Sixth Street Specialty Lending, Inc (TSLX) Q4 2020 Earnings Call Transcript

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Sixth Street Specialty Lending, Inc (TSLX -0.05%)
Q4 2020 Earnings Call
Feb 18, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to 6th Street Specialty Lending Inc's 4th Quarter and Fiscal Year Ended 31-2020 Earnings Conference Call. Before we Good morning and welcome to Sixth Street Specialty Lending, Inc's fourth quarter and fiscal year ended December 31, 2020 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 the 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 fourth quarter and fiscal year ended December 31, 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-K 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 fourth quarter and fiscal year December 31, 2020. [Operator Instruction]

I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Joshua Easterly -- Chief Executive Officer

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. I hope that everyone and their loved ones are doing well. On our Q4 earnings call a year ago, none of us could have predicted that we were on the precipice of a global pandemic of claim over 2 million lives shutter entire sectors of the global economy and drastically alter the cadence of our everyday lives. In the context for the year that was fraught with complexity and uncertainty. Our Q4 and full year results are testament to both the groundwork we've laid over the years to address the constraints of our sectors business model as well as the commitment of our people at all levels of our organization.

After closed yesterday, we reported fourth quarter and fiscal year financial results, which were consistent with the preliminary figures we provided on January 25. Our Q4 net investment income and net income per share were $0.48 and $0.79, respectively. This results in a full year net investment income per share of $2.19 or return on equity of 13% and a full year net income per share of $2.65 or return on equity of 15.8%, our highest annual return since inception. Both our 2020 ROE on net income and our ROE net -- our ROE on net investment income were above their respective average annual results since our IPO. Despite ongoing earnings headwinds from LIBOR from most of our sector, our strong Q4 net investment income were supported by the LIBOR floors on our assets in connection with the lower cost of funding given our 100% floating rate liability structure. It was also supported by another quarter of robust fee income and portfolio activity.

The difference between this quarter's net investment income and net income were primarily driven by overall net gains, including net realized and unrealized gains from portfolio company specific events and net unrealized gains from the impact of tightening credit spreads on the valuation of our debt investments. As shared in our pre-release, our Q4 figures include approximately $0.02 per share of capital gains incentive fee, fees that were accrued but not paid or payable related to the cumulative unrealized capital gains in excess of cumulative net realized capital gains, less any cumulative unrealized losses and capital gains incentive fees paid inception inception to-date. Excluding the impact of the accrued capital gains incentive fee except our net investment income per share and net income per share for the quarter ended December 31, 2020 was $0.50 and $0.81, respectively.

Since capital gains incentive fee accrual is the GAAP-related non-cash item, we believe the adjusted NII and NI, which excludes the impact of the accrual more accurately portrays the current core earnings power of our business. Our Q4 capital gains incentive fee accrual is just another byproduct of our long-term focus on minimizing losses and steadily [Phonetics] building net asset value and economic value per shareholders. Another way to see this is to the total economic returns we have generated for shareholders as calculated by the change in net asset value per share with the starting point adjusted to the impact of the supplemental and/or special dividends plus cumulative dividends per share. In 2020, we generated total economic returns of 16%[Phonetic] exceeding our average annual return rate since IPO of 12.2% to 2019. As seen on slide 10 of our earnings presentation, the primarily -- the primary drivers of our net asset value per share growth in 2020 to a new high of $17.16 a year end where the over-earning of our base dividend through net investment income, net unrealized mark-to-market gains from interest rate swaps on our fixed rate liabilities and realized and unrealized gains on investments. Yesterday, our Board approved a base quarterly dividend of $0.41 per share to shareholders of record as of March 15, payable on April 15. Our Board also declared supplemental dividend of $0.05 per share related to our Q4 earnings to shareholders of record as of February 26, payable on March 31. The supplemental dividend this quarter is calculated using our adjusted net investment income, which excludes the impact of accrued capital gains incentive fee expenses since there is no certainty to win for fees accrued expenses will be paid. We believe the adjusted NII is a more relevant figure to determine the overall earning that should be distributed to our shareholders. In the ongoing assessment of our unit economics mitigating the earnings drag and caused by excess tax related to our spillover income has been top of mind since declaring our tax driven special dividend last February.

We've continued to accumulate spillover income as a result of over-earning the capital gain -- over earning and capital gains from our portfolio realizations. In order to reduce our excess tax, satisfy RIC distribution requirements and enhance our capital efficiency, we in consolidation with our Board has declared a special cash dividend of $1.25 per share to shareholders of record as of March 25, payable on April 8 to the special dividend, putting all our people we should expect to reduce our full year excise tax from $0.10 to $0.04 per share.

This combined with a slight increase in our financial leverage is expected to drive approximately 100 basis points of uplift in our ROE. Our year-end net asset value per share adjusted for the impact of the special supplemental dividends that were declared yesterday of $15.86 and we estimate that our spillover income per share after the special dividends was approximately $0.54. Again, we would like to reiterate that our special dividend is motivated by tax and RIC distribution consideration and our goal of steadily building net asset value per share over time remains very much a part of our operating philosophy.

To sum up, we believe our performance in 2020 was largely supported by how we position -- how we were positioned pre-pandemic. The defensive nature of our portfolio combined with our strong liquidity funding and capital positions and our floating rate liability structure was the bedrock of our outperformance this year. Having this foundation as we entered the uncertain period at March allowed us to better dedicate our energy and efforts to support our portfolio companies and management teams and tactically deploy capital in dislocated areas. I'll now let Bo any each discuss how we're thinking about our positioning on the right-hand and left-hand sides of our balance sheet for the year ahead, as well as review of the Q4 and full year activity in more detail. Bo over to you.

Robert Stanley -- President

Thanks, Josh. I'd like to quickly share our thoughts on the market environment and how has informed our originations activities over the course of this year. After the COVID-induced market share in March, fiscal and monetary stimulus measures taken by the Fed and the US government led to a significant turnaround for risk assets. Strong investor demand for yield in a low rate environment along with unprecedented fiscal stimulus to support COVID-impacted businesses and households drove down risk premiums in both the equity and credit markets despite the prevailing uncertainty surrounding many parts of the US economy. In the leveraged loan market, LCD first lien spreads ended the year only 30 basis points wider than where it started and second lien spreads actually tightened 144 basis points year-over-year.

On an absolute basis, taking into account movements in LIBOR the benefit of floors and amortization of upfront fees all in returns for new issue single B loans for the year ended 2020 were approximately 100 basis points tighter than where they were a year prior. While new issuance volumes gathered pace in the second half of the year, fueled by opportunistic financings and the return of sponsor and M&A activity, strong investor demand still outpaced supply. By year-end, we saw the return of looser underwriting standards, similar to what we saw -- we witnessed pre-COVID. Despite the theme of recovery and headlines for most risk assets, we believe the story of average has masked the diverging performance and credit quality for COVID-impacted borrowers this year.

For example, total return for the leveraged loan index in 2020 was 3.1%, but sectors like energy and retail underperformed with negative 7.3 and negative 2% returns in sectors like healthcare and tech generated over 5% returns. This dispersion was also evident in credit statistics. Despite a seemingly moderate reported medium leverage of 5.5 times for public filers, and the leveraged loan index at year end, the percentage of filers with leverage greater than 7 times doubled from a year ago, primarily led by EBITDA declines for borrowers most impacted by COVID. As we saw a return in competitive behavior in our own markets in the latter half of the year, we were mindful of the unevenness and fragility of this recovery.

We believe that much of the optimistic market sentiment we saw starting in the second half of 2020 hinged on continue -- continued accommodative Fed policy and timely global vaccine distribution, which to date has been fragmented not without its challenges. In the near to medium term, we believe this could create windows of volatility and risk-off behavior in the broader markets, which would once again allow us to opportunistically deploy capital like we did in the spring and summer.

In the meantime, however, we felt that it was prudent to focus our origination efforts on sectors and themes that have been the hallmark of above market returns and continue to reinforce the defensive nature of our portfolio. In Q4, we generated a record level of quarterly commitments and fundings of $526 million and $450 million, respectively. This quarter's fundings were across 10 new and 10 existing portfolio companies. As sponsor M&A activity picked up, we were active in both bolt-on acquisitions for existing borrowers, as well as new financings along the lines of our expertise where we felt we could add incremental value to sponsors and management teams. Our activities this quarter tilted in favor of mission-critical software businesses with diverse, attractive revenue characteristics and high variable cost structures.

We also blended our expertise on a hybrid recurring revenue software and asset-based financing for Follett, a provider of K-12 education materials and technology solutions. Our ability to delve into and underwrite the company's software subsegment as well as its working capital and other fixed asset collateral allowed us to differentiate our capital and partner with an excellent family owned business and management team. On the repayment side, we continue to have elevated activity in Q4 with 10 full and one partial portfolio repayments totaling $266 million. As a result, net fundings activities for the quarter was $184 million. A bulk of this quarter's repayments were M&A related and in various cases resulted in activities related fees contributing to this quarter's income.

For the full year, our commitment and funding levels closely track last year's record high figures with $1.2 billion of commitments and $939 million of fundings. Total repayments for this year were $941 million, which meant the size of our portfolio remained relatively steady year-over-year. You may recall that in the first two quarters of the year we had a cumulative $266 million of net repayment activity in our portfolio. This meant that our team worked incredibly hard to build a strong pipeline of opportunities to generate over $263 million of net portfolio growth in the second half of the year alone.

As always, our priority is to source and structure consistent portfolio yields while partnering with high quality companies and management teams. This philosophy is reflected in the stability of our weighted average yield on debt and income producing securities at amortized cost, which can be seen on slide 15 of our earnings presentation. In Q4, the weighted average yield on debt and income producing securities at amortized cost remained stable at 10.2%. There was a slight positive uplift from amendments during the quarter, primarily related to M&A, which was offset by the impact of new versus exited debt investments. In Q4, the yield at amortized cost on new investments was 9.9% compared to an elevated yield of 12.9% on exited needs as a result of upfront fees against the short contraction maturity on our investment in Centric Brands. Excluding Centric Brands, the yield at amortized cost on exited investments this quarter would have been 10.3%.

Now, I'll move on to the credit quality of our portfolio by first providing some updates on our prior quarters nonaccrual names [Phonetic]. In December, we removed our pre-petition J.C. Penney's first lien term loan and notes from non-accrual status upon the company's emergence from Chapter 11. At emergence, our pre-petition debt and debt positions were converted to non-interest paying instruments but with the rights to immediate and future distributions and cash and other instruments. Our immediate distributions were $2.3 million of cash, $6.9 million of exit term loan in units and the PropCo and earn-out trust. The fair value marks of our J.C. Penney's pre-petition debt and debt positions at December 31 reflected the respective level 2 prices. Overall J.C. Penney's restructuring provided approximately $0.05 per share of uplift for our NAV this quarter, and at year end, the total realized and unrealized value of our pre-petition and debt positions exceeded the original cost basis. While this has been a complex process, we believe our involvement as pre-petition in debt lenders supported our ability to be one of four financing providers in the J.C. Penney's new $300 million ABL file alone, which in our view offers a very attractive risk-adjusted returns.

At year-end, our retail and consumer exposure was 11.8%, down 13.9% in the prior quarter. And 75% of this existing exposure were asset-based loans. In December, we also removed our first-lien loan in an E&P company, MD America from non-accrual status following the company's emergence from Chapter 11. During Q4, our $13.6 million fair value loan was restructured into a $9 million first-lien loan and a $3.9 million equity position. We believe the company's new capital structure is more appropriately suited for today's commodity price environment.

At quarter end, our portfolio's total energy exposure was 1.7% at fair value. During the quarter, we added one new investment. Our $21.6 million fair value loan in American Achievement to non-accrual status. The company manufactures and supplies a yearbooks, classrooms and graduation products, and as a result of COVID, underperform for the 2020 sales season. We are currently working with the company on a potential restructuring to keep our term loan outstanding and receive a majority of the equity in the business as a lender group. We expect to reach resolution on this in the near term.

As a result of these activities, our non-accruals at year end remain stable from the prior quarter at 0.9% of the portfolio at fair value. Quarter-over-quarter, our portfolio's weighted average performance rating improved slightly from 1.21 to 1.18 and our [Indecipherable] decreased from 8% to 2.5% on a fair value basis. As of Q4 our portfolio continued to be at the top of the capital structure with approximately 96% first-lien loans, the percentage of business service portfolio companies increased during the year to nearly 80% and we continue to have limited cyclical exposure excluding our asset-based loans in retail of 4.5%.

Note that the slight increase in our equity exposure from 3% to 4% year-over-year was primarily due to the increase in the fair value mark of our equity positions. Across our core borrowers for whom these metrics are relevant, we continue to have conservative -- conservative weighted average attachment and detachment points of 0.4 times and 4.4 times, respectively.

And the weighted average interest coverage remained relatively stable at 3.1 times. Year-over-year, the weighted average revenue and EBITDA of our core portfolio companies increase from $114 million to $117 million and from $35 million to $41 million, respectively. We believe this reflects the resilient business model of our core portfolio companies. Many of whom were able to execute on strategic acquisitions this year to drive continued growth.

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

Ian Simmonds -- Chief Financial Officer

Thanks, Paul. As Josh and Bo mentioned, this was a strong quarter from an earnings and originations perspective. In Q4, we generated net investment income per share of $0.48, which put our full year net investment income per share of $2.19. Our Q4 net income per share was $0.79, which put our full year net income per share of $2.65. As discussed excluding the $0.02 per share of capital gains incentive fee expenses that were accrued this quarter, our Q4 net investment income and net income per share were $0.50 and $0.81, respectively.

At year-end, we had total investments of $2.3 billion, total debt outstanding of $1.1 billion and net assets of $1.2 billion or $17.16 per share, which is prior to the impact of the supplemental and special dividends that we declared yesterday. Following this quarter's net funding activity, our ending debt-to-equity ratio was 0.95 times, up from 0.81 times in the prior quarter. However, due to the quarter end timing on a number of fundings, our average debt to equity ratio decreased from 0.93 times to 0.87 times quarter-over-quarter. For full year 2020, our average debt-to-equity ratio was 0.91 times, on the low end of our previously stated target range of 0.9 to 1.25 times and up from an average of 0.84 times in 2019. As Josh said earlier, our strong positioning at the beginning of 2020 on the right-hand side of our balance sheet played an important role in our ability to drive strong outcomes for the year.

At the beginning of 2021, we continue to follow our framework of systematically looking for ways to enhance our funding and liquidity profile. In late January, we capitalized on the attractive issuance environment in the investment grade capital markets and issued $300 million of 2.5%, 5.5-year unsecured notes, which to date represents the second-lowest coupon in the BDC sector. Consistent with the rest of our fixed rate debt, we entered into a fixed to floating interest rate swap on the new notes. At the swap adjusted spread that is only 3.5 basis points wider in the current drawn spread on our secured revolver funding, this funding mix shift is expected to have minimal drag on our ROE profile while further enhancing our funding flexibility.

In addition in early February with the ongoing support of our lending partners, we increased the commitments under our revolving credit facility from $1.335 billion to $1.485 billion and extended the final maturity on $1.39 billion of these commitments, including the upsizes we received by over year to February 2026. As a result, we believe our balance sheet has never been in better shape.

Through these two transactions, we are positioned even better than we were a year ago to take advantage of what the market may have to offer in the period ahead. To provide some numbers with the context pro forma for the new note issuance and the revolver amend extend our year-end liquidity increased by over 50% to $1.3 billion of undrawn revolver capacity representing over 55% of our year-end total assets and over 14 times coverage of our unfunded commitments eligible to be drawn.

Our year-end unsecured funding mix increased from 58% to 84% on a pro forma basis and our weighted average remaining life of debt funding increased by over 20% to 4.5 years compared to the weighted average remaining life of investments funded with debt of only 2.5 years. A quick note on our 2022 convertible notes. Some of you may have noticed that our stock price has closed above the adjusted conversion price on our notes every day so far in 2021. If the average share price of our stock for the period presented is greater than the adjusted conversion price, we are required to provide the calculation of diluted EPS. Since this could be relevant for our Q1 financial reporting, we wanted to provide some context in advance of that.

As you may know, if our 2022 notes are converted, we have the choice to pay or deliver as the case maybe at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. While these notes are not eligible for conversion today, the settlement flexibility gives us the opportunity to analyze the financial impact on alternative approaches in addressing the conversion of these notes depending on the capital and liquidity needs of our business at that time. Turning now to our presentation materials. Slide 9 is the NAV bridge for the quarter.

Walking through the main drivers of this quarter's NAV growth, we added $0.48 per share from net investment income against our base dividend of $0.41 per share. There was a $0.23 per share reduction to NAV, primarily from the reversal of net unrealized gains on our Swift and the Telus' equity positions as we book these gains as realized upon sale. The impact of Q4 credit spread tightening on the valuation of our portfolio had a positive $0.16 per share impact and there was a positive $0.40 per share impact from other changes in net realized and unrealized gains primarily driven by portfolio company specific events.

Moving on to our operating results detailed on slide 11, total investment income for the fourth quarter was $62.2 million compared to $71.3 million in the prior quarter. Breaking down the components of income, interest and dividend income was $52.7 million, down $1.2 million from Q3 due to the impact of heavier repayments earlier in the quarter and new fundings later in the quarter. Other fees, which consist of prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were $4.3 million compared to $9.3 million in the prior quarter when we had elevated fees related to Dye & Durham and Neiman FILO. Likewise, other income, albeit robust at $5.2 million was lower compared to the prior quarter given our elevated other income in Q3. Net expenses excluding this quarter's non-cash accrual related to capital gains incentive fees were $26.3 million, down $1.9 million from the prior quarter. This was primarily due to lower other operating expenses and lower cash incentive fee expenses. Our funding cost in Q4 continued to benefit from the one quarter timing lag on the LIBOR reset date on our interest rate swaps and the downward movement in LIBOR in Q3.

The weighted average interest rate on our average debt outstanding decreased by approximately 10 basis points quarter-over-quarter. Since LIBOR remained relatively flat during Q4, we would not expect to see any rate-related impact in our cost of debt in our Q1 results. Reviewing the unit economics of our business in 2020 in a year of heavy repayments, we generated robust fundings that allowed us to slightly increase our average financial leverage and we maintained our all-in asset level yields despite headwinds from LIBOR. We also benefited from a lower cost of debt as a result of our floating rate liability structure. These factors together drove an increase in our year-over-year ROE on net investment income from 12% to 13%.

Further, net realized and unrealized gains on our investments and net unrealized gains on our interest rate swaps related to our 2022 and 2023 notes contributed to a record high ROE on net income of 15.8% for 2020 compared to 14.5% in 2019. As we look ahead to 2021 based on our expectations for our net asset level yields, LIBOR, cost of funds and financial leverage, we expect to target a return on equity of 11.5% to 12% using our year end book value per share of $15.86, which is adjusted to include the impact of our Q4 supplemental dividend and 2021 special dividend. This corresponds to a range of $1.82 to $1.90 for full year 2021 net investment income per share.

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

Joshua Easterly -- Chief Executive Officer

Thank you, Ian. I'd like to close our prepared remarks today by thanking our team for their efforts this year in our business a comp -- in our businesses accomplishments in 2020. I also thank all of our shareholders -- stakeholders for their ongoing engagement and support. Maintaining your trust is very important to us. And hopefully through our series of public letters and frequent dialog this year, we've made apparent that timely and clear communication, both externally and internally, is a critical pillar of our business and success. Our focus for the year ahead is to continue to allocate capital in way that generate top tier results for our stakeholders to create value for our management team and portfolio companies. We'll do this through continued assessment of appropriate investment themes based on the world around us identifying opportunities within our existing ecosystem and finding new ways to leverage the capabilities and relationships across the Sixth Street platform.

With that, thank you everybody for your time today. Operator, please open up the line for question.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Devin Ryan with JMP Securities. Please go ahead.

Devin Ryan -- JMP Securities -- Analyst

Great. Good morning, everyone.

Joshua Easterly -- Chief Executive Officer

Good morning, Devin. How are you?

Devin Ryan -- JMP Securities -- Analyst

Doing terrific. So I appreciate all the detailed commentary and outlook. If I look at the current leverage levels, you're still at the lower end of your target range and you have your fairly significant liquidity and obviously with a strong deal making environment. So I just wanted to get a lot more context around how you guys are thinking about leverage and portfolio growth over the next few quarters and how that kind of ties in with some of the outlook you just provided?

Joshua Easterly -- Chief Executive Officer

Sure. Look, I think in the short term, we have it decently strong pipeline and as you point out, we have a ton of liquidity given the capital raise on the right-hand side of the balance sheet, both the revolver extension and upsize and the bond issuance. I would say in this environment, given some of the so kind of tail risk and uncertainty it's unlikely that from a risk perspective, we will operate at the top end of our target leverage ratio. So I would not expect that, but just given the uncertainty, and we think there could be some opportunities in the future to take -- take advantage of some volatility.

Devin Ryan -- JMP Securities -- Analyst

Okay. Great. Then maybe just want to kind of following on that comment. Yeah, with the -- your really obviously tight spread we're seeing here, but the strong deal flow. What are your expectations for syndication activity to generate additional fee income sort of central position and remain active but have saved some dry powder to potentially take advantage of when volatility does pick up and perhaps opportunities increase?

Joshua Easterly -- Chief Executive Officer

Look, I think that most definitely will be some opportunities to generate some syndication fees in those have ranged between $0.02 and $0.04 a year something like that historically?

Ian Simmonds -- Chief Financial Officer

Yeah, yeah. It was, it is only a penny last quarter.

Robert Stanley -- President

But on an annualized basis what like somewhere between $0.02 and $0.04?

Ian Simmonds -- Chief Financial Officer

That's right.

Devin Ryan -- JMP Securities -- Analyst

Okay. So that's kind of the expectation and still going forward?

Joshua Easterly -- Chief Executive Officer

Yeah. And most definitely -- I think there will be most definitely opportunities and look, I think with the the broad based Sixth Street platform, we clearly have the ability to move up markets and do big deals and provide certainty to our counterparties and management team to allow them to take advantage of opportunities in their own business and for growth or M&A. So I think we always try to finance the right balance of using exempted relief for co-invest and generating syndication fees.

Devin Ryan -- JMP Securities -- Analyst

Right. Okay. Terrific. I'll leave it there but really appreciate all the detail you guys provided.

Joshua Easterly -- Chief Executive Officer

Thanks, Devin.

Operator

Thank you. Our next question will come from Robert Dodd with Raymond James. Please go ahead.

Robert Dodd -- Raymond James -- Analyst

Hi, guys and congratulations on a lot of good year, not just the quarter, but in a pretty tough environment. A question more related to the liability side, I mean just --- now that you can borrow frankly unsecured at 2.5, I mean, swap it out, but at 2.5, does that change your appetite for moving down market by, I mean to lower coupon in terms of the types of deals like you mentioned one of them, the software deal where you're doing some asset back on the working capital side. I mean a lot of your IRR, frankly, doesn't come from in the 2.0 anyway. It comes from the product differentiation of fees you can get. So if the coupon doesn't matter as much and your borrowing costs are moving even lower, is there an appetite for shifting kind of where the players because you can still generate the ROEs or even higher ROEs even with lower coupons given that's not where a lot of your income comes from.

Joshua Easterly -- Chief Executive Officer

Yeah. So look, I think I have two comments. We actually think about the world for better or worse on an unlevered basis, you kind of, you can, you can get your specialty finance companies and and lenders and banks and everybody kind of gets themselves into trouble if they lose the forest or the trees and they just focus on marginal unit economics because anything is quite frankly accretive on a marginal basis, if you just look at your cost of financing and layer in -- where you sit on the cost curve, which includes fees and incentive fees. That might not mean that you're getting paid enough to take that credit risk. And so I think it's -- that finding the balance between understanding your unit economics and your marginal unit economics in your business and also finding, making sure you're making good investments on an unlevered basis that where you're getting paid enough spread or enough economics to cover default risks and probability of loss. And that you're -- there is relative value and you're providing value to your shareholders for the economics they pay you. And so I think the answer is a qualified yes, which is you kind of got to look at the entire ecosystem and find the right balance between making sure you're providing relative value basis where you saw the cost, make sure you the economics work on the cost of equity but also looking on an unlevered basis, the investments you're making and make sure they make sense given the underlying risk you're taking.

Robert Dodd -- Raymond James -- Analyst

I appreciate that. Thank you for that. Kind of tie to this types of this. On the -- I think there was a follow -- I can't remember the software company where you did the the differentiated product. I mean you talked about the loan plus the asset-backed component of it, is there increasing or decreasing demand for that kind of product set right now given, I mean the market is -- the lending markets to exaggerate is almost willing to give away money at this point.

So all those new ones products is there increasing demand, or is that actually dropping off as we head into '21 given the easy lending terms elsewhere in the market?

Joshua Easterly -- Chief Executive Officer

Yeah. I look I think this quarter I think 60% of our origination, Ian, correct me if wrong, Bo,was non-sponsored and 40% sponsored. So look, there are still opportunities outside the sponsor Lane define to provide certainty and to provide solutions for companies that we think are good companies or good assets and that, and that we can also make loans for our shareholders to find that balance between providing value to our issuers, value to our shareholders, and that was -- I think there is still that opportunity. And when we look at our pipeline, there are some of that in our pipeline for sure.

Robert Dodd -- Raymond James -- Analyst

Got it. Thank you.

Joshua Easterly -- Chief Executive Officer

But most definitely the -- just they hit on it. The -- there has been a large portion. This is not just an any market. So all risk assets are tighter. And so there is still, I think you could see as relative value and credit. But like if you look at earnings yield for the S&P. If you look at credit spreads, all risk assets are tighter and I think that's been by design, by policy makers, I think it's a big watch out not to get into politics but the big watch out is that the easing -- the easing policy by the Fed does -- has contributed to -- in equities. And I'm not sure, I'm not sure I have a good answer and how to solve it because it also supports the economy. But people who own assets do well and people do -- who don't own assets don't do well and so you kind of end up with a situation where we had post global financial crisis, which is populism from the right and populism from the left and it's -- you can kind of see history repeat itself pretty quickly given the policy moves post -- in COVID where you know unfortunately I think we're going to be in a period where we're going to have both those forces from the right and the left, given the unintended consequences of the Fed policy.

Robert Dodd -- Raymond James -- Analyst

I appreciate that. Thanks [Indecipherable]. Thanks a lot.

Operator

Thank you. And our next question will come from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Jordan Wathen -- Wells Fargo Securities -- Analyst

Hi. This is actually Jordan Wathen calling in today for Finian O'Shea. Just keep it real short and simple here, I know you don't have a lot of latitude to speak about individual portfolio companies. But when we're looking at, it looks like smart it was refinanced in December. The revolver commitment way we were really just wondering the disclosure says that maybe first lien last out loan now. So we were really wondering if you could just give us some kind of a framework I guess on how this loan -- how loans like this not necessarily this loan but how loans like this become first lien last out, is that you inherit another bank with the acquisition something like that.

Joshua Easterly -- Chief Executive Officer

Yeah. I think, Bo reminds me on days where I think they -- we brought in a bank, went on an acquisition.

Robert Stanley -- President

Correct. There was M&A activity that increased the size of the scale of the business. And at that point we brought in a bank to lay out some revolver exposure into a small amount of the term.

Jordan Wathen -- Wells Fargo Securities -- Analyst

Okay. So, that's -- when we see something like that that's what we should assume just in the general sense.

Joshua Easterly -- Chief Executive Officer

Well, I won't tell you what my father said about assuming. So feel free to ask us.

Jordan Wathen -- Wells Fargo Securities -- Analyst

No, no. I appreciate it. Thank you, guys. That's all for me.

Joshua Easterly -- Chief Executive Officer

Thanks so much. Hopefully Fin is|OK.

Operator

Thank you. Our next question will come from Ryan Lynch with KBW. Please go ahead.

Ryan Lynch -- KBW -- Analyst

Hey, good morning guys, and congrats on the -- a really great 2020. I have just a couple of questions. One just talking about your liability structure. Obviously you guys priced some really attractive notes 2.5% fixed rate that you guys swapped out to L plus 191 [Phonetic]. I'm just curious, can you talk about why you guys have made the decision to expand your revolver given that as you mentioned in the prepared comments, you guys are issuing unsecured debt, which has a lot more flexibility basically the same prices as the revolver. So, why did you guys then extend out the revolver, number one?

And on that point, would you guys think about change the composition of your liability structure now that you can price that again the same price -- unsecured debt at the same price of your revolver, would you look at to add more unsecured debt as a percentage of your liability structure?

Joshua Easterly -- Chief Executive Officer

Yeah. So, I don't know if we can add anymore unsecured debt, quite frankly, I think it's -- Ian, at year-end, it was -- I think most of our capital structure, right?

Ian Simmonds -- Chief Financial Officer

Yeah. Yeah. 85% pro forma.

Joshua Easterly -- Chief Executive Officer

Yeah. So effectively you -- but look at the business growth there'll most definitely be an opportunity. I think there is a couple of different strategy is one is the unsecured market for BDCs have been fickle this is least of years. I think it is actually taken a direction for the better which is it feels more stable, it feels like that that market is more acceptable and it feels like that market is kind of more accessible and more steady over time.

So I think that's a good thing for the industry and quite frankly I think there is still value to be had, if you look on a ratings basis and the spreads basis for investors, they keep supporting the industry. The second thing you asked a good question. Look, I think the revolver market has also been a little bit fickle for BDCs over time and for the effect over time. And the one lesson you've learned is if you look at COVID is the cost of insurance of having liquidity during moments of volatility more than enough pays for itself. And so we are most definitely incurring the cost by having that cost is relatively small, given commitment fees and unused line fees, but that is -- that's effectively insurance and allows us to participate and in times where capital was not available and because there's correlation between this great opportunities capital isn't available and so we're paying for that option to participate.

And when you look at our history in 2020 we drove I think, Ian, you have the numbers $0.30 to $0.40 of value on a per share basis through activity levels in a risk-off environment because we had made that investment and bought that insurance and that optional liquidity. Is that -- does that mean, does that make sense to you. I mean like that's, that is a quite frankly I think as a -- as not only an owner of TSLX like myself but as a -- as the the manager or the steward of the capital or shareholder capital you've got to burden or you should burn in your unit economics because you can't run the model so tight where you don't pay for an insurance, i.e. the option on liquidity, you don't -- you run it at max leverage the business model given the regulatory constraints, the mark-to-market and the correlation between risk-off environment and no capital available. You just have -- you have to bake in those cost to fully burden your -- in your unit economics to think about the business across the cycle.

Ryan Lynch -- KBW -- Analyst

Got it. That makes sense. And then my follow up would be, you gave some good color on the market. Couple of questions on just what you guys are seeing in the market. You mentioned this quarter about most of your originations were focusing on like mission-critical software businesses. Obviously, that's a very competitive space. I mean most most direct lenders want to be in that space so how are you guys still finding good opportunities in that space, and I think you mentioned maybe 50% of the originations were not sponsored. So maybe you guys you're now focusing more on the non-sponsored route.

And then that as a kind of a side question to that, can you talk about obviously competition return to the sponsored back areas kind of basically with the COVID pre-level. Can you talk about what competition looks like and deal terms and structures you're looking like in some of the niche businesses, the niche strategies you guys focus on like ABL, pharma, healthcare those sort of businesses.

Joshua Easterly -- Chief Executive Officer

Yeah. So look, I think this quarter most definitely was an anomaly on the non-sponsored side between J. C. Penney's, which we're involved and Follet, which is a great family owned business, which is a half software business and the half retail business effectively operating bookstores on college campuses that was a decent amount of our activity levels. But we'll continue to be active in the business services software.

And look, we have a great, I think, a great reputation of providing given that we're deep in those sectors providing certainty and reliable counterparty and being a good counterparty in that space. Bo, do you have anything to add on that front?

Robert Stanley -- President

No. Look, I think -- we have a 20 plus year history in the technology and software space and allows us to be very thematic in our approach to the market that thematic approach, we're able to find deals both within and outside of the sponsor network where we're specialized and we can differentiate our capital. We'll continue to do that. As Josh mentioned, look we're in a historically tight spread environment. And we continue to point to overcapacity in the direct lending market and to us that means you're focus on your lanes and continue to focus on your thematic approach and I think the ability to originate both in and out of the sponsor network is a competitive advantage.

Ryan Lynch -- KBW -- Analyst

Okay. Sounds good. Thanks for the time today and really, really nice year guys.

Joshua Easterly -- Chief Executive Officer

Thanks, Ryan.

Operator

[Operator Instructions] Our next question will come from the Melissa Wedel from JP Morgan. Please go ahead.

Melissa Wedel -- JP Morgan -- Analyst

Good morning, guys. Thanks for taking my question. I'm wondering if the return of pretty elevated competition in the market has impacted either the level or structure of some of the fees and prepayment penalties that you guys typically layer into the deals that you do.

Joshua Easterly -- Chief Executive Officer

Yeah, I would say -- Look again I think being thematic and being able to do small deals and large deals I don't think as mass changed our -- the economics of our business. That being said, we're not immune to -- we're not immune to competition. And so -- but I think just being having a relatively small capital base in -- for Sixth Street Specialty Lending have been able to do small deals and big deals that provides us a lot of degrees of freedom to -- and being thematic provides us a lot of degrees of freedom that continue to find good value for our shareholders. And while delivering excellent value putting certainty to our counterparties. Bo or Fishy [Phonetic], anything to add? I'm trying to get Fishy involved here.

Robert Stanley -- President

No, I reiterate -- I reiterate what Josh said as far as the size of our capital base allows us to not have to necessarily be a market flow oriented players. So we see a lot of opportunities and confine the most interesting risk return opportunities to do.

Melissa Wedel -- JP Morgan -- Analyst

Okay. Got it. And then on the repayment side, what's your outlook for repayment activity going forward? I mean do you think that -- well, I guess generally -- general market commentary but then also specific to your portfolio, do you feel like you've seen repayment activity that you're likely to see or as long as this environment persist do you think there is more room for that?

Joshua Easterly -- Chief Executive Officer

I mean, it feels -- it feels --- Ian, you should comment. It feels less in Q1, but Ian, you should comment on that.

Ian Simmonds -- Chief Financial Officer

Yeah. I mean, I think just as a byproduct of having a lot more origination activity in the second half of the year, our portfolio is a little bit younger as we start this year. So anticipating a slight drop off in repayment is probably a natural consequence of that cycle. That's ignoring of course any individual company specific needs.

Joshua Easterly -- Chief Executive Officer

There is economic hedge in the model, which is like given that we don't -- given that -- on the -- there is not -- we take -- we defer our origination fees, so one is high prepayments we lose the benefit of financial leverage vis-a-vis our economics.

But we do have the accretion of OID -- of unamortized OID that runs the model and then in low prepayment environments, you get some benefit from financial leverage. So there is a natural kind of hedge to the economics.

Melissa Wedel -- JP Morgan -- Analyst

Yeah. Got it. Thank you guys.

Operator

Thank you. And I'm showing no further questions in the queue at this time. I'll turn the call back over to management for any further remarks.

Joshua Easterly -- Chief Executive Officer

Great. So I have two general comments or two general things that maybe touch on real quick. Look, people have probably seen that -- as people know, Sixth Street is a parent company of our Adviser and so you've probably seen the litigation and given its pending litigation, there is a little bit of what we can say, but I wanted to be transparent about it. So, Sixth Street accepted a strategic investment from Dyal back in 2017. And in December, Dyal announced a merger with Owl Rock to go public with -- through SPAC. We recently filed litigation in Delaware to enjoin Dyal from transferring their interest to the Sixth Street to the merger [Indecipherable] without our consent, which is a breach over 2017 agreement. A public version of this complaint is going to become available sometime today if it is already. A few things to be clear on, first and foremost, we're in the partnership business and we take our partnership obligation seriously. We own our deals and expect our partners will too. And in this case Dyal didn't. In 20 years of business at Goldman Sachs and at Sixth Street we know what it is -- we know what it means to be a business partner and I mean sticking to your agreements. If we didn't do that within -- and didn't have a reputation for doing so we wouldn't have been able to do this for so long and we wouldn't have been able to build a $50 billion investment firm. Number 2, we are -- we entered into a partnership with Dyal and they told us verbally and in writing and said so publicly that we are partners not competitors and we believe them. That's what's in our agreement and now they're breaching it. They negotiated very limited exceptions, which are complaint outlines were intended only to provide liquidity to their underlying fund LPs, which isn't happening here.

We really don't want to have to -- we really don't want to have to file a lawsuit. But no matter how often people -- might how often -- no matter how others might choose to act our core principle is that we're always going to act in the best interest of our investors. Dyal deserted our partnership and their lack of engagement with us before or after announcing the proposed merger puts in a position, we had no choice, we had no choice.

And finally our dispute is directly with Dyal and not with Owl Rock. We have known the principles of Owl Rock for many years and we have a great deal of respect to their firm as a peer and a competitor. Other than the fact that they are party to the transaction with Dyal, Sixth Street has no issues with Owl Rock on this. That's it again on the complaint. It will be I think public today. And given the litigation process, we have limited to say -- limited things to say. The second thing I would like to say is that this -- obviously this is Black History Month and next month is Women's History Month and I know as a firm it's been a lot of time thinking and talking to our people about our history and the good and the bad of our history and the -- hopefully as we will in our firm, people will take some time and think about not only of our history, but actually the the collective contributions of both these groups to our society because there has been a ton and so hopefully people use a time for that. And then the last thing I will say because we always end this way, which is I hope people enjoy the spring hopefully it's an easier spring than last spring, Easter coming up, Passover coming up and we'll talk to you soon. Thanks so much.

Robert Stanley -- President

Thanks everyone.

Ian Simmonds -- Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Duration: 57 minutes

Call participants:

Joshua Easterly -- Chief Executive Officer

Robert Stanley -- President

Ian Simmonds -- Chief Financial Officer

Devin Ryan -- JMP Securities -- Analyst

Robert Dodd -- Raymond James -- Analyst

Jordan Wathen -- Wells Fargo Securities -- Analyst

Ryan Lynch -- KBW -- Analyst

Melissa Wedel -- JP Morgan -- Analyst

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