Oaktree Specialty Lending Corp (OCSL)·Q1 2025 Earnings Summary

Executive Summary

• Q1 FY2025 adjusted net investment income (ANII) was $44.7M ($0.54/share), down $0.01/share QoQ on lower reference rates, higher non‑accruals and less nonrecurring income; GAAP EPS was $0.09 vs $0.45 in Q4 FY2024 on higher realized/unrealized losses .
• Oaktree purchased $100M of newly issued OCSL shares at NAV ($17.63) on Feb 3, 2025 (10% premium to market), adding ~7% to NAV and expanding dry powder; management also implemented a permanent “total return hurdle” incentive fee cap that waived $6.4M of Part I fees this quarter .
• Base dividend reset to $0.40 with a supplemental ($0.07 declared for March 31, 2025) and an indicated policy to pay ~50% of adjusted NII above the base as supplemental, improving coverage and NAV accretion potential through cycles .
• Credit costs remain a headwind: non‑accruals were 3.9% of debt FV (flat QoQ) with new additions (e.g., Dominion Diagnostics) and further write‑downs; FinThrive was restructured and removed from non‑accrual, with some other names showing improvement .
• Stock reaction catalysts: insider-aligned $100M equity at NAV and fee cap (shareholder-friendly), plus accelerating large-cap, first‑lien originations (Encore, Optimizely, TEAM) against a tighter spread backdrop and expected 2025 deal flow .

What Went Well and What Went Wrong

• What Went Well

  • Permanent incentive fee cap (total return hurdle) and $6.4M Part I fee waiver supported NII despite lower revenues; management positioned this as long-term, shareholder‑friendly .
  • $100M primary equity raised at NAV (10% premium to market) expanded capacity and diversification without diluting at a discount; Oaktree locked up shares for one year .
  • High-quality, first‑lien originations in large sponsors: allocations to Encore (SOFR+5%), Optimizely (SOFR+5%), TEAM Technologies (SOFR+4.75%) reflect platform deal access and selective underwriting .

• What Went Wrong

  • Total investment income fell to $86.6M from $94.7M QoQ on lower reference rates, higher non‑accruals, reduced OID acceleration, and lower prepayment/dividend income; ANII slipped to $0.54 from $0.55 .
  • Continued credit issues: new non‑accrual (Dominion Diagnostics) and further write‑downs in several underperformers; non‑accruals remained elevated at 3.9% of debt FV and 5.1% of cost .
  • NAV/share declined to $17.63 (from $18.09) on realized/unrealized losses, reflecting concentration in a handful of challenged investments and macro rate dynamics .

Financial Results

Segment/Asset Mix

Key Portfolio & Capital KPIs

Notes: NII margin shown is a calculation from reported totals (NII/TII) using the cited figures .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “We had several positive outcomes within the portfolio, but continued to face challenges with several names. We remain focused on our underperforming borrowers, working through each situation to identify the appropriate course of action.” — CEO Armen Panossian .
• “Oaktree has purchased $100 million of shares at NAV… we have instituted a cap in the calculation of our Part I Incentive Fee to consider capital gains and losses… build up over time to a rolling 12 quarter lookback by our 2027 fiscal year‑end.” — CEO Armen Panossian .
• “Adjusted NII was $45 million or $0.54 per share… Our net asset value per share declined to $17.63 from $18.09 last quarter.” — President Matt Pendo .
• “One investment was restructured and removed from non‑accrual… we classified one new investment as non‑accrual… and took further write‑downs on other investments.” — CEO Armen Panossian .
• “We originated $198 million of new investment commitments… Encore, TEAM Technologies, Optimizely… reflect the deal sourcing power of Oaktree’s platform.” — Co‑CIO Raghav Khanna .

Q&A Highlights

• Rationale for $100M equity at NAV vs open‑market: drives asset growth and diversification at OCSL (not just manager buying shares), enabling leverage‑supported deployment into an attractive pipeline; 1‑year lockup standard .
• 2025 bond maturity plan (Feb 2025): ample liquidity (revolver, ABL, equity raise) with flexibility to refinance; OCSL a frequent unsecured issuer; evaluate markets post‑earnings .
• Supplemental dividend framework: management expects roughly 50% payout of adjusted NII above base to be paid as supplemental, subject to Board approval .
• Deployment cadence/cash drag: robust private and public pipeline; expects to deploy equity plus associated leverage over a couple of quarters; net of anticipated repayments .
• Incentive fee lookback scope: includes realized/unrealized capital gains/losses and FX movements (used primarily for hedging) .

Estimates Context

• Wall Street consensus estimates via S&P Global were unavailable at the time of analysis due to an SPGI request limit, so we cannot provide vs‑consensus comparisons for Q1 FY2025. We searched for EPS and revenue (total investment income) estimates for Q1 FY2025, Q4 FY2024 and Q1 FY2024 but were unable to retrieve them due to the SPGI limit. As a result, estimate-based beat/miss assessments are not included [SPGI GetEstimates error].

Key Takeaways for Investors

• Defensive repositioning is tangible: permanent fee cap and dividend policy reset should improve dividend coverage through cycles and align economics with total returns; near‑term NII supported by waivers, with policy clarity a positive for valuation .
• Capitalized for offense: $100M at NAV expands dry powder; target leverage remains 0.9–1.25x, implying additional purchasing power as deployment accelerates into 2025 deal flow .
• Credit normalization ongoing: non‑accruals stable but elevated; active workouts (FinThrive positive) vs new stress (Dominion Diagnostics, Dialyze) will drive NAV path near‑term; expect dispersion by name .
• Income headwinds from lower base rates and less nonrecurring OID/prepayment fees likely persist near‑term; NII margin improved on cost actions but revenue sensitivity to rates and repayments remains .
• First‑lien tilt and larger‑cap sponsor access should moderate loss severity and support stable cash yields as spreads stabilize; marquee allocations (Encore, Optimizely, TEAM) signal sourcing strength .
• Near‑term trading: shareholder‑friendly actions and insider capital may support multiple; monitor next two quarters for deployment velocity (cash drag fade) and credit resolutions as catalysts .
• Medium‑term thesis: if non‑accruals trend down and originations scale with stable spreads, NAV stabilization plus sustainable base/supplemental dividends can re‑rate shares toward peers.

Appendix: Additional context and subsequent event

• Subsequent to quarter‑end, OCSL priced $300M of 6.340% notes due 2030 and repaid the Feb 2025 notes (per Q2 FY2025 press release), optimizing maturity profile; liquidity remains >$1B in undrawn capacity .