BUY (TSLX, $16.11)
Excellent Asset Quality, Sound Capital Management, and a True Direct Originator - Initiating With A BUY Rating And $18 Price Target.
April 5, 2016
Christopher R. Testa
Investment Conclusion. We are initiating coverage of TPG Specialty Lending, Inc. (TSLX) with a BUY rating and $18 price target. TSLX is a direct originator with four regional offices in San Francisco, New York, Dallas, and Boston. TPG makes loans anywhere from $15 million to $350 million size, with the ability to take portions of larger deals enabled by co-investing with the private funds of its external manager. The company’s origination mix is roughly 60/40 sponsor and non-sponsor, respectively. The direct origination infrastructure has paid off for TPG, posting $222.2 million of net portfolio growth in 2015 even with sponsor finance volume down significantly in the US. Additionally, TSLX has excellent asset quality. Since going public in March 2014, the company has only had non-accruals in 2Q15 of $38.6 million, or 2.8% of the portfolio at cost on non-accrual, which was subsequently restructured. NAV/share (net asset value per share) has been very stable although it declined 2.4% Y/Y (year-over-year) in 2015 largely as a result of credit spreads widening. NAV/share was $15.51 in 1Q14 and finished 2015 at $15.15, with the company posting an economic return of 7.2% for the year ended 2015. First lien exposure has remained relatively constant for TSLX, with first lien debt being 88.2% of the portfolio at fair value from 89.0% the year prior. TPG is well positioned in the event of interest rate increases. The company is funded with 82.5% floating rate debt with an income producing investment portfolio that is 95% floating rate. Additionally, the portfolio is not cyclical in nature with 3.2% at fair value in energy and no metals and mining exposure. Our $18 price target implies an estimated 2017 P/NII of 10.1x, dividend yield of 8.7%, and P/NAV of 1.17x compared to the BDC sector averages of 7.5x, 11.7%, and 0.81x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
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