Josh Easterly - Chairman and Co-Chief Executive Officer Bo Stanley - President Ian Simmonds - Chief Financial Officer Michael Fishman - Co-Chief Executive Officer Lucy Lu - VP, Investor Relations.

Jonathan Bock - Wells Fargo Securities Rick Shane - JPMorgan Mickey Schleien - Ladenburg Thalmann & Company Inc. David Miyazaki - Confluence Investment Management Leslie Vandegrift - Raymond James & Associates, Inc. Terry Ma - Barclays Capital Christopher Testa - National Securities Corporation.

Good morning and welcome to TPG Specialty Lending, Inc.'s September 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 third quarter ended September 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 and for the third quarter ended September 30, 2017. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Josh Easterly, co-Chief Executive Officer of TPG Specialty Lending, Inc..

our Payless DIP loan and our Toys "R" Us prepetition ABL FILO loan. Consistent with our underwriting expectations, our Payless DIP loan was fully repaid during Q3 in connection with the company's emergence from bankruptcy, resulting in gross unlevered IRR of 24% on our investment.

In September, our prepetition ABL FILO loan for Toys "R" Us was fully realized upon the funding of a new DIP facility following the company's Chapter 11 filing.

As for our investment in Sears Canada, during Q3, our prepetition ABL term loan was rolled up into a DIP facility, one of the first term loan rollups ever to be completed under the Companies' Creditors Arrangement Act, the Canadian equivalent to Chapter 11.

Since we underwrote our original investment in Sears Canada with an expectation of a filing or a restructuring event, we believed that our core underwriting philosophy of strong loan documentation would be a key risk management tool.

Consistent with that belief, the intercreditor agreement that we along with the lender group negotiated played a pivotal role in our participation on the debt facility and resulted in an opportunity for us to generate additional economics while enhancing our collateral position.

Given the milestones in the bankruptcy case, we expect to be fully repaid on our loan, along with other economics, by year end.

Since late 2014 when we began executing our retail asset-based lending effort on a thesis of a secular decline in brick-and-mortar retail, we have originated more than $440 million of retail ABL investments, generating an average gross unlevered IRR weighted by capital investment of 25% on six fully realized investments to date.

Given the strong trends in e-commerce growth, we believe that the market opportunity set for providing asset-based loans to brick-and-mortar retailers, coupled with our platform's experience and expertise, continue to offer compelling risk-adjusted returns for our shareholders and provide much-needed capital to the sector.

Overall, the performance of our portfolio continues to trend well, with a weighted average rating of 1.21 based on our assessment scale of 1 to 5, with 1 being the highest, as compared to 1.28 for the prior quarter.

Across our portfolio, since inception through September 30, we have generated an average gross unlevered IRR weighted by capital invested of approximately 19% on fully realized investments totaling nearly $2.5 billion of original cash investment.

We believe that one of the primary drivers of our portfolio performance since inception is our philosophy of proactive risk to management, which begins with a robust direct origination platform and strong underwriting discipline, focused on downside protection.

With 98% of our portfolio by fair value sourced through non-intermediated channels, we are able to control the investment structure and process and maintain effectively voting control in 82% of our debt investments.

This has allowed us to quickly identify and implement risk mitigation measures in the case of underperformance in order to minimize losses while creating additional economics for our shareholders. 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, Josh. Leverage loan issuance continued to be robust in Q3, supported by an active M&A environment. In particular, sponsor-backed financings reached their highest level since the second quarter of 2007, a trend consistent with the nature of our portfolio activity this quarter.

In Q3, we generated our highest quarterly level of gross originations in funding since inception of $501 million and $329 million, respectively. This was distributed across 7 new portfolio companies and upsizes to 5 existing portfolio companies. Of the $501 million of gross originations, nearly 90% were driven by sponsor-related M&A or refinancings.

$142 million of our originations this quarter were syndicated or allocated to affiliated funds and $30 million consisted of commitments we funded post quarter end or expect to fund. On the repayments front, we also experienced a record level in Q3 at $331 million aggregate principal amount from 9 full and 2 partial realizations.

In many of these instances, we were able to generate sizable economics from prepayment fees and/or the acceleration of OID that supported our strong Q3 financial results.

Aided by a strong direct originations platform, our core underwriting philosophy of structuring embedded economics into our portfolio to compensate for reinvestment risk continues to pay off in the current environment. At quarter end, we had call protection on 84% of our debt investments.

While we expect the pace of our portfolio repayments to moderate in the period ahead, we continue to have substantial protection in the form of additional economics should our portfolio get repaid in the near term, as illustrated by the fact that the fair value of our debt portfolio as a percentage of call protection at September 30 is 95.6%.

So I'd like to highlight that two of our new investment fundings this quarter, Paylease and Frontline, were driven by sponsor acquisitions of our portfolio -- existing portfolio companies.

In both of these transactions, our pre-existing knowledge of the company, ability to move quickly, and capacity to originate larger commitments through coinvestments from affiliated funds presented a strong value proposition to our sponsor partners.

By focusing on opportunities that require certainty of execution as well as extensive due diligence and underwriting capabilities, we are generally able to negotiate more attractive pricing relative to similar risk assets in the broader middle markets.

To illustrate this, LCD middle-market B-rated spreads tightened by 97 basis points from year-end 2016 through Q3 2017. During this period, the weighted average spread over LIBOR of our debt investments at fair value actually widened by 14 basis points.

As for our overall portfolio yields, at September 30, the weighted average total yield on our debt and income-producing securities at amortized cost was 10.8%, consistent with the prior quarter and up 40 basis points from year-end 2016.

The weighted average total yield at amortized cost on new fundings and paydowns during the quarter were 10.3% and 10.7%, respectively. The downward yield impact of this quarter's net funding activity was offset by an increase in the effective LIBOR rate on our floating-rate debt portfolio.

Given the full realizations of Payless in August, which contributed 17 basis points of yield uplift in Q2, the stability of our quarter-over-quarter portfolio yield was attributable to the Sears Canada DIP loan, which, similar to Payless, had a higher spread, additional OID, and a significantly shorter contraction maturity compared to the prepetition loan.

If we were to adjust this quarter's yield for the Sears Canada DIP loan, the weighted average total yield at amortized costs for our portfolio would be 10.7%. As for the credit profile of our portfolio at quarter end, our portfolio is well diversified across 44 portfolio companies in 17 industries.

Our average investment size was approximately $35 million and our largest position accounted for 4.9% of the portfolio at fair value. At September 30, our core portfolio companies had weighted average annual revenues of $130 million and weighted average annual EBITDA of $22 million.

At quarter end, 93% of investments by fair value were first lien and our junior capital exposure, consistent with prior quarter, remained steady at 7%. At quarter end, 97% of our portfolio by fair value was senior secured. At September 30, Business Services was our largest industry exposure, comprising 17.2% of the portfolio at fair value.

Healthcare, primarily healthcare information technology with no direct reimbursement risk, and Financial Services, primarily integrated payment processing companies with limited bank regulatory exposure, each accounted for 14.3% of the portfolio.

As for energy exposure in our portfolio, post quarter end, we along with affiliated funds closed a $400 million first-lien loan facility for Northern Oil and Gas, $300 million of which was funded at close.

As part of our ongoing review of the energy landscape, this was an opportunity where we could provide a conforming first-lien reserved based loan for an upstream company along with attractive downside protective features in the form of significant hedged collateral value at current price levels.

Pro forma our investment in Northern Oil and Gas, our energy exposure at quarter end would have been 5.6% of the portfolio at fair value. At quarter end, our exposure to non-energy cyclical industries, which excludes asset-based loan investments, decreased from 5% to 4% of the portfolio quarter over quarter.

Given that asset-based loans are supported by liquid collateral values, which tend to be more stable across economic cycles compared to enterprise values for cash flow loans, we continue to look opportunistically to increase our asset-based loan exposure, given the late cycle environment. With that, I'd like to turn it over to Ian..

Thanks, Bo. Our balance sheet remained relatively stable quarter over quarter, as portfolio fundings kept pace with the high level of repayments during Q3. At quarter end, we had total investments of $1.55 billion, flat from the prior quarter, and total debt of $577 million.

The average debt-to-equity ratio in Q3 was 0.61x, below our target leverage ratio of 0.75x to 0.85x. And our leverage at quarter end, consistent with the prior quarter, was 0.6x. As Josh mentioned, our net investment income per share for the quarter was $0.51 against a base dividend per share of $0.39.

For the variable supplemental dividend, 50% of this quarter's overearning rounded to the nearest cent amounts to $0.06 per share. The NAV movement constraint element of the formula had no impact on the calculation of this amount. Moving to our presentation materials, slide 8 contains an NAV bridge for the quarter.

After giving effect to the Q2 supplemental dividend that was paid during Q3, we added $0.12 per share from net investment income net of our base dividend. And we had a $0.14 per-share reduction in NAV from the reversal of net unrealized gains from nine full investment realizations.

As discussed on our prior call, unrealized gains are booked when the fair value of our loan exceeds its amortized cost on our balance sheet. When a loan is repaid in full, we reverse this unrealized account on the balance sheet and take prepayment fees and/or any unamortized OID through investment income.

Moving back to our NAV bridge, $0.07 per share can be attributed to the net positive impact of credit spreads on the valuation of our portfolio. While a $0.02 reduction can be attributed to the impact of other realized and unrealized net losses, including portfolio company-specific events, partially offset by the gain on sale of certain investments.

If we were to pro forma the ending NAV per share of $16.09 for the variable supplemental dividend declared based on Q3 earnings that we will pay in Q4, the ending NAV per share becomes $16.03 for the quarter.

Moving to the income statement on slide 10, total investment income for the third quarter was $52.3 million, down $6.5 million from the previous quarter, primarily driven by elevated other fees during Q2.

This line item, which consists of prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, was $6.8 million compared to $15.7 million in the prior quarter.

Continuing with the income statement, interest and dividend income was $42 million, up $1.3 million from the prior quarter, given the predominantly quarter-end timing of new fundings in Q2 and the impact from an increase in LIBOR.

Other income was $3.6 million, up $1.2 million from the prior quarter, primarily driven by syndication fees that we earned in Q3. Net expenses for the quarter, excluding interest expense, were $15.2 million, down $1.1 million from the prior quarter, primarily due to lower incentive fees and lower other operating expenses, namely professional fees.

The decrease in this quarter's interest expense was due to the timing of the interest rate swap settlement on our 2022 convertible notes. Adjusted for this impact, our interest expense increased quarter over quarter due to an increase in the effective LIBOR rate on our floating-rate liabilities.

The weighted average interest rate on average debt outstanding, excluding amortization and fees and adjusted for the timing of the interest rate swap settlement, increased from 3.3% in Q2 to 3.5% in Q3, driven almost entirely by the increase in our effective LIBOR borrowing rate over the quarter.

Going forward, should market conditions support growth in the size of our portfolio, we would expect the weighted average spread on debt outstanding to decrease, given higher utilization of our lower-cost revolver funding.

Switching over to liquidity, just prior to quarter end, we expanded the size of our revolving credit facility from $945 million to $975 million through a commitment upsizing from an existing lender.

We continue to maintain significant liquidity, with $626 million of undrawn revolver capacity subject to regulatory constraints and remain match-funded from both an interest rate and duration perspective.

Regarding the ROEs of our business, year-to-date 2017, we have generate an annualized ROE based on net investment income of 12.9% with an average quarterly leverage ratio of 0.65x compared to 11.9% for the full year 2016, when we operated at an average leverage ratio of 0.80x. Our annualized ROE, based on net income for year-to-date 2017, was 11.8%.

The continued strength of our ROE, despite operating at lower financial leverage, highlights our ability to structure embedded economics into our portfolio to support shareholder returns in periods of high portfolio churn.

On a trailing 12-month basis, our quarterly weighted average portfolio yield at amortized cost was 10.6%, while our return on average assets was 13.2%. Expressed another way, year-to-date total investment income is up 14% year over year, while the average size of our portfolio remained flat over the same period.

Our ability to drive earnings growth absent growth in the size of the underlying portfolio means that we are generating significantly more portfolio economics today than we did a year ago. We believe this reflects our disciplined approach to growth as well as our focus on structuring additional income streams to optimize shareholder returns.

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, asset level yield, cost of funds, and financial leverage.

Using our year-end 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. Given the incremental ROE we have a generated year to date, we expect to see full-year results above the top end of that guidance range.

With that, I'd like to turn it over to Mike for concluding remarks..

Thank you, Ian. Q3 was another productive quarter as the team worked diligently to source and underwrite attractive risk-adjusted return opportunities in a highly competitive lending environment. Our gross originations for the first three quarters of 2017 have surpassed all of our full-year gross origination levels since inception.

As we look to the final quarter of 2017, we remain optimistic about our investment pipeline. We believe that our thematic approach to originations and investing have played a key role in our success to date.

By gaining insight into economic, political, and social trends in regions and sectors, we can develop proprietary views on how structural changes could lead to attractive investment opportunities or, in contrast, risks to our portfolio.

Supported by the deep sector expertise and relationships across the TSSP and TPG platform, we've developed and acted upon a number of themes, such as retail ABL and financing of pharma royalty streams, that have resulted in highly attractive returns across our portfolio.

In today's highly competitive and late-cycle environment, we believe increasing our commitment to thematic sourcing and investing will be a key differentiator in our ability to generate above-market returns. To this end, we have recently added to TSLX's originations team to allow for additional geographical and sector coverage.

Further, we continue to work at developing new themes as well as derivatives of existing themes. We believe that investing in our human capital is one of the many ways that we demonstrate our shareholder alignment and long-term orientation for the business. Our investment culture is premised upon the preservation of our shareholders' capital.

And to do so, we must continually challenge ourselves to evolve our investment strategy and processes, given our ever-changing and highly competitive environment.

Before opening the line to Q&A, as Josh shared with you on our last call, I will be stepping down as the co-CEO at the end of this year in order to spend more time with TSSP's London-based direct lending team.

It has been a privilege to co-lead TSLX along with my partner Josh over the last 6 1/2 years and I'm proud of the shareholder-oriented franchise that we, along with our strong leadership team, have built. There is tremendous momentum across our business today.

And I look forward to being a part of it as I continue my roles as a TSLX Board director and a member of the investment review committee. With that, thank you for your continued interest and for your time today. Operator, please open up the line for questions..

[Operator Instructions] Jonathan Bock, Wells Fargo..

Good morning and thank you for taking my questions. And again, congrats on another good quarter. One question I wanted to start relates to syndications or selldowns as well as corresponding fee income.

So just doing a quick year-over-year analysis, looking at the amount of selldowns that you had in 2016 of about $123 million versus today, syndication selldown of $142 million, I noticed a decent drop-off in other income, which includes both your amendment and syndication fees.

I was curious if syndication fees have compressed or are remaining stable in this current environment, given more competitive pressures.

I'd imagine that there could be some pressure on that line, but wanted to ask why you'd be doing the same amount of syndication volume, slightly higher, but the contribution on the syndication fee line seems to have fallen just a bit..

Thanks, Jon. It's Ian Simmonds. I will take this one. If I look at our syndication fee income in all of 2016, it was just over $0.06 per share. And if I look at it full year-to-date 2017, so it's only three quarters, it's just over $0.05 per share. So it's not tracking too dissimilar from what we experienced in 2016.

Just to give you a little bit more color, we had four separate transactions that we generated syndication fee income on in 2016, and year to date in 2017, we have also had four. So I am not sure there is a trend there.

Does that answer your question?.

Yes, no, that helps immensely. And then maybe staying on the syndication point….

Hey, Jonathan. I think one piece might be is that there is -- if you're calculating the total dollars of syndications versus fees, there has been more syndications to affiliated funds, which by order of the SEC has to go on a heads-up basis. So we can't skim affiliated funds.

That being said, having those affiliated funds allows us to create off-market transactions, given that we can provide size and certainty to our clients. So if you are looking at dollars per -- dollars generated per dollar syndicated, that might be a little bit of the disconnect..

Makes sense. And then, Josh, if you are looking at the syndications that you've done just this past quarter or maybe quarter prior, is there a breakout between what you would consider sole proprietary origination, a sole lead, versus -- and I'm going to use Qlik as an example, where it was part of a very exclusive club, amongst the best of the best.

But then you chose to syndicate a portion of that deal that you entered in the club with Ares and Golub. Do you have a breakout of your syndications between proprietary and/or I'm going to call it very exclusive club, just as proprietary as before. But you are doing it with a couple other folks in order to write a bigger check size to the sponsor..

We can go name by name, but it's generally a mix. For example, Frontline was an existing portfolio company of ours that was -- we were the sole lender to. And then that got upsized and it was part of that exclusive club. But it's a mix. And then another one this quarter was Vivial was a -- where we were the sole lender..

Got it, got it. And then --.

And that's syndication income..

If there's one theme that I would imagine we as well as our counterparts are -- the lower middle market is painful, as is junior debt. Now in light of just the competitive environment, you've been able to deploy quite a bit. And you are always very important about sizing your book to the opportunity set.

And just given the amount that you were able to put out today, how would you want investors to think about a good sizable new investment number, certainly above your $150 million average of quarterly growth, at a time when investors are looking at terrible underwriting by some and poor investments that are being put on the balance sheet.

How do you get them to balance a good amount of capital being put out at a time when we are finding it's uber-competitive, and in some cases, the really terrible underwriters have harmed NAV substantially?.

Yes. So look, we obviously have a track record of growing net asset value and I think a good track record of underwriting.

That being said, if you look at the new investments, a large portion of those or all those were in sectors we knew and a large portion of those were actually existing portfolio companies that traded to another financial buyer where we had the opportunity to participate in an upsize. So PayLease is PayLease II, Frontline is Frontline II.

Those were large commitments in the quarter. The other ones, for example Swift, Illuminate were in verticals that we knew very well and have invested in a long time. And then obviously 99 Cents and Staples were as well. So we are staying in our lanes.

And there's been a robust M&A market in our lanes or a need for capital, for example, in retail, but we are really staying in our lanes of what we do. And a lot of those were generated from our existing portfolio..

Makes sense. Then the last question I have just relates to the retail environment, where you have had such strong success. Josh, when we think of retailers going bankrupt and also your loan being backed by inventory, clearly there is a supply-and-demand issue.

To the extent that more tennis shoes or notepads or toys start to hit the market, can you give us a view on the amount of cushion that you have in terms of lending to some of this varying inventories. And the potential risk that those inventory values fall beneath the value of your loan.

Hasn't happened yet, not saying that it will, but what folks would be interested in is as more bankruptcies hit the market and you start to see more inventory get sold, it's possible that prices overall fall. Or not. I'm curious..

I think that's a little bit of a leap. So first of all, in generally speaking -- or not generally -- specifically speaking, our borrowing bases are dynamic in nature. So as turnover and inventory turnover slows, inventory appraisals get readjusted down, that is a dynamic process that happens.

The second piece is -- the second piece of that, I think the analysis is that the elasticity of demand is high as it relates to discounting. So the margin structure in retail inventory is a gross margin structure at still 50%. So when -- you can create a lot of demand from discounting.

I don't think you will see generally more liquidations, meaning that you will have pressure. What will create the actual pressure on liquidation sales is where you saw a little bit in Sears Canada, which is as retailers get stressed, they don't replenish the inventory.

And so the amount of -- you get adversely affected with what the inventory you have, but you kind of are able to dynamically manage that in a process and through appraisals as that is getting worked through. That being said, to be clear, we do think some of the larger retail ABL loans have not become attractive.

For example, we got taken out of our prepetition Toys "R" Us FILO. We did not participate in the debt for a variety of reasons, including structure and pricing and our view of that business model. And so we continue to be discerning as it relates to those opportunities, and for example, us not passing on the Toys "R" Us FILO DIP..

Got it. Thank you for taking my questions..

Rick Shane, JPMorgan..

Thanks for taking my questions. And Jon touched on a lot of it, but really two things related to the ABL DIP financing. Curious what you see as the barriers to entry there. When you talk about deploying $440 million at a 25% IRR, that is certainly going to attract some additional capital.

Like to talk about what you see your competitive advantages are there.

And then sort of to follow up on Jonathan's question and phrase slightly differently, if we think that this is mid-earnings in terms of the secular transition in retail and we move potentially from restructurings to more liquidations as we move through that secular trend, does that change the way you approach the space?.

we will put Jonathan in back of the queue on next earnings calls so that he doesn't steal your questions..

Hey, Josh, it's okay. I'm used to it. He asks great questions..

Okay, okay. Well, we will still do it. The first part of the question is look, we actually underwrite these, all of the liquidations versus reorg.

So when you look at what has happened and how we've been -- how these loans are being resolved, they have effectively been resolved through either liquidations or a takeout of our facility, which they are still in compliance -- they are still in formula on a liquidation value.

So A&P was a straight liquidation -- and I'm going through these off the top of my head. A&P was a -- Sports Authority was a straight liquidation. Aeropostale, half the stores were liquidated and we were effectively taken out through those proceeds.

Payless, half the stores or a portion of the stores were liquidated and then a traditional asset-based lender came in. And in Toys "R" Us, we were taken out through effectively a refi. So we really haven't been -- our thesis hasn't been supported by a reorg thesis in these businesses. They have really been supported by a liquidation thesis.

And I would expect that will continue to play out, given that the US is over-retailed on a brick-and-mortar side. And 50%, 55%, depending on what research you read, of American households are on Amazon Prime and that will continue to grow. So either software or Amazon is eating the world.

And so the good news is that will create more transitional capital need for the sector, which will be a big part in that. As it relates to barriers to entry, we actually have a dedicated team. You have to -- if you are going to do this well and do this in a discerning way, because we do pass on opportunities.

For example, we passed on -- your institution led the Toys "R" Us DIP FILO. We passed on that and -- but the barriers to entry is actually -- and we have a team located in Boston, which is where a whole bunch of the liquidators sit and a whole bunch of the traditional asset-based retail finance bank arms sit.

And so being close to them, being close to the liquidators, being close to the sponsors and the retail community provides us an edge. Along with the size of our capital and being able to provide. So I don't think there is anybody who's done -- there is a couple people who have been in the space.

But we're one of the surely top guys who have done a lot of this. We could provide certainty in size of capital. And quite frankly, we know how this stuff plays out. And we have deep embedded relationships not only with the sponsors, but with that community that allow us to have a discerning eye and to provide certainty. I don't know, Fishman.

Do you have anything to add?.

And the banks, right. We have a long-standing relationship with the primary banks that are the retail lenders. And all senior management here goes way back in an environment that was more asset-based-oriented.

So the DNA exists not only with the team in Boston, but with senior management here and with the relationships with the banks, and as Josh mentioned, with the liquidators, the appraisers. So it's really across the whole platform, having that knowledge base is -- you can call that a barrier to entry, I suppose..

Look, I would say this, which is this is -- you can go back to a history and even recent history and look at like RadioShack. The guys who don't know this business who think they can do it from the outside in will be mistaken.

And these are very process-intensive, people-intensive, human-capital-intensive, where you are managing a borrowing base, where you are blocking and tackling, where you are putting in reserves. Where you have to understand the landlord rules. You have to understand how gift certificates are treated state-by-state or gift cards.

So the people who don't understand the nuances of a borrowing base and what drives the liquidation models and the valuations will feel the pain. And my guess is it will attract capital, and some people will make mistakes and then will start again..

Got it, okay. That's very helpful. Thank you, guys..

Mickey Schleien, Ladenburg..

Thanks for taking my question. Josh, I clearly see the benefit from your focus on the lower middle market with your strong results on a very consistent basis. And Jon Bock alluded to the fact that other BDCs are definitely sort of throwing in the towel.

Those are the ones focused on larger companies and particularly doing financings for sponsored deals because they are just too competitive. So I have a couple of questions in relation to that.

Can you remind us what proportion of your portfolio includes private equity sponsors? And how have the companies in your portfolio, which are smaller than the ones that I am alluding to, performed in downward turns of the economy? And how are you avoiding being a price taker when there are so many multiple term sheets on the table?.

we want to be a value-added partner where we think we can add value through certainty because we understand in the underlying themes and unit economics of a business.

And then generally, I think what makes us very different is, as a credited investor is, and you look at the outcomes in our portfolio over the billions of dollars we invested in our loss rates is we are focused on companies who have secondary source of repayments.

We are not a cash flow lender where our recoveries or our prospects of a lender are directly correlated to the underlying cash flow of the business.

If that's retail ABLs, that's software, if that's royalty transactions where there is discrete sellable assets, we are a traditional -- we are classically trained credit investors versus leveraged finance and every dollar of EBITDA is created equal. Sorry for my (multiple speakers)..

That's very helpful, Josh. And if you could just give us a sense of how have these companies that you are lending to performed in previous downturns, given that most market observers think we are late in the credit cycle. Although I guess the jury is out on that..

Look, let's talk about late in the credit cycle and not late in the credit cycle. My view has evolved over time. And I think when you look at traditionally where cycles last seven, eight years, if you look at that metric, you would say that we are late. The reality of it is that what drives a credit cycle business cycle is traditionally inflation.

Inflation leads to a policy response, which is rising rates. Rising rates lead to a tightening environment, higher cost of capital, which leads to a business cycle. And you could debate we haven't seen a whole bunch of inflation. We had very much of a slow recovery versus a V-shaped recovery. So do I think -- we have a big distressed business.

And I would love to say that there is a cycle in late 2017 in 2018. I don't see it. That being said, the underlying portfolio companies that we have financed and the strategies have performed extremely well.

And quite frankly, we have been doing this for 20 years or 25 years and these themes that we picked are based on how they perform in a down cycle and the secondary source of repayment in a down cycle.

For example, retail ABL which, quite frankly on an idiosyncratic basis, retail is in a massive secular decline, even though generally the business cycle is very good. I don't know.

Fishy or Bo, you have anything to add?.

Certainly we've seen on software highly recurring revenue businesses that aren't capital-intensive and are more headcount-oriented from a cost perspective. They performed very well through the last downturn -- the last two downturns because the cost basis can be right-sized pretty readily. So those we've seen perform well through cycles.

And we focused in those areas that are less capital-intensive and less fixed cost-intensive and do perform well through the cycles..

I will make two other points, because I think this will put it all together, which is if you take a step back over the last 9 to 12 months, our balance sheet has shrunk. Just when you really take a step back and you look at it, we've shrunk.

When you look at the guys who have had trouble recently or the companies that have had trouble recently, their balance sheets have grown, net grown. And ours might in the future grow, but we are surely sticking to our lanes and we are trying to not -- we haven't grown substantially our middle-market practice. We are sticking to our lanes.

The last thing I would say is that you just have to be disciplined about what you do it and how you do it and have a long-term view about protecting your investors' capital. Because the management team and our other partners own 5.5% or 6% of stock. We're super aligned and we think about this franchise over decades, not over months..

That's really helpful, Josh. I appreciate your time this morning. Thanks..

David Miyazaki, Confluence Investment Management..

You know, it seems to me that your ability to lend where other people can't or won't, like you are in retail, creates these opportunities for outsized returns. And I apologize if you have already talked a little bit about your energy loan, but it seems like that could be an area where people are very reticent to go in and lend.

So could you describe that environment? And then also, one of the things that it seems to me could have protected lenders in the last downturn was hedging. So if you could talk a little bit about how you -- what hedging requirements are in place to protect your second means of recovery, that would be helpful..

Thanks, Dave. Good question. So I think we started -- and Lucy can talk to me about this.

I think we started foreshadowing us getting involved in the energy sector -- Lucy?.

In early 2016..

In early 2016. And so we had one rescue financing that was under a letter of intent, my guess is in 2016 sometime. That didn't go through and the company decided to file and reorg their balance sheet. But we think there's an opportunity there. Obviously, there's been -- the commodity prices haven't -- they have stabilized, but they haven't come back.

So there is a lot of overlevered balance sheets. Northern Oil is clearly one. And so my hope is that we will continue to do this where we are financing great assets, bad balance sheets, well protected on our collateral is our thesis.

Hedging is massively important and so we typically have a hedging requirement of 75% in year one, then 50% to 75% in the following years, and try to get three years of rolling hedges on.

Then we run a dynamic borrowing base where we calculate our collateral on a quarterly basis and effectively margin that collateral based on the current price deck, plus or minus the current market value of the hedges. And so we've done this well historically over time. Where we -- I think we are net positive in our upstream E&P loans.

Where we have got -- where we did get stung is when we own junior capital or an equity investment such as in MSR. So we think there's an opportunity. What you will find is, I think our total energy exposure will never probably be beyond 10% of our portfolio, given -- at the end of the day.

Even though you are hedging collateral, you do have commodity price risk or derivative of commodity price risk. And so I think that will be a portfolio constraint. And you will see us only invest in top of the capital structure where we have hedge collateral that we're effectively running a borrowing base to that protects us and not do junior stuff.

And so we hope there's an opportunity in it, but you will not see us overexposed from a portfolio concentration. And you will see us with a massive bias to top of the capital structure..

That's very helpful. So a couple of things.

The requirement for hedging, is that something that has become more lender-friendly? Or is it -- I mean, if you compare that back to a few years ago, was it hard to have that hedging requirement as part of your docs?.

So I think most definitely it's become more lender-friendly. I think there was always a hedging requirement. Management generally wants the commodity price risk and the volatility and lenders obviously don't. That, given the run you've had from $90 or $100 oil to $30 to $50, that surely -- that power is surely more in the lender's camp.

In addition to that, given that not all these balance sheets have been restructured and cash flow is king, it surely is more -- you are seeing those requirements more as well. So I think in energy sector, I think management teams have just realized that lenders are going to have more power as it relates to that term..

Very helpful. Thanks a lot, Josh..

Leslie Vandergrift, Raymond James..

Good morning. Thanks for taking my questions. Just a quick question. I know you mentioned the late timing of some things in second quarter.

What was the timing around originations versus repayments this quarter?.

So maybe the best way to look at that -- Ian can answer that -- is the average debt to equity ratio versus the ending debt to equity ratio for each quarter. And so that will give you a sense of actual timing and financial leverage in unit economics in our business. So --.

The other thing I would just add is, Leslie, we had a number of loans that actually closed on the last day of the quarter at the end of Q2. And so that's what we meant by that comment in our prepared remarks..

Got it. Okay. And then -- go ahead..

Average leverage was a little higher during Q3, but only marginally..

Than ending leverage..

That's right..

Okay. And then I know obviously you've gone through the prepayment on Toys "R" Us and Payless.

What were the fees for each on the call protection?.

So Toys, there was no call protection, although we did buy some Toys late at a discount that got taken out at par.

But I think Toys was callable at par, and then Payless, Ian?.

On Payless -- or actually PayLease, it was about $0.01. Frontline was really the more impactful one, which was a little over $0.03 for the quarter..

Got it. Okay.

And then after the payout of the supplemental this quarter, what's your spill?.

What's our spillover? Is that -- our estimate is $1.12..

Okay. And then -- I'm sorry. Go ahead..

Hey, Leslie, can we stop on that for a minute? Because I think it's -- look, I think when we put in a supplemental dividend program, I think in retrospect it's worked pretty well. We distributed an additional $0.19 over 3 quarters. And basically in that period, NAV has been flat to slightly growing. So I think it's worked pretty well.

In addition to that and more importantly is that that $0.19 is about $0.01 of savings as it relates to an excise tax. So right --.

Over the course of a year..

Over a course of a year. And so we've slowed the drag on the growth of the excise tax. So we have accelerated -- held NAV steady, accelerated capital, and taken away a drag on future earnings..

Perfect, thank you. And then the high prepayments -- I know we said it's going to moderate.

I mean, I guess the real question is what is moderate there? How -- is it fourth quarter still looking healthy and then moderate in 2018 or do you really expect it to drop off right now?.

I think the activity will be a little bit more moderated in Q4 and much less so in 2018..

Got it, perfect. Thank you for answering my questions this morning..

Terry Ma, Barclays..

Just want to follow-up on the ABL stuff again. So you guys have done pretty well with the 6 or 7 that you've done so far getting 20%-plus IRR.

Can you just give us a sense of what it would take to go wrong for one of your investments and for you to not realize your target return?.

So I think we've done 12 so far on retail ABL, and other ABL is more significant. So just to put numbers on it, there's I think been six or seven that's actually fully realized. What -- you always run the risk of fraud.

I mean, I think that's a key issue, which is -- and the way you mitigate that is by doing inventory testing and inventory counts and ABL audits, which are different than financial audits or different than quality of earnings. And so it's actually people counting inventory and calculating a concept of dilution on the receivables.

And so fraud is I think the top risk where somebody is -- where you are lending on inventory that is not there and there is ways to mitigate that. So I think that's predominantly a top risk.

The second risk on retail inventory is that in the way -- again, if you were listening to earlier, the way you guard against that is that as a retailer deteriorates, their inventory turns slow. And they become more capital constrained, they don't purchase new inventory, and so you are going to have a downward drift on recoveries.

So the way you do that is you get to a dynamic borrowing base where you get appraisals. And you put in reserves that allow you to change that. So the mix shift in the underlying inventory is the next biggest risk out of fraud. That being said, you are not lending 100% and the model can take some mix shift and you have a dynamic borrowing base.

And if you know what you are doing, you manage that through reserves as well. So mix shift should not -- given that you do have a margin of safety, shouldn't cause a loss. The big outlier to a loss would be an outright fraud.

Fishy or Bo, do you have anything to add?.

No, that's exactly right..

Okay got it. That's helpful. And then you guys mentioned in your prepared comments that you guys are working on new themes and other derivatives of existing themes.

Can you just give a sense of what you guys are actually working on?.

Are you asking us to give the market our secret sauce? No, we are reticent to talk about -- we spent about 50% of this call talking about retail, which doesn't feel great. But look, it's continued. You can see the themes. Educational software, payments. We have obviously been successful on the healthcare royalty side.

Energy, we have a fully built-out Houston office for the TSSP platform now. And so it's in those buckets..

Okay, got it. That's it for me. Thanks..

[Operator Instructions] Christopher Testa, National Securities..

Thanks for taking my questions. Most have been asked and answered. Just looking at obviously the opportunity set in retail ABL, just the impact of e-commerce, obviously, is big, as you guys have alluded to.

How big of a portion of the portfolio do you foresee this being if the current trajectory of e-commerce crushing the brick-and-mortar model was to continue?.

So it's hard to scale. That's the other thing is, quite frankly, given that it's shorter duration, I would -- it's been about 10% and I can't imagine it getting much more significant about that. Just because you have -- when you do another one, you have another one, you have it roll off or resolve.

So our current portfolio, quite frankly, is about $132 million. We've already realized on about $275 million of -- so it's shorter duration. So my guess is it's somewhere between 10% and 12%, 10% and 13%..

Okay, great. And just you had mentioned you did seven new originations and five existing.

I am just curious what the dollar breakdown is between new and existing commitments for the quarter?.

80%. So it's 80% on new, 20% on upsizes, although the new includes stuff that was in our existing portfolio, such as PayLease and Frontline. And so if you shift that, it might have been 50/50 or something like that. But it was mostly new deals. Some of those new deals were not redos. They were sold to a new financial sponsor.

There was a new financing that we later participated in..

Got it. And you guys have mentioned obviously the $500-million-plus of gross originations. And you said that you had $100 million you've syndicated or allocated to the other funds. Just curious if you could give us just a quick overview on the allocation policy.

And how you determine what is able to be syndicated out to a third party outside of the platform versus what's co-invested?.

Yes, so look, it's pretty clear in our exemptive relief order where TSL gets what it wants first. And then any -- so in the waterfall in our exemptive relief is TSL get what it wants first.

That's determined by a risk decision of what we want to hold or what we want to underwrite, given the risk on what we think is selling and what we think the -- and what our capital base is. So generally, we haven't take on underwriting positions to third parties above $100 million. And our holds range between $30 million and $70 million.

So -- and historically in general..

Got it. And obviously, you guys have done a great job preserving NAV and have always done right by shareholders.

But just curious if there is any inclination on behalf of the Board to implement a rolling lookback feature?.

Well, the Board just renewed our management contract. I think if you look at our fees, generally we are low on the cost curve. That has been a very good trade for our shareholders in the sense that they have not -- they have gotten more of the economic net profit, significantly more of the economic net profit compared to the rest of the sector.

And so there was a trade originally -- and let me -- I will put this in actual since we just did this analysis.

Since LTM 6/30, the -- when you look at the total economic profit across the sector, on average management -- to the manager either through G&A reimbursement, incentive fees or management fees, have been getting about 40% of the economic profit. We are at 33%. That is because of predominantly a lower fee structure.

And so there was a conscious trade made by original shareholders to trade, given that they thought we would be good at protecting NAV to trade a lower fee structure and have more of the economic net profit versus the lookback.

I think if people want to look back, we would -- I think the fair trade would be that we would raise our fees to market level, which I don't think people would want, given our ability to protect NAV..

Okay, those are fair points. Thanks for taking my questions..

Thank you. That concludes our question-and-answer session for today. I'd like to turn the conference back over to Josh Easterly for any closing comments..

Great. So thanks for people's time. We hope people have a great holiday season and -- which is coming up. Q4 obviously is our longer reporting cycle and so we will plan to talk to people in February if not before at conferences or generally in the community. But we wish people a Happy Thanksgiving and a happy holiday season.

And the management team is always available, and we will look forward to talking to people in February on our earnings call..

Thanks, everyone..

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..