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TPG Specialty Lending Inc (NYSE:TSLX)
Q2 2020 Earnings Call
Aug 5, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s June 30, 2020 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 the 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 result of a number of factors, including those described from time-to-time in Sixth Street 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, 2020, and posted a presentation to the Investor Resources section of its website www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc.'s earnings release is also available on the company's website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the second quarter ended June 30, 2020. 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 Sixth Street Specialty Lending, Inc.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Thank you. Good morning, everyone, and thank you for joining us. With me today is my partner and our President, Bo Stanley; and our CFO, Ian Simmonds.

We and everyone here at Sixth Street, hope you and your loved ones are able to stay safe and healthy in this uncertain environment. We spoke in May. Our hope has been that by August there would've been-there would be more clarity on the path and timeline of return to full business activity.

However, the current health crisis continues to take a toll on human lives, as well as the economic health of households and businesses around the world. While the Fed and U.S. government have provided rapid extraordinary fiscal and monetary support, it remains to be seen how long are we turned to normalcy will take and what the long-term impact of COVID will ultimately be. As shared in our Stakeholder Letter less than two weeks ago, we've always believed that any business model, including the BDC model has inherent constraint and risks. These risks make it fragile and particularly vulnerable to market shocks and uncertainty. That is why over the last years, we've taken steps across our business, not only to mitigate the undesired outcomes of inherent fragility, but also to allow us to create value in periods of volatility.

These elements we've introduced into our business model include our focus on high-quality underwriting and cycle appropriate portfolio construction match funding, the nature of our liabilities with our assets for actively meeting general liquidity and liability low risk setting a financial policy that preserves our reinvestment option and finding the optimal business model to provide both the benefits of scale and outsize returns for stakeholders.

While still early in the unfolding of this COVID induced downturn, we believe that the strength of our Q2 results is an early indication of the value we can create for our stakeholders in the period ahead.

With that, let me turn this quarter's highlights, which are consistent with the preliminary earnings results we provided on July 23. After the market closed yesterday, we reported second quarter net investment income of $0.59 against our Q2 base dividend of $0.41. Net income per share of Q2 was $1.43. These results correspond to an annualized return of equity on net investment income and net income of 15.6% and 38%, respectively. In the annualized year-to-date return on equity of net-on net investment income and net income of 13.1% and 7.6%, respectively. Net investment income this quarter was reported-was supported by elevated prepayment and other fee activity in our portfolio, most notably our realized investment in Ferrellgas. Our strong-our strong net income this year quarter was primarily due to the unrealized gains related to the impact of markets spread tightening during this quarter, as well as a robust net investment income.

Over the course of Q2, LCD first lien and second lien spreads retraced 60% and 71% of the respective Q1 spread widening. Consistent with the broadly syndicated market, the impact of this on valuation of our portfolio this quarter result in a reversal of approximately 60% of our Q1 spread related unrealized losses, which was reflected as an unrealized gain for Q2.

Net asset value per share was $16.08, increasing by 6.7% from our pro forma March 31 net asset value per share of $15.07, which accounts for the impact of the $0.50 aggregate special dividends per share that was paid during Q2. Ian will walk through the quarter's net asset value bridge in more detail. Taking a step back, our net asset value per share at quarter-end, if we were to add back our $0.50 per share of special dividends paid to shareholders in Q2, would be $16.58, which brings almost entirely back to our starting level of $16.77 at the beginning of the year. Even though our spread related unrealized losses have only been reversed by 60%. This is because we've been able to rebuild net asset value in other ways, including through the overreaching of our base dividend, out-performance on some of our small equity positions and unrealized mark-to-market gains on our interest rate swaps.

Yesterday, our Board declared a third quarter base dividend of $0.41 per share to shareholders of record as of September 15 payable on October 15. Consistent with what we said last quarter, based on review, the core earnings power of our portfolio, we do not anticipate making any changes to our base dividend level in the near and medium term.

There were no supplemental dividends declared relating to Q2 earnings as a result of the net asset value test in our framework, which specifies that no supplemental dividends are declarative pro forma net asset value per share adjusted for the impact of any supplemental dividends over the current and preceding quarter declined by more than $0.15 per share. Any downward impact in net asset value as a result of special dividends, not supplemental dividends, are added back for the purpose of the net asset value test. If we compare this quarter's net asset value per share, and in back our $0.50 per share of special dividends of $16.58 against our Q4, 2009 pro forma net asset value of $16.77, there was $0.19 of NAV per share decline against a limiter of $0.15. Therefore, we were $0.04 short of being able to declare a supplemental dividend $0.50 of this quarter's overearning.

Based on our current outlook and presuming no material declines, our net asset value per share as a result of the exogenous events like the market volatility we observed in March, we would expect to resume declaring supplemental dividends on overearnings in Q3, provided that our reported net asset value per share as September 30 is greater $14.92.

With that, I would like to turn the call over to Bo to walk through the activity and health of our portfolio in more detail.

Robert (Bo) Stanley -- President

Thanks, Josh. I'll begin with a quick overview of our market backdrop during the quarter. Amid economic uncertainty, M&A activity continue to be significantly muted as buyers and sellers struggled to agree on valuations.

Meanwhile, in the second quarter, there was significant tightening of risk premiums in the broader credit markets. A disconnect emerged between asset prices and economic reality, which we believe was primarily fueled by extensive fed and government and intervention driving investor demand back into risk assets. As a result, secondary prices across credit rose sharply in Q2, and there's an abundance of liquidity in the investment grade and high yield markets for a broad variety of issuers, including those in sectors most impacted by COVID.

In light of these market dynamics, and given our focus on maintaining strong risk adjusted returns across our portfolio, Q2 origination's activity was relatively light at $89 million of commitments and $77 million of fundings. These fundings were across six new and six existing portfolio companies. The majority of our fundings on a dollar basis this quarter was providing a new financing in connection with the recapitalization of Moran Foods, where we replaced our existing ABL loan with a new one at a higher spread and refresh call protection.

Other new investments included small opportunistic purchases of triple B CLO liabilities and limited junior debt co-investments alongside our affiliated funds and growth businesses with attractive risk adjusted returns. As a result, our portfolio's first lien exposure decreased slightly from 97% to 96% quarter-over-quarter on a fair value basis. Repayments during Q2 totaled $211 million across three full and two partial paid outs. Ferrellgas and Nektar, which were our two largest portfolio names at the end of Q1, were both fully repaid early in the quarter. As a result net repayment activity for the quarter was $134 million.

During the quarter as M&A activity slowed and the immediate opportunity set for secondary market purchases and rescue financings became less actionable given fed intervention, our team continued to work hard to build a pipeline of opportunities where we could create value through our core competencies of deep sector expertise and the ability to underwrite complexity.

As we previewed in our letter on July 23, we've been active in capital deployment post quarter-end. As of today, Q3 fundings totaled approximately $135 million primarily led by two new investments. In broad strengths, our reputation is creative solutions providers, particularly among participants within our sector themes play an important role in a sourcing of these investments. Our deep diligence and underwriting capabilities, along with a scale solutions we're able to offer as part of the $34 billion Sixth Street platform allowed us to structure investments with attractive spreads, strong call protection and other fees that enhances the overall risk adjusted return profile of our portfolio.

Today, we continue to have a robust pipeline, which we're constantly working to build through our direct sourcing channels. Looking ahead, we believe the competitive advantage of our human capital will become increasingly evident as a financing solution sought by company's management teams and sponsors will only grow in complexity in this uncertain environment.

As it relates to our portfolio at quarter-end, the overall performance of our portfolio continues to be solid, with approximately 98% rated one or two on a performance rating scale of one to five, with one being the highest and minimum non-accruals at approximately 0.4% of the portfolio on a fair value basis, representing three investments.

To revisit Josh's introductory remarks, we have long recognized inherent fragility of the left-hand side of the balance sheet. Our assets are callable loans, which means that the investments where we are overearning due to borrow outperformance are typically the ones that get called away, and in periods of volatility, when credit spreads widen, the value of our assets tend to decline. In order to combat the fragile elements of the left-side of our balance sheet, we've over the years focused on strong underwriting discipline and defensive portfolio construction, which includes sector, business model and management team selection. We believe these efforts have played a role in the performance of our portfolio today. However, we'd be remiss not to highlight our portfolio company's high quality management teams who took quick action at the onset of COVID to optimize cost structures and protect their liquidity positions. Albeit, it's still early, our portfolio has performed above our expectations, given the macro backdrop.

The slight increase in this quarter's non-accruals from approximately 0.1% to 0.4% of the portfolio by fair value at quarter-end was driven by our Neiman Marcus first lien term loan, not our ABL FILO term loan and the residual non-DIP roll up portions of our J.C. Penney first lien term loan and secured notes. Given what we believe maybe less than par recovery, we have applied the regularly scheduled cash interest payments we received during the quarter to the amortized cost of our positions, all of which were acquired at prices less than par.

As we covered in our preliminary release in July, our retail ABL exposure at quarter-end was stable from prior quarter at 9.4% of the portfolio at fair value. $0.99 Moran Foods and Staples businesses that are generally deemed essential during COVID shutdown continue to benefit from tailwinds in the current environment and together represent 44.5% of our retail ABL exposure at quarter-end. Our largest retail ABL exposure is our FILO term loan and Neiman Marcus, which was 3.6% of our portfolio at fair value at quarter-end. Our current expectation based on the company's plan of reorganization and case milestones is that we will be refinanced upon Neiman's exit from bankruptcy, which is expected to occur in the fall of 2020.

With Sixth Street as lenders of size in each of Neiman and J.C. Penney's pre-petition capital structures, we are able to have meaningful roles in driving the DIP financing process and terms. As a result, we believe our $11.5 million par value DIP loan for Neiman and our $6 million par value DIP loan for J.C. Penney at quarter-end offer attractive risk adjusted returns, given the structural protection of DIP loans in combination with our contractual economics. Our portfolio's energy exposure at quarter-end was 3.9% at fair value at a sense fall into 2.8% on a pro forma basis given partial paydowns on Verdad and Energy Alloys post quarter-end. We expect to be fully repaid on Energy Alloys during Q4 2020 as the company completes an out-of-court wind-down via liquidation of its assets.

Our portfolio composition and credit stats for Q2 remain relatively stable from prior quarter. Top industry exposures continue to be business services at 22% of portfolio and fair value, followed by financial services and healthcare at approximately 17% and 11%, respectively.

Based on the financial information through March 31 of our core portfolio companies, the average net attachment point at last dollar average was 0.4 times and 4.3 times compared to 0.3 times and 4.1 times, respectively. Our average interest cover ratio was 3.3 times compared to 3.2 times in the prior quarter. We would caveat that these figures given the timing lag and trailing nature do not fully reflect the impact of economic shutdown that persisted through most of Q2. However, based on an ongoing engagement with borrowers, we do not expect a material deterioration of credit metrics across our portfolio in the near term. This quarter out of our portfolio of 65 names, we had only one investment outside of the retail sector ones we discussed earlier, complete an amendment with COVID cited as a direct cost. To the extent state reopenings of positive reversed, we would expect that this figure to increase in order to provide our borrowers that additional flexibility on cabinets. As of today, we do not expect any defaults on debt service obligations in the near term.

Now onto our portfolio yields. The weighted average total yield on our debt and income producing securities at amortized cost increased by approximately 10 basis points quarter-over-quarter to 10%. Breaking this down, there were 15 basis points of yield uplift from the impact of new and exited investments this quarter and 10 basis points uplift from the impact of amendments. These were partially offset by 15 basis points of downward yield impact from the movement in LIBOR prior to it reaching our average floors of 115 basis points across our floating rate assets. Quarter-over-quarter, the weighted average spread over the three months LIBOR of our floating rate investments increased by a 100 basis points, almost entirely due to the benefit of our LIBOR floors.

With that, I'd like to turn it over to Ian.

Ian Simmonds -- Chief Financial Officer

Thank you, Bo. I'll begin with an overview of our balance sheet. Total investments at fair value decreased slightly from $2.05 billion to $1.99 billion quarter-over-quarter, primarily due to net repayment activity in our portfolio, partially offset by the positive valuation impact of tightening credit spread on the fair value of our investment.

Total principal amount of debt outstanding was $875 million and net assets was $1 billion or $16.8 per share. Average debt to equity ratio was 0.87 times, and our ending debt to equity ratio was 0.81 times, down from 0.96 times in the prior quarter. At quarter-end, we had $1.08 billion of liquidity under our revolver against $73 million of unfunded portfolio company commitments available to be drawn. Given the net funding activity thus far in Q3, our leverage today is approximately 0.91 times. And that liquidity stands at $975 million with an estimated $75 million of unfunded portfolio company commitments available to be drawn.

In our recent letter to stakeholders, we discussed at length the structural limitations that make the BDC model innately fragile. To review, these include the requirement to be loan only, the need to be fully invested in order to generate a dividend level that the market expects, and the fact that there are limitless alpha generating direct middle market lending opportunities. This is further complicated by strict regulatory requirements and a mark-to-market valuation framework. Bo discussed the elements we've introduced to the left-hand side of that balance sheet to address the inherent fragility of our business model. And I'll now cover our efforts on the right-hand side of the balance sheet.

As risk managers and capital solutions providers, we believe paying for the option on liquidity during periods of low volatility is critical in our ability to operate and create value for both stakeholders and clients in periods of high volatility. At quarter-end, our liquidity represented approximately 54% of our total assets, and we had nearly 15 times coverage on our unfunded commitments available to be drawn by our borrowers based on contractual requirements in the underlying loan agreements.

This compares to peer median of approximately five times at March 31. Our robust liquidity combined with our financial leverage of 0.91 times today means that we have substantial investment capacity and flexibility during these uncertain times.

To put some numbers around the cost of our option on liquidity. If our revolver was size to have only five times coverage of our unfunded commitments at quarter-end, similar to the median of our peers, we would have picked up approximately 25 basis points of ROE on an annualized basis or approximately $2.6 million. However, through our ability to be opportunistic in both new portfolio investments and investments in our own capital structure in the past few months, we believe we have already realized a return on this investment. During the quarter, given our strong liquidity position, we were able to opportunistically purchase $29.7 million principal amount about 2022 convertible notes and $2.5 million principal amount about 2024 notes at prices below par. Concurrent with these purchases, we permanentized a portion of the unrealized mark-to-market gains on the interest rate swaps corresponding to those nodes, by effectively canceling pro-rata portions of our swamps.

Taking these gains into account, our weighted average purchase price on the combined 32.2 million of notes was approximately 94%. To put this into perspective, the benefits of these purchases alone, namely our gains on the swaps and the reduction to our blended cost of debt covered the majority of our cost of the option full liquidity on the entire year.

Moving on to address the size and access constraints that BDCs face in the funding markets. We've also been paying for insurance to mitigate our refinancing risk. We extend the maturity of our five-year revolver every 12 to 15 months and opportunistically issued notes in the unsecured market to create a diverse funding profile with staggered long-term maturities. Our next maturity is approximately two years away at only $143 million principal amount. And our funding mix at quarter-end was comprised of 73% unsecured and 27% secure debt. The average remaining life of our investments funded with debt was 2.2 years compared to a weighted average remaining maturity on our debt commitments of 4.2 years at the end of Q2.

With respect to our fixed rate liability. We continue to use interest rates swaps to match our liabilities with the predominantly floating rate nature of our assets. In periods of economic uncertainty, which typically can coincide with falling right environments, these swaps have enhanced our capital liquidity and earnings profile. At quarter-end, we had approximately $34 million of unrealized mark-to-market gains on our interest rate swaps, of which $15 million was embedded in our NAV. The remainder was reflected in the carrying value of our 2024 unsecured notes at quarter-end, given the application of hedge accounting on our swaps associated with those notes.

Turning to our presentation materials. Slide eight is the NAV bridge for the quarter. As Josh mentioned, the impact of credit spread tightening on the valuation of our portfolio was a significant driver of NAV movement this quarter, with unrealized gains of $0.72 per share. Walking through the other drivers of NAV movement this quarter, we added $0.59 per share from net investment income against the base dividends of $0.41 per share. There was a $0.15 per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations and recognize these gains into this quarter's net investment income. Other changes resulted in a positive $0.25 per share impacted this quarter's NAV. This was primarily driven by unrealized gains related to some of our equity position.

Moving to the income statement on slide nine. Total investment income $70.2 million compared to $66.3 million in the prior quarter. This was driven by other fees, which consists of prepayment fees and accelerating amortization of upfront fees from unscheduled paydowns of $14.3 million compared to $7.6 million in the prior quarter. The largest driver of this quarter's fees was Ferrellgas. Other income increased to $6.5 million compared to $2.8 million in the prior quarter. Interest and dividend income was $49.5 million, down $6.4 million from the prior quarter due to the decrease in the average size of our portfolio. It was also due to the impact of a falling LIBOR, which was mitigated by the average floors across our floating rate debt.

Net expenses decreased by $1.8 million quarter-over-quarter to $29.8 million, primarily driven by lower interest expense from a lower effective LIBOR and a decrease in our average debt outstanding. This quarter's weighted average cost of debt outstanding decreased by approximately 60 basis points to 3.3%, reflecting the decrease in the effective LIBOR and our debt outstanding, as well as the small accretive impact of our opportunistic notes repurchases.

Given the one quarter timing lag on the LIBOR reset date for our interest rate swaps, we have relatively good visibility into our cost of debt for the quarter ahead. As we think about our net interest margin for Q3 and beyond, our LIBOR remains below the average floors on our assets. Any incremental declines in LIBOR will benefit our cost of debt and flow directly to our net interest margin for any given level of asset yields and leverage. Assuming an average leverage for Q3 in line with our current level of 0.91 times, and based on our Q2 asset level yields, we would expect net interest margin expansion for Q3 of approximately 90 basis points. This would imply a year-over-year net interest expansion in our business of approximately 115 basis points. Unlike most of our peers with unswapped fixed rate liabilities that are likely experiencing net interest margin compression in low rate environment, we have been able to enhance the power of our portfolio in this period of economic uncertainty.

On this note, let me wrap up with an update on our earnings guidance for the remainder of the year. Given our results for the first half of 2020 and our current outlook, we would expect our full year net investment income per share to be on the upper end of our previously communicated range of $1.84 to $2.1. Given the strength of our pipeline and the prospects of higher asset level yields, given our capabilities as a solutions provider in this environment, we feel good about our ability to continue generating attractive ROEs for the period ahead.

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

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Thank you, Ian. While we're pleased with our Q2 results and proud of what the team has been able to accomplish to date in these challenging times, we're operating with the mindset that there will be prolonged economic challenges ahead of us. However, our deliberate efforts in creating a business that not only survive volatility and uncertainty, but thrive on that continues to result in small wins.

Hindsight is always 2020, and therefore, we are continually learning along the way. We will continue to evolve and refine our thinking in our processes to create a differentiated business model and experience for our stakeholders and our clients.

Before moving to Q&A, I'd like to spend a moment to reflect the impact of COVID on our communities. When we take a step back, it's evident that the economic fault of this pandemic has had a disproportional impact of people with lower incomes, less job security, and those lacking caregiver flexibility. The regressive impact of COVID was magnified by the inherit inequalities, racial, gender, socioeconomic, to name a few, as a built into our institutions over time. As a result, in a business that strives to be leaders in our communities, we can't help a fill an imperative that support change that helps create a better and more inclusive society. Over the past few months, in addition to trying to facilitate honest conversations with our teams on these topics, Sixth Street has been contributing resources to organizations, addressing inequality as well as those directly counteracting COVID economic impact.

We've also been for some time now been exploring ways to addressing under representation in finance through our recruiting and business partnership efforts. We think of silver lining of COVID is that these issues of inequality are being brought to the forefront. And we will continue doing our part as an organization to be an agent of change.

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

Questions and Answers:

Operator

Our first question comes from Rick Shane with JPMorgan. Your line is open.

Rick Shane -- JPMorgan -- Analyst

Good morning, guys and thanks for taking my questions. I'm glad everybody's doing well. I wanted to talk to you a little bit about your relative cost of capital versus peers in your relative multiple. I know that-in general, you think of cost of capital on an absolute basis in terms of your investment strategy. But, right now, your relative advantages are so significant. I'm wondering how you think it's about monetizing that? Is it through the possibility of acquisition? Is it through growth in a period when your peers can't necessarily grow and access capital in the same way that you do for good.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Hey, Rick. Good morning. Thanks for the question. So, look, I don't think we get caught up in a moment and moment looking at our cost of capital. We kind of have a view of the world, which is the market will tell you our costs-the market will tell us our cost of capital, but that will fluctuate during times. And so, we can try to look at our cost of capital across cycles.

On the M&A front, I think, it's very hard to-at this moment in time to get any accretive M&A done. Historically, the only kind of M&A in the BDC space has either been very, very small, externally managed BDCs that have really, really deep credit problems where we're at the time we have done work. We don't think that the kind of the valuation-we think the market valuation is kind of reasonable to reflect those credit problems or on internally managed BDCs where it's easier to get something done. Quite frankly, there's not that many scaled internally managed BDCs left.

So, I think as we think about the path forward to create value for our stakeholders on a go-forward basis, my view is continuing to find high-risk adjusted return, opportunities to put our balance sheet to work. And we'll see if-and I think that is ultimately the path for value creation, and that's kind of been our North Star since inception, and I think it's worked pretty well for stakeholders. So, I think what we're most definitely in the latter camp versus a former camp as it relates to the value creation path going-forward.

Rick Shane -- JPMorgan -- Analyst

Got it. My head is spinning between latter and former in the context of your

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

That was organic-the organic growth, putting capital work in high-risk adjusted opportunities where our competitors are more capital constrained, and we're not capital constrained versus the integrated acquisition path.

Rick Shane -- JPMorgan -- Analyst

Got it. Okay. I appreciate that. Look, to some extent-obviously, you're a financial company, but if you think about it in the context of being a manufacturing business, you will make loans and writedown and it's been persistent. But I think right now, more disparate than it's been at any point in a long time. Your cost of goods sold is so advantageous versus your peers. I'm just wondering if-more aggressive ways to take advantage of that.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Yeah. I mean, to be honest-like it's a little bit circular. I think, our cost of goods sold-so our cost of capital is low on a relative basis, because the market thinks we are a very prudent allocator of capital. And that we try to build in a large margin of safety as it relates to the assets we're creating versus our cost of goods sold. I have high gross margin, and when things go get go wrong, that we're still able to create high returns on capital. I think the more you lean into the-hey, I'm super low on the cost curve, the more you'll probably end up eroding that relative advantage, if that makes sense.

Rick Shane -- JPMorgan -- Analyst

It absolutely does. And again, understanding what motivates you guys and incense you, helps us understand sort of where you're going. And then that makes a lot of sense. So, thank you.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Thanks, Rick.

Operator

Next question comes from Ryan Lynch with KBW. Your line is open.

Ryan Lynch -- KBW -- Analyst

Hey, good morning. Thanks for taking my questions. First off, I really appreciate that the shareholder letter that you guys provided that was very thoughtful and informative. So, thank you for that. Bo, some of your comments earlier, you mentioned that that M&A has been really muted and then the market, which is pressured market activity as buyers and sellers struggled to agree on valuation. But then you also mentioned that you're-you have a robust pipeline today.

And so, I'm just wondering what has really changed in the marketplace to grow your pipeline. Has there been more market activity generally speaking? Or are you guys just getting better hit rates on some of the deals that you guys are searching for? As well as, can you kind of clarify when you talk about a robust pipeline, are you talking about just the potential for deal activity to pick up from the depth you talking about the pipeline returning to levels more seen in 2019?

Robert (Bo) Stanley -- President

Sure. Thanks, Ryan. As I mentioned, I think, we're encouraged by both the depth and quality of the pipeline recently and really all channels we focused on, so direct to company ABL, and now we're starting to see some sponsor led opportunistic M&A activity. So, we're encouraged to see that.

I will say as compared to Q2 where there was a pipeline, that quality is getting better. So, we're continuing to be selective and we'll always be selective, and really focus our capital on the opportunities that we think are best for our shareholders, but it is across each of those channels. We're not seeing yet as a lot of new platform M&A from sponsors rather more opportunistic M&A from existing platform portfolio companies, but still again, I think the quality is up from what we saw, not only in Q2, but really throughout 2019.

Ryan Lynch -- KBW -- Analyst

Do you guys have a-do you guys have a preference, or do you guys favor in this environment more deep value sort of rescue financing deals given just the tumultuous market backdrop. And I would assume that those opportunities are probably going to come up quite a bit and you can get obviously extremely good pricing in terms? Or would you guys want a more lean into a more secular grower stories companies that are-don't have a really bad affected by COVID downturn, but obviously the structures in terms of those aren't going to be as favorable. Do you guys have a preference?

Robert (Bo) Stanley -- President

We really don't have a preference. I think the beauty of the platform is that the expertise of our people and it goes across each of those channels. We're, obviously, very active in rescue financings from time-to-time when we think the opportunity set is good. And we also like to pursue growth opportunities for businesses that are growing closer than GDP have sets of tailwinds and come to other downturns, economic downturns better. So, we really focus the opportunity set based on like core conversations with our team, which is very diverse.

Ryan Lynch -- KBW -- Analyst

Okay. Fair enough. And then just one last one. You mentioned really only one investment outside of the two retail. Once you talked about have completing an amendment, you don't expect any new defaults in the near term. I mean, that's surprising, but obviously in a very positive way that you guys have a lot of confidence in your portfolio going forward. Can you just talk about with the-that assertion you guys made, what is the economic backdrop that you guys are using as a base case to make that assertion? And then from a higher level, why do you think that your portfolio has held up so well and performed so much better than other BDCs thus far in this?

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Hey, Bo, let me hit some of that and you can jump in or fishy can jump in. Look, I think, I think when you look at our portfolio, we didn't have-we had very-we had a full amount of cyclical exposure. And cyclical business models typically have high fixed costs. And so that we avoided kind of the typical cyclical business model. Generally, when you look at our top three industries, which include business services, financial services, but really fintech and healthcare, which has really either form a royalty financings or a healthcare IT, you just had-those typically had variable cost structures and a strong kind of-less cyclical exposure and strong secular tailwinds.

And so, to me, it was just a-most of the outside of retail, which obviously has been impacted, we were just setup to have a kind of a cycle, what we would call late cycle minded portfolio construction, or cycle appropriate portfolio construction, because that might change over time. And so, when we look at our portfolio, it's really a bonds up view versus a top down view, i.e. slow recovery V-shape, U-shape. It's really, how are these companies doing? What are their forecasts? Are those realistic forecast? And so, our view is really a bonds up view. I don't know, bow or fish-fishy, or any have anything to add, but it was really just business model and sector exposure.

Robert (Bo) Stanley -- President

I think that's exactly right. I don't have a lot to add. I think that we also had-as we mentioned in the script, we had a lot of really high quality management teams. That's focused on liquidity and appropriate cost structures early in the cycle. And that is a created to our benefit as well.

Ryan Lynch -- KBW -- Analyst

Okay. Understood. I appreciate the time today. Those are all my questions.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Thanks, Ryan.

Operator

Thank you. Our next question comes from Finian O'Shea with Wells Fargo Securities. Your line is open.

Finian OShea -- Wells Fargo Securities -- Analyst

Hi. Good morning, guys.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Hey, Fin.

Finian OShea -- Wells Fargo Securities -- Analyst

How are you? First question on new deals this quarter. There were a couple that are paying service channel sprinkler, I believe. You historically shied away from that reasonably so for the BDC structure. But what makes these more suitable or safer than opportunities that might be very attractive if it weren't for their peck structure?

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Yeah. So, look, TSLX affiliated funds that our growth platform, originally it was investments. And quite frankly, you hit it on the nail on the head. Given the underlying business models that we're growing at significant rates and that the capital requirements for that growth, we did a-we did structures that allowed the peck. We're really bullish on the companies, really bullish in the markets they serve, really bullish on the management teams, unfortunately that the BD-the Sixth Street Specialty Lending only could take small amounts, given we have a policy about how much peck we're wanting to have in the book. And so, if those structures were not peck structures, we would have had-we would have had significantly more appetite for those in the BDC. But given our financial policy and given our risk limitations around peck, there were relatively small size in-what was the-I think they were each like kind of 5 million or 7 million bucks or something like that.

Finian OShea -- Wells Fargo Securities -- Analyst

Yeah, that's right.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

So then that-Bo, do you have anything to add there?

Robert (Bo) Stanley -- President

No. You hit it on the head.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

I think the sprinkler was $3.75 million, and it was a convertible note and service channel was a $5 million investment at 12% peck. Again, those were much larger deals. We have-but we thought they were very, very high risk adjusted returns. Quite frankly, those companies might need more capital in the future that have a-that are not tech nature when they-when growth slows and they become more mature.

And quite frankly, one of the reasons why we actually made the co-invest even in small sizes, if they-if you-if we weren't in those capital structures, we would not be able to provide those financings on a go-forward basis when they become appropriate for the BDC, given that the rules around joint transactions and affiliate transactions with the affiliated funds. And so, we love them as a stand-alone investment. We also think there's going to be opportunities to put more capital in that are more appropriate for the BDC going forward.

Finian OShea -- Wells Fargo Securities -- Analyst

Okay. Thank you. And another portfolio name AvidXchange. You've had that for a while, and I think the growth platform also took part in an equity round or-I'm not sure if there's a few capital structures there. But the BDC got a very small piece of this too it looks like. Can you give us some color on the nature of that capital raise and why the very small BDC allocation?

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

So there was a-Bo, correct me, I think there were two pieces. There was a-there was a staple finance in between a senior secured facility and a redeemable prep with warrants. Correct, Bo?

Robert (Bo) Stanley -- President

Correct.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

And they were a strip. And so the redeemable prep with warrants was much larger than the senior secured facility. So, again, the exact same considerations that we discussed before. AvidXchange is actually a kind of a more mature business. It's in B2B payment space, but much more mature business. But, again, it came down to having the right-having been appropriate for the BDC, which has a cash pay dividend as a liability that we're always thoughtful about.

Robert (Bo) Stanley -- President

That's right. The only thing that I would add is that's a business that we've grown well since 2015. We've excellent risk reward. But again, size appropriately given the peck component.

Finian OShea -- Wells Fargo Securities -- Analyst

Okay. That's all for me. Thanks so much.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Thanks.

Operator

Thank you. Our next question comes from Robert Dodd with Raymond James. Your line is open.

Robert Dodd -- Raymond James -- Analyst

Hi. Morning, guys. Just kind of general question. I mean, obviously, in the prepared remarks, you brought up-obviously the amount of stimulus that's been put in. And that's one of the contributing factors to spreads retracing so much in the widening they went through before. So, is there-obviously there's benefit to NAV on that. What do you think that the lists are given how much private capital there still is out there as an evaporator, as a result of this COVID issue, that those spreads continue to retrace to NAV benefit, but potentially to the opportunity set getting excessively competitive again, as it was, call it, last year, but before we had this COVID event.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Yeah. So, you hit it, Robert, as you always do. The good news and the bad news. The good news is the-with the spread retracing, there has been a benefit to NAV, a benefit of the capital in the BDC space, a benefit people not getting close out-stakeholders not getting close out of their option, i.e. having issues with-from a regulatory framework or from vendors in the space. So, that's the good news. The bad news is the question of how the truncated, that coupled with the amount of private credit, dry powder. Has it truncated the go forward opportunity? I think, is that the question?

Robert Dodd -- Raymond James -- Analyst

Yes.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Yeah. So I would look-I would say, it's surely-it's most definitely-I want to say Uber competitive is a lot less competitive than a year ago. We actually saw-when you look at the data, you actually saw yields, absolute yields, not only on a spread basis, but actually come up quarter-over-quarter, I think, in our book. And so, I think in-so I think last-yield amortized cost last quarter was 99. Is that 10-is at 10% on a spread basis against LIBOR it's much wider.

The new investments we put in Q-that we've put in, in Q3 to date have been much wider. And so, it's surely not-it's it-I don't think it's been-it's surely not what it would have been if the Fed hadn't stepped in. There would have been a ton of issues across the BDC space, I think, and across-generally across risk assets at the Fed didn't step in. I think, we would have been very well-positioned to take advantage of that, but we would've had less investment capacity. We would have been more concerned about liquidity. So, I think it is what it is. I don't think that there's the go-forward opportunities that at least what we're seeing today has been completely truncated. And we feel like there's probably some good-there is some good opportunities out there and we've executed on that in Q3.

Robert Dodd -- Raymond James -- Analyst

Got it. Got it. If I could

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Mike, do you have anything to add fishy? I wish I felt fishy in the mix just to keep them on-on the West Coast.

Michael Graf -- Vice President & Principal Accounting Officer

No. I have nothing. Thanks.

Robert Dodd -- Raymond James -- Analyst

If I could ask just kind of why to take that a little bit, maybe because to your point, spreads widen in Q3, but the biggest investment in Q3 was the extension of renewal, if you will, of the ABL with whose name-misplaced it. So is that is-is the opportunity set given ABL financing is a much more specialized labor intensive business? I mean, is that where the spreads and yields are staying wide of versus in the traditional cash flow lending such that it is, given activity-is there going to be an increased divergence between available returns in a specialized book versus a commodity lending book? And should we expect maybe the ABL book to grow faster as a result?

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Yeah. I think, that's a good question. So, what I would say is, is that we-so we made two large investments in Q3. One was ABL deal, receivables financing and one was a-which quite frankly, had very much wide spread. It was complicated, had very much wide spreads historically available. And then one was a-we don't call it a cash flow loan, although, it's a company that has high recurring revenue embedded-ERP like embedded in their customer base. So, we think there's a second way out. And so, it's not-and so we don't think about-we're not pure cash flow lenders in that sense that. That loan we had-we got warrants-I think Bo, correct me if I'm wrong. 7% of the company is struck at the money. And so-and it was done at probably 200-150 to 200 basis points wider with more call protection than what would have done-been done pre-COVID. And.

Robert (Bo) Stanley -- President

Correct.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

So, look, I think you're going to see wider spreads across credit asset classes. And quite frankly, if lenders are not pricing stuff with wider spreads, they're effectively telling their investor base and telling their stakeholders that they see no uncertainty in the world. Like, there is no-like wider spreads are to compensate us-because compensate investors for uncertainty. And I can't imagine anybody in the world, if they're being disciplined, as it relates to allocating capital, doesn't think that uncertainty has increased significantly over the last six months.

And so, I expect that you'll see wider spreads, or you should see wider spreads if people are doing their jobs and being fiduciaries to their stakeholders across the opportunity set. My guess is on the margin, you're going to see wider spreads-you're going to see wider spreads for specialized and-for specialized kind of lending opportunities or where there is complexity, you'll see more drastic because people-when they already have problems in their book, don't want to take on more kind of problems through complexity. But it would be shocking to me if people are trying not-are pricing the same things as competitive as they were a year ago, a year ago, there was a lot less uncertainty. And again, you got it-you got to get paid for the uncertain world we are in.

Robert Dodd -- Raymond James -- Analyst

I appreciate the color, Josh. Thank you. Yeah.

Operator

Our next question comes from Mickey Schleien with Ladenburg. Your line is open.

Mickey Schleien -- Ladenburg -- Analyst

Yes. Good morning, everyone. Glad to hear you're doing well. I sort of want to follow-up on Robert's question and ask you about the markets stone, Josh. We're, obviously, in a yield hungry world, and there's a lot of capital, which is formed to invest in private debt and disintermediate the banks. And when we look at the forward LIBOR curve, which has been wrong many times, nevertheless, it implies that very low interest rates will persist for years. But like, we've all talked about this morning loan spreads are tightening again. GDP looks like it'll bounce back a lot in the third quarter with the economies reopening, obviously from very poor results in the first half of the year. But after that the forecast looks pretty weak, which could keep the Fed from tightening again.

So, this scenario to me seems to point to continued pressure on portfolio yields. A lot of that has been in place for a while. But as you pointed out, you generally maintained excellent portfolio yield. So, I just like to step back for a moment and ask what factors in your origination process and perhaps your relationships provide you the ability to generate the loan terms that we see-particularly the fee structures that have helped you mitigate that pressure, like we saw with Ferrellgas this quarter.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Yeah. So look, I think, A, we are willing to-I think there's a couple of different pieces of our business. Good question, Mickey. The first one is, is like we have really deep expertise in some sectors. And we're involved in those sectors. We're involved in those ecosystems. And so, I think, as it relates to those-as it relates to that piece of our business we-our counterparties don't think we're a commodity lender. They think they can-it's speed and certainty because we have deep knowledge of the nuances of how those industries and how those ecosystems work. And so, I think that's most definitely been helpful on a response for business.

The second thing is, is that we're not in the-we're not in the asset gathering game. Like, we're in the creating returns, serving our clients and return-and creating returns for our stakeholders game. And so, I think part of the spread widening-I mean, as far as spread tightening over time as people-or competitors or the industry growing much faster than the actual true demand for capital from GDP. And you've seen this in.

When you see-when you look at historically over time, right, the corporate sector has-is massively levered that corporate debt has grown faster than GDP. And so, asset managers have leaned into growing assets and they've traded growing assets for creating high stakeholder returns. And so, we surely have a different model on that front. And just-and if people haven't looked at it, the corporate sector had-it's going to be really interesting. And actually, this is why I think-this is why I'm quite bullish on the opportunities that. If you look up through 2007 pre-global financial crisis, the corporate sector had a lot less GDP than it did. The corporate does a percentage of GDP, was a lot less than it did pre-COVID.

So, corporate sector started the cycle much more levered, and quite frankly, has issued much more debt and post-COVID than post global financial crisis. And so, you're going to end up with a massively overlevered corporate sector when things settle out with what I would expect to be relatively anemic growth is special. If you look at the LIBOR curve and which to me will create an opportunity for providing creative financing where there's complexity.

And then outside the sector expertise, outside of our desire, not to go to grow the business, but kind of shade creating stakeholder returns and serving our clients, we're willing to deal with complexity and other way that is really a-not a great investment from the investment manager standpoint, because those assets tend to turn more. You can't build. You can't stack assets because of the book churns, and therefore, you can't grow fees, but they tend to be a great return for shareholders. We've been wanted to do that and we'll continue to do that for our stakeholders.

Mickey Schleien -- Ladenburg -- Analyst

I appreciate your thought. Does it-it's a great philosophy, and I really appreciate it. In light of what you just said Josh, how do you see LIBOR floors trending on new deals over time? In other words, for the most part everyone's deals are now benefiting from LIBOR floors that were negotiated two or three years ago, but LIBOR was crashed. Is the market-be more accommodative or our lenders sort of sticking to their guns on LIBOR floors?

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Look, I think the-if you look at our-the vintages across our LIBOR floors to-2020 vintages for LIBOR floors, really no different than 2019.

Mickey Schleien -- Ladenburg -- Analyst

And post-COVID, is that still the case?

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Yeah.

Mickey Schleien -- Ladenburg -- Analyst

Okay. That's good. That's good to hear.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

And quite frankly, again, like, I actually think to Rick Shane's point is, we sit the lowest on the cost curve, right? And the fact we have lower fees. We have lower-given our floating rate liability structure, we're the lowest in the cost curve. So, I would-if things work the way they should work, people should be more focused than we are, and we should have-there should be less pressure on keeping and maintaining net interest margin, which we should benefit from, because we're lowest on the cost curve.

Mickey Schleien -- Ladenburg -- Analyst

I understand. Josh, in terms of your particular expertise, obviously, one area is taking advantage of the tailspin and the brick and mortar retail space. And we've seen a number of bankruptcies in the last few days, and you've been very adept there. How do you see competition developing in that segment? Or are there new entrance coming in to try to take advantage and dislocating deal terms? Or are you still in a position where you think you can get comfortable risk adjusted returns there?

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Yeah. So, the good-most definitely more competition. The good news is the more supply of opportunity as well.

Mickey Schleien -- Ladenburg -- Analyst

Yeah.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

So-in that space-quite frankly, that's not good news, right? It's obviously very-as being a little bit flipped, it's obviously very-it's-when you take a big step back and you look at communities and there's a lot of hourly workers that are being affected, but from an opportunity set there was a lot more opportunities. There is slightly more capital formation. But it feels like there's decent risk adjusted-continues to be decent risk adjusted returns there as well.

Mickey Schleien -- Ladenburg -- Analyst

I understand. That's really helpful. Those are all my questions for the-this morning. I appreciate your time and wish everyone well there.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Great. Thank you.

Operator

Thank you. Our next question comes from Maria Levin with Delphi Capital. Your line is open.

Maria Levin -- Delphi Capital -- Analyst

Yes. Thank you very much for the presentation. I have two questions. The first question is that how many loan modifications out of total brought out did you make last quarter? And how are you going to deal with loan modification requests? This is my first question.

Then the second question is that, I'd like to know the impairment-loan impairment session last quarter? And if you have loan impairment I directly hear from you the expected recoveries of those loan impairment. Thank you.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Well, let me answer the second question first. So, the-I would refer you to our schedule investments. The schedule investments have-and BDC adjusted market assets of fair value. And so those would incorporate recoveries and timelines, those fair value. So, you-and on level three assets, those are mark-to-model, but again, they incorporate time and recoveries in the fair value. And then on level two assets that incorporates-effectively the markets collect a view on timelines and recoveries for fair value, i.e. if a loan trades at $0.40 the recovery-the market view that the recovery is something above $0.40 based on whatever the-the ultimate recovery based on an assumed timeline. So, I would refer you to schedule investments, and you can look at fair value.

On the-first question was, there were effectively three-there was no really uptick. And we constantly are doing amendments and waivers for companies given the structure of our loan agreements that relate to-quite frankly, if they open-typically if they open up a new checking account, they need to come to us and get amendment and waiver, we need to get a control agreement in place. And so, generally there was not a material uptick in amendments and waivers. The-there was three COVID related-kind of what I would say, non-normal amendments and waivers. Two of those were Neiman and J.C. Penney which is obviously retail related and had filed a bankruptcy that we're involved in. And the third one was a consumer company.

Maria Levin -- Delphi Capital -- Analyst

Thank you.

Operator

Thank you. And I'm currently showing no further questions at this time. I'll turn the call back over to Joshua Easterly for closing remarks.

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Great. Well, look, we really appreciate people's time, and we hope everybody has a good remainder of the summer and a good Labor Day. And clearly, it's going to continue to be interesting for anybody who's a parent to figure out what's happening with their kids going to school and not going to school. And obviously, the investment environment continues to remain tricky, but we'll continue to work very hard for our stakeholders and for our clients, and providing valuable creative solutions so they can create value for their stakeholders and we'll continue to work for our stakeholders. Thank you very much.

Robert (Bo) Stanley -- President

Thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 69 minutes

Call participants:

Joshua Easterly -- Director and Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Advi

Robert (Bo) Stanley -- President

Ian Simmonds -- Chief Financial Officer

Michael Graf -- Vice President & Principal Accounting Officer

Rick Shane -- JPMorgan -- Analyst

Ryan Lynch -- KBW -- Analyst

Finian OShea -- Wells Fargo Securities -- Analyst

Robert Dodd -- Raymond James -- Analyst

Mickey Schleien -- Ladenburg -- Analyst

Maria Levin -- Delphi Capital -- Analyst

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