SIXTH STREET SPECIALTY LENDING, INC.
Fitch Ratings has assigned a 'BBB(EXP)' expected rating to
Fitch does not anticipate a material impact on the company's leverage as a result of the issuance, as proceeds will be used to repay borrowings on secured credit facilities.
Key Rating Drivers
TSLX's ratings reflect its strong credit performance, consistent operating performance, strong management team, focus on first lien investments with lower underlying portfolio company leverage and meaningful call protection, solid asset coverage cushion, strong liquidity, consistent dividend coverage and access to investment resources from
Rating constraints include above-average industry concentrations in TSLX's portfolio given the meaningful exposure to software businesses. Rating constraints for business development companies (BDCs) more broadly include the market impact on leverage, given the need to fair-value the portfolio each quarter, dependence on access to the capital markets to fund portfolio growth and a limited ability to retain capital due to dividend distribution requirements. Fitch believes BDCs will experience weaker asset quality metrics in 2024 amid macroeconomic headwinds and higher debt service burdens and slower growth prospects at portfolio companies.
The Stable Rating Outlook reflects Fitch's expectations for continued operating consistency, a continued focus on first lien investments, and the maintenance of strong asset quality, ample liquidity, solid dividend coverage and leverage within the targeted range.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
An increase in leverage that is not commensurate with the risk profile of the portfolio; an inability to maintain sufficient cushion to asset coverage to account for valuation volatility;
a sustained meaningful increase in non-accrual levels; meaningful realized losses;
deterioration in the portfolio risk profile as demonstrated by a meaningful decline in exposure to first lien investments, meaningful up-ticks in underlying portfolio leverage and/or a meaningful deterioration in portfolio company interest coverage or covenants which signal the potential for future asset quality issues;
a sustained decline in unsecured debt-to-total debt below 40% and/or weaker cash income dividend coverage could all yield negative rating momentum.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Very strong and differentiated asset quality performance of recent vintages, which will be evaluated in combination with the stability and consistency of TSLX's operating performance, asset quality, valuation, and underlying portfolio metrics, including leverage and interest coverage could yield positive rating momentum;
The maintenance of unsecured debt-to-total debt of at least 50%, the maintenance of ample liquidity, and consistent core operating performance would also be necessary to yield positive rating action.
Although Fitch does not consider it likely, a reduction in the leverage target that is not accompanied by an offsetting increase in the portfolio risk profile could also contribute to positive rating momentum.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The expected unsecured debt rating is equalized with the ratings assigned to TSLX's existing senior unsecured debt as the new notes will rank equally in the capital structure. The alignment of the unsecured debt rating with that of the Long-Term Issuer Default Rating (IDR) reflects solid collateral coverage for all classes of debt given TSLX is subject to a 150% regulatory asset coverage requirement and will have a meaningful unsecured funding component following the proposed issuance and repayment of secured borrowings.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The unsecured debt rating is primarily linked to the Long-Term IDR and is expected to move in tandem with it. However, a reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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