May 17, 2021
[5 min Read]
Sixth Street Specialty Lending Inc. is a business development company based out of San Francisco, California. Sixth Street provides senior secured loans, mezzanine debt, non-control structured equity, and common equity with a focus on organic growth, acquisitions, market/product expansion, restructuring, recapitalizations, and refinancing.
Sixth Street seeks out mid-market cap companies ($50M-$1B) located in the USA in the following industries: business services, software/technology, healthcare, energy, consumer/retail, manufacturing, industrials, education, and specialty finance. Sixth street also looks for companies with an EBITDA between $10-250M (average EBITDA is $41M).
In total, Sixth Street has invested in 68 companies, with an average transaction size of $35M. Their portfolio of diversified investments has grown to over $50B AUM (March 2021).
Most of the debt that Sixth street invests into is not rated by any rating agencies, however if they were Sixth Street believes it would be rated at BBB (by Standard and Poor's) and would be classified as “junk debt”. This kind of debt offers a higher yield (return) to investors because there is a larger credit risk (risk of the company offering these bonds to go bankrupt and not be able to pay investors out) involved. However, Sixth street is able to make consistent returns on this debt as a result of them hedging against their debt (call protection).
Sixth Street is able to generate their revenues through interest income from the investments that they hold in their portfolio. Furthermore, they make income off of dividends, special dividends, capital gains, and other fees that are not as steady sources of income as their interest income.
Sixth street classifies their investments risk on a scale of 1 to 5. On their scale 1 means that there are no concerns about the underlying company's (who's bonds Sixth Street holds) financial performance or ability to meet bond payments, these investments are reviewed monthly. Alternatively, on their scale a 5 means that the underlying company is currently/expected to be defaulting on their bond payments, and are of poor financial health, these investments are reviewed bi-monthly. Only 3.6% of Sixth Streets portfolio is invested into debt/equities that are classified as a 3 or above on their riskiness scale.
Sixth Street has a TMM revenue of $315.16M, a TTM EBIT of $214.5M, a market cap of $1.58B and has a forward dividend of 7.36%.
Sixth Street has $2.4B in total assets, which translates into a net asset value per share of $16.47. This is 24.3% lower than the current share price and it would not make sense if the share price were to fall below this point as the value per share would be lower than the asset value per share.
The net income, asset value and distributions per share add up to a value of $18.99/share. This is 12.73% below what $TSLX is currently trading at and serves as a point of support, which may be observed in the “investment plan” section of this report.
Sixth Street has an annualized ROE on their Adjusted net investment income of 13.3%, and an annualized ROE on their adjusted net income of 22.1% for Q1 2021.
100% of Sixth Street's debt investments (49% of their portfolio) are at a floating rate, meaning it moves up and down with the performance of the financial markets. This floating rate has served them very well over the past year, however there is more risk with a floating rate, especially if the sentiment in the market turns negative.
EBIT growth rate:
I found the EBIT growth rate on Stockopedia, in which they estimated that it is 9.3%
Interest Expense Decrease Rate:
I used the annual decrease rate of Sixth Street's interest expense between 2016-2020, which came out to be an annual decrease of 14.97%.
I found Sixth Street's tax rate in one of their SEC filings. They reported that their tax rate was 21%.
I found Sixth Streets WACC on Tracktak, which provides information on some key metrics of companies that can be used when conducting a DCF model.
Some of Sixth Street's closest competitors can be found in the comparable analysis. These competitors are all based out of the USA and are of similar market cap, these companies include BlackRock TCP Capital Corp. ($TCPC), Pennant Park Floating Rate Capital ($PFLT). TriplePoint Venture Growth BDC Corp. ($TPVG), Fidus Investment Corp. ($FDUS), and Newtek Business Services Corp. ($NEWT).
Investment Plan and Valuation:
In order to value GCBC I used a combination of a DCF analysis and a comparable analysis.
The figures I used in this model and why I used them can be found above under the “valuation information” section of this report. With the being said, my DCF model arrived at an estimated fair value of $28.03/share, which implies an upside of 28.82%. To further investigate this valuation, I underwent a comparable analysis in an attempt to validate the figure achieved through the DCF model.
Comparable Analysis - P/S:
In this analysis I compared Sixth Street's price to sales ratio (P/S) to their publicly traded competitors listed above under the “competition” section. All of the comparable companies are based in the USA, provide similar services, and are of similar market caps. With that being said, the P/S comparable found that Sixth Street is currently undervalued, and the estimated fair value is $23.74/share, which implies a share price increase of 9.10%.
Comparable Analysis - P/E:
In this analysis I compared Sixth Street's price to earnings ratio (P/E) to their publicly traded competitors. The P/E analysis found that the fair value for $TSLX should be $28.63/share, which implies an upside of 31.58% This analysis confirms the results in the DCF and hints at these levels being more likely than the price achieved through the P/S comparable.
Any entrance into a position in $TSLX would be the best if bought between $21-22/share.
If the price dropped past this $21 level, I would exit my position and look for a re-entry at $18.99/share, and if this doesn't hold my last point of re-entry would be between $16.26-16.47/share.
However, if the stock reaches the $28.03 level, I will look to sell my shares and close out the position.