Q4 2024 Earnings Summary
- OCSL is actively optimizing their joint ventures (JVs), with the potential to increase leverage beyond the current 1.4x, which could enhance returns. Management stated, "we do think that there's a little bit of leverage capacity there to increase given the nature of those portfolios." They are "constantly looking at the portfolio allocation... as well as the quantum and cost of the leverage," aiming to "get a little bit more return out of them."
- OCSL's management is committed to supporting shareholder value through discretionary fee waivers and a permanent reduction in the management fee to 1%, enhancing net investment income. The management team explained, "we describe it as a discretionary fee waiver of $1.2 million... starting July 1 is when the management fee was reduced to 1%, that was permanent."
- OCSL is experiencing increased deal flow discussions and anticipates more investment opportunities over the next 12 to 24 months, potentially leading to portfolio growth and increased income. Management noted, "over an extended period of time over the next 12 to 24 months... the expectation and some of the conversations that we've been having with sponsors and with non-sponsored companies has certainly picked up."
- Increase in investments on nonaccrual status, indicating potential credit quality issues. OCSL added three investments to nonaccrual during the quarter, including nThrive, which experienced declining bookings and retention rates. Management is closely monitoring these situations, but the nonaccruals could impact earnings and NAV.
- Discretionary nature of incentive fee waivers, which are not guaranteed to continue. The company waived $1.2 million of Part 1 incentive fees this quarter, but management stated these waivers are discretionary, not permanent. If these waivers are not continued, future net investment income may be negatively affected.
- Erosion of covenants and terms in new loans, potentially increasing risk. Management noted that covenant erosion has been observed, especially in larger deals, and legal protections have weakened. This could increase the credit risk in OCSL's portfolio.
-
Nonaccrual Investments Status
Q: Updates on nThrive and Thrasio?
A: Thrasio will take a few more quarters to reach a value-maximizing resolution. FinThrive (nThrive) had a positive development from a recent press release, and the business is well-positioned but requires execution and sponsor engagement. -
Market Covenants Outlook
Q: Will covenants hold in 2025 with more activity?
A: In the lower and core middle markets ($20–$70 million EBITDA), covenants are expected to remain strong with quarterly tests and good protections. In larger markets (above $100 million EBITDA), covenant erosion has occurred, but increased deal flow may strengthen covenants, though not completely reverse previous loosening. -
Optimizing Joint Ventures
Q: Can JVs generate more income?
A: OCSL is exploring ways to optimize Joint Ventures to increase returns. Combined leverage in the JVs is about 1.4x, with potential to increase over time. Plans include rotating out of private assets into broadly syndicated loans to enhance leverage capacity and returns. -
Investment Activity Outlook
Q: Expecting lower December activity, more in 2025?
A: It's hard to predict quarterly deal flow, but over the next 12–24 months, conversations with sponsors and companies have increased, indicating potential for more activity. The team has noticed a pickup in the velocity of these discussions, though timing remains uncertain. -
Incentive Fee Waivers
Q: Are fee waivers ongoing if NII is below dividend?
A: The adviser views the incentive fee waivers as discretionary and not permanent, assessing them quarter-to-quarter. The management fee reduction to 1% starting July 1 is permanent. -
Pluralsight Loan Usage
Q: Can Pluralsight use revolver to pay interest?
A: The revolver has covenants and restrictions; it's not intended for the borrower to draw on it to pay coupon interest. It's meant to support the business as it strengthens its position, not to pay interest on restructured loans.
Research analysts covering Oaktree Specialty Lending.