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    Oaktree Specialty Lending (OCSL)

    Q2 2024 Earnings Summary

    Reported on Mar 12, 2025 (Before Market Open)
    Pre-Earnings Price$19.87Last close (Apr 29, 2024)
    Post-Earnings Price$19.29Open (Apr 30, 2024)
    Price Change
    $-0.58(-2.92%)
    • OCSL has successfully shifted its portfolio toward higher-quality first-lien investments, increasing first-lien loans from 60% to 80% over the past 24–36 months, aiming to deliver low volatility and dependable dividends to shareholders.
    • The company is experiencing strong origination activity with a robust pipeline, having already funded $100 million in the current quarter and expecting another strong quarter for originations as the market opens up with more M&A deal volume.
    • Management is confident in the quality of their portfolio and their ability to manage credit issues, and they have reduced the base management fee to 1%, which is expected to increase net investment income per share and align management's interests with shareholders.
    • OCSL has experienced write-downs during the quarter on several nonperforming assets, including Thrasio, Impel, and OTG, indicating ongoing credit quality issues within the portfolio.
    • The company is increasing leverage in its Joint Ventures, with a target leverage ratio of 1.5x to 1.75x, up from the current 1.3x, which may increase risk exposure.
    • Spreads have tightened over the last 18 months, leading to spread compression of about 15 basis points in OCSL's portfolio, which, combined with a shift towards lower-yielding first-lien loans, may result in lower interest income and pressure on returns.
    1. Dividend Coverage Confidence
      Q: How confident are you in covering the dividend after the fee cut?
      A: Management feels very comfortable covering the dividend due to the reduction in the management fee to 1% effective July 1 , adjustments for inter-quarter timing differences in repayments and fundings , and a healthy pipeline of investments.

    2. Spread Compression and Yield Impact
      Q: What caused the decline in interest income—spreads or timing?
      A: The decline was due to spread compression of around 15 basis points on the weighted average yield , partly from the second-lien portfolio impact of 10 basis points , and timing differences, with $330 million deployed mid-February to March causing about a 1.5-cent impact this quarter.

    3. Portfolio Credit Quality and NPAs
      Q: How are portfolio valuations trending excluding nonperforming assets?
      A: Excluding NPAs, the portfolio was relatively flat quarter-on-quarter. Unrealized depreciation was mainly due to write-downs in Thrasio, Impel, and OTG, their nonperforming assets from December 31.

    4. Fee Cut Rationale and First Lien Shift
      Q: Does the fee cut reflect expected lower returns due to spread tightening?
      A: The portfolio has shifted to 80% first lien from 60% 24 months ago , reflecting a lower risk profile. The fee reduction to 1% aligns with this shift and aims to deliver stability to shareholders, not necessarily predicting future spreads.

    5. Balance Sheet and JV Leverage
      Q: Is there appetite to increase leverage at JVs and on balance sheet?
      A: JV leverage increased to 1.3x with a target of 1.5x to 1.75x as they rotate into more first lien assets. On balance sheet, net leverage is over 1.0x, moving toward 1.1x, leaving capacity up to their 1.25x target.

    6. Prepayment Income Outlook
      Q: Should we expect normalized prepayment income in a high-rate environment?
      A: Prepayments may be higher over the next 12 months than in late 2022 and most of 2023 , driven by idiosyncratic events like company outperformance or M&A. However, it's difficult to predict due to rising rates and portfolio turnover.

    7. Investment Activity Expectations
      Q: What are your expectations for new investments and prepayments ahead?
      A: Already funded $100 million this quarter , with a healthy pipeline suggesting another strong quarter for originations. They have less visibility on unexpected prepayments but note the market is opening up.

    8. Portfolio Company Performance
      Q: How are portfolio company revenues and EBITDA trending year-over-year?
      A: Generally, revenues are stable to modestly increasing, and EBITDA is stable. Over the past 2-3 years, companies have seen revenue growth of a few percentage points annually, with EBITDA flat to slightly up.

    9. Repayment Activity and Turnover
      Q: Can you provide color on recent repayments and exits?
      A: Repayments included large private positions like Melissa and Doug , Ardana, and a second-lien repayment in Blackhawk Networks. Total exits were about $56 million in public assets and $201 million in private assets, often at better than par.

    10. Nontraded BDC Fundraising
      Q: How is nontraded BDC fundraising progressing, and does it strain resources?
      A: They've been raising about $150 million per month for two years , which works well and is not a burden on resources. The partnership with Brookfield in Brookfield Oaktree Wealth Solutions supports retail channel activities.

    11. Secondary Market Activity
      Q: What drove the higher secondary market purchases at higher prices?
      A: They rotated into higher-spread public names and purchased CLO BB tranches in the high 90s, with spreads in the mid-700s. This opportunistic move was due to strong CLO issuance and allowed them to obtain outsized pricing.

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