Sixth Street Specialty Lending, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EX-32 - Sixth Street Specialty Lending, Inc.	tslx-ex32_7.htm
EX-31.1 - EX-31.1 - Sixth Street Specialty Lending, Inc.	tslx-ex311_8.htm
EX-31.2 - EX-31.2 - Sixth Street Specialty Lending, Inc.	tslx-ex312_6.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission File Number 001-36364

TPG Specialty Lending, Inc.

(Exact name of registrant as specified in its charter)

Delaware	27-3380000
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2100 McKinney Avenue, Suite 1500, Dallas, TX	75201
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (469) 621-3001

Not applicable

Former name, former address and former fiscal year, if changed since last report.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	TSLX	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock, $.01 par value per share, outstanding at May 4, 2020 was 67,062,552.

TPG SPECIALTY LENDING, INC.

	INDEX	PAGE NO.

PART I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements	4

	Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019	4

	Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (Unaudited)	5

	Consolidated Schedules of Investments as of March 31, 2020 (Unaudited) and December 31, 2019	6

	Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2020 and 2019 (Unaudited)	19

	Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (Unaudited)	20

	Notes to Consolidated Financial Statements (Unaudited)	21

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64

Item 4.	Controls and Procedures	65

PART II.	OTHER INFORMATION	66

Item 1.	Legal Proceedings	66

Item 1A.	Risk Factors	66

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3.	Defaults Upon Senior Securities	71

Item 4.	Mine Safety Disclosures	71

Item 5.	Other Information	71

Item 6.	Exhibits	71

SIGNATURES		72

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict, that could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

In addition to factors previously identified elsewhere in the reports and other documents TPG Specialty Lending, Inc. has filed with the Securities and Exchange Commission, or SEC, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

•

an economic downturn, including the current and future economic effects of the COVID-19 pandemic, could impair our portfolio companies’ abilities to continue to operate, which could lead to the loss of some or all of our investments in those portfolio companies;

•

such an economic downturn could disproportionately impact the companies in which we have invested and others that we intend to target for investment, potentially causing us to experience a decrease in investment opportunities and diminished demand for capital from these companies;

•

such an economic downturn could also impact availability and pricing of our financing;

•

an inability to access the capital markets could impair our ability to raise capital and our investment activities; and

•

the risks, uncertainties and other factors we identify in the section entitled “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 19, 2020, and elsewhere in our filings with the SEC.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, some of those assumptions are based on the work of third parties and any of those assumptions could prove to be inaccurate; as a result, forward-looking statements based on those assumptions also could prove to be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. We do not undertake any obligation to update or revise any forward-looking statements or any other information contained herein, except as required by applicable law.

The “TSLX”, “TOP” and “TAO” marks are marks of Sixth Street. Sixth Street and TPG are no longer affiliates, and accordingly, TPG is not an affiliate of ours. The products and services referred to herein are managed exclusively by Sixth Street, which is entirely responsible for their nature and performance. The “TSL”, “TSL Europe”, “TSLE”, “TICP” and “TCS” marks are marks of TPG and are being used by Sixth Street under an exclusive license.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TPG Specialty Lending, Inc.

Consolidated Balance Sheets

(Amounts in thousands, except share and per share amounts)

(Unaudited)

	March 31,			December 31,
	2020			2019
Assets
Investments at fair value
Non-controlled, non-affiliated investments (amortized cost of $2,007,756 and $2,099,781, respectively)	$	1,963,091		$	2,147,876
Non-controlled, affiliated investments (amortized cost of $49,186 and $49,445, respectively)		48,484			50,136
Controlled, affiliated investments (amortized cost of $88,399 and $88,811, respectively)		33,997			47,916
Total investments at fair value (amortized cost of $2,145,341 and $2,238,037, respectively)		2,045,572			2,245,928
Cash and cash equivalents (restricted cash of $14,315 and $9,315, respectively)		19,765			14,143
Interest receivable		9,756			13,055
Prepaid expenses and other assets		6,624			7,805
Total Assets	$	2,081,717		$	2,280,931
Liabilities
Debt (net of deferred financing costs of $21,353 and $18,471, respectively)	$	980,158		$	1,094,467
Management fees payable to affiliate		8,165			8,234
Incentive fees payable to affiliate		7,140			7,161
Dividends payable		27,355			25,927
Other payables to affiliate		2,657			1,948
Other liabilities		19,506			23,897
Total Liabilities		1,044,981			1,161,634
Commitments and contingencies (Note 8)
Net Assets
Preferred stock, $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.01 par value; 400,000,000 shares authorized, 66,865,815 and 66,613,671 shares issued, respectively; and 66,569,771 and 66,524,591 shares outstanding, respectively		669			666
Additional paid-in capital		1,013,079			1,009,270
Treasury stock at cost; 296,044 and 89,080 shares held, respectively		(4,291	)		(1,359	)
Distributable earnings		27,279			110,720
Total Net Assets		1,036,736			1,119,297
Total Liabilities and Net Assets	$	2,081,717		$	2,280,931
Net Asset Value Per Share	$	15.57		$	16.83

The accompanying notes are an integral part of these consolidated financial statements.

TPG Specialty Lending, Inc.

Consolidated Statements of Operations

(Amounts in thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended			Three Months Ended
	March 31, 2020			March 31, 2019
Income
Investment income from non-controlled, non-affiliated investments:
Interest from investments	$	60,766		$	46,523
Dividend income		432		—
Other income		2,787			2,078
Total investment income from non-controlled, non-affiliated investments		63,985			48,601
Investment income from non-controlled, affiliated investments:
Interest from investments		1,236			2,411
Other income		19			31
Total investment income from non-controlled, affiliated investments		1,255			2,442
Investment income from controlled, affiliated investments:
Interest from investments		1,027			1,439
Other income		3			5
Total investment income from controlled, affiliated investments		1,030			1,444
Total Investment Income		66,270			52,487
Expenses
Interest		12,910			10,369
Management fees		8,165			6,622
Incentive fees		7,140			5,650
Professional fees		1,645			1,295
Directors’ fees		228			135
Other general and administrative		1,510			1,478
Total expenses		31,598			25,549
Management and incentive fees waived (Note 3)		—			—
Net Expenses		31,598			25,549
Net Investment Income Before Income Taxes		34,672			26,938
Income taxes, including excise taxes		1,010			300
Net Investment Income		33,662			26,638
Unrealized and Realized Gains (Losses)
Net change in unrealized gains (losses):
Non-controlled, non-affiliated investments		(92,759	)		12,813
Non-controlled, affiliated investments		(1,394	)		427
Controlled, affiliated investments		(13,507	)		(3,667	)
Translation of other assets and liabilities in foreign currencies		13,799			(1,432	)
Interest rate swaps		9,181			3,319
Total net change in unrealized gains (losses)		(84,680	)		11,460
Realized gains (losses):
Non-controlled, non-affiliated investments		75			180
Controlled, affiliated investments		(2,097	)		570
Foreign currency transactions		(59	)		(103	)
Total net realized gains (losses)		(2,081	)		647
Total Net Unrealized and Realized Gains (Losses)		(86,761	)		12,107
Increase (Decrease) in Net Assets Resulting from Operations	$	(53,099	)	$	38,745
Earnings (Loss) per common share—basic and diluted	$	(0.80	)	$	0.59
Weighted average shares of common stock outstanding—basic and diluted		66,656,280			65,595,441

The accompanying notes are an integral part of these consolidated financial statements.

TPG Specialty Lending, Inc.

Consolidated Schedule of Investments as of March 31, 2020

(Amounts in thousands, except share amounts)

(Unaudited)

Company ⁽¹⁾	Investment	Initial Acquisition Date	Reference Rate and Spread			Interest Rate			Amortized Cost ⁽²⁾⁽⁸⁾		Fair Value ⁽¹⁰⁾		Percentage of Net Assets
Debt Investments
Beverage, food and tobacco
AFS Technologies, Inc. ^(3)(5)(6)	First-lien loan ($45,266 par, due 10/2023)	10/16/2018		L + 6.25	%		7.75	%	$	44,745	$	44,021		4.3	%
Business services
Acceo Solutions, Inc.^(3)(4)(5)	First-lien loan (CAD 63,863 par, due 7/2023)	7/6/2018		C + 4.75	%		5.99	%		47,935	43,522 (CAD 61,947)			4.2	%
Alpha Midco, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($58,167 par, due 8/2025)	8/15/2019		L + 6.75	%		8.24	%		56,719		54,287		5.2	%
Dye & Durham Corp. ⁽³⁾⁽⁴⁾	First-lien loan (CAD 65,087 par, due 7/2024)	7/11/2019		C + 7.00	%		8.27	%		48,631	43,556 (CAD 61,995)			4.2	%
	First-lien revolving loan (CAD 3,150 par, due 7/2024)	7/11/2019		P + 6.00	%		8.50	%		2,275	2,096 (CAD 2,984)			0.2	%
Exela Receivables 1, LLC ⁽³⁾⁽⁵⁾	First-lien revolving loan ($40,000 par, due 1/2025)	1/10/2020		L + 4.75	%		6.39	%		39,021		43,600		4.2	%
Integration Appliance, Inc.⁽³⁾	First-lien loan ($71,500 par, due 8/2023)	8/13/2018		L + 7.25	%		9.43	%		70,697		69,355		6.7	%
	First-lien revolving loan ($2,619 par, due 8/2023)	8/13/2018		L + 7.25	%		8.54	%		2,593		2,540		0.2	%
Motus, LLC ⁽³⁾⁽⁵⁾	First-lien loan ($59,699 par, due 1/2024)	1/17/2018		L + 5.50	%		6.96	%		58,671		57,908		5.6	%
Netwrix Corp. and Concept Searching, Inc.⁽³⁾⁽⁵⁾	First-lien loan ($20,000 par, due 10/2024)	10/17/2019		L + 5.88	%		6.88	%		19,561		19,000		1.8	%
Nintex Global, Ltd.⁽³⁾⁽⁵⁾	First-lien loan ($74,034 par, due 4/2024)	3/30/2018		L + 6.25	%		7.25	%		72,728		72,739		7.0	%
										418,831		408,603		39.3	%
Chemicals
Vertellus Specialties, Inc. ⁽³⁾	Second-lien loan ($4,357 par, due 10/2021)	10/31/2016		L + 12.00	%		13.00	%		4,356		4,030		0.4	%
Communications
IntelePeer Holdings, Inc.	First-lien loan ($38,500 par, due 12/2024) ⁽³⁾	12/2/2019		L + 8.25	%		9.86	%		38,448		36,864		3.6	%
	Convertible note ($350 par, due 12/2020)	2/28/2020		8.00	%	8.00% (incl. 8.00% PIK)				308		304		0.0	%
										38,756		37,168		3.6	%
Education
Frontline Technologies Group, LLC ⁽³⁾	First-lien loan ($65,638 par, due 9/2023)	9/18/2017		L + 5.75	%		6.75	%		65,261		63,669		6.1	%
Illuminate Education, Inc.⁽³⁾⁽⁵⁾	First-lien loan ($63,863 par, due 8/2022)	8/25/2017		L + 7.25	%		8.25	%		63,134		61,627		5.9	%
										128,395		125,296		12.0	%
Financial services
AvidXchange, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($10,468 par, due 4/2024)	10/1/2019		L + 9.00	%		10.50	%		10,323		9,870		1.0	%
Bear OpCo, LLC ⁽³⁾⁽⁵⁾	First-lien loan ($17,413 par, due 10/2024)	10/10/2019		L + 5.00	%		6.00	%		16,957		16,324		1.6	%
BlueSnap, Inc. ⁽³⁾	First-lien loan ($35,000 par, due 10/2024)	10/25/2019		L + 7.00	%		8.00	%		34,350		33,162		3.2	%
	First-lien revolving loan ($2,500 par, due 10/2024)	10/25/2019		P + 6.00	%		9.25	%		2,454		2,369		0.2	%
Factor Systems, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($30,000 par, due 1/2025)	1/17/2020		L + 7.00	%		8.50	%		29,369		28,150		2.7	%

G Treasury SS, LLC ⁽³⁾⁽⁵⁾	First-lien loan ($30,113 par, due 4/2023)	4/9/2018	L + 8.25	%		10.03	%	29,779		29,511	2.9	%
GC Agile Holdings, Ltd. ⁽³⁾⁽⁴⁾	First-lien loan ($39,624 par, due 6/2025)	1/31/2019	L + 7.00	%		8.25	%	39,028		36,850	3.6	%
Kyriba Corp.⁽³⁾	First-lien loan ($13,006 par, due 4/2025)	4/9/2019	L + 9.00	%	10.50% (incl. 9.00% PIK)			12,692		12,560	1.2	%
	First-lien loan (EUR 7,743 par, due 4/2025)	4/9/2019	E + 9.00	%	9.00% (incl. 9.00% PIK)			8,455	7,643 (EUR 6,966)		0.7	%
	First-lien revolving loan ($1,411 par, due 4/2025)	4/9/2019	L + 7.25	%		8.75	%	1,374		1,363	0.1	%
	First-lien revolving loan (EUR 336 par, due 4/2025)	4/9/2019	E + 7.25	%		7.25	%	367	314 (EUR 287)		0.0	%
PayLease, LLC ⁽³⁾	First-lien loan ($64,163 par, due 7/2022)	7/28/2017	L + 7.25	%		8.25	%	63,458		64,323	6.2	%
	First-lien revolving loan ($2,000 par, due 7/2022)	7/28/2017	L + 7.25	%		8.25	%	1,969		2,008	0.2	%
PrimeRevenue, Inc. ⁽³⁾	First-lien loan ($21,440 par, due 12/2023)	12/31/2018	L + 8.50	%	10.00% (incl. 5.50% PIK)			21,188		21,232	2.1	%
Swift Gift, Ltd. ⁽³⁾⁽⁵⁾	First-lien loan ($27,964 par, due 1/2022)	7/31/2017	L + 6.50	%		7.50	%	27,638		28,523	2.8	%
								299,401		294,202	28.5	%
Healthcare
Caris Life Sciences, Ltd.	First-lien loan ($5,000 par, due 9/2023)	9/21/2018	11.30	%		11.30	%	4,863		5,000	0.5	%
	Convertible note ($2,551 par, due 9/2023)	9/21/2018	8.00	%	8.00% (incl. 8.00% PIK)			2,551		2,551	0.2	%
Clinicient, Inc.⁽³⁾	First-lien loan ($15,000 par, due 5/2024)	5/31/2019	L + 7.00	%		8.50	%	14,871		14,362	1.4	%
	First-lien revolving loan ($2,400 par, due 5/2024)	5/31/2019	L + 7.00	%		8.50	%	2,367		2,230	0.2	%
Integrated Practice Solutions, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($49,750 par, due 10/2024)	6/30/2017	L + 7.50	%		8.50	%	48,055		47,884	4.6	%
MedeAnalytics, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($40,496 par, due 9/2020)	9/30/2015	L + 7.00	%		8.45	%	40,351		40,091	3.9	%
Quantros, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($18,230 par, due 12/2020)	2/29/2016	L + 8.50	%		9.50	%	18,143		17,866	1.7	%
TherapeuticsMD, Inc. ⁽³⁾⁽⁴⁾	First-lien loan ($37,500 par, due 3/2024)	4/24/2019	L + 7.75	%		10.45	%	36,681		35,813	3.5	%
Valant Medical Solutions, Inc. ⁽³⁾	First-lien loan ($27,936 par, due 4/2024)	4/8/2019	L + 8.75	%		10.25	%	27,190		26,411	2.6	%
	First-lien revolving loan ($1,500 par, due 4/2024)	4/8/2019	L + 8.75	%		10.25	%	1,468		1,405	0.1	%
Vita Bidco, Inc.⁽³⁾⁽⁵⁾	First-lien loan ($21,773 par, due 2/2024)	2/11/2019	L + 6.50	%		7.50	%	21,264		21,337	2.1	%
								217,804		214,950	20.8	%
Hotel, gaming, and leisure
IRGSE Holding Corp. ⁽³⁾⁽⁷⁾	First-lien loan ($29,752 par, due 9/2021)	9/29/2015	L + 9.50	%	10.95% (incl. 5.00% PIK)			28,027		26,628	2.6	%
	First-lien revolving loan ($4,719 par, due 9/2021)	9/29/2015	L + 9.50	%	10.90% (incl. 5.00% PIK)			4,719		4,162	0.4	%
								32,746		30,790	3.0	%

Human resource support services
Absorb Software, Inc. ^(3)(4)(5)	First-lien loan ($34,750 par, due 5/2024)	7/31/2019	L + 6.50	%		7.50	%	34,071		32,752	3.2	%
ClearCompany, LLC ⁽³⁾	First-lien loan ($19,679 par, due 7/2023)	7/23/2018	L + 8.50	%	10.28% (incl. 2.50% PIK)			19,495		18,892	1.8	%
DaySmart Holdings, LLC. ⁽³⁾	First-lien loan ($30,499 par, due 10/2024)	10/1/2019	L + 7.25	%		8.75	%	29,742		26,082	2.5	%
	First-lien revolving loan ($3,000 par, due 10/2024)	10/1/2019	P + 6.25	%		9.50	%	2,921		2,538	0.2	%
PageUp People, Ltd. ⁽³⁾⁽⁴⁾	First-lien loan (AUD 51,441 par, due 12/2022)	1/11/2018	B + 7.25	%	8.50% (incl. 1.25% PIK)			39,437	30,382 (AUD 49,640)		2.9	%
	First-lien revolving loan (AUD 5,000 par, due 12/2022)	1/11/2018	B + 7.25	%		8.50	%	3,017	2,953 (AUD 4,825)		0.3	%
PayScale Holdings, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($39,850 par, due 5/2024)	5/3/2019	L + 7.00	%		8.00	%	38,913		37,712	3.6	%
Shaker International, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($22,331 par, due 5/2024)	5/15/2019	L + 7.00	%		8.50	%	21,848		21,326	2.1	%
								189,444		172,637	16.6	%
Insurance
Riskonnect, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($51,349 par, due 10/2023)	6/30/2017	L + 7.00	%		8.26	%	50,865		49,809	4.8	%
Vertafore, Inc. ^(3)(11)	First-lien loan ($718 par, due 7/2025)	3/23/2020	L + 3.25	%		4.24	%	562		630	0.1	%
								51,427		50,439	4.9	%
Internet services
Gainsight, Inc. ⁽⁹⁾	First-lien loan ($3,432 par, due 7/2025)	7/29/2019	13.00	%	13.00% (incl. 13.00% PIK)			3,370		3,289	0.3	%
Higher Logic, LLC⁽³⁾⁽⁵⁾	First-lien loan ($37,050 par, due 1/2022)	6/18/2018	L + 6.00	%		7.00	%	36,703		35,475	3.4	%
Lithium Technologies, LLC ⁽³⁾	First-lien loan ($54,700 par, due 10/2022)	10/3/2017	L + 8.00	%		9.00	%	53,953		51,474	5.0	%
Lucidworks, Inc. ⁽⁹⁾	First-lien loan ($12,232 par, due 7/2024)	7/31/2019	12.00	%	12.00% (incl. 7.00% PIK)			12,100		11,609	1.1	%
								106,126		101,847	9.8	%
Marketing Services
Acoustic, L.P.⁽³⁾	First-lien note ($33,000 par, due 6/2024)	12/17/2019	L + 7.00	%		8.50	%	32,265		31,268	3.0	%
Office products
USR Parent, Inc.⁽³⁾⁽⁵⁾	ABL FILO term loan ($11,000 par, due 9/2022)	9/12/2017	L + 7.75	%		9.37	%	10,857		10,862	1.0	%
Oil, gas and consumable fuels
Energy Alloys, LLC ⁽³⁾⁽⁵⁾	ABL FILO term loan ($20,250 par, due 8/2024)	8/28/2019	L + 6.25	%		8.25	%	19,530		19,369	1.9	%
MD America Energy, LLC ⁽³⁾	First-lien loan ($18,947 par, due 11/2023)	11/14/2018	L + 7.75	%		9.47	%	18,729		17,194	1.7	%
Mississippi Resources, LLC ^(3)(7)(16)	First-lien loan ($7,786 par, due 6/2020)	6/29/2018	L + 9.00	%		10.00	%	7,784		2,842	0.3	%
Verdad Resources Intermediate Holdings, LLC ⁽³⁾	First-lien loan ($42,222 par, due 10/2023)	4/10/2019	L + 7.50	%		9.50	%	41,313		39,847	3.8	%
								87,356		79,252	7.7	%
Pharmaceuticals
Nektar Therapeutics ^(4)(5)(9)	Secured note ($74,950 par, due 10/2020)	10/5/2015	7.75	%		7.75	%	74,830		75,137	7.2	%
Real Estate

ResMan, LLC ⁽³⁾	First-lien loan ($20,805 par, due 10/2024)	10/3/2019	L + 8.00	%		9.00	%	20,384	19,410	1.9	%
Retail and consumer products
99 Cents Only Stores LLC ⁽³⁾	ABL FILO term loan ($32,500 par, due 4/2021)	9/6/2017	L + 7.75	%		8.75	%	32,340	32,581	3.1	%
American Achievement, Corp. ⁽³⁾⁽⁵⁾	First-lien loan ($22,730 par, due 9/2022)	9/30/2015	L + 8.25	%	9.84% (incl. 3.25% PIK)			22,658	20,457	2.0	%
Forever 21, Inc. ⁽³⁾	ABL DIP term loan ($6,227 par, due 7/2020)	10/2/2019	L + 12.00	%		13.00	%	6,162	6,227	0.6	%
J.C. Penney Company, Inc. ⁽¹¹⁾	First-lien loan ($9,189 par, due 6/2023)⁽³⁾	6/5/2019	L + 4.25	%		5.86	%	7,712	3,676	0.4	%
	First-lien secured note ($12,338 par, due 7/2023)	6/5/2019	5.88	%		5.88	%	10,367	4,565	0.4	%
Maurices, Inc. ⁽³⁾⁽⁵⁾	ABL FILO term loan ($26,111 par, due 5/2024)	5/6/2019	L + 6.50	%		8.08	%	25,428	26,111	2.5	%
Moran Foods, LLC ⁽³⁾	ABL FILO term loan ($39,138 par, due 12/2021)	6/21/2019	P + 5.75	%		9.00	%	38,796	39,138	3.8	%
Neiman Marcus Group Ltd LLC ⁽³⁾	ABL FILO term loan ($72,000 par, due 7/2021)	9/11/2019	L + 6.00	%		7.50	%	71,225	71,100	6.9	%
	First-lien loan ($993 par, due 10/2023) ⁽¹¹⁾	9/12/2019	L + 6.00	%		7.50	%	796	417	0.0	%
								215,484	204,272	19.7	%
Transportation
Ferrellgas, L.P. ^(3)(4)(5)	First-lien loan ($85,159 par, due 5/2023)	5/4/2018	L + 5.75	%		7.34	%	84,075	88,901	8.6	%
Total Debt Investments								2,057,282	1,993,085	192.3	%

Equity and Other Investments
Beverage, food and tobacco
AFS Technologies, Inc. ^(6)(13)	Preferred Units (4,441,090 units)	10/16/2018						4,441	4,463	0.4	%
Business Services
Motus, LLC ⁽¹³⁾	Class A Units (1,262 units)	1/17/2018						1,262	2,527	0.2	%
	Class B Units (517,020 units)	1/17/2018						—	—	0.0	%
Nintex Global, Ltd. ⁽¹³⁾	Class A Shares (1,197 shares)	3/30/2018						1,197	1,580	0.2	%
	Class B Shares (398,557 shares)	3/30/2018						12	16	0.0	%
								2,471	4,123	0.4	%
Chemicals
Vertellus Specialties, Inc. ^(13)(14)	Common Units (3,386,630 units)	10/31/2016						4,575	2,516	0.2	%
Communications
IntelePeer Holdings, Inc. ^(13)(14)	70,000 Warrants	2/28/2020						46	46	0.0	%
Financial services
AvidXchange, Inc. ⁽¹⁴⁾	Preferred Shares (293,232 shares)	10/1/2019						14,854	14,260	1.4	%
Oxford Square Capital Corp. ^(4)(12)	Common Shares (1,059 shares)	8/5/2015						7	3	0.0	%
Swift Gift, Ltd. ⁽¹³⁾	Common Shares (35,000 shares)	7/31/2017						3,500	9,310	0.9	%
								18,361	23,573	2.3	%
Healthcare
Caris Life Sciences, Ltd. ⁽¹³⁾	633,376 Warrants	9/21/2018						192	192	0.0	%
Quantros, Inc. ^(13)(14)	4,685,068 Warrants	10/7/2019						139	139	0.0	%
Valant Medical Solutions, Inc. ^(13)(14)(15)	954,478 Warrants	4/8/2019						281	190	0.0	%
Vita Topco, Inc. ^(13)(15)	Common Shares (1,000 shares)	2/11/2019						1,000	2,297	0.2	%
								1,612	2,818	0.2	%
Hotel, gaming, and leisure
IRGSE Holding Corp. ^(7)(13)	Class A Units (31,690,171 units) ⁽¹⁴⁾	12/21/2018						21,836	317	0.0	%
	Class C-1 Units (8,800,000 units)	12/21/2018						100	48	0.0	%
								21,936	365	0.0	%

Human resource support services
ClearCompany, LLC ^(13)(15)	Class A Units (44,944 units)	8/24/2018		2,014		1,994	0.2	%
DaySmart Holdings, LLC. ^(13)(14)(15)	Class A Units (125,810 units)	10/1/2019		1,000		785	0.1	%
				3,014		2,779	0.3	%
Insurance
Riskonnect, Inc. ⁽¹³⁾	Common Shares Class A (1,020 units)	6/30/2017		1,020		1,193	0.1	%
	Common Shares Class B (987,929 units)	6/30/2017		10		12	0.0	%
				1,030		1,205	0.1	%
Internet Services
Lucidworks, Inc. ^(13)(14)	Series F Preferred Shares (199,054 shares)	8/2/2019		800		742	0.1	%
Marketing services
Validity, Inc. ⁽¹³⁾	Series A Preferred Shares (3,840,000 shares)	5/31/2018		3,840		9,857	1.0	%
Oil, gas and consumable fuels
Mississippi Resources, LLC ^(7)(13)	Class A-0 Member Units (1,000 units) ⁽¹⁴⁾	12/12/2019		6,693		—	0.0	%
	Class A-1 Member Units (1,360 units)	5/3/2017		10,366		—	0.0	%
	Class A-2 Member Units (933 units)	6/4/2014		8,874		—	0.0	%
				25,933		—	0.0	%
Total Equity and Other Investments				88,059		52,487	5.0	%
Total Investments			$	2,145,341	$	2,045,572	197.3	%

	Interest Rate Swaps as of March 31, 2020
	Company Receives	Company Pays	Maturity Date	Notional Amount		Fair Market Value			Upfront Payments / Receipts		Change in Unrealized Gains / (Losses)
Interest rate swap ^(a)	L	1.97%	6/25/2020	$	91,500	$	(177	)	$	—	$	(102	)
Interest rate swap ^(a)	L	1.47%	7/30/2021		11,700		(155	)		—		(193	)
Interest rate swap ^(a)	L	1.36%	7/29/2022		3,200		(68	)		—		(92	)
Interest rate swap ^(a)	4.50%	L + 2.37%	8/1/2022		115,000		4,371			—		3,150
Interest rate swap ^(a)	4.50%	L + 1.59%	8/1/2022		50,000		2,824			—		1,291
Interest rate swap ^(a)	4.50%	L + 1.60%	8/1/2022		7,500		422			—		194
Interest rate swap ^(a)	4.50%	L + 1.99%	1/22/2023		150,000		8,495			—		4,933
Total					428,900		15,712			—		9,181

Interest rate swap^(a)(b)	3.88%	L + 2.25%	11/1/2024		300,000		15,010			—		16,797
Interest rate swap^(a)(b)	3.88%	L + 2.46%	11/1/2024		50,000		2,019			—		2,019
Total					350,000		17,029			—		18,816
Cash collateral					—		(29,821	)		—		—
Total derivatives				$	778,900	$	2,920		$	—	$	27,997

(a)

Contains a variable rate structure. Bears interest at a rate determined by three-month LIBOR.

(b)

Instrument is used in a hedge accounting relationship. The associated change in fair value is recorded along with the change in fair value of the hedged item within interest expense.

(1)	Certain portfolio company investments are subject to contractual restrictions on sales.

(2)	The amortized cost represents the original cost adjusted for the amortization of discounts and premiums, as applicable, on debt investments using the effective interest method.

(3)

Investment contains a variable rate structure, subject to an interest rate floor. Variable rate investments bear interest at a rate that may be determined by reference to either London Interbank Offered Rate (“LIBOR” or “L”) (which can include one-, two-, three- or six-month LIBOR), Euro Interbank Offer Rate (“Euribor” or “E”) (which can include one-, two-, three- or six-month Euribor), Canadian Dollar Offered Rate (“CDOR” or “C”), Bank Bill Swap Bid Rate (“BBSY” or “B”) or an alternate base rate (which can include the Federal Funds Effective Rate, the Toronto-Dominion Bank rate, or the Prime Rate or “P”), at the borrower’s option, which reset periodically based on the terms of the credit agreement. For investments with multiple interest rate contracts, the interest rate shown is the weighted average interest rate in effect at March 31, 2020.

(4)

This portfolio company is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of total assets. Non-qualifying assets represented 18.8% of total assets as of March 31, 2020.

(5)

In addition to the interest earned based on the stated interest rate of this investment, which is the amount reflected in this schedule, the Company may be entitled to receive additional interest as a result of an arrangement with other members in the syndicate to the extent an investment has been allocated to “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any amounts due thereunder and the Company holds the “last out” tranche.

(6)

Under the 1940 Act, the Company is deemed to be an “Affiliated Person” of, as defined in the 1940 Act, this portfolio company, as the Company owns more than 5% of the portfolio company’s outstanding voting securities. Transactions during the three months ended March 31, 2020 in which the Company was an Affiliated Person of the portfolio company are as follows:

Non-controlled, Affiliated Investments during the three months ended March 31, 2020

Company

Fair

Value at

December 31,

2019

Gross

Additions (a)

Gross

Reductions (b)

Net Change

In Unrealized

Gain/(Loss)

Realized

Gain/(Losses)

Transfers

Fair

Value at

March 31,

2020

Other

Income

Interest

Income

AFS Technologies, Inc.

50,136

(293

)

(1,394

)

—

48,484

1,236

Total

50,136

(293

)

(1,394

)

—

48,484

1,236

(a)

Gross additions include increases in the cost basis of investments resulting from new investments, payment-in-kind interest or dividends, the amortization of any unearned income or discounts on debt investments, as applicable.

(b)

Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, and the amortization of any premiums on debt investments, as applicable. When an investment is placed on non-accrual status, any cash flows received by the Company may be applied to the outstanding principal balance.

(7)

Under the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and “Control,” as such terms are defined in the 1940 Act, this portfolio company, as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Transactions during the three months ended March 31, 2020 in which the Company was an Affiliated Person of and was deemed to Control a portfolio company are as follows:

Controlled, Affiliated Investments during the three months ended March 31, 2020

Company	Fair Value at December 31, 2019		Gross Additions (a)		Gross Reductions (b)			Net Change In Unrealized Gain/(Loss)			Realized Gain/(Losses)			Transfers		Fair Value at March 31, 2020		Other Income		Interest Income
IRGSE Holding Corp.	$	34,812	$	1,899	$	—		$	(3,459	)	$	(2,097	)	$	—	$	31,155	$	3	$	1,027
Mississippi Resources, LLC		13,104	—			(214	)		(10,048	)	—			—			2,842	—		—
Total	$	47,916	$	1,899	$	(214	)	$	(13,507	)	$	(2,097	)	$	—	$	33,997	$	3	$	1,027

(a)

(b)

(8)	As of March 31, 2020, the estimated cost basis of investments for U.S. federal tax purposes was $2,143,424, resulting in estimated gross unrealized gains and losses of $81,191 and $150,959, respectively.

(9)	These investments contain a fixed rate structure. The Company entered into an interest rate swap agreement to swap to a floating rate. Refer to Note 5 for further information related to the Company’s interest rate swaps on investments.

(10)

In accordance with Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements (“ASC 820”), unless otherwise indicated, the fair values of all investments were determined using significant unobservable inputs and are considered Level 3 investments. See Note 6 for further information related to investments at fair value.

(11)	This investment is valued using observable inputs and is considered a Level 2 investment. See Note 6 for further information related to investments at fair value.

(12)	This investment is valued using observable inputs and is considered a Level 1 investment. See Note 6 for further information related to investments at fair value.

(13)	This equity investment is non-income producing.

(14)

All or a portion of this security was acquired in a transaction exempt from registration under the Securities Act of 1933, and may be deemed to be “restricted securities” under the Securities Act. As of March 31, 2020, the aggregate fair value of these securities is $16,732, or 1.6% of the Company’s net assets.

(15)	Ownership of equity investments may occur through a holding company or partnership.

(16)	Investment is on non-accrual status as of March 31, 2020.

The accompanying notes are an integral part of these consolidated financial statements.

TPG Specialty Lending, Inc.

Consolidated Schedule of Investments as of December 31, 2019

(Amounts in thousands, except share amounts)

Company ⁽¹⁾	Investment	Initial Acquisition Date	Reference Rate and Spread			Interest Rate			Amortized Cost ⁽²⁾⁽⁸⁾		Fair Value ⁽¹⁰⁾		Percentage of Net Assets
Debt Investments
Beverage, food and tobacco
AFS Technologies, Inc. ^(3)(5)(6)	First-lien loan ($45,559 par, due 10/2023)	10/16/2018		L + 6.25	%		8.05	%	$	45,004	$	45,673		4.1	%
Business services
Acceo Solutions, Inc.^(3)(4)(5)	First-lien loan (CAD 64,025 par, due 7/2023)	7/6/2018		C + 4.75	%		6.83	%		48,001	49,497 (CAD 64,185)			4.4	%
Alpha Midco, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($45,296 par, due 8/2025)	8/15/2019		L + 6.75	%		8.75	%		43,921		44,061		3.9	%
Dye & Durham Corp. ⁽³⁾⁽⁴⁾	First-lien loan (CAD 65,669 par, due 7/2024)	7/11/2019		C + 7.00	%		9.03	%		49,015	49,628 (CAD 64,355)			4.4	%
	First-lien revolving loan (CAD 1,750 par, due 7/2024)	7/11/2019		P + 6.00	%		10.00	%		1,269	1,296 (CAD 1,680)			0.1	%
Integration Appliance, Inc.⁽³⁾	First-lien loan ($71,500 par, due 8/2023)	8/13/2018		L + 7.25	%		9.43	%		70,619		71,685		6.4	%
Motus, LLC ⁽³⁾⁽⁵⁾	First-lien loan ($59,853 par, due 1/2024)	1/17/2018		L + 5.50	%		7.45	%		58,764		60,451		5.4	%
Netwrix Corp. and Concept Searching, Inc.⁽³⁾⁽⁵⁾	First-lien loan ($20,000 par, due 10/2024)	10/17/2019		L + 5.88	%		7.67	%		19,541		19,650		1.8	%
Nintex Global, Ltd.⁽³⁾⁽⁵⁾	First-lien loan ($74,223 par, due 4/2024)	3/30/2018		L + 6.25	%		8.05	%		72,844		75,151		6.7	%
										363,974		371,419		33.1	%
Chemicals
Vertellus Specialties, Inc. ⁽³⁾	Second-lien loan ($4,147 par, due 10/2021)	10/31/2016		L + 12.00	%		13.63	%		4,147		4,147		0.4	%
Communications
IntelePeer Holdings, Inc. ⁽³⁾	First-lien loan ($35,000 par, due 12/2024)	12/2/2019		L + 8.00	%		9.91	%		35,000		34,711		3.1	%
Education
Curriculum Associates, LLC ⁽³⁾⁽⁵⁾	First-lien loan ($75,000 par, due 9/2025)	2/28/2018		L + 5.50	%		7.30	%		72,055		77,438		6.9	%
Frontline Technologies Group, LLC ⁽³⁾	First-lien loan ($65,798 par, due 9/2023)	9/18/2017		L + 5.75	%		7.55	%		65,395		65,963		5.9	%
Illuminate Education, Inc.⁽³⁾⁽⁵⁾	First-lien loan ($64,025 par, due 8/2022)	8/25/2017		L + 7.25	%		9.05	%		63,227		63,545		5.7	%
										200,677		206,946		18.5	%
Electronics
APX Group, Inc. ⁽¹¹⁾	Secured note ($1,000 par, due 12/2022)	5/31/2019		7.88	%		7.88	%		938		1,009		0.1	%
Financial services
AppStar Financial, LLC ⁽³⁾	First-lien loan ($15,855 par, due 8/2020)	8/18/2015		L + 7.50	%		9.30	%		15,794		15,944		1.4	%
AvidXchange, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($10,350 par, due 4/2024)	10/1/2019		L + 9.00	%		11.00	%		10,195		10,236		0.9	%
Bear OpCo, LLC ⁽³⁾⁽⁵⁾	First-lien loan ($17,456 par, due 10/2024)	10/10/2019		L + 5.00	%		6.80	%		16,978		17,063		1.5	%
BlueSnap, Inc. ⁽³⁾	First-lien loan ($35,000 par, due 10/2024)	10/25/2019		L + 7.00	%		8.80	%		34,273		34,531		3.1	%
G Treasury SS, LLC ⁽³⁾⁽⁵⁾	First-lien loan ($30,000 par, due 4/2023)	4/9/2018		L + 8.25	%		10.03	%		29,643		30,000		2.7	%
GC Agile Holdings, Ltd. ⁽³⁾⁽⁴⁾	First-lien loan ($39,724 par, due 6/2025)	1/31/2019		L + 7.00	%		8.95	%		39,099		39,128		3.5	%
Kyriba Corp.⁽³⁾	First-lien loan ($12,717 par, due 4/2025)	4/9/2019		L + 9.00	%	10.94% (incl. 9.00% PIK)				12,391		12,866		1.1	%

	First-lien loan (EUR 7,571 par, due 4/2025)	4/9/2019	E + 9.00	%	9.00% (incl. 9.00% PIK)			8,258	7,759 (EUR 6,912)		0.7	%
	First-lien revolving loan ($427 par, due 4/2025)	4/9/2019	L + 7.25	%		9.17	%	384		536	0.0	%
	First-lien revolving loan (EUR 183 par, due 4/2025)	4/9/2019	E + 7.25	%		7.25	%	197	60 (EUR 54)		0.0	%
PayLease, LLC ⁽³⁾	First-lien loan ($64,327 par, due 7/2022)	7/28/2017	L + 7.25	%		9.05	%	63,518		65,511	5.9	%
PrimeRevenue, Inc. ⁽³⁾	First-lien loan ($21,144 par, due 12/2023)	12/31/2018	L + 8.50	%	10.30% (incl. 5.50% PIK)			20,877		21,213	1.9	%
Swift Gift, Ltd. ⁽³⁾⁽⁵⁾	First-lien loan ($28,146 par, due 1/2022)	7/31/2017	L + 6.50	%		8.31	%	27,776		28,849	2.6	%
								279,383		283,696	25.3	%
Healthcare
Caris Life Sciences, Ltd.	First-lien loan ($5,000 par, due 9/2023)	9/21/2018	11.30	%		11.30	%	4,855		4,956	0.4	%
	Convertible note ($2,500 par, due 9/2023)	9/21/2018	8.00	%		8.00	%	2,500		2,550	0.2	%
Clinicient, Inc.⁽³⁾	First-lien loan ($15,000 par, due 5/2024)	5/31/2019	L + 7.00	%		8.94	%	14,829		14,858	1.3	%
Integrated Practice Solutions, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($49,875 par, due 10/2024)	6/30/2017	L + 7.50	%		9.30	%	48,104		49,875	4.5	%
MedeAnalytics, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($40,773 par, due 9/2020)	9/30/2015	L + 7.50	%		9.30	%	40,556		40,875	3.7	%
Quantros, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($18,444 par, due 12/2020)	2/29/2016	L + 8.50	%		10.41	%	18,326		18,444	1.6	%
TherapeuticsMD, Inc. ⁽³⁾⁽⁴⁾	First-lien loan ($30,000 par, due 3/2024)	4/24/2019	L + 7.75	%		10.45	%	29,333		29,100	2.6	%
Valant Medical Solutions, Inc. ⁽³⁾	First-lien loan ($27,936 par, due 4/2024)	4/8/2019	L + 8.75	%		10.55	%	27,117		27,372	2.4	%
Vita Bidco, Inc.⁽³⁾⁽⁵⁾	First-lien loan ($21,773 par, due 2/2024)	2/11/2019	L + 6.50	%		8.30	%	21,237		21,773	1.9	%
								206,857		209,803	18.6	%
Hotel, gaming, and leisure
IRGSE Holding Corp. ⁽³⁾⁽⁷⁾	First-lien loan ($31,600 par, due 9/2021)	9/29/2015	L + 9.50	%	11.44% (incl. 5.00% PIK)			29,746		31,047	2.8	%
	First-lien revolving loan ($3,221 par, due 9/2021)	9/29/2015	L + 9.50	%	11.44% (incl. 5.00% PIK)			3,221		3,128	0.3	%
								32,967		34,175	3.1	%
Human resource support services
Absorb Software, Inc. ^(3)(4)(5)	First-lien loan ($34,837 par, due 5/2024)	7/31/2019	L + 6.50	%		8.30	%	34,122		34,228	3.1	%
ClearCompany, LLC ⁽³⁾	First-lien loan ($19,192 par, due 7/2023)	7/23/2018	L + 8.50	%	10.34% (incl. 2.50% PIK)			18,993		19,140	1.7	%
DaySmart Holdings, LLC. ⁽³⁾	First-lien loan ($30,247 par, due 10/2024)	10/1/2019	L + 7.25	%		9.05	%	29,370		29,456	2.6	%
PageUp People, Ltd. ⁽³⁾⁽⁴⁾	First-lien loan (AUD 51,401 par, due 12/2022)	1/11/2018	B + 7.25	%	8.50% (incl. 1.25% PIK)			39,391	36,042 (AUD 51,273)		3.2	%
	First-lien revolving loan (AUD 1,000 par, due 12/2022)	1/11/2018	B + 7.25	%		8.50	%	714	694 (AUD 988)		0.1	%
PayScale Holdings, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($39,900 par, due 5/2024)	5/3/2019	L + 7.00	%		8.80	%	38,914		39,187	3.5	%
Shaker International, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($22,388 par, due 5/2024)	5/15/2019	L + 7.00	%		8.94	%	21,879		21,940	2.0	%
								183,383		180,687	16.2	%
Insurance
Riskonnect, Inc. ⁽³⁾⁽⁵⁾	First-lien loan ($49,813 par, due 10/2023)	6/30/2017	L + 7.00	%		8.95	%	49,346		50,186	4.5	%

Internet services

Gainsight, Inc. ⁽⁹⁾	First-lien loan ($3,322 par, due 7/2025)	7/29/2019	13.00	%	13.00% (incl. 13.00% PIK)			3,255	3,284	0.3	%
Higher Logic, LLC⁽³⁾⁽⁵⁾	First-lien loan ($37,430 par, due 1/2022)	6/18/2018	L + 6.00	%		7.80	%	37,034	37,243	3.3	%
Lithium Technologies, LLC ⁽³⁾	First-lien loan ($54,700 par, due 10/2022)	10/3/2017	L + 8.00	%		10.04	%	53,888	53,967	4.8	%
Lucidworks, Inc. ⁽⁹⁾	First-lien loan ($12,018 par, due 7/2024)	7/31/2019	12.00	%	12.00% (incl. 7.00% PIK)			11,879	11,941	1.1	%
								106,056	106,435	9.5	%
Marketing Services
Acoustic, L.P.⁽³⁾	First-lien note ($33,000 par, due 6/2024)	12/17/2019	L + 7.00	%		8.80	%	32,230	32,175	2.9	%
Office products
USR Parent, Inc.⁽³⁾⁽⁵⁾	ABL FILO term loan ($11,500 par, due 9/2022)	9/12/2017	L + 7.75	%		9.45	%	11,338	11,701	1.0	%
Oil, gas and consumable fuels
Energy Alloys, LLC ⁽³⁾⁽⁵⁾	ABL FILO term loan ($22,000 par, due 8/2024)	8/28/2019	L + 6.25	%		8.25	%	21,171	21,260	1.9	%
MD America Energy, LLC ⁽³⁾	First-lien loan ($19,069 par, due 11/2023)	11/14/2018	L + 7.75	%		9.67	%	18,836	18,640	1.7	%
Mississippi Resources, LLC ⁽³⁾⁽⁷⁾	First-lien loan ($8,000 par, due 6/2020)	6/29/2018	L + 9.00	%		10.80	%	7,998	8,000	0.7	%
Verdad Resources Intermediate Holdings, LLC ⁽³⁾	First-lien loan ($42,222 par, due 10/2023)	4/10/2019	L + 7.50	%		9.50	%	41,257	41,347	3.7	%
								89,262	89,247	8.0	%
Pharmaceuticals
Nektar Therapeutics ^(4)(5)(9)	Secured note ($74,950 par, due 10/2020)	10/5/2015	7.75	%		7.75	%	74,774	76,074	6.8	%
Real Estate
ResMan, LLC ⁽³⁾	First-lien loan ($20,648 par, due 10/2024)	10/3/2019	L + 8.00	%		9.94	%	20,208	20,303	1.8	%
Retail and consumer products
99 Cents Only Stores LLC ⁽³⁾	ABL FILO term loan ($32,500 par, due 4/2021)	9/6/2017	L + 7.75	%		9.64	%	32,303	32,581	2.9	%
American Achievement, Corp. ⁽³⁾⁽⁵⁾	First-lien loan ($22,619 par, due 9/2022)	9/30/2015	L + 8.25	%		9.95	%	22,540	22,167	2.0	%
Forever 21, Inc. ⁽³⁾	ABL DIP term loan ($50,000 par, due 7/2020)	10/2/2019	L + 12.00	%		13.81	%	48,970	48,500	4.3	%
J.C. Penney Company, Inc. ^(4)(11)	First-lien loan ($6,201 par, due 6/2023)⁽³⁾	6/5/2019	L + 4.25	%		6.16	%	5,358	5,451	0.5	%
	First-lien secured note ($11,559 par, due 7/2023)	6/5/2019	5.88	%		5.88	%	9,761	9,911	0.9	%
Maurices, Inc. ⁽³⁾⁽⁵⁾	ABL FILO term loan ($27,778 par, due 5/2024)	5/6/2019	L + 6.50	%		8.21	%	27,014	28,958	2.6	%
Moran Foods, LLC ⁽³⁾	ABL FILO term loan ($39,138 par, due 12/2021)	6/21/2019	L + 6.75	%		8.69	%	38,750	39,138	3.5	%
Neiman Marcus Group Ltd LLC ⁽³⁾	ABL FILO term loan ($72,000 par, due 7/2021)	9/11/2019	L + 6.00	%		7.89	%	71,086	71,100	6.4	%
	First-lien loan ($996 par, due 10/2023) ⁽¹¹⁾	9/12/2019	L + 6.00	%		7.71	%	799	819	0.1	%
Transform SR Holdings, LLC ⁽³⁾	ABL FILO term loan ($75,000 par, due 2/2024)	2/11/2019	L + 7.25	%		9.18	%	74,359	75,750	6.8	%
								330,940	334,375	30.0	%
Transportation
Ferrellgas, L.P. ^(3)(4)(5)	First-lien loan ($85,159 par, due 5/2023)	5/4/2018	L + 5.75	%		7.45	%	83,994	90,053	8.0	%
Total Debt Investments								2,150,478	2,182,815	195.0	%

Equity and Other Investments
Beverage, food and tobacco
AFS Technologies, Inc. ^(6)(13)	Preferred Units (4,441,090 units)	10/16/2018						4,441	4,463	0.4	%
Business Services

Motus, LLC ⁽¹³⁾	Class A Units (1,262 units)	1/17/2018		1,262		2,738	0.2	%
	Class B Units (517,020 units)	1/17/2018		—		—	0.0	%
Nintex Global, Ltd. ⁽¹³⁾	Class A Shares (1,197 shares)	3/30/2018		1,197		1,939	0.2	%
	Class B Shares (398,557 shares)	3/30/2018		12		20	0.0	%
				2,471		4,697	0.4	%
Chemicals
Vertellus Specialties, Inc. ^(13)(14)	Common Units (3,386,630 units)	10/31/2016		4,575		3,614	0.3	%
Financial services
AvidXchange, Inc. ⁽¹⁴⁾	Preferred Shares (293,232 shares)	10/1/2019		14,423		14,423	1.3	%
Oxford Square Capital Corp. ^(4)(12)	Common Shares (1,059 shares)	8/5/2015		7		6	0.0	%
Swift Gift, Ltd. ⁽¹³⁾	Common Shares (35,000 shares)	7/31/2017		3,500		10,255	0.9	%
				17,930		24,684	2.2	%
Healthcare
Caris Life Sciences, Ltd. ⁽¹³⁾	633,376 Warrants	9/21/2018		192		192	0.0	%
Quantros, Inc. ^(13)(14)	4,685,068 Warrants	10/7/2019		139		139	0.0	%
Valant Medical Solutions, Inc. ^(13)(14)(15)	954,478 Warrants	4/8/2019		281		281	0.0	%
Vita Topco, Inc. ^(13)(14)(15)	Common Shares (1,000 shares)	2/11/2019		1,000		1,442	0.1	%
				1,612		2,054	0.1	%
Hotel, gaming, and leisure
IRGSE Holding Corp. ^(7)(13)	Class A Units (29,440,171 units) ⁽¹⁴⁾	12/21/2018		21,813		589	0.1	%
	Class C-1 Units (8,800,000 units)	12/21/2018		100		48	0.0	%
				21,913		637	0.1	%
Human resource support services
ClearCompany, LLC ^(13)(15)	Class A Units (44,944 units)	8/24/2018		2,014		2,255	0.2	%
DaySmart Holdings, LLC. ^(13)(14)(15)	Class A Units (125,810 units)	10/1/2019		1,000		1,000	0.1	%
				3,014		3,255	0.3	%
Insurance
Riskonnect, Inc. ⁽¹³⁾	Common Shares Class A (1,020 units)	6/30/2017		1,020		1,412	0.1	%
	Common Shares Class B (987,929 units)	6/30/2017		10		14	0.0	%
				1,030		1,426	0.1	%
Internet Services
Lucidworks, Inc. ^(13)(14)	Series F Preferred Shares (199,054 shares)	8/2/2019		800		800	0.1	%
Marketing services
Validity, Inc. ⁽¹³⁾	Series A Preferred Shares (3,840,000 shares)	5/31/2018		3,840		12,379	1.1	%
Oil, gas and consumable fuels
Mississippi Resources, LLC ^(7)(13)	Class A-0 Member Units (1,000 units) ⁽¹⁴⁾	12/12/2019		6,693		5,104	0.5	%
	Class A-1 Member Units (1,360 units)	5/3/2017		10,366	—		0.0	%
	Class A-2 Member Units (933 units)	6/4/2014		8,874	—		0.0	%
				25,933		5,104	0.5	%
Total Equity and Other Investments				87,559		63,113	5.6	%
Total Investments			$	2,238,037	$	2,245,928	200.6	%

	Interest Rate Swaps as of December 31, 2019
	Company Receives	Company Pays	Maturity Date	Notional Amount		Fair Market Value			Upfront Payments / Receipts		Change in Unrealized Gains / (Losses)
Interest rate swap ^(a)	L	1.97%	6/25/2020	$	91,500	$	(75	)	$	—	$	(75	)
Interest rate swap ^(a)	L	1.47%	7/30/2021		11,700		38			—		38
Interest rate swap ^(a)	L	1.36%	7/29/2022		3,200		24			—		24
Interest rate swap ^(a)	4.50%	L + 2.37%	8/1/2022		115,000		1,221			—		3,098
Interest rate swap ^(a)	4.50%	L + 1.59%	8/1/2022		50,000		1,533			—		994
Interest rate swap ^(a)	4.50%	L + 1.60%	8/1/2022		7,500		228			—		150
Interest rate swap ^(a)	4.50%	L + 1.99%	1/22/2023		150,000		3,562			—		4,100
Interest rate swap ^(a)(b)	L	1.72%	1/10/2020		—		—			—		(378	)
Interest rate swap ^(a)(b)	4.50%	L + 2.86%	12/15/2019		—		—			—		1,285
Interest rate swap ^(a)(b)	L	2.66%	6/27/2019		—		—			—		(42	)
Total					428,900		6,531			—		9,194

Interest rate swap^(a)(c)	3.88%	L + 2.25%	11/1/2024		300,000		(1,787	)		—		(1,787	)
Total					300,000		(1,787	)		—		(1,787	)
Cash collateral					—		(3,737	)		—		—
Total derivatives				$	728,900	$	1,007		$	—	$	7,407

(a)

Contains a variable rate structure. Bears interest at a rate determined by three-month LIBOR.

(b)

Interest rate swap was terminated or matured in 2019.

(c)

Instrument is used in a hedge accounting relationship. The associated change in fair value is recorded along with the change in fair value of the hedged item within interest expense.

(1)	Certain portfolio company investments are subject to contractual restrictions on sales.

(2)	The amortized cost represents the original cost adjusted for the amortization of discounts and premiums, as applicable, on debt investments using the effective interest method.

(3)

Investment contains a variable rate structure, subject to an interest rate floor. Variable rate investments bear interest at a rate that may be determined by reference to either London Interbank Offered Rate (“LIBOR” or “L”) (which can include one-, two-, three- or six-month LIBOR), Euro Interbank Offer Rate (“Euribor” or “E”) (which can include one-, two-, three-, or six-month Euribor), Canadian Dollar Offered Rate (“CDOR” or “C”), Bank Bill Swap Bid Rate (“BBSY” or “B”) or an alternate base rate (which can include the Federal Funds Effective Rate, the Toronto-Dominion Bank rate, or the Prime Rate or “P”), at the borrower’s option, which reset periodically based on the terms of the credit agreement. For investments with multiple interest rate contracts, the interest rate shown is the weighted average interest rate in effect at December 31, 2019.

(4)

(5)

(6)

Under the 1940 Act, the Company is deemed to be an “Affiliated Person” of, as defined in the 1940 Act, this portfolio company, as the Company owns more than 5% of the portfolio company’s outstanding voting securities. Transactions during the year ended December 31, 2019 in which the Company was an Affiliated Person of the portfolio company are as follows:

Non-controlled, Affiliated Investments during the year ended December 31, 2019

Company	Fair Value at December 31, 2018		Gross Additions (a)		Gross Reductions (b)			Net Change In Unrealized Gain/(Loss)		Realized Gain/(Losses)		Transfers			Fair Value at December 31, 2019		Other Income		Interest Income
AFS Technologies, Inc.	$	45,342	$	4,845	$	(1,175	)	$	1,124	$	—	$	—		$	50,136	$	76	$	5,207
Validity, Inc.		38,590		1,489		(234	)		148	—			(39,993	)	—			12		1,163
Total	$	83,932	$	6,334	$	(1,409	)	$	1,272	$	—	$	(39,993	)	$	50,136	$	88	$	6,370

(a)

(b)

(7)

Under the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and “Control,” as such terms are defined in the 1940 Act, this portfolio company, as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Transactions during the year ended December 31, 2019 in which the Company was an Affiliated Person of and was deemed to Control a portfolio company are as follows:

Controlled, Affiliated Investments during the year ended December 31, 2019

Company	Fair Value at December 31, 2018		Gross Additions (a)		Gross Reductions (b)			Net Change In Unrealized Gain/(Loss)			Realized Gain/(Losses)			Transfers		Fair Value at December 31, 2019		Other Income		Interest Income
AFS Technologies, Inc.	$	—	$	—	$	—		$	—		$	570		$	—	$	—	$	—	$	—
IRGSE Holding Corp.		34,527		8,279		(1,750	)		(6,244	)	—			—			34,812		11		3,963
Mississippi Resources, LLC		21,978		1,427	—				(6,137	)		(4,164	)	—			13,104	—			1,995
Total	$	56,505	$	9,706	$	(1,750	)	$	(12,381	)	$	(3,594	)	$	—	$	47,916	$	11	$	5,958

(a)

(b)

(8)	As of December 31, 2019, the estimated cost basis of investments for U.S. federal tax purposes was $2,230,116, resulting in estimated gross unrealized gains and losses of $87,386 and $78,478, respectively.

(9)	These investments contain a fixed rate structure. The Company entered into an interest rate swap agreement to swap to a floating rate. Refer to Note 5 for further information related to the Company’s interest rate swaps on investments.

(10)

(11)	This investment is valued using observable inputs and is considered a Level 2 investment. See Note 6 for further information related to investments at fair value.

(12)	This investment is valued using observable inputs and is considered a Level 1 investment. See Note 6 for further information related to investments at fair value.

(13)	This equity investment is non-income producing.

(14)

All or a portion of this security was acquired in transaction exempt from registration under the Securities Act of 1933, and may be deemed to be “restricted securities” under the Securities Act. As of December 31, 2019, the aggregate fair value of these securities is $23,986, or 2.1% of the Company’s net assets.

(15)	Ownership of equity investments may occur through a holding company or partnership.

The accompanying notes are an integral part of these consolidated financial statements.

TPG Specialty Lending, Inc.

Consolidated Statements of Changes in Net Assets

(Amounts in thousands, except share amounts)

(Unaudited)

	Common Stock					Treasury Stock
	Shares			Par Amount		Shares		Cost			Paid in Capital in Excess of Par			Distributable Earnings			Total Net Assets
Balance at December 31, 2019		66,524,591		$	666		89,080	$	(1,359	)	$	1,009,270		$	110,720		$	1,119,297
Net decrease in net assets resulting from operations:
Net investment income		—			—		—		—			—			33,662			33,662
Net change in unrealized gains (losses) on investments and foreign currency translation		—			—		—		—			—			(84,680	)		(84,680	)
Net realized gain (loss) on investments and foreign currency transactions		—			—		—		—			—			(2,081	)		(2,081	)
Decrease in Net Assets Resulting from Capital Share Transactions:
Purchases of Treasury Stock		(206,964	)		—		206,964		(2,932	)		—			—			(2,932	)
Dividends to stockholders:
Stock issued in connection with dividend reinvestment plan		252,144			3		—		—			4,825			—			4,828
Dividends declared from net investment income		—			—		—		—			—			(31,358	)		(31,358	)
Tax reclassification of stockholders' equity in accordance with GAAP ⁽¹⁾		—			—		—		—			(1,016	)		1,016			—
Balance at March 31, 2020		66,569,771		$	669		296,044	$	(4,291	)	$	1,013,079		$	27,279		$	1,036,736

	Common Stock				Treasury Stock
	Shares		Par Amount		Shares		Cost			Paid in Capital in Excess of Par			Distributable Earnings			Total Net Assets
Balance at December 31, 2018		65,412,817	$	655		89,080	$	(1,359	)	$	991,919		$	71,987		$	1,063,202
Net increase in net assets resulting from operations:
Net investment income		—		—		—		—			—			26,638			26,638
Net change in unrealized gains (losses) on investments and foreign currency translation		—		—		—		—			—			11,460			11,460
Net realized gain (loss) on investments and foreign currency transactions		—		—		—		—			—			647			647
Dividends to stockholders:
Stock issued in connection with dividend reinvestment plan		300,145		3		—		—			5,583			—			5,586
Dividends declared from net investment income		—		—		—		—			—			(33,469	)		(33,469	)
Tax reclassification of stockholders' equity in accordance with GAAP ⁽¹⁾		—		—		—		—			(304	)		304			—
Balance at March 31, 2019		65,712,962	$	658		89,080	$	(1,359	)	$	997,198		$	77,567		$	1,074,064

(1)	The Company’s tax year end is March 31^st.

The accompanying notes are an integral part of these consolidated financial statements.

TPG Specialty Lending, Inc.

Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

	Three Months Ended			Three Months Ended
	March 31, 2020			March 31, 2019
Cash Flows from Operating Activities
Increase (decrease) in net assets resulting from operations	$	(53,099	)	$	38,745
Adjustments to reconcile increase (decrease) in net assets resulting from operations to net cash provided by (used) in operating activities:
Net change in unrealized (gains) losses on investments		107,660			(9,573	)
Net change in unrealized (gains) losses on foreign currency transactions		(13,799	)		1,432
Net change in unrealized gains on interest rate swaps		(9,181	)		(3,319	)
Net realized (gains) losses on investments		2,022			(750	)
Net realized losses on foreign currency transactions		9			10
Net amortization of discount on investments		(6,834	)		(2,462	)
Amortization of deferred financing costs		1,230			1,085
Amortization of discount on debt		110			225
Purchases and originations of investments, net		(119,852	)		(148,265	)
Proceeds from investments, net		1,014			3,472
Repayments on investments		218,075			40,418
Paid-in-kind interest		(1,795	)		(1,805	)
Changes in operating assets and liabilities:
Interest receivable		3,314			(804	)
Interest receivable paid-in-kind		(15	)		32
Prepaid expenses and other assets		1,307			201
Management fees payable to affiliate		(69	)		(447	)
Incentive fees payable to affiliate		(21	)		(3,706	)
Payable to affiliate		709			805
Other liabilities		23,481			(2,264	)
Net Cash Provided by (Used) in Operating Activities		154,266			(86,970	)
Cash Flows from Financing Activities
Borrowings on debt		215,699			310,166
Repayments on debt		(332,196	)		(193,046	)
Deferred financing costs		(4,113	)		(3,286	)
Purchases of treasury stock		(2,932	)		—
Dividends paid to stockholders		(25,102	)		(27,789	)
Net Cash Provided by (Used) in Financing Activities		(148,644	)		86,045
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash		5,622			(925	)
Cash, cash equivalents, and restricted cash, beginning of period		14,143			10,575
Cash, Cash Equivalents, and Restricted Cash, End of Period	$	19,765		$	9,650
Supplemental Information:
Interest paid during the period	$	11,795		$	11,321
Excise and other taxes paid during the period	$	3,900		$	3,100
Dividends declared during the period	$	31,358		$	33,469
Reinvestment of dividends during the period	$	4,828		$	5,586

The accompanying notes are an integral part of these consolidated financial statements.

TPG Specialty Lending, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(Amounts in thousands, unless otherwise indicated)

1. Organization and Basis of Presentation

Organization

TPG Specialty Lending, Inc. (“TSLX” or the “Company”) is a Delaware corporation formed on July 21, 2010. The Company was formed primarily to lend to, and selectively invest in, middle-market companies in the United States. The Company has elected to be regulated as a business development company (“BDC”) under the 1940 Act. In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). TSLX is managed by TSL Advisers, LLC (the “Adviser”). On June 1, 2011, the Company formed a wholly-owned subsidiary, TC Lending, LLC, a Delaware limited liability company. On March 22, 2012, the Company formed a wholly-owned subsidiary, TPG SL SPV, LLC, a Delaware limited liability company (“TPG SL SPV”). On May 19, 2014, the Company formed a wholly-owned subsidiary, TSL MR, LLC, a Delaware limited liability company.

On March 21, 2014, the Company completed its initial public offering (“IPO”) and the Company’s shares began trading on the New York Stock Exchange (“NYSE”) under the symbol “TSLX.”

Basis of Presentation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and include the accounts of the Company and its subsidiaries. In the opinion of management, all adjustments considered necessary for the fair presentation of the consolidated financial statements for the periods presented have been included. The results of operations for interim periods are not indicative of results to be expected for the full year. All intercompany balances and transactions have been eliminated in consolidation.

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with U.S. GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission (“SEC”), on February 19, 2020.

Certain prior period information has been reclassified to conform to the current period presentation. These reclassifications have no effect on the Company’s financial position or its results of operations as previously reported.

The Company is an investment company and, therefore, applies the specialized accounting and reporting guidance in Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies.

Fiscal Year End

The Company’s fiscal year ends on December 31.

2. Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual amounts could differ from those estimates and such differences could be material.

Cash and Cash Equivalents

Cash and cash equivalents may consist of demand deposits, highly liquid investments (e.g., money market funds, U.S. Treasury notes, and similar type instruments) with original maturities of three months or less, and restricted cash pledged as collateral. Cash and cash equivalents denominated in U.S. dollars are carried at cost, which approximates fair value. The Company deposits its cash and cash equivalents with highly-rated banking corporations and, at times, cash deposits may exceed the insured limits under applicable law.

Investments at Fair Value

Loan originations are recorded on the date of the binding commitment, which is generally the funding date. Investment transactions purchased through the secondary markets are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds received (excluding prepayment fees, if any) and the amortized cost basis of the investment without regard to unrealized gains or losses previously recognized, and include investments charged off during the period, net of recoveries. The net change in unrealized gains or losses primarily reflects the change in investment values and also includes the reversal of previously recorded unrealized gains or losses with respect to investments realized during the period.

Investments for which market quotations are readily available are typically valued at those market quotations. To validate market quotations, the Company utilizes a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available, as is the case for substantially all of our investments, are valued at fair value as determined in good faith by the Company’s Board of Directors (the “Board”), based on, among other things, the input of the Adviser, the Company’s Audit Committee and independent third-party valuation firms engaged at the direction of the Board.

As part of the valuation process, the Board takes into account relevant factors in determining the fair value of its investments, including and in combination of: the estimated enterprise value of a portfolio company (that is, the total value of the portfolio company’s net debt and equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments based on its earnings and cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to any similar publicly traded securities, and overall changes in the interest rate environment and the credit markets that may affect the price at which similar investments may be made in the future. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Board considers whether the pricing indicated by the external event corroborates its valuation.

The Board undertakes a multi-step valuation process, which includes, among other procedures, the following:

•

The valuation process begins with each investment being initially valued by the investment professionals responsible for the portfolio investment in conjunction with the portfolio management team.

•

The Adviser’s management reviews the preliminary valuations with the investment professionals. Agreed upon valuation recommendations are presented to the Audit Committee.

•

The Audit Committee reviews the valuations presented and recommends values for each investment to the Board.

•

The Board reviews the recommended valuations and determines the fair value of each investment; valuations that are not based on readily available market quotations are valued in good faith based on, among other things, the input of the Adviser, Audit Committee and, where applicable, other third parties including independent third-party valuation firms engaged at the direction of the Board.

The Company conducts this valuation process on a quarterly basis.

The Board has engaged independent third-party valuation firms to perform certain limited procedures that the Board has identified and requested them to perform in connection with the valuation process. At March 31, 2020, the independent third-party valuation firms performed their procedures over substantially all of the Company’s investments. Upon completion of such limited procedures, the third-party valuation firms concluded that the fair value, as determined by the Board, of those investments subjected to their limited procedures, appeared reasonable.

The Company applies Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurement (“ASC 820”), as amended, which establishes a framework for measuring fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, the Company considers its principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in determination of fair value. In accordance with ASC 820, these levels are summarized below:

•

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

•

Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

•

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur. In addition to using the above inputs in investment valuations, the Company applies the valuation policy approved by its Board that is consistent with ASC 820. Consistent with the valuation policy, the Company evaluates the source of inputs, including any markets in which its investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. When a security is valued based on prices provided by reputable dealers or pricing services (that is, broker quotes), the Company subjects those prices to various additional criteria in making the determination as to whether a particular investment would qualify for treatment as a Level 2 or Level 3 investment. For example, the Company reviews pricing provided by dealers or pricing services in order to determine if observable market information is being used, versus unobservable inputs. Some additional factors considered include the number of prices obtained as well as an assessment as to their quality, such as the depth of the relevant market relative to the size of the Company’s position.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.

In addition, changes in the market environment, including the impact of changes in broader market indices and credit spreads, and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected herein.

Financial and Derivative Instruments

The Company recognizes all derivative instruments as assets or liabilities at fair value in its consolidated financial statements, pursuant to ASC 815 Derivatives and Hedging, further clarified by the FASB’s issuance of the Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging, which was adopted in 2019 by the Company. For all derivative instruments designated in a hedge accounting relationship, the entire change in the fair value of the hedging instrument shall be recorded in the same line item of the Consolidated Statements of Operations as the hedged item. The Company uses certain interest rate swaps as derivative instruments to hedge the Company’s fixed rate debt, and therefore both the periodic payment and the change in fair value for the effective hedge, if applicable, will be recognized as components of interest expense in the Consolidated Statements of Operations. For derivative contracts entered into by the Company that are not designated in a hedge accounting relationship the Company presents changes in the fair value through current period earnings.

In the normal course of business, the Company has commitments and risks resulting from its investment transactions, which may include those involving derivative instruments. Derivative instruments are measured in terms of the notional contract amount and derive their value based upon one or more underlying instruments. While the notional amount gives some indication of the Company’s derivative activity, it generally is not exchanged, but is only used as the basis on which interest and other payments are exchanged. Derivative instruments are subject to various risks similar to non-derivative instruments including market, credit, liquidity, and operational risks. The Company manages these risks on an aggregate basis as part of its risk management process.

Derivatives, including the Company’s interest rate swaps, for which broker quotes are available are typically valued at those broker quotes.

Offsetting Assets and Liabilities

Foreign currency forward contract and interest rate swap receivables or payables pending settlement are offset, and the net amount is included with receivable or payable for foreign currency forward contracts or interest rate swaps in the consolidated balance sheets when, and only when, they are with the same counterparty, the Company has the legal right to offset the recognized amounts, and it intends to either settle on a net basis or realize the asset and settle the liability simultaneously.

Foreign Currency

Foreign currency amounts are translated into U.S. dollars on the following basis:

•

cash and cash equivalents, market value of investments, outstanding debt on revolving credit facilities, other assets and liabilities: at the spot exchange rate on the last business day of the period; and

•

purchases and sales of investments, borrowings and repayments of such borrowings, income and expenses: at the rates of exchange prevailing on the respective dates of such transactions.

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, the Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. The Company’s current approach to hedging the foreign currency exposure in its non-U.S. dollar denominated investments is primarily to borrow the par amount in local currency under the Company’s Revolving Credit Facility to fund these investments. Fluctuations arising from the translation of foreign currency borrowings are included with the net change in unrealized gains (losses) on translation of assets and liabilities in foreign currencies on the Consolidated Statements of Operations.

Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. dollar.

Equity Offering Expenses

The Company records expenses related to equity offerings as a reduction of capital upon completion of an offering of registered securities. The costs associated with renewals of the Company’s shelf registration statement are expensed as incurred.

Debt Issuance Costs

The Company records origination and other expenses related to its debt obligations as deferred financing costs, which are presented as a direct deduction from the carrying value of the related debt liability. These expenses are deferred and amortized using the effective interest method, or straight-line method, over the stated maturity of the debt obligation.

Interest and Dividend Income Recognition

Interest income is recorded on an accrual basis and includes the amortization of discounts and premiums. Discounts and premiums to par value on securities purchased or originated are amortized into interest income over the contractual life of the respective security using the effective interest method. The amortized cost of investments represents the original cost adjusted for the amortization of discounts and premiums, if any.

Unless providing services in connection with an investment, such as syndication, structuring or diligence, all or a portion of any loan fees received by the Company will be deferred and amortized over the investment’s life using the effective interest method.

Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when management has reasonable doubt that the borrower will pay principal or interest in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest has been paid and, in management’s judgment, the borrower is likely to make principal and interest payments in the future. Management may determine to not place a loan on non-accrual status if, notwithstanding any failure to pay, the loan has sufficient collateral value and is in the process of collection.

Dividend income on preferred equity securities is recorded on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly-traded portfolio companies.

Other Income

From time to time, the Company may receive fees for services provided to portfolio companies by the Adviser. The services that the Adviser provides vary by investment, but may include syndication, structuring, diligence fees, or other service-based fees, and fees for providing managerial assistance to our portfolio companies and are recognized as revenue when earned.

Reimbursement of Transaction-Related Expenses

The Company may receive reimbursement for certain transaction-related expenses in pursuing investments. Transaction-related expenses, which are expected to be reimbursed by third parties, are typically deferred until the transaction is consummated and are recorded in Prepaid expenses and other assets on the date incurred. The transaction-related costs of pursuing investments not otherwise reimbursed are borne by the Company and for successfully completed investments included as a component of the investment’s cost basis.

Cash advances received in respect of transaction-related expenses are recorded as Cash and cash equivalents with an offset to Other liabilities or Payables to affiliates. Other liabilities or Payables to affiliates are relieved as reimbursable expenses are incurred.

Income Taxes, Including Excise Taxes

The Company has elected to be treated as a RIC under Subchapter M of the Code, and the Company intends to operate in a manner so as to continue to qualify for the tax treatment applicable to RICs. To qualify as a RIC, the Company must, among other things, distribute to its stockholders in each taxable year generally at least 90% of its investment company taxable income, as defined by the Code, and net tax-exempt income for that taxable year. To maintain its RIC status, the Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which generally relieves the Company from corporate-level U.S. federal income taxes.

The Company evaluates tax positions taken or expected to be taken in the course of preparing its financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are reserved and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.

Depending on the level of taxable income earned in a tax year, the Company can be expected to carry forward taxable income (including net capital gains, if any) in excess of current year dividend distributions from the current tax year into the next tax year and pay a nondeductible 4% U.S. federal excise tax on such taxable income, as required. To the extent that the Company determines that the estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such income, the Company accrues excise tax on estimated excess taxable income.

For the three months ended March 31, 2020 and 2019, we recorded a net expense of $1.0 million and $0.3 million, respectively, for U.S. federal excise tax and other taxes.

Dividends to Common Stockholders

Dividends to common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the Board and is generally based upon the earnings estimated by the Adviser. Net realized long-term capital gains, if any, would generally be distributed at least annually, although the Company may decide to retain such capital gains.

The Company has adopted a dividend reinvestment plan that provides for reinvestment of any dividends declared in cash on behalf of stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes, and it declares, a cash dividend, then the stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash dividend. The Company expects to use newly issued shares to satisfy the dividend reinvestment plan.

New Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update 2018-13 (“ASU 2018-13”) “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance modifies the disclosure requirements on fair value measurements in ASC Topic 820, by eliminating, amending, and adding certain disclosure requirements. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company’s adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, cash flows or notes to the consolidated financial statements.

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-04 (“ASU 2020-04”) “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. ASU 2020-20 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company expects that the adoption of this guidance will not have a material impact on the Company’s financial position, result of operations or cash flows.

3. Agreements and Related Party Transactions

Administration Agreement

On March 15, 2011, the Company entered into the Administration Agreement with the Adviser. Under the terms of the Administration Agreement, the Adviser provides administrative services to the Company. These services include providing office space, equipment and office services, maintaining financial records, preparing reports to stockholders and reports filed with the SEC, and managing the payment of expenses and the oversight of the performance of administrative and professional services rendered by others. Certain of these services are reimbursable to the Adviser under the terms of the Administration Agreement. In addition, the Adviser is permitted to delegate its duties under the Administration Agreement to affiliates or third parties and the Company pays or reimburses the Adviser for certain expenses incurred by any such affiliates or third parties for work done on its behalf.

In February 2017, the Board of Directors of the Company and the Adviser entered into an amended and restated administration agreement (the “Administration Agreement”) reflecting certain clarifications to the agreement to provide greater detail regarding the scope of the reimbursable costs and expenses of the Administrator’s services.

In November 2019, the Board renewed the Administration Agreement. Unless earlier terminated as described below, the Administration Agreement will remain in effect until November 2020, and may be extended subject to required approvals. The Administration Agreement may be terminated by either party without penalty on 60 days’ written notice to the other party.

No person who is an officer, director or employee of the Adviser or its affiliates and who serves as a director of the Company receives any compensation from the Company for his or her services as a director. However, the Company reimburses the Adviser (or its affiliates) for the allocable portion of the costs of compensation, benefits, and related administrative expenses of our officers who provide operational and administrative services to us pursuant to the Administration Agreement, their respective staffs and other professionals who provide services to us (including, in each case, employees of the Adviser or an affiliate). Such reimbursable amounts include the allocable portion of the compensation paid by the Adviser or its affiliates to the Company’s Chief Financial Officer, Chief Compliance Officer, and other professionals who provide operational and administrative services to us pursuant to the Administration Agreement, including individuals who provide “back office” or “middle office” financial, operational, legal and/or compliance services to us. The Company reimburses the Adviser (or its affiliates) for the allocable portion of the compensation paid by the Adviser (or its affiliates) to such individuals based on the percentage of time those individuals devote, on an estimated basis, to the business and affairs of the Company and in acting on behalf of the Company. The Company may also reimburse the Adviser or its affiliates for the allocable portion of overhead expenses (including rent, office equipment and utilities) attributable thereto. Directors who are not affiliated with the Adviser receive compensation for their services and reimbursement of expenses incurred to attend meetings.

For the three months ended March 31, 2020 and 2019, the Company incurred expenses of $1.0 million and $1.1 million, respectively, for administrative services payable to the Adviser under the terms of the Administration Agreement.

Investment Advisory Agreement

On April 15, 2011, the Company entered into the Investment Advisory Agreement with the Adviser. The Investment Advisory Agreement was subsequently amended on December 12, 2011. Under the terms of the Investment Advisory Agreement, the Adviser provides investment advisory services to the Company. The Adviser’s services under the Investment Advisory Agreement are not exclusive, and the Adviser is free to furnish similar or other services to others so long as its services to the Company are not impaired. Under the terms of the Investment Advisory Agreement, the Company will pay the Adviser the Management Fee and may also pay certain Incentive Fees.

The Management Fee is calculated at an annual rate of 1.5% based on the average value of the Company’s gross assets calculated using the values at the end of the two most recently completed calendar quarters, adjusted for any share issuances or repurchases during the period. The Management Fee is payable quarterly in arrears.

For the three months ended March 31, 2020 and 2019, Management Fees were $8.2 million and $6.6 million, respectively.

The Adviser intends to waive a portion of the Management Fee payable under the Investment Advisory Agreement by reducing the Management Fee on assets financed using leverage over 200% asset coverage (in other words, over 1.0x debt to equity) (the “Leverage Waiver”). Pursuant to the Leverage Waiver, the Adviser intends to waive the portion of the Management Fee in excess of an annual rate of 1.0% (0.250% per quarter) on the average value of the Company’s gross assets as of the end of the two most recently completed calendar quarters that exceeds the product of (i) 200% and (ii) the average value of our net asset value at the end of the two most recently completed calendar quarters. Any waived Management Fees are not subject to recoupment by the Adviser. As of March 31, 2020, no Management Fees have been waived pursuant to the Leverage Waiver.

The Incentive Fee consists of two parts, as follows:

(i)

The first component, payable at the end of each quarter in arrears, equals 100% of the pre-Incentive Fee net investment income in excess of a 1.5% quarterly “hurdle rate,” the calculation of which is further explained below, until the Adviser has received 17.5% of the total pre-Incentive Fee net investment income for that quarter and, for pre-Incentive Fee net investment income in excess of 1.82% quarterly, 17.5% of all remaining pre-Incentive Fee net investment income for that quarter. The 100% “catch-up” provision for pre-Incentive Fee net investment income in excess of the 1.5% “hurdle rate” is intended to provide the Adviser with an Incentive Fee of 17.5% on all pre-Incentive Fee net investment income when that amount equals 1.82% in a quarter (7.28% annualized), which is the rate at which catch-up is achieved. Once the “hurdle rate” is reached and catch-up is achieved, 17.5% of any pre-Incentive Fee net investment income in excess of 1.82% in any quarter is payable to the Adviser.

Pre-Incentive Fee net investment income means dividends, interest and fee income accrued by the Company during the calendar quarter, minus the Company’s operating expenses for the quarter (including the Management Fee, expenses payable under the Administration Agreement to the Administrator, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the Incentive Fee). Pre-Incentive Fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with pay-in-kind interest and zero coupon securities), accrued income that the Company may not have received in cash. Pre-Incentive Fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital gains or losses.

(ii)

The second component, payable at the end of each fiscal year in arrears, equaled 15% through March 31, 2014 and, beginning April 1, 2014, equals a weighted percentage of cumulative realized capital gains from the Company’s inception to the end of that fiscal year, less cumulative realized capital losses and unrealized capital losses. This component of the Incentive Fee is referred to as the Capital Gains Fee. Each year, the fee paid for this component of the Incentive Fee is net of the aggregate amount of any previously paid Capital Gains Fee for prior periods. For capital gains that accrue following March 31, 2014, the Incentive Fee rate is 17.5%. The Company accrues, but does not pay, a capital gains Incentive Fee with respect to unrealized capital gains because a capital gains Incentive Fee would be owed to the Adviser if the Company were to sell the relevant investment and realize a capital gain. The weighted percentage was intended to ensure that for each fiscal year following the completion of the IPO, the portion of the Company’s realized capital gains that accrued prior to March 31, 2014, was subject to an Incentive Fee rate of 15% and the portion of the Company’s realized capital gains that accrued beginning April 1, 2014 is subject to an Incentive Fee rate of 17.5%. As of March 31, 2020, there are no remaining investments that were made prior to April 1, 2014, and as a result, the Incentive Fee rate of 17.5% is applicable to any future realized capital gains.

For purposes of determining whether pre-Incentive Fee net investment income exceeds the hurdle rate, pre-Incentive Fee net investment income is expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding calendar quarter.

Section 205(b)(3) of the Investment Advisers Act of 1940, as amended, or the Advisers Act, prohibits the Adviser from receiving the payment of fees on unrealized gains until those gains are realized, if ever. There can be no assurance that such unrealized gains will be realized in the future.

For the three months ended March 31, 2020 and 2019, Incentive Fees were $7.1 million and $5.7 million, respectively, all of which were realized and payable to the Adviser.

Since the Company’s IPO, with the exception of its waiver of Management Fees and certain Incentive Fees attributable to the Company’s ownership of certain investments and the Leverage Waiver, the Adviser has not waived its right to receive any Management Fees or Incentive Fees payable pursuant to the Investment Advisory Agreement.

In November 2019, the Board renewed the Investment Advisory Agreement. Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect until November 2020, and may be extended subject to required approvals. The Investment Advisory Agreement will automatically terminate in the event of an assignment and may be terminated by either party without penalty upon 60 days’ written notice to the other party.

From time to time, the Adviser may pay amounts owed by the Company to third-party providers of goods or services, including the Board, and the Company will subsequently reimburse the Adviser for such amounts paid on its behalf. Amounts payable to the Adviser are settled in the normal course of business without formal payment terms.

4. Investments at Fair Value

Under the 1940 Act, the Company is required to separately identify non-controlled investments where it owns 5% or more of a portfolio company’s outstanding voting securities as investments in “affiliated” companies. In addition, under the 1940 Act, the Company is required to separately identify investments where it owns more than 25% of a portfolio company’s outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company as investments in “controlled” companies. Detailed information with respect to the Company’s non-controlled, non-affiliated; non-controlled, affiliated; and controlled, affiliated investments is contained in the accompanying consolidated financial statements, including the consolidated schedules of investments. The information in the tables below is presented on an aggregate portfolio basis, without regard to whether they are non-controlled, non-affiliated; non-controlled, affiliated; or controlled, affiliated investments.

Investments at fair value consisted of the following at March 31, 2020 and December 31, 2019:

	March 31, 2020
	Amortized Cost ⁽¹⁾		Fair Value		Net Unrealized Gain (Loss)
First-lien debt investments	$	2,050,067	$	1,986,200	$	(63,867	)
Second-lien debt investments		4,356		4,030		(326	)
Mezzanine debt investments		2,859		2,855		(4	)
Equity and other investments		88,059		52,487		(35,572	)
Total Investments	$	2,145,341	$	2,045,572	$	(99,769	)

	December 31, 2019
	Amortized Cost ⁽¹⁾		Fair Value		Net Unrealized Gain (Loss)
First-lien debt investments	$	2,143,831	$	2,176,118	$	32,287
Second-lien debt investments		4,147		4,147		—
Mezzanine debt investments		2,500		2,550		50
Equity and other investments		87,559		63,113		(24,446	)
Total Investments	$	2,238,037	$	2,245,928	$	7,891

(1)	The amortized cost represents the original cost adjusted for the amortization of discounts or premiums, as applicable, on debt investments using the effective interest method.

The industry composition of investments at fair value at March 31, 2020 and December 31, 2019 is as follows:

	March 31, 2020			December 31, 2019
Beverage, food and tobacco		2.4	%		2.2	%
Business services		20.2	%		16.8	%
Chemicals		0.3	%		0.3	%
Communications		1.8	%		1.5	%
Education		6.1	%		9.2	%
Electronics		—			0.1	%
Financial services		15.5	%		13.7	%
Healthcare		10.7	%		9.4	%
Hotel, gaming and leisure		1.5	%		1.6	%
Human resource support services		8.6	%		8.2	%
Insurance		2.5	%		2.3	%
Internet services		5.0	%		4.8	%
Marketing services		2.0	%		2.0	%
Office products		0.5	%		0.5	%
Oil, gas and consumable fuels		3.9	%		4.2	%
Pharmaceuticals		3.7	%		3.4	%
Real Estate		1.0	%		0.9	%
Retail and consumer products		10.0	%		14.9	%
Transportation		4.3	%		4.0	%
Total		100.0	%		100.0	%

The geographic composition of investments at fair value at March 31, 2020 and December 31, 2019 is as follows:

	March 31, 2020			December 31, 2019
United States
Midwest		14.4	%		16.9	%
Northeast		12.7	%		15.8	%
South		22.0	%		19.2	%
West		41.5	%		38.8	%
Australia		1.6	%		1.6	%
Bermuda		1.8	%		1.7	%
Canada		6.0	%		6.0	%
Total		100.0	%		100.0	%

5. Derivatives

Interest Rate Swaps

In February 2017, in connection with the issuance of the 2022 Convertible Notes, the Company entered into an interest rate swap transaction with a $115.0 million notional amount. The Company receives fixed rate interest at 4.50% and pays variable rate interest based on three-month LIBOR plus 2.37%. The swap transaction matures on August 1, 2022, matching the maturity date of the 2022 Convertible Notes.

In January 2018, in connection with the issuance of the 2023 Notes, the Company entered into an interest rate swap transaction with a $150.0 million notional amount. The Company receives fixed rate interest at 4.50% and pays variable rate interest based on three-month LIBOR plus 1.99%. The swap transaction matures on January 22, 2023, matching the maturity date of the 2023 Notes.

In June 2018, in connection with the reopening and issuance of additional 2022 Convertible Notes, the Company entered into two interest rate swap transactions with notional amounts of $50.0 million and $7.5 million, respectively. The Company receives fixed rate interest on each swap at 4.50%, and pays variable rate interest based on three-month LIBOR plus 1.59%, and 1.60%, respectively. The swap transactions mature on August 1, 2022, matching the maturity date of the 2022 Convertible Notes.

In June 2019, upon maturity of the original swap transaction on an existing fixed rate investment, the Company entered into an interest rate swap transaction with a $91.5 million notional amount. The Company receives three-month LIBOR and pays fixed rate interest at 1.97%. The swap transaction matures on June 25, 2020.

In August 2019, in connection with two fixed rate investments, the Company entered into two interest rate swap transactions with notional amounts of $11.7 million and $3.2 million, respectively. The Company receives three-month LIBOR and pays fixed rate interest at 1.47% and 1.36%, respectively. The swap transactions mature on July 30, 2021 and July 29, 2022, respectively, matching the current expected repayment dates of each investment.

In November 2019, in connection with the issuance of the 2024 Notes, the Company entered into an interest rate swap transaction with a $300.0 million notional amount. The Company receives fixed rate interest at 3.88% and pays variable rate interest based on three-month LIBOR plus 2.25%. The swap transaction matures on November 1, 2024, matching the maturity date of the 2024 Notes. The Company designated this interest rate swap as the hedging instrument in a hedge accounting relationship with the 2024 Notes.

In February 2020, in connection with the reopening and issuance of additional 2024 Notes, the Company entered into an interest rate swap transaction with a $50.0 million notional amount. The Company receives fixed rate interest at 3.88% and pays variable rate interest based on three-month LIBOR plus 2.46%. The swap transaction matures on November 1, 2024, matching the maturity date of the additional 2024 Notes. The Company designated this interest rate swap as the hedging instrument in a hedge accounting relationship with the additional 2024 Notes.

The following tables present the amounts paid and received on the Company’s interest rate swap transactions for the three months ended March 31, 2020 and 2019:

				For the Three Months Ended March 31, 2020
	Maturity Date	Notional Amount		Paid			Received		Net
Interest rate swap ⁽¹⁾	6/25/2020	$	91,500	$	(456	)	$	440	$	(16	)
Interest rate swap ⁽¹⁾	7/30/2021		11,700		(43	)		56		13
Interest rate swap ⁽¹⁾	7/29/2022		3,200		(11	)		16		5
Interest rate swap	8/1/2022		115,000		(1,259	)		1,294		35
Interest rate swap	8/1/2022		50,000		(449	)		563		114
Interest rate swap	8/1/2022		7,500		(68	)		84		16
Interest rate swap	1/22/2023		150,000		(1,500	)		1,688		188
Interest rate swap	11/1/2024		300,000		(3,149	)		2,906		(243	)
Interest rate swap	11/1/2024		50,000		(283	)		269		(14	)
Total		$	778,900	$	(7,218	)	$	7,316	$	98

				For the Three Months Ended March 31, 2019
	Maturity Date	Notional Amount		Paid			Received		Net
Interest rate swap ⁽¹⁾	6/27/2019	$	91,500	$	(609	)	$	646	$	37
Interest rate swap	12/15/2019		115,000		(1,588	)		1,294		(294	)
Interest rate swap	1/10/2020		33,333		(698	)		769		71
Interest rate swap	8/1/2022		115,000		(1,455	)		1,294		(161	)
Interest rate swap	8/1/2022		50,000		(537	)		563		26
Interest rate swap	8/1/2022		7,500		(81	)		84		3
Interest rate swap	1/22/2023		150,000		(1,759	)		1,687		(72	)
Total		$	562,333	$	(6,727	)	$	6,337	$	(390	)

(1)	The notional amount of certain interest rate swaps may be more or less than the Company’s investment in individual portfolio companies as a result of arrangements with other lenders in the syndicate, amortization, or interest income paid-in-kind.

For the three months ended March 31, 2020 and 2019, the Company recognized $9.2 million and $3.3 million, respectively, in net change in unrealized gains on interest rate swaps not designated as hedging instruments in the consolidated statement of operations related to the swap transactions. For the three months ended March 31, 2020, the Company recognized $18.8 million in net change in unrealized gains on interest rate swaps designated as hedging instruments as a component of interest expense in the consolidated statement of operations. This amount is offset by $18.8 million for a change in the carrying value of the 2024 Notes. As of March 31, 2020, the swap transactions had a fair value of $32.7 million which is netted against restricted cash collateral on the Company’s consolidated balance sheet. As of December 31, 2019, the swap transactions had a fair value of $4.7 million which is netted against cash collateral on the Company’s consolidated balance sheet.

The Company is required under the terms of its derivatives agreements to pledge assets as collateral to secure its obligations under the derivatives. The amount of collateral required varies over time based on the mark-to-market value, notional amount and remaining term of the derivatives, and may exceed the amount owed by the Company on a mark-to-market basis. Any failure by the Company to fulfill any collateral requirement (e.g., a so-called “margin call”) may result in a default. In the event of a default by a counterparty, the Company would be an unsecured creditor to the extent of any such overcollateralization.

As of March 31, 2020, $14.3 million of cash is pledged as collateral under the Company’s derivative instruments and is included in restricted cash as a component of cash and cash equivalents on the Company’s consolidated balance sheet. As of December 31, 2019, $9.3 million of cash is pledged as collateral under the Company’s derivative instruments and is included in restricted cash as a component of cash and cash equivalents on the Company’s consolidated balance sheet.

6. Fair Value of Financial Instruments

Investments

The following tables present fair value measurements of investments as of March 31, 2020 and December 31, 2019:

	Fair Value Hierarchy at March 31, 2020
	Level 1		Level 2		Level 3		Total
First-lien debt investments	$	—	$	9,287	$	1,976,913	$	1,986,200
Second-lien debt investments		—		—		4,030		4,030
Mezzanine debt investments		—		—		2,855		2,855
Equity and other investments		3		—		52,484		52,487
Total investments at fair value	$	3	$	9,287	$	2,036,282	$	2,045,572
Interest rate swaps		—		32,742		—		32,742
Total	$	3	$	42,029	$	2,036,282	$	2,078,314

	Fair Value Hierarchy at December 31, 2019
	Level 1		Level 2		Level 3		Total
First-lien debt investments	$	—	$	17,191	$	2,158,927	$	2,176,118
Second-lien debt investments		—		—		4,147		4,147
Mezzanine debt investments		—		—		2,550		2,550
Equity and other investments		6		—		63,107		63,113
Total investments at fair value	$	6	$	17,191	$	2,228,731	$	2,245,928
Interest rate swaps		—		4,744		—		4,744
Total	$	6	$	21,935	$	2,228,731	$	2,250,672

Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur.

The following tables present the changes in the fair value of investments for which Level 3 inputs were used to determine the fair value as of and for the three months ended March 31, 2020 and 2019:

	As of and for the Three Months Ended
	March 31, 2020
	First-lien debt investments			Second-lien debt investments			Mezzanine debt investments			Equity and other investments			Total
Balance, beginning of period	$	2,158,927		$	4,147		$	2,550		$	63,107		$	2,228,731
Purchases or originations		115,294			209			304			477			116,284
Repayments / redemptions		(218,019	)		—			—			—			(218,019	)
Paid-in-kind interest		1,744			—			51			—			1,795
Net change in unrealized losses		(85,669	)		(326	)		(53	)		(11,123	)		(97,171	)
Net realized losses		(2,163	)		—			—						(2,163	)
Net amortization of discount on securities		6,822			—			3			—			6,825
Transfers within Level 3		(23	)		—			—			23			—
Transfers into (out of) Level 3		—			—			—			—			—
Balance, End of Period	$	1,976,913		$	4,030		$	2,855		$	52,484		$	2,036,282

	As of and for the Three Months Ended
	March 31, 2019
	First-lien debt investments			Second-lien debt investments			Mezzanine debt investments		Equity and other investments			Total
Balance, beginning of period	$	1,628,037		$	4,137		$	2,481	$	43,234		$	1,677,889
Purchases or originations		145,977			—			—		1,278			147,255
Repayments / redemptions		(15,020	)		—			—		(1,636	)		(16,656	)
Paid-in-kind interest		1,805			—			—		—			1,805
Net change in unrealized gains (losses)		12,802			(1	)		50		(2,414	)		10,437
Net realized losses		(73	)		—			—		(365	)		(438	)
Net amortization of discount on securities		2,241			1			—		—			2,242
Transfers within Level 3		—			—			—		—			—
Transfers into (out of) Level 3		—			—			—		—			—
Balance, End of Period	$	1,775,769		$	4,137		$	2,531	$	40,097		$	1,822,534

The following tables present information with respect to the net change in unrealized gains or losses on investments for which Level 3 inputs were used in determining fair value that are still held by the Company at March 31, 2020 and 2019:

	Net Change in Unrealized			Net Change in Unrealized
	Gains or (Losses)			Gains or (Losses)
	for the Three Months Ended			for the Three Months Ended
	March 31, 2020 on			March 31, 2019 on
	Investments Held at			Investments Held at
	March 31, 2020			March 31, 2019
First-lien debt investments	$	(78,748	)	$	12,802
Second-lien debt investments		(326	)		(1	)
Mezzanine debt investments		(53	)		50
Equity and other investments		(11,123	)		(3,337	)
Total	$	(90,250	)	$	9,514

The following tables present the fair value of Level 3 Investments at fair value and the significant unobservable inputs used in the valuations as of March 31, 2020 and December 31, 2019. The tables are not intended to be all-inclusive, but instead capture the significant unobservable inputs relevant to the Company’s determination of fair values.

March 31, 2020

Valuation

Unobservable

Range (Weighted

Impact to Valuation

from an

Fair Value

Technique

Input

Average)

Increase to Input

First-lien debt investments

1,976,913

Income approach ⁽¹⁾

Discount rate

3.0% — 19.5% (12.4%)

Decrease

Second-lien debt investments

4,030

Income approach

Discount rate

21.0% — 21.0% (21.0%)

Decrease

Mezzanine debt investments

2,855

Income approach

Discount rate

8.4% — 8.4% (8.4%)

Decrease

Equity and other investments

52,484

Market Multiple ⁽²⁾

Comparable multiple

2.8x — 15.0x (7.8x)

Increase

Total

Sixth Street Specialty Lending, Inc. - FORM 10-Q - May 5, 2020

Attached files