OREANDA-NEWS. Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR), secured debt rating, and unsecured debt rating of TPG Specialty Lending, Inc. (TSLX) at 'BBB-'. The Rating Outlook is Stable.

These actions are being taken in conjunction with a broader industry review, which includes 10 business development companies (BDCs). For more commentary on the broader sector review, please see 'Fitch Takes Several Negative Rating Actions Following BDC Peer Review', available at 'www.fitchratings.com'.

KEY RATING DRIVERS

The rating affirmation reflects the strength of TSLX's relationship with TPG Special Situations Partners (TSSP) and TPG Global (TPG) as well as its affiliates, which provide enhanced access to deal flow and investment resources, a relatively lower risk profile compared to peer BDCs as evidenced by a senior lending focus and lower underlying portfolio company leverage, strong asset quality, appropriate leverage, strong dividend coverage, solid liquidity.

Fitch also views positively TSLX's public listing and unsecured debt issuance in 2014, which enhance its funding diversity and access to liquidity, as well as strong alignment of interest between TPG and TSLX, which is evidenced by its shared brand and the meaningful ownership interest of the BDC's common shares by TPG and its partners and employees.

Rating constraints include TSLX's relatively short operating history as a BDC, modest portfolio concentrations, a largely secured funding profile, the capital markets impact on leverage given the need to fair value the portfolio each quarter, dependence on the capital markets to fund portfolio growth, and a limited ability to retain capital due to dividend distribution requirements.

The Stable Outlook reflects Fitch's expectations for continued operating consistency, relatively stable portfolio yields, given the focus on direct originations, and the maintenance of good asset quality, appropriate leverage and strong dividend coverage.

Leverage, as measured by debt to equity, amounted to 0.47 times (x) at Dec. 31, 2014, which was modestly below the peer average. Longer-term, TSLX is targeting leverage of 0.65x-0.75x, which Fitch views as consistent with TSLX's senior lending strategy. Fitch expects leverage to increase closer to the targeted range over the longer term, as the firm continues to ramp up its portfolio.

Asset quality trends have been strong since inception and no investments were on non-accrual status as of Dec. 31, 2014, supported, in part by favorable market conditions. TSLX continues to focus on the senior part of the capital structure, with first and second lien debt representing 98% of the investment portfolio, which compares favorably to the peer average of 70.1%. TSLX is meaningfully invested at the senior-most part of the capital structure, with first lien debt, including first lien last-out debt, representing 89% of the portfolio. Exposure to equity investments, which can experience meaningful valuation volatility, was very low, representing 1%, with an additional 1% in mezzanine investments.

The investment portfolio was somewhat more concentrated than peers, as TSLX generally takes larger positions in portfolio companies given its focus on direct originations and control lending. As of Dec. 31, 2014, the top 10 investments accounted for 46% of assets and 71.7% of equity. That said, Fitch expects portfolio concentrations will improve modestly over time with additional portfolio growth, and the order for exemptive relief from the SEC providing TSLX with an opportunity to invest in larger transactions and increase the diversification of its investment portfolio.

Oil, gas and consumable fuel investments accounted for 8.2% of the portfolio at Dec. 31, 2014, and according to Fitch's calculations, the combined energy exposure of 9.8%, was modestly below the peer average of 10.5%. Fitch conducted a stress test on the firm's exposure along with the rest of the peer group, and views the impact of valuation declines on the firm's leverage as negligible.

TSLX's operating history is relatively short, having begun investing in 2011, but net investment income (NII) has been on an upward trajectory given strong portfolio growth and improved operating efficiencies. NII grew 81.7% to \$104.5 million in 2014 compared to \$57.5 million in 2013. NII yield on the portfolio at cost was 9.2% in 2014, well above the peer average of 6.4%. Yield compression has been less significant than peers, given the firm's strong call protection on a relative basis, which has limited refinancing volume to some extent. As of Dec. 31, 2014, TSLX had call protection on 96.8% of its investments, with weighted average call prices of 106.9%, 103.9%, and 101.4%, for the first, second and third year from the initial date of investment, respectively.

TSLX's funding profile is largely secured, consisting of a special purpose vehicle (SPV) facility and a corporate revolver. As of Dec. 31, 2014, there was \$283.9 million outstanding under secured borrowings. In June 2014, TSLX completed an issuance of \$115 million of five and a half year convertible notes. Proceeds from the issuance were used to repay a portion of the firm's revolver borrowings. As of Dec. 31, 2014, unsecured debt represented 28.8% of total debt. Fitch expects TSLX will look to increase unsecured debt and to improve funding flexibility over time.

TSLX's liquidity profile is considered solid with \$2.4 million of balance sheet cash and \$511.5 million of borrowing capacity under its secured funding facilities, subject to borrowing base requirements, at Dec. 31, 2014. Additionally, cash flows from investment repayments and exits were significant in 2014, amounting to \$721.3 million while the use of cash for new investments amounted to \$974.8 million. The high level of cash used for investment activity reflects the continued ramp-up of the investment portfolio.

Cash earnings dividend coverage, which adjusts for non-cash income and incentive payment accruals, was solid, amounting to 100% in 2014. The dividend is further supported by the presence of spillover income, which Fitch believes provides further stability to the dividend over the medium term, particularly in an origination environment characterized by tighter spreads.

RATING SENSITIVITIES

Negative rating actions could be driven by material change in the firm's risk profile, resulting from higher leverage, a decline in first lien positions or a meaningful increase in the proportion of equity holdings without a commensurate decline in leverage. A spike in non-accrual levels or weaker cash income dividend coverage would also be viewed negatively from a ratings perspective.

Conversely, positive rating momentum could develop for TSLX over time, provided the company demonstrates measured portfolio growth in the face of a competitive market environment. This would be evaluated in the context of the stability and consistency of TSLX's operating performance, asset quality, valuation and underlying portfolio metrics, including leverage and interest coverage. Continued access to unsecured funding would also be viewed positively.

TSLX is an externally managed BDC, organized in July 2010 and commencing investment operations in July 2011. As of Dec. 31, 2014, the company had investments in 34 portfolio companies amounting to approximately \$1.3 billion.

Fitch has affirmed the following ratings:

TPG Specialty Lending, Inc.
--Long-term IDR at 'BBB-';
--Senior secured debt at 'BBB-';
--Senior unsecured debt at 'BBB-'.

The Rating Outlook is Stable.