Joshua Easterly - Co-CEO Mike Fishman - Co-CEO Alan Kirshenbaum - CFO.

Rick Shane - JPMorgan Douglas Mewirther - SunTrust Robinson Humphrey Chris York - JMP Securities Jonathan Bock - Wells Fargo Securities.

Good morning and welcome to TPG Specialty Lending, Inc.'s June 30, 2015 quarterly earnings conference call. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements.

Statements other than statements of historical facts made during this call may constitute as forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in TPG Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The Company assumes no obligation to update any such forward-looking statements.

Yesterday, after the market close, the Company issued its quarterly earnings press release for the second quarter ended June 30, 2015, and posted a supplemental earnings slide presentation to the Investor Relations section of the website, www.tpgspecialtylending.com.

The earnings presentation should be reviewed in conjunction with the Company's Form 10-Q filed yesterday with the SEC. TPG Specialty Lending, Inc.'s earnings release is also available on the Company's website under the Investor Resources section. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Joshua Easterly, Co-Chief Executive Officer and Chairman of the Board of TPG Specialty Lending. .

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Thank you, Ashley. Good morning everyone and thank you for joining us today. I'll begin today with a brief overview of our quarterly highlights and then will turn the call over to my Partner, Mike Fishman, to discuss our originations and portfolio metrics for the second quarter of 2015.

Alan Kirshenbaum, our CFO, will then discuss our quarterly financial results in more detail. I will conclude with final remarks and our outlook for market conditions before opening the call to Q&A. I am pleased to report solid financial results for the second quarter.

Net investment income per share was $0.46 for the second quarter of 2015, as compared to $0.39 per share for the first quarter of 2015. This $0.07 per share quarter-over-quarter positive variance was driven by fees on investment paydowns and prepayment premiums earned during the quarter.

Net asset value per share as of June 30 was $15.84, as compared to $15.60 as of March 31. Alan will walk through this in greater detail, but at a high level these variances were largely driven by higher net investment income and net realized and unrealized gains on investments.

Net realized and unrealized gains per share for the second quarter of 2015 increased to $0.17, up from $0.06 in the previous quarter, reflecting idiosyncratic, positive valuation adjustments in the portfolio and to a lesser extent, a tightening in spreads.

As announced on last quarter's call, our Board of Directors declared a second quarter 2015 dividend of $0.39 per share payable to shareholders of record as of June 30th, which was paid on July 31st. Our Board has also declared a third quarter dividend of $0.39 per share, payable to shareholders of record as of September 30th on or about October 30th.

Our Board has established a dividend policy reflective of the high-quality earnings power of our business over the intermediate term at a level that we believe can be consistently earned and which maximizes cash dividends to our shareholders.

During the second quarter of 2015, we over-earned our dividend on a net investment income per share basis by $0.07 and over-earned our dividend on a net income per share basis by $0.24. From a portfolio management perspective, the second quarter was very active for us.

As was publicly reported, on July 15th, Milagro Exploration, and its subsidiaries, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.

As we have previously discussed on quarterly calls, we underwrote our investment in Milagro assuming some degree of process risk, but believed that our first-lien investment was protected by a substantial hedged collateral value. We believe this thesis will be proven out.

Our senior secured investment in Milagro benefits from a first-lien priority interest, ranking ahead of $250 million of bonds.

As detailed in the Company's bankruptcy filing, the pre-arranged bankruptcy plan includes a sale of substantially all of its oil and gas assets to a strategic buyer in exchange for $120 million in cash and approximately $97 million of equity value in the acquirer, for total consideration of $217 million.

The combined proceeds are expected to be well in excess of the Company's entire first-lien obligations totaling $102 million, which include 100% of principal value, accrued interest, and a $14 million yield maintenance premium.

The key Milagro stakeholders have agreed to the pre-arranged bankruptcy plan via an executed contribution agreement and restructuring support agreement and we expect the bankruptcy process to be finalized during the third or fourth quarter of 2015.

On July 19, A&P, which operates approximately 300 food retail stores primarily in the Northeast, filed voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As of the filing date, the Company has signed agreements to sell 120 of its 300 stores to strategic buyers.

The aggregate bid value for these stores alone, less revolver outstandings related to working capital assets, provides for approximately $390 million of collateral value for the benefit of approximately $263 million of first-lien term loan obligations, of which TSLX holds approximately $22 million of principal value.

Consistent with our initial investment thesis, the company's significant leasehold real estate value is expected to provide for substantial downside protection and liquidity, resulting in early repayment of our term loan with a prepayment premium likely in Q3 2015.

Finally, our first-lien investment in IRG was rated “5” as of June 30th, based on our internal investment performance ratings, representing the loan's non-accrual status.

The fair value as of June 30th reflects agreed upon terms as stipulated in a subsequently executed restructuring support agreement with the Company and its guarantor, resulting in a $20 million performing credit investment, a $5 million equity investment, and a settlement with the guarantor that we expect to result in an additional $10 million performing credit investment.

We believe that the $30 million of combined performing credit investments are well-collateralized.

Although we are disappointed to have a loan on non-accrual this quarter, our control of this bilateral credit agreement and the collateral value, including real estate, underlying our investment provided downside coverage and is expected to result in a swift resolution to this non-accrual.

With that, I'd like to turn the call over to Mike Fishman who will walk you through our quarterly originations and portfolio metrics in more detail. .

Thanks, Josh. Gross originations and new commitments made during the second quarter totaled approximately $112 million across five new portfolio companies and three upsizings of existing portfolio companies, a lower level than we've experienced in recent quarters.

Of the $112 million of new investment commitments made during the quarter, approximately $84 million was funded. As we previously discussed, our direct originations efforts, coupled with our high degree of investment selectivity, results in investment activities that tend to be idiosyncratic during any given quarter.

It is therefore instructive to focus on our originations and investment pace over a longer term period. Over the last four quarters, we have generated average quarterly originations of approximately $240 million and average quarterly fundings of approximately $160 million, or approximately $640 million on a full year basis.

Our investment focus is to concentrate our resources on selecting the 3-5 most attractive risk-adjusted return investments per quarter, which we expect to represent approximately $150-$200 million of gross originations on an average quarterly basis.

Of the more than 4,100 opportunities we've screened since inception, we've closed less than 2% of these investments. During the second quarter, we exited commitments totaling $22 million due to a full investment paydown, two partial investment paydowns and the partial sale of a Level 2 investment.

Approximately 94% of our debt investments have the benefit of call protection, which serves to mitigate reinvestment risk and results in additional economics when loans are repaid.

Our net funded activity for the second quarter was approximately $63 million, as compared to our average quarterly net funded activity of approximately $74 million based upon the past four quarters, or approximately $300 million of net funded activity on a full year basis, a level of growth that we continue to feel is prudent in the current market environment.

Since inception through June 30th, we have generated a gross unlevered IRR of 16.4% on fully exited investments totaling over $900 million of cash invested.

We continue to believe that our ability to provide flexible, fully-underwritten financing solutions and to hold significant positions is a key competitive advantage benefitting both our borrowers and our shareholders. Through our direct originations efforts, approximately 90% of our current portfolio was sourced through non-intermediated channels.

This enables us to control the documentation and investment structuring process and to maintain effective voting control in approximately 81% of our debt investments.

In the case of IRG, although this credit event was not consistent with our underwritten base case, our control position enabled us to swiftly take actions to protect and maximize shareholder value. As of June 30th, our portfolio totaled $1.40 billion at fair value compared to $1.33 billion at March 31st and $1.26 billion at December 31, 2014.

At quarter-end, 90% of investments by fair value were first-lien and 98% of investments by fair value were secured. At this point in the cycle, we are primarily focused on investing at the top of the capital structure and, in keeping with our focus over the past year, our second-lien exposure remained at 8%.

The portfolio is broadly distributed across 40 portfolio companies and 19 industries. Our average investment size is approximately $35 million and our largest position accounts for 4.9% of the portfolio at fair value.

At this later point in the economic cycle, we are focused on industries with low exposure to cyclicality and the ability to perform throughout credit cycles.

Our largest industry exposure by fair value at quarter-end were to Healthcare and Pharmaceuticals, primarily healthcare information technology with no direct reimbursement risk, which accounted for 15.7% of the portfolio at fair value, and Business Services, which accounted for 11.7% of the portfolio at fair value.

After giving effect to the expected Milagro realization, at June 30th our Oil and Gas exposure represents less than 3.7% of the portfolio at fair value. The weighted average total yield on our debt and other income producing securities at amortized cost at June 30th was 10.4% versus 10.3% at March 31, 2015 and 10.5% at June 30, 2014.

The weighted average interest rate at par of new investment commitments made during the second quarter was 7.9% as compared to 10.2% for the first quarter of 2015 and 10.6% for the second quarter of 2014.

While this figure will vary quarter-to-quarter as originations in any single quarter are idiosyncratic, this quarter's variance is primarily driven by our largely unfunded commitment to the Sears non-extended, asset-based revolver, which we purchased at a significant discount to par and whose near-term maturity provides a further yield enhancement.

The effective return on our investment in Sears is more accurately reflected in another important metric- the weighted average yield at amortized cost on new investments in new portfolio companies made during the second quarter, which was 9.9%. Our investment focus is to mitigate both credit and non-credit risk.

We seek to mitigate credit risk by investing in companies that are scaled and relevant to their supply chain. As of June 30, our core portfolio companies had weighted average annual revenues of $135 million and weighted average annual EBITDA of $31 million.

Our target borrower profile has inherent downside protection features that may include a high degree of contractual recurring revenues and/or hard asset value, depending on the borrower's industry and our investment thesis. Whenever possible, we seek to avoid credit risks that are asymmetrical to the downside.

Non-credit risks that we seek to mitigate include interest rate, foreign currency and reinvestment risk, the latter of which is mitigated by call protection. We mitigate interest rate and foreign currency risk by match funding our assets and liabilities.

Approximately 96% of our income producing securities are floating rate, typically subject to interest rate floors, and 100% of our liabilities are floating rate.

And when we fund investments in currencies other than US dollars, we borrow on our revolver in local currency, as this provides a natural hedge of our principal value against foreign currency fluctuations. At June 30th, 97.5% of our investments were meeting all covenant and payment requirements.

As previously noted, as of June 30th, we had one investment- IRG- on non-accrual status. Subsequent to quarter-end, we've executed a restructuring support agreement with the company and reached a settlement with the guarantor, which are expected to result in a performing credit investment for TSLX.

With that, I'd like to turn it over to Alan to discuss our quarterly results in more detail. .

Interest from Investments - Interest Income. Our Interest from Investments - Other Fees was $9.8 million for the quarter ended June 30th. This is up from $2 million in the previous quarter, primarily driven by yield maintenance premiums earned during the second quarter related to Milagro Exploration, as Josh touched on earlier.

As we have discussed on prior earnings calls, we expect that our Interest from Investments - Other Fees revenue line will be uneven over time as it is generally correlated to the movement in credit spreads and risk premiums.

During 2014, we generally experienced strong levels of Interest from Investments - Other Fees, which was in part driven by the call protection embedded in our portfolio and in part driven by the accelerated amortization of our upfront fees from full or partial paydowns. That pattern has continued in the first six months of 2015.

And with an annualized ROE of 10.9% on net investment income for the six months ended June 30th, we are right in line with our annualized ROE target of 10.5% to 11.5% on net investment income. For the quarter ended June 30th, total expenses were $19.8 million.

This is up from the previous quarter, primarily due to higher interest expense as a result of progressing towards our target debt-to-equity range, and higher incentive fees as a result of unrealized gains booked during the quarter, which I noted as part of the NAV bridge. On slides 15 and 16, we discuss our debt and funding profile.

A few things to touch on here. As I noted earlier, we believe there is little-to-no funding risk in our business. As you can see on the bottom of slide 16, 56% of our earning assets are funded by permanent equity capital, which we expect will marginally decrease as we continue to leg into our target debt-to-equity ratio.

The remaining 44% of our earning assets have a weighted average maturity of approximately 2.7 years versus our debt financings, which have a weighted average maturity of approximately 4.5 years.

In closing, we had another solid quarter, over-earning our dividend on an NII basis, and continuing to make steady progress towards our target debt-to-equity range. At 0.64x, we're at our highest level since prior to our IPO. As of June 30th, we have an estimated over $0.70 per share in undistributed distributions on a tax basis.

We continue to generate strong, consistent earnings driven by a high quality of income from embedded economics in our portfolio. Josh, back to you..

Thanks Alan. The second quarter of 2015 saw a tightening of risk premiums across asset classes, including LCD second lien spreads, which tightened by 34 basis points, while conversely LCD first-lien spreads widened slightly by 8 basis points.

The net impact of the spread movement was a small appreciation in the fair value of our investment portfolio prior to accounting for other idiosyncratic events that drove positive valuation adjustments in the portfolio this quarter.

Our investment strategy, which is predicated on mitigating credit and non-credit risks, seek to avoid situations where asymmetric downside risks exist. However, despite our high degree of investment selectivity, the risk of principal or interest loss, as well as bankruptcy “process” risk, is an inherent aspect of our business.

Though we remain committed to late-cycle sector and capital structure perspectives, from time to time, typically during later-cycle investing periods, certain of our portfolio investments will underperform expectations, or, as in the case of Milagro and A&P, our underwritten base case involving “process” risk will play out.

In either of these scenarios, it is our belief that our expertise in managing credit and “process” risk, as well as our focus on senior secured investments at the top of the capital structure with substantial enterprise value and/or hard asset value protection, and our control positions, provide for opportunities for value creation and creating shareholder value, in addition to downside protection, as exemplified by the expected IRG restructuring.

Although the IRG credit event was not consistent with our underwritten base case, our structural protections allowed us to swiftly take action to protect shareholder value by restructuring our investment into what we expect will be a performing credit.

We believe that our proficiency in selecting and structuring downside protected investments, and our ability to navigate complexity in the portfolio, are the drivers of our high quality of risk-adjusted returns.

Our long-term focus is the driving principle behind our dividend policy, capital raising philosophy and capital allocation decisions, and the alignment of interest we foster with our investors. This long-term perspective is the motivation behind our practice of match-funding our assets and liabilities, as well as our stock repurchase programs.

It is our belief that in managing our Company with a long-term perspective, we are acting in the best interest of all of our stakeholders. To that end, yesterday, our Board of Directors authorized the Company to enter into a new stock repurchase program on substantially the same terms as the prior stock repurchase plan that expired on June 30, 2015.

The new plan will remain in effect through the earlier of February 29, 2016, which happens to be a leap year, or such time as the $50 million plan has been fully utilized subject to certain conditions.

As previously stated, we believe that return on equity, coupled with the quality, risk profile, and control features of our portfolio, is the appropriate measure of our ability to generate high quality, risk-adjusted returns over the long term.

For the three months ended June 30th, we generated an ROE based on net investment income of 11.9%, and for the six months ended June 30th, we generated an ROE based on net investment income of 10.9%.

Based on our current asset level yields, and as we continue to leg into our target leverage ratio, supported by our pipeline of new investment opportunities, our target return on equity is 10.5% to 11.5% over the intermediate term.

This corresponds to $1.63 per share to 1.79 per share on net investment income based on our 12/31/14 book value, which compares to our annualized dividend of $1.56 per share. A few points in closing related to senior management changes announced last Friday.

Alan Kirshenbaum will be stepping down as our CFO in October to pursue a new career opportunity. He will play an advisory role in our third quarter close to facilitate a seamless transition. Mike and I not only value Alan as a trusted partner in our business, but also as a friend. His consistency and leadership will be greatly missed.

Alan's enduring legacy to TSLX is the talented team of dedicated finance and accounting professionals that he has led during his time as CFO. Upon Alan's departure in October, Bob Ollwerther, our Chief Operating Officer, will assume the role of interim CFO as we search for a permanent CFO amongst both internal and external candidates.

Bob is a seasoned executive and valued member of the TSLX team. We look forward to introducing him to you on next quarter's call. On behalf of myself, Mike, Alan, and Bob, thank you for your continued interest in TSLX and for your time today. Ashley, please open up the line for questions..

[Operator Instructions]. Our first question comes from Rick Shane of JPMorgan. Your line is open..

Rick Shane:.

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Our next question comes from Douglas Mewirther of SunTrust. Your line is open..

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Okay, because that was on a non-accrual status in 2Q?.

Right, exactly. And it’s expected to go back on accrual this quarter, or in the third quarter. .

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So look – to take a step, I mean, I’ll take the quirky as a compliment. .

Yes, I intended that as a compliment..

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Our next question comes from Chris York of JMP Securities. Your line is open..

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Our next question comes from Jonathan Bock of Wells Fargo Securities. Your line is open..

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Thank you. [Operator Instructions]. I'm not showing any further questions in queue, I'd like to turn the call back over to Joshua Easterly for any further remarks..

So we really appreciate everybody's participation and again Alan, thank you for being a great partner to Mike and myself and we look forward to continuing the friendship, which is very, very important to me.

So the last thing I want to say is that I hope people enjoy their summer and their Labor Day and we will surely talk if not in November before then. So thank you..

Thank you, Josh. Thank you, Mike. Appreciate it very much..

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