Another good question. So the simple answer is no. All the economics go to our shareholders. The more complex answer which doesn't change the simple answer, which is absolutely, no, is I think it's allowed in the 40 Act. We've chosen not to do this. The challenge is in our mind is we already get paid for our efforts through a management fee and incentive fee and so taking, skimming an origination fee, although allowed by the 40 Act, effectively just increases our management fee and not in a transparent way, which is not consistent with our culture.

Issuers quite frankly look at their total cost of capital, so they are really indifferent between upfront fees and spread and so it would also create a conflict on how deals are structured and then most importantly, quite frankly, it's not a great incentive to get paid on originations activity, we're trying to get paid on return. So again, the answer is, no, all the economics go to our shareholders and the economics of the manager are transparent and clear.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [6]

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And congratulations on the quarter.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [7]

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Thanks and have a good day.

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Operator [8]

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Thank you. And our next question comes from Rick Shane with JP Morgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [9]

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Hey guys, thanks for taking my questions. Josh, I thought you were going to delve a little bit deeper into what I wanted to touch on it, which is floors. I'd love to talk about floors on both the left and right side of the balance sheet. You guys, can you provide some color on sort of in terms of the distribution of the floors on the asset so we can know when floor income might start to kick in on a percentage of the portfolio and also provide some color on negotiating floors in the current environment, with the forward curve trending down.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [10]

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Sure. Thanks. It's a great question. So you kind of had this, first of all, let me start off with the -- my hope, which is a -- and is a hope and when LIBOR is increasing, managers and investors were trading spread for kind of risk free return, given the rate environment, I hope that trend reverses. So I hope that that spreads will go up and people stopped, given that they were historically trading spread for -- for basically base rate or basically LIBOR and so they -- my hope is that they keep kind of -- the environment allows you to keep absolute return. I think -- we will only know that a year or two down the road, if that's the case. As it relates to how our portfolio behaves and the effect on our ROEs, think of it as kind of a U-shape. Which is today, we have no floors on our liabilities, more effectively floors of zero. On our assets, the average floor is 107. That is up from probably 85 basis points a year, to year and a half ago. And then the new floors, are about 120. And so we've been able to push floors up in new deals and hopefully, we will continue to do that. And so what you end up having when you put, when you do the math, kind of -- if you think about three month LIBOR today at 226, our ROEs are about call it 11.5% -- 11.7% or something like that. If you know, if you get to a -- they trough about 10.8% -- 10.9% all things being equal, all things hopefully will not be equal and i.e., the market will get spread back as LIBOR drops, but assuming that they don't and then if LIBOR goes zero, you are kind of back at 11.5%. And so you have this kind of U-shape effect as it relates to ROEs given the asset side has floors, the liability side, it has no -- it has a floor of zero. Is that helpful. Rick?

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [11]

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That's very helpful. That and actually the context of where floors are today. It's interesting the breadth of our coverage and we think the floors, it appears to me that the floors in commercial real estate lending are substantially higher than what you guys get and it's just interesting to get that context, so that we understand better that U-shaped performance you're describing. Thank you.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [12]

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Yeah. And again, our hope is that you had an environment when you had the -- when you had the LIBOR curve in contango, so to speak, you have lenders trading, keeping absolute returns basically flat and trading spread for risk free. My hope again is that lenders as the -- as the curve is in backwardation, kind of scrapes back spread as LIBOR drops. We will be in that.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [13]

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Hi Josh, this is starting to sound more like an energy call than a financials call.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [14]

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Yeah, we practiced it.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [15]

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Okay. There you go. Well, I'm glad, you got to say contango.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [16]

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Thanks.

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Operator [17]

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Thank you. And our next question comes from Ryan Lynch with KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [18]

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I wanted to kind of stick on the interest rate theme right now. So obviously, the Fed cut rates yesterday. I think consensus is that there are going to be multiple more rate cuts in the future. So I wanted to talk about with the consensus sort of being a rate cut cycle. Does that change the way you all approach direct lending and I'm not necessarily talking about how you guys construct your portfolio with maybe more fixed rate assets, more floating rate liabilities and LIBOR floors and something like that. I'm more talking about, does a rate cut cycle present a more attractive or less attractive or a similar environment for deploying capital into direct lending?

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [19]

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Yeah. So look, this is a really kind of odd rate cut cycle and in the sense that you don't usually see cuts in rates so proactive when the economy is effectively doing so well. And so, it's -- when you take a step back, the economy and our portfolio companies are doing well. Average lever -- there has been EBITDA growth, average leverage is down quarter-over-quarter and you usually see rate cut cycles when the economy is contracting and there is a, the monetary policy the reason is to stimulate the economy. And so we actually think that this is the proactive, and we can debate the merits, but the proactive accommodate of Fed is probably good for our portfolio companies and good for continuing to investing, that it pushes out what you would think is that -- the typical business cycle or seems a typical business cycle. So I think, it's relatively good for our portfolio companies and good for our credit quality and good for us to continue to invest. Bad for, it mutes volatility and again, I think the hope is that lenders will remain disciplined on a -- trying to drive absolute returns in our portfolio and try to scrape back some spread.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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Got you. That makes sense, it's helpful color. In your prepared remarks, you mentioned maybe there being some challenges in retail which present some opportunities for yourself. I know you guys have a strong ABL lending business. I think you said you saw an uptick in this quarter of four new investments. There are four, you said. I'm just wondering, with the nature of those loans, if you guys do start to have a higher percentage of your originations focus in that area, it seems to be that, a lot of those loans have a higher propensity to prepay early and so does that present any sort of challenges of a higher portfolio turnover from velocity standpoint?

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [21]

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Yeah, I mean, look, I think one of the reasons why we like the space versus others like the space is that, we think it creates really good returns for our shareholders. Although our -- the team's efforts are not rewarded. If you were to pick a longer duration name. So let me give you an example, the average life of a typical cash flow enterprise value deal might be 2.5 years to 3 years in this cycle. The average life of our retail ABL credits are 12 moths to 18 months. And so when you think, we've generated historically around 20% IRRs on our retail asset base investments, but we're -- for every $100 on the retail asset based side, we're probably earning as between incentive fees and management fees, we're probably earning a third to half as much as you would earn in a, given the duration and not being able to grow the portfolio, as you would in a cash flow or enterprise value loan. We like that because we're able to generate strong risk adjusted returns for our shareholders. It's okay, that we don't grow the balance sheet as long as we are driving strong unlevered high risk adjusted returns for our shareholders. Does that create -- I think historically, I think it's been just again put the weighted average life in context, we've originated about $5 billion of loans, about $1 billion or $800 million of loans have been in retail ABL and so call it rough math 18% to 20% and it never picks up more than 10% of our portfolio. And so it's never going to be more than 10% to 15% of our portfolio and therefore, it doesn't really create huge amount of impact as it relates to our ability to manage the balance sheet, but it creates great -- what we think are very good strong risk-adjusted returns and quite frankly, the platform is not benefiting given the management company and the labor is not benefiting to the same extent that they would, for the same amount of effort on a cash flow loan. Well, we think that's fine and good because it's consistent with how we think about our shareholders.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [22]

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Got it. That makes total sense. I appreciate the time today.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [23]

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Thanks, Ryan. Have a good day.

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Operator [24]

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Thank you. (Operator Instructions) Our next question comes from Robert Dodd with Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

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Hi, everybody. Good morning. Following up on Ryan's questions, going to ask about ABL as well. To your point the 22% IRR on realized ABL deals, obviously that's very attractive. And you talked about how labor-intensive and difficult it is and that's understood. But are you seeing, I've heard that there are new ABL funds being raised. I mean those returns look attractive, and we've seen it in other subsectors of direct lending where new entrants come into sectors where the returns look great. They don't have the expertise and they get out two years later, but in the mean term, they distort the market. So that has happened not necessarily in ABL but in other areas like venture lending and things like that. Have you -- are you seeing any new efforts on the ABL side, where people are coming in? Maybe they don't have the expertise, but that really doesn't matter in the short term as they may distort the market. So are you seeing anything competitively there?

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [26]

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Yeah, so I guess on the supply of opportunity side or the demand for capital depending on how you look at it, we think that's growing. I think 2018 was relatively a muted year given that 2017 was a very difficult year for retail and so comps looked, okay. 2019, I think, it's going to be a very difficult year for retail given the secular trend. So I think, the general opportunity is growing. There surely is -- we are the tip of the whip of capitalism, so when there's outsized returns there's capital formation independent of people have the expertise or not. So I'm still really bullish on the opportunity set that given, the -- even though that there is capital formation, we think that the overall opportunity set is growing, and quite frankly, we have real barriers to entry as it relates to our capabilities in that business. So we've -- I'm looking at this year, we've probably done 20 loans and so. We've put out a ton of capital, we are one of the go-to-guys. We have scale, we have real deep relationship with the ecosystem. And so I'm, you're exactly right. With the tip of the whip of capitalism, there will be capital formation, but the opportunity set, that's growing, and we have -- we built a real franchise with real scale and there are some barriers to entry including that are just -- that are competitive -- that provides a competitive position outside of just capital.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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Got it. Thank you. I appreciate that. And then kind of -- the follow-up on that sort of, when we look at the -- looking at the LIBOR forward curve, obviously the Fed did cut rates. But the forward curve implies several more by, let's say the back end of next year, which, if that's right, I presume it's not just -- the forward curve isn't just projecting proactive cuts but general weakness. So is there -- and you talked about ABLs, the fact that you see more opportunities, but is there a particular correlation between economic weakness and ABL demand or is it really that -- is it the secular shift that's driving the demand right now because obviously retail ABLs have been growing while the economy has been doing quite well, and we can -- doing our fingers at Amazon, I think for that and a lot of cases. But is it just the secular shifts that are overwhelming anything that goes on economically, or would the economic, if the LIBOR curve is right, like would that tend to result in even more growth in 2020.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [28]

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So I think. I think it's a great question. Over the next time I see you, we should debate what the LIBOR curve is telling us. I'm not sure the LIBOR curve is telling us weakness or it's just telling us that inflation is very hard to find in the world today given changes of productivity and there has been a lot of deflationary forces. And so on a secular basis, when you look at rates, even though the, when you look at the last 15-20 years and you look at rates even though the economy has been, has grown significantly over 15 or 20 years, rates have massively dropped, given that we could be in a new world of not being able to find inflation. And so, but I'll take your premise that, and assume the proposition is correct that the forward LIBOR curve is seeing weakness versus inflation is just very hard to find given the deflationary pressures.

So let's take that premise and what I would say is ABL grows in times of weakness, it grows because other sources of capital shrink and they step back and so you know there has been a secular tailwind on for retail ABL but generally ABL is counter cyclical to economic cycles or the growth in ABL given banks usually take a step back in those times and become inwardly focused on their portfolio. Fish or Bo, do you have anything to add on that? Mike you have been, and by the way, a guest appearance by Mike Fishman as always, you can't get away from us. Mike, you've been, you ran an ABL business and my sense is it was pretty counter -- counter cyclical given that banks would try to flip borrowers in ABL credits in times of...

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Michael Fishman, TPG Specialty Lending, Inc. - VP & Director [29]

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Yeah, I mean obviously the times are different now and you pointed out, the overlay today is the secular shift, in times past that wasn't the case. I think today the secular changes are much more impactful.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [30]

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In times of weakness and in times of the economy in retraction mode, you would think that ABL grows on a cyclical basis.

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Michael Fishman, TPG Specialty Lending, Inc. - VP & Director [31]

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Absolutely, yes.

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Bo Stanley, TPG Specialty Lending, Inc. - President [32]

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Yeah, the only thing I would add is we're certainly seeing a secular shift from in the channel from brick and mortar to online and that's led by Amazon. There's also a secular shift in how new generations are consuming, so millennials are buying less goods and there is a more experience-based economy and that's adding to that secular shift. But as far as sort of macro versus secular, right now the consumer is strong, the discretionary spending is up. However, they're buying different things than they do in the past, so there is certainly been more secular than macro at this point.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [33]

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But we should have a longer discussion about, what the LIBOR curve is really telling us. I think it's a combination of inflation is hard to find, massive deflationary forces, those massive deflationary forces have been offset a little bit from on the trade war side, but generally inflation has been very hard to find and there has been breaks in the Phillips-curve and which is well reported, my guess is significant changes in productivity.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

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Yes, I really appreciate the color, guys. And I am always up for that debate. So, thank you.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [35]

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Thanks.

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Operator [36]

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Thank you. And our next question comes from Terry Ma with Barclays.

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [37]

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Hey, good morning. Just to follow up on the ABL. Can you maybe give a little more color on Moran Foods, it's slightly different than your other retail investments, at least in terms of the inventory I believe. So I guess the risk profile change or the way you think about the business?

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [38]

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Yes, are you talking about on Save-A-Lot?

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [39]

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Yes.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [40]

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Look, we've been involved in as you probably remember, maybe remember 3 to 4 years ago, we were involved in a retail ABL FILO on a business called A&P, which is a Northeast supermarket business that ultimately liquidated. And so we understand, I think if A&P or Great Atlantic and Pacific Tea Company. So we understand the inventory. Again the inventory, the NOLV takes in consideration the shorter time periods, given the nature of the business. And so, in addition, our view on Save-A-Lot, although we underwrite everything to liquidation, is that there is probably a going concern. So I don't think we view that we obviously don't view the risk profile different when the NOLV is taken into consideration the risk profile. In addition, you reserve for things such as perishables and PACA liens and so, it's a conforming borrowing base -- based on NOLV.

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [41]

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Okay, got it. That's helpful. I actually forgot about A&P. And then just on the rate outlook, is there a risk that competition actually intensifies given lower rates because there has been capital formation over the last several years because of a low rate environment. So is there any risk that competition actually stays or intensifies?

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [42]

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Yeah, it's a good question. I think your question is given that, returns are hard to find and the low yield environment, will people will be pouring more dollars to direct lending, is that your question?

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [43]

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Yes, that is my question.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [44]

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Yeah, I think there's some chance, again I think lenders and managers have historically, unlike us, we've been focused on spreads, have been focused on providing absolute return. Hurdles tend to be fixed and so my sense is, given the structure, where hurdles are fixed and that people will continue to -- will continue to be on the kind of absolute versus spread or relative return bandwagon. So again this is a little bit of a hope and we'll see in time -- or a little bit of a thesis, that the market takes back for what they've lost in LIBOR, takes back spread, but again time will tell and there clearly is and has been capital formation in this space.

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [45]

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Yeah. That's helpful. Thank you.

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Operator [46]

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Thank you. And I'm not showing any further questions at this time, I would now like to turn the call back over to Josh Easterly for any closing remarks.

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Joshua Easterly, TPG Specialty Lending, Inc. - Chairman of the Board & CEO [47]

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Great. Well, thank you. We're always happy, the team between Ian, myself, Lucy, Mike Fishman and Bo, we always welcome any comments or questions, feel free to reach out. And then we'll talk to people for our Q3 earnings call in November, and I hope people will have a great Labor Day and a nice end to the summer. And feel free to reach out. Thank you.

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Bo Stanley, TPG Specialty Lending, Inc. - President [48]

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Thanks everyone.

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Operator [49]

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