Michael Fishman - Co-CEO Bo Stanley - President Ian Simmonds - CFO Joshua Easterly - Chairman of the Board.

Leslie Vandegrift - Raymond James Jonathan Bock - Wells Fargo Mickey Schleien - Ladenburg Rick Shane - JP Morgan Chris York - JMP Securities.

Good morning, and welcome to TPG Specialty Lending, Inc.'s June 30, 2017 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 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 earnings press release for the second quarter ended June 30, 2017 and posted a presentation to the Investor Resources section of its website, www.tpgspecialtylending.com. The 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. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of the second quarter ended June 30, 2017. 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. Good morning, everyone and thank you for joining us. I will begin today with an overview of our quarterly highlights before turning the call over to our President, Bo Stanley to discuss our origination and portfolio metrics for the second quarter of 2017. 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 that Q2 was a very productive quarter. Net investment income per share was $0.57 which exceeded our base dividend of $0.39 per share.

Net asset value per share, unadjusted for the impact of the variable supplemental dividend, reached an all-time high of $16.15. Net asset value movement during Q2 was primarily driven by the over-earning of our base quarterly dividend.

Yesterday, our board announced a third quarter base dividend of $0.39 per share to shareholders of record as of September 15, payable on October 13.

In addition, consistent with the formulaic approach introduced last quarter, our board declared a Q2 variable supplemental dividend of $0.09 per share to shareholders of record as of August 31, payable on September 29. Moving on to portfolio highlights. We had no investments on nonaccrual status at quarter end.

As mentioned on the last call, our first-lien investment in Mississippi Resources, an upstream E&P company which was on nonaccrual status at the end of Q1 was restructured during the quarter into a performing first-lien loan and equity investment with a combined fair value approximating that of our loan at March 31.

At June 30, the combined fair value of our new securities slightly increased, as intra-quarter CapEx resulted in an improved outlook on production volumes, which more than offset the negative impact of the quarter-over-quarter decline in spot oil prices and a flattening of the forward curve.

We believe Mississippi Resources will continue to be cash flow-generative and that the outcome of our recent restructuring better positions the company to execute on plans for value creation. During the quarter, we funded our first new energy investment in nearly two years, with a first-lien loan in Rex Energy.

As a part of our ongoing review of the energy landscape, Rex was an opportunity where we could provide a conforming first-lien, reserve-based loan for an upstream company situated low on the cost curve. Additionally, we believe our investment has strong downside protection in the form of significant hedged collateral value at current price levels.

At quarter end, inclusive of our investment in Rex, our energy exposure continues to be limited at 2.9% of the portfolio at fair value. Another noteworthy area to highlight this quarter was the activities related to our ABL retail investments. We are pleased to report that bankruptcy proceedings for Payless are progressing as expected.

During the quarter, our asset-based FILO term loan investment in Payless was rolled up into a debtor-in-possession financing, which calls for full cash repayment prior to the company’s exit from bankruptcy. Given the court approved milestones in the bankruptcy case, we expect repayment on our DIP loan by or before August 10.

Continuing on this theme on June 22, one of our other ABL retail portfolio companies, Sears Canada, filed for bankruptcy protection under the Company’s Creditors Arrangement Act, the Canadian equivalent of Chapter 11. Our asset based term loan investment is being rolled up into a debtor-in-possession financing.

Similar to Payless, we underwrote our original investment in Sears Canada with an expectation of a bankruptcy or a restructuring event, but believe our borrowing base governed loan secured by the company's assets provide substantial protection of our contractual claim, which includes our principal, interest and fees.

We believe our thesis will be proven out and expect repayment of our loan in the second half of 2017, given the milestones in the bankruptcy case.

Overall, the performance of our portfolio is trending well, with a weighted average rating of 1.28, based on our assessment scale of 1 to 5, with 1 being the highest, as compared to 1.35 for the prior quarter.

We attribute the stability of our portfolio performance to our focus on low capital intensive businesses that are scaled and relevant to their supply chain; and in the case of retail investments, our ability to underwrite and manage borrowing base governed loans with strong downside lender protection.

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. Q2 was an activity filled quarter, as an issuer friendly loan market drove an acceleration of repayments in our portfolio and a healthy M&A environment supported our efforts on the originations front.

Various factors, including increased confidence in the overall economy, expectations for deregulation and tax reform and robust levels of private equity dry powder, drove the highest level of first half middle market M&A deals completed in the last 10 years.

The deal environment for direct capital providers like ourselves remain highly competitive due to continued capital formation in the middle market credit space, which has increased the financing alternatives available to borrowers.

During the quarter, we generated gross originations of $398 million, well above our prior 12 month quarterly average of $221 million, leading to fundings of $246 million distributed across five new portfolio companies and upsizes to five existing portfolio companies.

Of the $398 million of gross originations, $130 million was syndicated or allocated to affiliated funds, and $21 million consisted of commitments we funded post quarter end or expect to fund.

We attributed the robustness of our originations activity this quarter to the strength and diversity of our relationships, as well as our collective experience of investing in challenging markets.

Out of the five new investments this quarter, four of them were related to sponsor acquisitions, where our ability to provide timely and sizable commitments, along with certainty of execution, presented a strong value proposition.

As credit risk premiums continue to tighten in Q2, we experienced a record level of repayments at $271 million aggregate principal amount from 7 full realizations and 1 partial sell-down. In many of these instances, such as Qlik and Idera, we are able to generate sizable economics from prepayment fees and/or the acceleration of OID.

Aided by a strong direct originations platform, our core underwriting philosophy of structuring embedded economics into our portfolio to compensate for reinvestment risk has paid off in this current environment. One of the realizations this quarter I'd like to highlight is our equity investment in Global Healthcare Exchange.

We, and a club of lenders, funded an initial debt and equity investment in 2014 to support a sponsor acquisition of the company and refinance out of our loan position in Q3 2015.

This quarter, we fully realized our equity position upon the sale of the company, which has resulted in a gross unlevered IRR on our equity investment of approximately 66% and a contribution of $0.04 per share to net realized gains this quarter.

While we're predominantly focused on senior secured loan investments, there are situations like Global Healthcare Exchange, where we will participate in the equity upside opportunities if we believe it is appropriate for the overall risk reward profile of our portfolio. Now let me take a moment to provide an update on our portfolio yields.

At June 30, the weighted average total yield on our debt and income-producing securities at amortized cost was 10.8%, exceeding our prior quarter yield of 10.4%.

Breaking down this 40 basis points of quarter-over-quarter yield increase, approximately half of this was due to the Payless DIP, which, compared to the pre-petition loan, had a higher spread, additional OID and a significantly shorter contractual maturity.

The remainder of the yield uplift was driven by the impact of an increasing LIBOR on our portfolio and the net impact of portfolio fundings and repayments during the quarter. The weighted average total yield at amortized cost on new and exited debt investments during the quarter were 12.5% and 10.8%, respectively.

If we were to exclude Payless from this calculation of this quarter's portfolio yield, the weighted average total yield at amortized cost would be approximately 10.6%. As for the credit profile of our portfolio at quarter end, our portfolio continues to be well diversified across 46 portfolio companies and 17 industries.

Our average investment size was approximately $34 million, and our largest position accounted for 4.9% of the portfolio at fair value. At June 30, our core portfolio companies had weighted average annual revenues of $129 million and weighted average annual EBITDA of $23 million.

The decrease from the prior quarter was primarily driven by the repayment of several large portfolio companies, including Qlik and Idera, as mentioned earlier. At quarter end, 93% of investments by fair value were first lien, and our junior capital exposure, consistent with guidance provided on our last call, trended higher at 7%.

This is primarily due to the restructuring of Mississippi Resources as well as our participation in the recapitalization of AFS Technologies. As part of the recapitalization, we rolled our existing position into a second-lien loan and funded a new $12.5 million preferred equity investment.

At quarter end, 97% of our portfolio by fair value was senior secured.

At June 30, our largest industry exposure by fair value were to business services, which accounted for 23.2% of the portfolio at fair value and health care, primarily health care information technology, with no direct reimbursement risk which accounted for 14.1% of the portfolio at fair value.

Since early 2013, we reduced our exposure to non-energy cyclical industries from 31% to 5% of the portfolio at fair value.

It is important to note that our cyclical exposure excludes asset-based loan investments, as those 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..

Thank you, Bo. We ended the quarter with total investments of $1.55 billion, down from $1.58 billion in the prior quarter as portfolio repayments marginally outpaced fundings. Total debt at quarter end was $585 million and net assets were $968 million.

Average debt-to-equity in Q2 was 0.62 times slightly below our target leverage range of 0.75 times to 0.85 times and our leverage at quarter end was 0.6 times. As Mike mentioned, our net investment income per share for the quarter was $0.57 against the base dividend per share of $0.39.

For the variable supplemental dividend, 50% of this quarter's over-earn, rounded to the nearest cent, amounts to $0.09 per share, with no impact to this amount from the NAV movement constraint element of the formula. The supplemental dividend will be paid in September. Moving to our presentation materials.

Slide eight contains an NAV bridge for the quarter.

After giving effect to the Q1 supplemental dividend that was paid during Q2, we added $0.57 per share from net investment income against the base dividend of $0.39 per share and we had a $0.27 per share reduction in NAV from the reversal of net unrealized gains from investment realizations during the quarter.

Let me take a moment to provide an example of the impact of a reversal. And for this purpose, I'll use our investment in Idera. In Q4 2015, we purchased $62.5 million par value of Idera's first-lien loan at $0.90 on the dollar in a hung syndication. This purchase discount was booked as OID to be amortized over the contractual life of the loan.

Idera's first-lien loan was a level two security, with an observable market price and therefore, as its trading price recovered to par, the fair value of our loan outpaced its amortized cost on our balance sheet, resulting in unrealized gains.

Upon the refinancing of Idera in Q2, we reversed this unrealized account, amounting to $0.08 per share and took the remaining unamortized OID as investment income.

Moving back to the NAV bridge, $0.06 per share can be attributed to the positive impact of credit spreads on the valuation of our portfolio and a further $0.18 can be attributed to the positive impact of other realized and unrealized net gains of which the majority was related to portfolio company specific events.

Conceptually, if we were to pro forma the ending NAV per share of $16.15 for the variable supplemental dividend declared based on Q2 earnings that we will pay in Q3, the ending NAV per share becomes $16.06 for the quarter.

As illustrated by this quarter's results, we believe our dividend framework offers an effective and systematic way to maximize shareholder distributions while preserving the stability of our NAV. Moving to the income statement on slide 10. Total investment income for the second quarter was $58.8 million, up $7.9 million from the previous quarter.

Breaking down the components of income, interest and dividend income was in line with the prior quarter at $40.7 million, as the slight decrease in the size of our portfolio was offset by the intra-quarter resolution of a prior-quarter nonaccrual investment.

Other fees which consist of prepayment fees and accelerated amortization of upfront fees from unscheduled pay downs, was $15.7 million compared to $8.1 million in the prior quarter.

This was due to the recognition into investment income of our call protection on Payless, as well as sizable prepayment fees and/or accelerated OID associated with our investments in Qlik and Idera, amongst others. Other income was $2.4 million for the quarter compared to $2.2 million in the prior quarter.

Net expenses for the quarter, excluding interest expense, were $16.4 million, up $1.5 million from the prior quarter, primarily due to higher incentive fees and other operating expenses.

Incentive fees increased as a result of the strong investment income booked during the quarter, and other operating expenses increased primarily due to professional fees associated with our Special Meeting of Shareholders in May.

The increase in this quarter’s interest expense was largely due to the timing of the interest rate swap settlement on our 2022 convertible notes. Adjusted for this impact, our interest expense slightly decreased quarter-over-quarter due to a decrease in the average debt outstanding.

The weighted average interest rate on average debt outstanding, excluding amortization and fees and adjusted for the timing of interest rate swap settlement, increased from 3.0% to 3.3% quarter-over-quarter.

Approximately 20 basis points of this increase was due to an increase in LIBOR, and the remainder was due to a marginally higher cost funding mix as balance sheet leverage decreased. As we grow, we would expect our weighted average spread on debt outstanding to decrease, given higher utilization of our lower cost revolver funding.

At quarter end, we had significant liquidity, with $588 million of undrawn revolver subject to regulatory constraints, and remained match-funded from both an interest rate and duration perspective.

In order to match our liabilities with the floating rate nature of our portfolio, we’ve entered into interest rate swaps for each of our fixed rate convertible notes that correspond with the notional amount and term of those notes. As it relates to the ROEs of our business.

For the first six months of 2017, we generated an annualized ROE based on net investment income of 13.0%, with an average quarterly leverage ratio of 0.68 times compared to 11.9% for the full year 2016, when we operated at an average leverage ratio of 0.8 times. Year-to-date, we’ve also generated an annualized ROE based on net income of 12.6%.

The strength of the year-to-date ROE, despite a decrease in financial leverage, highlights our ability to structure embedded economics into our portfolio to support shareholder returns. On a trailing 12 month basis, our quarterly weighted average portfolio yield at amortized cost was 10.5%, while our return on average assets was 13.2%.

This quarter, we had close to full coverage of our $0.39 dividend from base NII, which we’ve defined as net investment income excluding activity driven income and its impact on fees. This coverage level is similar to what we experienced during 2014 and 2015, when we operated below our target leverage range.

In those years, we were still able to achieve full dividend coverage from NII and generate double-digit ROEs as a result of elevated activity related fee income. This quarter, our coverage of the $0.39 dividend from NII was 146%.

As we’ve said in the past, in environments where we receive elevated levels of pay downs and a decrease in our financial leverage ratio, we would expect elevated levels of other fees.

However, if repayment activity were to decline, then we would expect to leg back into our target leverage ratio, contributing more rapidly to our interest and dividend income line. As an example, we achieved full coverage of our dividend in 2016 from base NII.

In either scenario, we expect to continue to drive strong ROEs, consistent with our targeted range. Over the intermediate term, we continue to expect a target return on equity of 10.5% to 11.5%, based on our expectations for the interest rate environment, net asset level yields, cost of funds and financial leverage.

Using our December 31, 2016, book value of $15.95 per share, this corresponds to a range of $1.67 to $1.83 for full year net investment income per share. Based on our performance year-to-date, we would expect to end 2017 at or around the upper end of our full year guidance. With that, I'd like to turn it over to Josh for concluding remarks..

Thank you, Ian. We're pleased that our strong Q2 results have directly translated into incremental distributions for our shareholders.

While none of us could have foreseen the muted risk environment that has persisted post election, we started laying the groundwork for value creation during late 2015 and the first half of 2016, when there were periods of high market volatility driven by decline in oil prices and concerns about global growth.

Consistent our investment philosophy of restraining growth in a risk-on environment and capitalizing on high ROE opportunities in moments of market volatility, we grew our portfolio by 15% on a fair value basis during Q4 2015 through Q2 2016.

And as of June 30, we have realized an average gross unlevered IRR weighted by capital investment of 29% on fully realized investments made during that period.

With respect to the secondary markets, you may recall that we had opportunistically purchased certain names in late 2015 and early 2016, as we identified what we believe to be outsized risk return opportunities in sectors and companies in which we had a differentiated perspective.

As secondary market prices have recovered, we've significantly reduced our liquid holdings from $273 million par value in Q1 2016 to $62 million at the end of this quarter.

Across our portfolio, since inception through June 30, we have generated an average gross unlevered IRR weighted by capital invested, of approximately 20% on fully realized investments, totaling over $2.1 billion of cash invested. As for our view on the macro landscape, over the short term, we remain constructive on the health of the U.S.

economy given continued job and wage growth, strong household net worth and corporate earnings that continue to outperform market expectations. We believe all these factors should support consumer and corporate spending, driving U.S. GDP growth in the near term.

However, we also believe that there are various tail risks, including rising rates, Central Bank policy missteps and general political uncertainty that could create volatility in asset prices.

Consistent with our view on the macro environment, we have been deliberate in our efforts to rotate risk out of our portfolio, given that we are, by nature, long in liquidity on the asset side. Independent of market environment, we believe our direct origination strategy remains a key driver in our ability to deliver attractive shareholder returns.

With 96% of our portfolio by fair value sourced through non-intermediate channels, we are able to control the investment structuring and process and maintain effective voting control in 78% of our debt investments. Further, this allows us to mitigate risks, such as reinvestment risks, through call protection on 78% of our debt investments.

At quarter end, the fair value of our portfolio, as a percentage of call protection, was approximately 96%, which means that we have protection in the form of additional economics should our portfolio get repaid in the near term. Before I conclude, I'd like to share with you an update on my partner, Mike Fishman.

As most of you know, Mike has been with TSLX since 2011, shortly after its inception. With Mike's guidance, we have built a strong foundation for the business, as well as a culture of respect, collaboration and accountability. Starting in 2018, Mike will lend his leadership to TSSP's direct lending efforts in Europe.

Since he expects to dedicate a sizable portion of his time with the London-based team, Mike will be stepping down as Co-CEO at the end of the year.

Fortunately, however, we will continue to benefit from Mike's insight and expertise, as he will remain in his roles as a director on TSLX's Board, a member of TSLX's Investment Review Committee and a partner of TSSP and TPG. The remainder of Mike's day-to-day responsibilities at TSLX will be assumed by our President, Bo Stanley.

We thank Mike for all his contributions and are excited to see him guide the development of another business within our platform. From a personal perspective, I've worked with Mike in various roles and capacities over the past 17 years and look forward to another 17 years with him, God willing and health permitting.

As we think about our long-term vision for our business, we believe our goal of providing attractive shareholder returns over time requires both a disciplined investment framework and sound capital allocation principles.

It is our hope that we've build over time, through our dividend policy, capital raising philosophy and ongoing stock repurchase program, a reputation for strong shareholder alignment.

At our Special Meeting of shareholders held in May, we were humbled that holders of 94% of our shares represented at the meeting voted in favor of a proposal authorizing TSLX with approval of our independent Board of Directors to issue shares of our common stock at a price below net asset value.

I'd like to reiterate that while we have no plans to exercise this flexibility, we sought the ability to do so because we believe there could be times when it could be in shareholders' best interests.

Again, before exercising this flexibility, we would juxtapose the overall benefits of repurchasing our stock versus investing in new assets for our shareholders. The trust that our shareholders has placed in us is not something we take for granted. We will continue to prioritize shareholder alignment in all that we do.

With that, thank you for your continued interest and for your time today. Candice, please open up the line for questions..

Thank you. [Operator Instructions] And our first question comes from Leslie Vandegrift of Raymond James. Your line is now open..

Good morning and thank you for taking my question. I had a quick question on the Payless refi. So it got repaid and now you have the DIP due in November.

Do you expect that to go all the way to November? I know you said second half of the year, but are you thinking more third quarter or fourth quarter for that?.

So Payless, I think the case will be resolved in the next month. So I think the -- August 10th is -- so even shorter than that, August 10th is the confirmation of the case, so I would expect that we get paid out significantly before November..

Okay, all right. And then on My Alarm, I know you guys have the first lien in it and it's marked above cost a little bit this quarter. Other BDCs that are in the second lien that have already reported had it marked down to 25% and it's on nonaccrual.

Can you give me an update on that and why the first lien is doing better?.

So My Alarm actually got paid out. I think it was announced on July 19. So, we’ve been paid in full of our $63.8 million par investment in My Alarm, and you should see a little bit of OID due to call protection that was put into OID in Q3. I think there’s a lot of lessons learned for My Alarm.

One is being in a deal where you have a large voice can help optimize a workout. And the second is, obviously, we have a tendency to invest on top of the capital structure.

And by our calculation, my guess is depending on how you value the junior equity and take back paper, the recovery is going to be somewhere between $0.25 and $0.32 for the second lien. But we’ve been paid in full, including call protection..

Okay. And then on, thank you for that color on that.

And on just a modelling question, Spillover income as of the end of the quarter?.

Spillover?.

Hi. Leslie, actual spillover income is $1.10 per share. But I did want to point out, there are some nuances to that, because this past quarter, we realized a loss on one of our investments. And so for your purposes, to think about the right number, it’s closer to $1.24 per share.

The nuances I’m referring to are there are different distribution requirements of tax relating to ordinary income and capital income -- or income of a capital nature..

Okay. All right. Thank you. Appreciate it..

Thanks Leslie..

Thank you. And our next question comes from Jonathan Bock of Wells Fargo. Your line is now open..

Good morning. And thank you for taking my questions. So, Bo and Mike, a question for you on a new origination that seemingly has an outsized yield and was effectively part of yourself and kind of a very exclusive club, of financing Tangoe. And I believe it was Marlin Equity, kind of take private plus a merger with one of their portfolio companies.

Only because today’s environment seems to favor folks with a focus on software larger loans. It seems like the syndicate option here might have worked, and then perhaps the spread could have, in fact, have been lower.

And can you walk us through why this loan, particularly with the bank involved, PNC, why this loan has such a high yield when a majority of other folks are putting assets on the balance sheet at much tighter spreads?.

Thanks, Jonathan. Yeah, I mean, we look at each individual opportunity as far as the total facility and the structure, the syndication structure, whether banks make sense or don’t make sense. We thought that in this security and opportunity, it did make sense. So as you pointed out, we did structure what we think is a very good risk return for us.

And in addition, not to get too detailed on the credit, we feel that this credit is similar and consistent with many of the credits we do with strong downside protection on the recurring revenues of this business. So, I don’t know if....

Hey, Jonathan, this is Josh.

I think your question was larger credit software, why didn’t it go the syndicate route?.

I think that was your question. And so, look, I think the answer is it was a merger of 2 companies that needed certainty and I was provided the opportunity. And it was a take-private, which also requires certainty. So -- and the complexity related to the merger and the take-private has allowed us to provide value.

It's not a traditional software company, just to be clear, in the sense that it is a BPO business services that manages telecom spend for corporates. So hopefully, that answers your question. But typically, it's complexity and certainty needed that allows us to drive returns for our investors..

And I'll add one more thing, Jonathan. It's also size. There is a size level under which going the syndicated loan route isn't feasible. So the club market for the size of this credit -- the combination of the size of the credit, the club market, the speed to deliver a close here, made much more sense to club up this opportunity..

Got it, got it.

And then just a question, because Bo -- and I know you're looking at everything, would you say that there are similar idiosyncratic-type transactions that are still kind of bubbling up in the pipeline today? Or are you finding that just competitiveness, writ large, is kind of limiting those types of opportunities as spreads grow tighter and it just becomes more and more difficult?.

Yes, as we've said in the past, originations quarter-to-quarter can be idiosyncratic. But because we stay in our lanes and in our themes, we tend to come across opportunities that have complexity and the need for platform scale, where we can find outsized returns in this market. So we continue to see those opportunities from time to time..

Okay, okay. Then just a small question in terms of writeups. I noticed that Helix actually received a nice writeup. I believe this is a foreign currency-denominated investment, and so sometimes those fluctuations can affect fair value.

Ian, one, am I correct in understanding that that's what was responsible for the $3 million writeup? And/or how would you characterize the operating performance of that business?.

So let me -- the answer, Jonathan, is yes. But you would have seen a corresponding -- it would have been NAV-neutral because you would have seen a corresponding unrealized loss on our borrowings on our revolver..

Okay, okay, okay. So it's all hedged out, okay. So then the other question and Josh, for you. You had mentioned talking about equity issuance as the means to -- particularly, the confidence that shareholders are putting in you, Mike and Bo, on being able to issue below book value. Clearly, that's not an issue now.

But if we look at the ability to issue equity relative to what you're putting on the balance sheet, you could, in fact, have an accretive offering, both to NAV and to NOI or core, or true earnings in EPS, based on your track record of gains.

Can you talk about, not that you just can means you should, but how you and the team are looking at your capital base relative to the opportunity set today and whether or not it would make sense to consider hitting the market and raising a little bit of additional equity capital, if you've got place -- if you and Bo and others have a place to put it?.

Yes, so appreciate that comment. I think you, you're exactly right which is on a book value basis accretive. On a NOI basis, it is accretive. If you look -- if you think of our dividend yield as a proxy for our cost of equity, I would argue that since we grow NAV, that our dividend yield is not the sole -- sole cost of our equity.

That all being said, is that raising equity capital and the -- and how accretive those returns don't compare to how accretive it would be not to raise equity capital and borrow at LIBOR 200 which is actually a little bit less on a revolver when you think about rebating the unused line fee.

Our marginal cost of capital -- our cheapest marginal cost of capital is like LIBOR 165 on our revolver. And given that we have a ton of capacity on our revolver that is the most accretive to our ROEs..

Got it. All right. Correct answer and one that I appreciate. And then lastly, if we....

I appreciate the test. I'm glad we passed..

Yes, you did. That one is important to a lot of folks, just because folks have abused the privilege of a high price to NAV and clearly, that's not the case here.

And then the last item is if we look at the loans that are marked above par, it's always a good indication of either an embedded prepayment fee or something that good things can eventually happen.

What we're noticing is there's a couple loans for example, Quantros or Frontline Tech or a few others that had been originated in that 2016 time frame, early, when spreads were wide, folks were nervous. I believe you made the Idera investment at that time, Qlik as well.

Could we expect to see those potentially prepay near term, likely due to the fact that spreads are tighter than when those were invested and the fact that they're trading at above -- well above par?.

Yes, look, the valuations of above par reflect a combination of what the embedded call price is and our expectation on duration.

So if we -- if there is a transaction a -- and where we own a spread that is significantly over-market, the limitation of the valuation is based that the duration will be very short because an issuer has that call option and they'll refinance us.

So you're right and I will expect continued -- there will be some continual portfolio churn which is, as you've seen in this quarter which is good for forward economics of the business. But I'm not going to comment on any specific name..

Fair enough. Guys, thank you so much for taking my questions..

And our next question comes from Mickey Schleien of Ladenburg. Your line is now open..

Good morning, everyone. I understand that TSLX is not immune from the trends we're seeing in the more liquid leverage -- more liquid end of the leveraged loan markets, but you're clearly benefiting from being able to originate deals for somewhat smaller companies.

I think it would be useful if you could remind me what the structure is of your deal origination team and what are the principal deal-sourcing channels that they use?.

Sure. I'll let Mike and Bo take that. Just an overview, I think we also benefit, Mickey that we are -- we have a lot of human capital in our -- human capital resources in our business and we don’t as it relates to the relative size of our balance sheet. And so, we get to see a lot of opportunities and are very selective in what we do.

And so it’s not only the size of our origination team and the size of the people -- and the dedicated people, and Mike and Bo will talk about that. But, what really matters is the size relative to the capital that you have and the capital you’re trying to deploy or have to deploy.

And so the nice thing about our business is that we have a lot of human capital. We have a relatively small balance sheet as it relates to the publicly traded BDC. And then in times when credit spreads widen, we’re able to flex up and use exemptive relief and the affiliated balance sheets that provide certainty in size and scale to our clients.

And quite frankly, that scale is important, but that scale doesn’t burden our public shareholders.

So Bo, do you want to -- or Mike?.

Josh, to follow up on what you just said. I understand, and I had looked at the ratio of investment professionals to deals and it is good. But I also noticed that your OpEx ratio is not out of line for an externally managed BDC.

So does that imply that it’s being subsidized by other parts of the organization? Or how do I reconcile that?.

I think the OpEx line – you’re just pulling remember, the OpEx line is effectively just external professional fees plus CFO, IR, et cetera.

So, I and -- so that does not include, obviously, the core investing team is burdened by those expenses are burdened by the external manager, just to put a -- so the OpEx line, I think, is different than the investment team.

But, I think if you look at the investment team, just to take a step back, the BDC shareholders do get the benefit of the broader -- the investment team. So, TSSP, which is a credit and special sits platform, has about 110, 115 investment professionals.

And so, there are some investment professionals that, for example that are in sectors such as healthcare, that do a lot of stuff in our special sits funds that on occasion, will originate loans that we don’t consider in the BDC kind of headcount.

And so for example, Nektar and Ironwood, two of our specialty pharma deals, effectively, we get the benefit of the broader platform.

And then as you build down, we have about 30 professionals in the dedicated week spending 100% of their time on the BDC and about six or seven origination people spending 100% of their time on the BDC, but then they’re actually augmented by our healthcare guy in our special sits platform, our European guy, our European direct lending team, who, on occasion for example, Sovos is a European sponsor or a U.S.

asset that is in our portfolio. And so there is, 30 dedicated professionals -- and I’m stealing Mike and Bo's thunder, 30 dedicated professionals, six or seven originators, but that doesn’t count the origination efforts of other parts of the credit platform, which have about 110 investment professionals..

And I'll add to that. Even within the BDC, although there are not a significant number of originators, they are -- you could see the way our portfolio is constructed. They're sector-focused. We have people that are focused on ABL retail, people that are focused on business services and software and payments.

So those people are generating opportunities in those sectors, and health care IT also. And beyond that, as Josh mentioned, we have other sector teams that also augment that originations effort..

That's very helpful.

And can you remind me, is TSLX still benefiting from a first look on all the TPG middle market deals? Or is that -- has that gone away now that the BDC has sort of matured?.

No, no. So any U.S. middle market origination opportunities that come through the broader credit platform, or broader TPG as an organization, TPG -- TSLX shareholders get the first look on that..

Okay, and one last question. I think you said in the prepared remarks that 96% of the portfolio is from non-intermediated channels.

Can I interpret that as meaning that only 4% of the portfolio has a private equity sponsor? Or is there semantics involved that I'm not...?.

Yes, no, the non-intermediated means so we didn't buy off a desk of a broker-dealer. So like -- non-intermediated is sponsor, direct to company, small broker-dealer.

But it's not like we're buying -- it's not a deal that's either been on a secondary basis or on a primary basis that was originated off of a broker-dealer's desk, such as Goldman Sachs, Credit Suisse, et cetera..

Okay, that makes sense.

So what percentage of the portfolio does have a private equity sponsor?.

It's been -- it's probably higher right now, it's about 62% now, and it fluctuates between 60% and 50-50..

Okay that’s great, I appreciate your time this morning. Thanks a lot..

And our next question comes from Rick Shane of JP Morgan. Your line is now open..

And really sort of following up on the last perspective. One of the things that we're seeing in the sponsor business is that it is becoming more and more concentrated among the large sponsors. And the good news for you guys is that you have the balance sheet to be able to do larger transactions. But the trade-off there is potential spread compression.

Just wondering how you guys are thinking about that outlook and if that's something we should be considering, larger, more concentrated, but lower-yielding deals?.

Yes, I mean -- it's a good question, Rick. I think from our perspective, you've actually saw a little uplift in yield and amortized cost this period. New investments, 4 out of the 5 deals that were -- this quarter were sponsor-based. New investments had yield amortized cost of, I think it was 12.4% on new investments -- 12.5% on new investments.

So there is most definitely a theme of spread compression. We're trying to pick our spots where we like the risk return, we're able to do a private equity-style due diligence, we're able to have a differentiated view, and that we're -- there is complexity or certainty needed that provides us -- provides a need for our capital.

Every quarter is kind of idiosyncratic. But there is surely a headwind as it relates to spreads in the business.

I think the one watch-out and if you look at the industry data which we probably have been able to avoid a little bit and that's because I think, again, the amount of human capital we have compared to our size of our balance sheet, the one watch-out is that I think we all like to walk around and say we have an asset-sensitive portfolio.

But as LIBOR has increased, the benefit of the asset sensitivity has been muted by spread compression..

[Operator Instructions] And our next question comes from Chris York of JMP Securities. Your line is now open..

Just one question this morning, because I bounce between three calls. So you maintained your guidance for '17 despite the strong quarter here in net investment income per share.

So I calculate that your high end of guidance of $1.83 implies $0.39 or about $0.39 per share in each 3Q and Q4, which would be low for your results relative to historical periods and then maybe expectations for OID and prepayment fees.

So maybe Ian or Josh, is it reasonable to conclude your maintenance of your guidance includes some conservatism?.

Yes, I'll take a first shot at this, Chris. I think the math you did is spot on. We've been historically very strong in saying that we will cover our -- we will look to cover our dividend with a high degree of certainty. So the guidance really reflects that, given that the remainder two quarters of $0.39 will get you to the top end of that guidance.

I think it's probably a little too early to talk about expectations of repayments in the remainder of the year which would actually potentially lead to some increased activity-based income. But essentially, you're probably correct in your assumption about the conservatism. But we're reluctant at this stage to be any more aggressive..

Yes, look, what I will say, Chris, is I think Ian is dead-on. What I will say is if you use fiscal year 2016 as a proxy, I think our guidance was $1.59 to $1.74 and fiscal year was $1.83. We're generally people who like to under-promise and over-deliver, so I think there is surely conservative built in there.

But in an environment where you have some headwinds as it relates to keeping financial leverage and some headwinds as it relates to spread, most definitely, in our business model, offset by activity base, we -- I think that was a methodology built in with a little bit of -- or a lot of us being conservative and liking to not disappoint and over-deliver..

Great, makes sense. Just want to see if I was wrong on the other side of that interpretation for the numbers. And then I just wanted to conclude, Mike. I wanted to extend my congratulations on the new opportunity at TSSP, and then best of luck with the growth overseas..

Well, thank you very much. I really appreciate it..

And just to be clear, there are no health issues, although Mike is getting up there in age. Just joking. Everybody is in excellent health, or at least good health. With two young kids at home, it’s hard to be in excellent health.

But, we really appreciate everybody’s time today and hope everybody has a -- oh, I think, Jonathan, are you back on?.

We do have a follow-up from the line of Jonathan Bock. Your line is now open..

And now Jonathan is gone. So -- and we hope people have a great end of the summer and a great Labor Day and get to enjoy their time with their friends and family. So, we appreciate it..

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