Mike Fishman - Co-CEO Josh Easterly - Chairman, Co-CEO & Co-CIO of the Adviser Ian Simmonds - CFO Bo Stanley - President.

Matya Rothenberg - SunTrust Robinson Humphrey Terry M&A - Barclays Capital Christopher Testa - National Securities Chris York - JMP Securities Mickey Schleien - Ladenburg Thalmann & Company Jonathan Bock - Wells Fargo Securities Leslie Vandegrift - Raymond James & Associates Rick Shane - JPMorgan.

Welcome to the TPG Specialty Lending, Inc.'s September 30, 2016 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 fact 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 forward-looking statements as a result of a number of factors including those described from time to time in the TPG Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The Company assumes no obligation to update any such forward-looking statements.

Yesterday after the market closed the Company issued its quarterly earnings press release for the third quarter ended September 30, 2016 and posted a supplemental earnings presentation to the investor resources section of its 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 in their investor resources section.

Unless stated otherwise all performance figures mentioned in today's prepared remarks are as of third fiscal quarter ended September 30, 2016. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Mike Fishman, Co-Chief Executive Officer of TPG Specialty Lending, Inc..

Thank you, Nicole. Good morning, everyone and thank you for joining us. I will begin today with a brief overview of our quarterly highlights and we'll turn the call over to our President Bo Stanley to discuss our origination and portfolio metrics for the third quarter of 2016.

Our CFO Ian Simmonds will review our quarterly financial results in more detail and my partner Josh Easterly will conclude with final remarks before opening the call to Q&A. I am pleased to report strong financial results for the third quarter. Net investment income per share was $0.51 as compared to $0.43 for the second quarter of 2016.

This increase of $0.08 per share was largely due to higher syndication and amendment fees attributable to our direct originations model and embedded economics in our portfolio. In Q3, we continued our track record of overearning our dividend on a net investment income plus net realized gains basis.

Yesterday our Board of Directors declared a fourth quarter dividend of $0.39 per share to shareholders of record as of December 31, 2016 payable on or about January 31, 2017. Net asset value per share was $15.78 as compared to $15.55 for the prior quarter.

This increase was primarily driven by unrealized gains resulting from a continued tightening of credit spreads and by the overearning of our third quarter dividend.

With regards to our portfolio activity during the third quarter, we're pleased to report that our dedicated efforts in retail asset based lending over the past year have resulted in two full investment realizations, Sports Authority which we've discussed at some length on or prior calls and Aeropostale.

Specifically on Aeropostale we fully exited our $70 million committed DIP facility in the clothing retailer upon a sale of the Company as a going concern in September.

Consistent with our base underwriting case, Aeropostale's milestone-driven DIP plan provided visibility on exit and the potential for additional fee income while providing downside lender protection in the form of working capital collateral coverage.

We generated substantial IRRs on our investments in Aeropostale and Sports Authority, which we primarily attribute to our team's deep-rooted expertise in asset-based lending and ability to underwrite and manage process risk.

Notably, given our asset-based underwriting approach in retail, our originations activities in this sector tend to be acyclical in nature due to the typically high elasticity of consumer demand through discounting which drives strong recoveries in liquidation scenarios.

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

Thanks, Mike. The middle-market loan environment during the third quarter remained challenging for capital providers like ourselves amid tightening credit spreads, more issuer-friendly terms and elevated capital inflows.

As always, we remain disciplined in our underwriting approach and focused on opportunities where the expertise and capabilities of our platform allowed for attractive risk-adjusted returns.

Our role as joint lead arranger in the $1 billion Qlik financing which was announced in June and closed during the third quarter, exemplifies our competitive advantage amid market uncertainty in an increasingly stringent bank regulatory landscape.

The certainty of execution that we, along with our financing partners, brought to the sponsor during the volatile credit markets of early 2016 was attributable to our ability to move quickly and provide a sizable commitment through TSLX and affiliated funds across the TSSP platform.

From a capital efficiency standpoint, we captured additional economics for our shareholders by syndicating commitments beyond our target hold size which resulted in a higher yield to maturity on our $40.5 million principal hold position of approximately 12% versus a pre-syndication yield to maturity of 10%.

Our expected return on a yield to average life basis would be even higher. Note that those additional shareholder economics showed up in the form of syndication fees for the third quarter.

We believe our role in this financing demonstrates the significant sector and market expertise of our platform as well as our structural advantage in providing sizable commitments when advantageous for our shareholders.

In the third quarter, we had gross originations of approximately $318 million and funded approximately $190 million of investments distributed across six new portfolio companies.

The nature of our investments in this quarter was befitting of our late-cycle minded approach, consisting entirely of first-lien positions in primarily business service-oriented companies that shared defensive traits including strong recurring revenues, robust industry fundamentals and attractive asset level returns on invested capital.

At quarter end, 94% of our investments by fair value were first lien and 98% of investments by fair value were secured. Our junior capital exposure continues to remain low at 6% of portfolio at fair value.

However, we view this as our trough level of junior capital exposure and from time to time, we may look to slightly increase this exposure depending on the opportunity set.

As to be expected during periods of tightening credit spreads and risk premiums, we received an elevated level of repayments during the third quarter of approximately $199 million aggregate principal amount.

This was from four full investment realizations, one partial investment realization and four partial selldowns of certain level two investments totaling approximately $31 million.

The weighted average yield at fair value of level two investments exited during the quarter was 9.3% compared to a weighted average yield at fair value of 11.3% as of March 31, 2016 for those investments.

Given our focus on capital efficiency, we chose to sell those investments once market prices approached our indifference point of holding the underlying security and forego incremental fees from holding these assets in order to better maximize returns for our shareholders.

Across our portfolio since inception through September 30 we have generated a gross unlevered IRR of 15.6% on fully realized investments totaling over $1.5 billion of cash invested. At quarter end, our portfolio totaled approximately $1.64 billion at fair value compared to approximately $1.61 billion at June 30.

The portfolio is broadly distributed across 52 portfolio companies in 19 industries. Our average investment size is approximately $32 million and our largest position accounts for 4.5% of portfolio at fair value.

The weighted average total yield on our debt and income-producing securities and amortized cost was 10.3% versus 10.5% at June 30 and 10.5% at September 30, 2015. The weighted average total yields on new and exited investments during the third quarter were 10.2% and 12.3%, respectively. Investments exited in Q3 had on average higher levels of OID.

Through our direct origination efforts 87% of our current portfolio by fair value was sourced through non-intermediated channels. This enabled us to control the documentation and investment structure and process and has resulted in our ability to maintain effective voting control in 73% of our debt investments on a fair value basis.

Central to our investment framework is the mitigation of credit risk, which we do by investing in companies that are scaled and relevant to their supply chain. As of the third quarter, our core portfolio companies had weighted average annual revenues of approximately $144 million and weighted average annual EBITDA of approximately $33 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 or investment thesis.

Of equal importance to our investment process is the mitigation of noncredit risk which include interest rate, foreign currency and reinvestment risk, the latter of which is mitigated by call protection on 86% of our investments. When we fund investments in currencies other than U.S.

dollars, we borrow on our revolver in local currency as this provides a natural hedge of our principal value against foreign currency fluctuations. While there has been elevated volatility in currency markets since Brexit we have not experienced any currency-related impact to NAV given our hedging strategy.

At this latter point in the economic cycle we continue to focus on industries with low cyclicality and the ability to perform throughout credit cycles.

Our largest industry exposure by fair value at quarter end were to business services, which accounted for 22.8% of the portfolio and healthcare, primarily healthcare information technology with no direct reimbursement risk which accounted for 12.5% of the portfolio.

Additionally, since the beginning of 2013 we have reduced our exposure to non-energy cyclical industries from approximately 31% of our portfolio at fair value to 6% at third quarter end 2016.

Note that this metric excludes our asset-based loan exposure as these loans are supported by liquid collateral values and not underwritten based on enterprise value which tends to fluctuate with market cycles. With that I'd like to turn it over to Ian to discuss our third quarter financial results in more detail..

Thanks, Bo. We ended the third quarter of 2016 with total investments of $1.64 billion, debt outstanding of $689 million and net assets of $940 million or $15.78 per share.

Our leverage ratio at September 30 was 0.73x while our weighted average leverage ratio during the quarter was 0.83x which reflected repayments occurring during the latter part of Q3. And as Mike mentioned at the beginning of this call, our net investment income for the third quarter was $0.51 per share.

From a liquidity perspective we have approximately $245 million of undrawn commitments on our revolver prior to regulatory leverage constraints, and we believe we remain match funded from an interest rate and duration perspective. Moving over to our presentation materials, slide 8 contains an NAV bridge for the quarter.

Walking through the various components we added $0.51 per share from net investment income against a dividend of $0.39 per share and we had a $0.05 per share reduction in NAV from the reversal of unrealized gains following the full realization of four investments during the quarter.

There were two other factors impacting net asset value movement in Q3.

$0.24 per share can be attributed to the positive impact of credit spreads on the valuation of our portfolio and $0.09 per share can be attributed to the net impact of other unrealized losses, of which the majority was related to negative credit adjustments from idiosyncratic events at individual portfolio companies.

From an overall portfolio perspective the weighted average performance rating was 1.4 based on our assessment scale of 1 to 5 with 1 being the highest compared to a rating of 1.3 the prior quarter.

Post third quarter end, our sole investment on non-accrual status which was the prepetition first-lien loan that we held in Vertellus, was restructured upon the 363 sale of the Company's assets to prepetition lenders.

Our prepetition loan was restructured into a combination of a performing credit along with an equity investment, the fair value of which combined approximates the fair value of our prepetition loan at September 30, 2016.

Separately, our position in Vertellus' DIP loan was converted into a first-lien loan investment in the new company at the same pricing level. Moving to the income statement on slide 10, total investment income for the third quarter was $53.9 million.

This is up $7.9 million or approximately 17% from the previous quarter driven by an increase in other income and higher interest income. Breaking down the components of income, interest and dividend income was $44.6 million for the quarter compared to $42.8 million in the prior quarter, driven by a higher level of investment assets.

“Interest from investments-other fees” was $2.5 million for the quarter compared to $1.8 million in the previous quarter. This revenue line will be uneven over time as it is generally correlated with movements in credit spreads and risk premiums. Other income was $6.8 million for the quarter compared to $1.5 million the previous quarter.

This increase was primarily due to syndication fees associated with our role in the Qlik financing and to amendment fees driven by specific events at our portfolio companies. Net expenses for the quarter were $22.7 million, up from $20 million for the previous quarter.

This increase was primarily due to higher interest expense as a result of higher outstanding debt during Q3, higher incentive fees from higher pre-incentive fee NII and higher professional fees related to our activities in TICC, which amounted to approximately $0.03 per share in Q3.

We do note, however, that we believe third quarter professional fees as presented are not reflective of the run rate level of this line item and we expect these to be lower going forward. For the nine months year to date we generated an annualized ROE based on net investment income of 11.9%.

Based on our current asset level yields and as we continue to operate within our target leverage ratio of 0.75x to 0.85x our target return on equity is 10.5% to 11.5% over the intermediate term based on our December 31, 2015 book value.

This corresponds to a range of $1.59 to $1.74 per share on a net investment income basis and compares to our annualized dividend of $1.56 per share. In light of our results year to date, we expect to be at or above the upper end of our NII per share guidance for the full-year 2016.

Given we view our dividend as a liability that must be supported with real cash earnings our dividend policy is reflective of the earnings power of our business across an economic cycle at a level that can be consistently earned.

While we have over-earned our dividend by $0.19 per share year to date on an NII basis, we take a multifaceted approach to assessing our dividend level, factoring in our medium term expectations on the market opportunity set, our portfolio performance and activity and the interest rate environment given the asset sensitive nature of our portfolio.

We will continue to evaluate our dividend level to ensure it is commensurate with the earnings power of our portfolio. Last quarter we highlighted a developing positive trend in the operating leverage in unit economics of our business. This trend persisted in Q3.

From the third quarter of 2015 to the third quarter of 2016 our all-in cost of debt decreased from 3.4% to 3.2% as a percentage of average debt outstanding and our other operating expenses, adjusted for nonrecurring items, decreased from approximately 90 basis points to approximately 60 basis points as a percentage of the portfolio on a fair value basis.

This, along with the arrival at our target debt-to-equity ratio over the past year, has contributed to higher return on equity for our shareholders. We continue to evaluate financing alternatives for our business that could provide us with greater balance sheet diversity and flexibility but may also result in higher costs.

As with all costs in our business, we remain highly disciplined and opportunistic in our approach and will only incur them to the extent we believe there are growth opportunities that benefit the long term interests of our shareholders. In closing, we had a strong quarter overearning our dividend on both an NII and NII plus net realized gains basis.

The consistent core earnings power and high quality of income from embedded economics in our portfolio continue to drive our quarterly results. With that I'd like to turn it over to Josh for concluding remarks..

Thank you, Ian. I'd like to conclude our prepared remarks by noting our solid financial results for the third quarter. Especially in light of the competitive market environment, we generated an annualized return on average equity for the quarter on a net investment income and net income basis of approximately 13.2% and 15.9% respectively.

It should also be noted that over the past year, we have increased net asset value per share by approximately 4.2% from $15.15 to $15.78 per share. Our portfolio's weighted average yield at amortized cost has remained steady and we continue to derisk the portfolio while improving the underlying operating leverage of our business.

We have just recently completed the annual review of our investment advisory agreement whereby we, along with our Board of Directors, took the time to rigorously analyze the value that our management team and platform provides for our shareholders.

Since our IPO, we have generated near double-digit annualized economic returns for our shareholders as defined by the growth in NAV plus dividends which far outperforms the average and medium results of our industry peers over the same benign credit environment.

Although there have been credit events in our portfolio that were not consistent with our base underwriting case, we have been able to price in these risks through our call protection and embedded economics in our portfolio wholly attributable to our direct origination strategy and the underwriting expertise of our platform.

To illustrate this concept, the weighted average total yield at amortized cost of our portfolio over the last 12 months was approximately 10.3% which compares to a return on average assets of 11.9% on a total investment income basis for the same period.

In addition to the value of our direct origination platform and our human capital, we believe that our performance is also driven by our ever-present focus on shareholder alignment as evidenced by our dividend policy, capital-raising philosophy and focus on capital efficiency.

The desire to do the right thing for our shareholders is the motivation behind our practice of match funding our assets and liabilities, our comprehensive portfolio evaluation process and our ongoing stock repurchase programs. We will continue to focus on the investment and capital allocation principles that have brought us here.

It is with our hope that BDC managers and their respective Board of Directors engage in thoughtful introspection on how they create value for their shareholders.

We believe BDCs as an asset class can be a high value proposition for total return seeking investors to the extent managers take a disciplined and long term approach to driving shareholder value. On behalf of TSLX team thank you for your continued interest and your time today. Nicole, please open up the lines for questions..

[Operator Instructions]. Our first question comes from the line of Jonathan Bock of Wells Fargo. Your line is now open..

And only because it's sizable and it would be helpful for us to learn a little bit more, can you walk us through the amendment fee earned in the quarter? Effectively how does one really position themselves to earn this fee in this environment to the extent operating performance declines? We're not interested in who it is, unless you are willing to share it, but more just the mechanics of how it's important because oftentimes you don't see some of these fees that are this sizable come in the quarter and I clearly look at it as a positive thing.

So a little more description there would be helpful, Mike or Josh, if that's all right..

So look, the one thing I would say about the amendment fees that we've collected or sizable prepayment fees over the last couple of years which you may note this is actually not even close to the most sizable.

First of all, I think we've collected since 2014 about 11 such fees consisting of about $32 million, an average of $3 million per fee since 2014. So this activity is more regular than you think, I would suspect. Then in this quarter specifically there was actually amendment fees and other fees across probably five portfolio companies.

And so although there was two that was concentrated and one was really an exit fee as it relates to Aeropostale, but these fees generally the nature of these fees are -- and specifically related to this borrower, we actually had the opportunity due to some late reporting to actually derisk our position, it was a borrowing-based position, add in a significant borrowing base reserves, so our position is significantly derisked.

And then the size of the fee was really driven by our contract with the borrower as it relates to other alternatives such as them refinancing us against the embedded call protection and the economic cost as it relates to them choosing to go in a different direction.

So it's really driven by our contractual relationship, but it was spread over, again, we generate these fees on occasion, multiple times since 2014, I think 11 such fees averaging about $3 million.

And in this case we not only did we able to collect the fee but we were able to significantly derisk on the borrowing base deal by putting in availability reserves..

And I think that in talking about fees being way more consistent than maybe we or even the market believe, clearly this has been the case. So I appreciate it. Then that dovetails into the question, what it signals as a result of the amendment fee is good underwriting, yourself or Bo or Mike or others.

And in an environment where we're seeing significant capital flows to the middle market just as it relates to better yields, better risk-adjusted returns, everyone now is somehow a fantastic ABL lender, they will make that announcement, some have purchased other platforms that specialize in this industry.

While the call protection that you may have received that allowed you to get the outsized amendment fee incurred maybe in the last I'd say year or two depending on when you originated the loan, is it fair to say that can we continue to expect that the more risk-adjusted return continues to get competed away? Granted it's not that you will do a bad deal, we can see that in your returns, it's just that you might not do a deal because somebody else is going to be putting out money that perhaps they shouldn't.

So can you walk us through covenants, call protection, you name it, all very important part of your strategy and with so much more coming in folks are already done competing on price, now they will start competing on structure..

So it's hard for me given today is election day not to make a political comment. But I'm going to avoid making a political comment --.

Please make a political comment..

What I would tell you is I think people generally overweight proximity in their lives and as analysts. And so I think your comments as it relates to the market, about the competitive nature of the market are true. But you would have had those same comments in the middle of last year as it relates to capital formation, spreads, covenants.

So what we saw between the middle of last year and between starting November, December and indeed in March, there was a huge dislocation that created market volatility. And so, yes, is the market tough today? Yes.

Will there be idiosyncratic -- and there's probably since the global financial crisis there's been four to five events where you've had credit spreads blow out related to the possible Greece exit, about European sovereigns last year. So, yes, has the market stayed tough? Yes. Is there capital formation? Yes.

One of the things how we think about the world is do I think you are overweighting that as it relates to our business model because of the proximity of that event? Yes.

One of the ways we think about the world is and how we manage our business is that we want to play for optionality and give that optionality to participate in dislocations for our investors that drives where we invest in the capital structure, how we rotate our book.

So I'm not sure I answered your question directly and Mike I don't know if you have anything to add..

Yes, the other thing I would say is in all markets there's competition. We're not looking at an opportunity and we're the sole party trying to provide credit.

I would say, though, that in most opportunities that we look at, we self-select opportunities where there is not a plethora of lenders beating each other up trying to get to a level of risk return that is not interesting for us. So we do self-select opportunities where there are fewer versus more competitors looking at that opportunity..

So the last thing I would say is we have always said this is that we think our lack of size but our ability to scale up given our exemptive relief in our platform provides that optionality to our investors but doesn't force them to participate in bad markets by taking reinvestment risk.

And so I think what we have shown is and I hope will continue in this business model is, that if we were much larger and we had $1 billion of repayments a quarter to deal with or $500 million of repayments for the quarter to deal with and the business model to some extent requires you to be long and invested, you are much more sensitive to periods of competition.

Given that we only we try to do three to four deals a quarter and we invest $150 million to $200 million a quarter and we have a direct origination platform not that we're immune but we're surely less sensitive and then us as a platform and our shareholders own the option to participate in dislocations like at the beginning of the year..

Okay. So then maybe this is a quicker question.

Are you still getting both call protection and covenant protection on the deals that you are originating today relative to what you were originated 1 year, 1.5 years, 2 years ago? Similar or less attractive?.

So I think year one call protection across our portfolio is like 1.06. So I think in 1.03 year two, I think historically it's been 1.06 and 1.04 or something. So I think relatively similar. But the reality is that we haven't grown our portfolio much.

And so when you look at our portfolio and you know this, we've done one primary equity raise in the 2.5 years since we've gone public. And so given the capital formation in this space we have been disciplined about growing our portfolio to try to keep hold of the economics that we believe that this business needs.

I think when you, to do a full circle here for a second, when you look at -- when we went to our 15c process and you looked at economic returns across the sector and you looked at ROEs across the sector, so dividends plus NAV increases over the last year in a benign credit environment, I would say we were shocked at what the math told us.

And I think the difference is that when we think about pricing risk into the middle market, we think we need some of those extra fees and extra levers as it relates to our net economics to make up for the uncertainty around credit risk.

So, again, if you listen to the prepared remarks, the yield at amortized cost of the portfolio was 10.3%, so if we did nothing, if we invested $100 we would have $10.3 in investment income. What ended up being, we were closer to $12 over the last 12 months and that is needed to protect NAV and protect your distribution..

Got it, got it.

And then this is a wrap, so Finalsite, I was curious looking at about $40 million position on the books, can you just give us a sense of your position relative to the size of the total loan originated?.

The total loan originated is around $70 million..

$70 million. All right, thank you so much for taking my questions..

Our next question comes from the line of Mickey Schleien of Ladenburg. Your line is now open.

Josh, we're almost halfway through the quarter and spreads, it's amazing to watch how spreads have continued to compress.

So just curious if you would comment on expectations for continued repayments or potentially repricings in the fourth calendar quarter in your portfolio?.

Sure. I think there are a couple of things that might go away from us in the quarter. I think we don't, quite frankly, have a view on that today. But in an environment when credit spreads tighten typically leads to, not always, but typically leads to more repayments and more “Other income” given accelerated OID and call protection.

So when you think about our business model which is that I think some of the space is levered to origination activity which is because of how they recognize their fee income. So as they tend to do more deals, they tend to drive near term net investment income. That's not how our model works.

How our model works is when in an environment where credit spreads are widening, we're able -- it's easier for us to keep leverage and enable us to create ROEs from interest income alone.

And as credit spreads tighten it might be more difficult to keep the financial leverage in our business but, quite frankly, we have a whole bunch of embedded economics in our portfolio that allow us to drive higher ROEs in that time. So I don't think we've had any significant payoffs quarter to date.

But I would suspect that we may have one or two in this quarter if markets hold..

One more question, I just looked at your taxable income disclosed in the last 10-K and using back of the envelope with NII this year and net realized gains and dividends paid, it looks like you are at about $1 of spillover taxable income as we stand today.

I'm just curious how we should think about that given the timing of the need to eventually distribute that versus the risks, although some of that will be dissipated tonight when we finally get the results of the election, but perhaps more importantly what the Fed is going to do or the direction of the economy.

So what I'm asking is, how should we think about the Board looking at the regular dividend versus paying a special dividend in order to distribute some of that spillover?.

I’m going to turn the call over to Ian as it relates to the taxable income piece. I would suspect that given how the rules work you have to distribute 90% of your taxable income that and we keep on growing the notional dollars, I would expect we would have no RIC issues.

But, Ian, can confirm that and I will take the point as it relates to the dividend policy..

Your back of the envelope math is pretty accurate, we’re a little bit less around $0.86 a share is the spillover at the moment. When we think about the dividend, in the prepared remarks you will note that we made some comments about various factors that we take into account.

One of those things that we look at very closely is the shape of the forward curve. And that's important for our understanding of the asset sensitive nature of our business.

So we went through that exercise as we do every quarter with our Board and we're very mindful of making sure that any dividend declaration takes into account the future obligations of distributing our income.

I don't think we're overly supportive of going down the path of a special dividend given our ability to generate economics for our shareholders with that capital. But I think it's just something that we continue to watch. And if the shape of the yield curve changes going forward, then we will continue to monitor the level of dividend..

I think the one big surprise for us if you would have asked us at the beginning of the year as it relates to what was the likelihood and I'm not suggesting that it’s zero that we raise our dividend, we would have said given the asset sensitive nature of our book, although BDCs don't trade that way, that we would have, there would have been an opportunity to raise the dividend.

But and that would have been the 12/31/2015 yield curve. For example, if you looked at that 12/31/2015 yield curve, what you would have seen at 6/30/2017 you would have seen LIBOR at 140, 145. Now if you look at the yield curve as of 11/1 you would have seen LIBOR in that exact same reference date of about 100.

So you've lost a decent amount on -- the yield curve has flattened out a lot which is not helpful as it relates to the asset sensitive nature of our business. Ironically I think people, market participants think BDCs are interest-rate sensitive versus asset sensitive.

But the forward curve has not been helpful as it relates to the notional earnings power of the business, although the earnings power of the business on a spread basis to risk-free is still the same and, quite frankly, probably increasing given the operating financial leverage in the business..

Our next question comes from the line of Doug Mewhirter of SunTrust. Your line is now open..

This is actually Matya Rothenberg on for Doug Mewhirter. Thank you for taking my question. So quite a few of your newer donations were in the business services sector.

Is this just a function of opportunity and are you concerned about industry concentration?.

So business services is kind of catchall, so they tend to have lower sensitivity to cycles but they all do different things. So what we like about business services is generally high returns of invested capital, high barriers to entry, recurring revenue and typically not as much sensitivity to economic downturns as, for example, as consumer.

So it's a very large part of the U.S. economy and we feel very comfortable from an end market perspective..

And just to talk about the cyclicality, everyone looks at leverage on investments, we spend a lot of time looking at EBITDA minus CapEx. These are this business services part of our portfolio tends to be more asset-light, lower CapEx businesses with high free cash flow. So on an EBITDA minus CapEx basis, we feel very comfortable in those loans..

Then you marked your investment in Mississippi Resources down a little further this quarter.

Can you discuss what you are seeing there?.

Yes, unfortunately on Mississippi -- the forward oil curve was basically flat quarter over quarter, so not only the spot prices but the shape of the curve. That really didn't drive it. What drove it was, unfortunately, we had a technical issue when one of the producing wells that came offline that affected net asset value..

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

Ian, what was the specific driver in the increase in professional fees this quarter given that TICC investment was in the portfolio both prior quarters or periods?.

I don't know where you have been living my friend, but it was a proxy fight the week before Labor Day. The activities for the proxy fight in Q3..

So in light of this proxy outcome here, how are you thinking about your equity investment going forward? And then maybe the costs and the waivers associated with this investment..

So the waivers will continue. We have no reason to change that, our belief remains consistent which is they are not earning their dividend so in our view it’s very hard to collect an incentive fee on a return of what we think is a return of capital.

As it relates to our future plans with that investment, like any investment we will continue to think about that investment and as when it gets to our indifference point on intrinsic value we will be a seller. Until then, we will be a holder and maybe in time the nature of that investment changes and becomes strategic again.

We don't think about it that way and therefore we don't think the professional fees and run rate in Q3 are representative of the business going forward. And so Ian can walk you through the exact math of that..

So Chris, the professional fees related to that activity in Q3 was about $0.03 a share, a little under $0.03 a share. So the comments that we made about run rate if you exclude that amount then that will back you down to a more appropriate run rate for that line item..

So is that $1.2 million to $1.5 million then?.

That's right..

Okay.

And then Josh, interesting, so the way that you are looking at the TICC investment it's more of a fundamental investment as opposed to you are looking at it more -- fundamental investment as opposed to a strategic investment?.

I think that's a fair consideration and unless the shareholder base changes and some of the structural issues in the industry changes around AFFE and the 3% rule, I think the lesson learned is that on a retail shareholder base, it's hard to drive change which makes the investment and we probably underestimated that which makes the investment less strategic..

Got it. Understood.

And then maybe taking a step back, I know we talked a little bit about this, but where are you seeing the best risk-adjusted returns in your opportunity set today?.

I will let Bo talk about it. Generally I think it's either in sponsored businesses where we have an edge as it relates to a sector and we can provide credibility in execution.

It's in off-the-run opportunities where that are more, where they are less sensitive to price, those could be DIPs, rescue financings, etc., that we think have high risk-adjusted returns.

And it can be -- and Bo, anything else to add in that mix?.

No, I think that's right. It's really the broad diversity of our originations platform that allows us to focus both on thematic elements like retail ABL and ABL and also some niche verticals in the sponsor community that really drives what we're seeing today..

So maybe given the episodic nature of your value add there and maybe, Josh, you talked about proximity and a potentially narrowing opportunity set.

Could you remind us on how your intermediate and longer term outlook for portfolio growth is? And then may be the largest size of the investment portfolio for the vehicle?.

I actually I think one of the takeaways from the industry is that portfolio growth doesn't mean growth in shareholder economics and so I don't actually focus on portfolio growth at all.

Sometimes maybe our book will shrink and the way that we keep economics for our shareholders if our book shrinks is by our stock repurchase program which effectively automatically relever the business. And so I don't think about the world on what is the opportunity set going forward.

I think about how do we keep on earning our cost of capital and what is our investment process and what is our underwriting process and how do we think about the required returns on invested capital given the risk and how do we think about our capital structure over time? I would say my experience has been that given that this sector is generally playing in 8% to 14% returns that we're on the margin we're the marginal capital into the middle market that it's very difficult to be the biggest guy in this space and keep underwriting discipline.

And given that there isn't inherent operating leverage in these business models for shareholders. And so I don't -- we don't think about the world that way, not to dodge the question.

But I don't think about the world in portfolio growth or opportunity, I think about the world as how do we generate acceptable or high returns on invested capital for our shareholders..

Our next question comes from the line of Robert Dodd of Raymond James. Your line is now open..

It's actually Leslie this morning. Sorry about that. I just wanted to comment on, get a comment on some of the syndication stuff.

You already gave a lot of color in the prepared remarks earlier, but with the appetite in the market right now for those large syndications like Qlik and some of the other commentary we've heard from some your peers about larger uni–tranche, upper middle-market appetites out there, what can we see going forward without and, obviously, there's quarter-to quarter choppiness that we can see going forward for you guys doing those deals or the larger unit tranche deals just so we can get an idea of where we're going here?.

I'm probably not as bullish as we sit in this market opportunity set today as it relates to those opportunities.

We're in a market where until last week where you had massive high-yield outflows that you had capital formation in the leverage loan space, you had capital formation in high-yield, you had credit spreads tightening, there was an imbalance of supply demand as it relates to capital formation in the more broadly syndicated leverage finance markets.

And so when you look at credit spreads and you look at capital formation, so I don't see Qlik was at a point in time where you actually had all those dynamics that exist today that were nonexistent in Q1, which was there was credit spreads widening.

So I would be very skeptical that a $1 billion -- there's always the exception and there are always special sits and a time dynamic or something else that is driving a process, but when leveraged loan markets are open and high-yield markets are open, the idea that we're competing against those very efficient markets and, therefore, have the opportunity to create syndication revenue I think is more challenging.

And if that is happening and you are competing against very efficient markets, quite frankly, I would be skeptical about the underlying risk return in those investments because you are competing against very efficient markets in the high-yield and leverage loan market. Let's take, for example, Mediware.

Mediware was a company that grew up with us that we grew -- Bo, what was the size of the total Mediware financing?.

It was close to $200 million..

$200 million, the total financing was including the first out?.

The broadly syndicated deal was $310 million. Ours was a little over 200 million..

So Mediware was a company that couldn't get access that was a marginal given the size of that investment which was $310 million and is a very, very good company, had difficulty accessing the broadly syndicated market and six months ago, right before Brexit and then has recently accessed it this past quarter.

And so Mediware being a smaller issuer now has access to that broadly syndicated market. And Mediware is a great company, 35%, 40% EBITDA -- like a very good company.

High free cash flow and so the idea that Mediware is getting access to that market at $310 million makes me a little bit skeptical that we're going to compete against that market in the $1 billion financings..

Okay.

But even in the smaller ones, not necessarily the $1 billion deals like you saw a little bit of a larger size this quarter, but in the upper middle market your typical unitranche that you look at are we seeing any moves in the size there that you are taking down?.

Our typical company from an EBITDA perspective was pretty well in line this quarter. Again we're trying to finance companies that have, are large but don't have access to that broadly syndicated market or high-yield market because we think those are generally very efficient markets.

And we don't, quite frankly, have the tools given the regulatory leverage that can generate significant ROEs given the regulatory leverage in BDCs versus CLOs that have much more embedded leverage. I would suspect that our syndication revenue and income continues to be lumpy.

And so if you look on a year basis it won't be lumpy, if you look on a quarter basis it will continue to be pretty lumpy..

We will continue to step in during periods of dislocation to provide certainty and the power of our platform and balance sheet allows us to do that. But I agree with Josh..

I think another way to look at it is in the broadly syndicated market they typically won't go below a certain size, a $250 million or $300 million because of liquidity and other things. That size level will increase depending on the market stability or instability.

So if Q1 repeats the opportunity set might increase to being seeing $500 million unitranche opportunities or opportunities such as Qlik, but that wouldn't be the normal conditions under normal market conditions..

Unless you choose to have a business model where you want to compete and people may do this and think it's a good business model, it's not our business model, where you compete against the high-yield market and the broadly syndicated market..

Yes, obviously, you don't want to be out there pricing into those deals. But good job, good quarter for the syndication so that worked out well and thank you for the color on the annual basis there because that will help going forward obviously. My last question, just a quick modeling.

You talked about TICC, obviously that finished with the September, early September vote.

Now that's $0.03 a quarter, but is some of that going to bleed into fourth quarter numbers just simply because it ended later in the third quarter or are we be done with that $0.03 now?.

All in Q3..

Our next question comes from the line of Rick Shane of JPMorgan. Your line is now open..

Thanks guys for taking my questions.

They've actually mostly been asked and answered but, Josh, fair to conclude after the TICC experience in terms of M&A once bitten twice shy?.

Yes, unless there are -- unless you wake up and see the shareholder base significantly change or you see changes around AFFE which I think limits institutional investor participation in the space also limits equity research analysts in the space given the lack of institutional investors or the 3% rule, I think it's very challenging..

Fair enough. I won't consider myself to be limited in terms of being a research analyst. That's it for me. Thank you, Josh..

Our next question comes from the line of Terry Ma of Barclays. Your line is now open..

So with more capital in the market and tighter spreads can you maybe just talk about where spreads are relative to what you may consider more attractive? And then just broadly about maybe what needs to happen to get them there?.

So I don't quite understand the question. I think, as you know, that we'll find opportunities with high risk-adjusted returns given our origination platform that independent of spreads, given that we're out pounding the pavements and we do non-sponsored deals, etc.

So it makes it harder, you won't see us growing the portfolio, so I hope you didn't take away that we think there is, given the competition that we think there is zero opportunity. That's surely not the case or not what we're seeing.

As it relates to your second part of the question which is what will be a catalyst for spreads increasing I think was the second part of the question, who knows? I think generally we live, again we happen to be sitting here on Election Day, so you surely can't discount geopolitical risks that we live in.

But heightened, surely have been heightened in the U.S., you saw that last week with asset prices based on the new cycle. You have elections in Europe, you have Brexit and Article 50, you have the Chinese consumer and infrastructure spend.

So I think there's many points in the world that could be a catalyst for a risk-off environment which would be a better environment to be investing in. Do I know which one is going to come up on the roulette table? I have no idea..

And can you just remind me of what your target debt equity or leverage level is and just maybe talk about your capacity to make investments if you don't see any more repayments this quarter at least?.

Sure, Terry, it's Ian. Our target leverage ratio range is the same as what we've been talking about through this year, so 0.75x to 0.85x.

And then the capacity is still dictated at the moment by a combination of what's available under our revolver and then our ability to access any other forms of financing which we're opportunistic in doing so but also mindful of the cost that that bears on our shareholders through ROE.

So there's a combination of things, but we have capacity through the revolver currently..

[Operator Instructions]. Our next question comes from the line of Christopher Testa of National Securities. Your line is now open..

Just as we've seen continued stress in the retail sector, should we expect potentially better economics for you to earn in the ABL lending there?.

I think we're pretty bullish on that opportunity set.

But, quite frankly, you have to -- that opportunity set comes with a decent barrier to entry as it relates to the skill set that we own in our platform which is we have a group of people have been doing this type of lending for two decades which include being able to monitor the borrowing base which is more difficult than you think because you have to think about dilution and shrink and all those type of things.

So I think we have a wedge there to continue to be competitive and think about risk returns there. There was a couple of other guys to do it very, very well in this space that we have a lot of respect for. We would expect that there will be continued dislocation in the retail space and there will continue to be opportunity in that space.

Our hope and desire is that given the barrier to entry around the skillset that we will be able to continue to find good risk-adjusted returns. But if those risk premiums get competed away because people are doing what we think are not very attractive things, we will back away.

But we sure think there's tailwinds for the opportunity set, headwinds for retail in general given changes in consumer behavior, Amazon etc..

And just with, obviously, we've seen spread compression in the space as you guys have alluded to, how much do you think you being able to provide certainty of closing by investing across TPG's platform can somewhat abate that? Do you think that that can essentially lead to you earning actually better yields going forward given that sponsors seem to value this more than they do pricing?.

Sure. So that's a great question. I want to clarify if people are listening, we're -- we don't invest, I know you weren't saying this, but we don't invest in TPG portfolio companies. What we do is, we're able to given exemptive relief, we're able to speak for much more capital and outsized capital in TSLX's balance sheet to provide certainty.

So, for example, I think since the beginning -- we've invested approximately $650 million and co-invested across the TSSP platform which is the credit business of TPG, which allows us to provide certainty to our borrowers. It also allows, quite frankly, for us to continue to drive the granularity and diversity in our portfolio.

And so over time we've actually spoken for larger transactions, but when you look at the TSLX balance sheet and the risk embedded in that, diversity has increased, our largest position size has shrunk, our top 10 names as a portfolio have shrunk and so I think the model is working pretty well.

I think certainty in different end market environments are valued differently. So just to be honest, certainty is probably less valued today than it was nine months ago. But it was more valued nine months ago than a year and a half ago.

So those times where certainty is highly valued in some markets and not so valued in other markets given the robust or lack of robustness in the underlying market opportunity at that time..

And how much acceleration of OID was there during the quarter?.

Hold on one second. We will get you the exact number..

It's a little under $0.05 a share. So it's $2.5 million..

And most of that was driven by Aeropostale..

Aeropostale..

Thank you. At this time I am showing no further questions. I'd like to hand the call back to Mr. Josh Easterly for any closing remarks..

Great. Well, again, we appreciate it. Thank you for taking the time on actually such an important day for our country. So I appreciate it and we look forward to catching up with people later in the fall at industry conferences, etc. Thanks..

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone have a great day..