Q3 2024 Earnings Summary
- Elevated origination activity reflects growth opportunities: The company has seen increased origination levels due to pent-up M&A activity in the pipeline, indicating robust growth prospects. As Armen Panossian noted, "As that M&A activity has picked up this year, we have seen some elevated originations."
- Maintaining a disciplined investment philosophy: Oaktree continues to focus on its core competency in below investment-grade and unrated credit, adhering to its relative value philosophy without pursuing unnatural growth. Armen Panossian stated, "We're going to continue managing the business with that legacy in mind, and we're not going to sort of do anything that's unnatural from a growth perspective."
- Recent performance issues are isolated events: The company attributes the recent NAV declines to "unfortunate idiosyncratic situations in a small handful of credits," suggesting that these are isolated incidents rather than indicative of systemic problems.
- OCSL's recent earnings benefited from a onetime Part 1 fee waiver, which is not expected to recur, potentially leading to lower earnings in future quarters.
- The company is experiencing tighter spreads compared to last year, which could pressure future earnings as new originations might generate lower yields.
- The company acknowledged performance issues in recent quarters due to idiosyncratic situations in some credit investments that were significant enough to hurt NAV, raising concerns about the quality of their credit portfolio.
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Oaktree's Strategy
Q: What's your vision for Oaktree amid recent changes?
A: Oaktree remains focused on its core of below investment-grade and unrated credit investments, both performing and nonperforming. The firm is not seeking unnatural growth, and recent performance issues are due to idiosyncratic situations in a few credits, not platform shifts. -
Part I Fee Waiver
Q: Is the Part I fee waiver truly one-time?
A: Yes, the Part I fee waiver this quarter is truly one-time and is not ongoing. It was deemed appropriate for this quarter, similar to past transaction-related waivers. -
Undistributed NII
Q: How much undistributed NII is there per share?
A: Adjusted Net Investment Income came in at $0.55 per share, aligning with the dividend payout. -
Net Deployment Levels
Q: Will elevated net deployment continue?
A: Elevated net deployment this quarter was partly due to timing and pent-up M&A activity. The firm remains cautious, focusing on first lien investments, and is selective amid tighter spreads and elevated base rates.
Research analysts covering Oaktree Specialty Lending.