Oaktree Specialty Lending Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2024

There are 11 speakers on the call.

Operator

Welcome and thank you for joining Oaktree Specialty Lending Corporation's 2nd Fiscal Quarter Conference Call. Today's conference call is being recorded. At this time, all participants are in a listen only mode, but we will be prompted for a question and answer session following the prepared remarks. Now I would like to introduce Michael Mosticchio, Head of Investor Relations, who will be hosting today's call. Mr.

Operator

Mosticchio, you may begin.

Speaker 1

Thank you, operator, and welcome to Oaktree Specialty Lending Corporation's 2nd fiscal quarter conference call. Our earnings release, which we issued this morning and the accompanying slide presentation can be accessed on the Investors section of our website at oaktreespecialtylending.com. Joining us on the call today are Armen Panosian, Chief Executive Officer and Chief Investment Officer Matt Pendo, President Chris McCown, Chief Financial Officer and Treasurer and Matt Stewart, Chief Operating Officer. Before we begin, I want to remind you that comments on today's call include forward looking statements reflecting our current views with respect to, among other things, our future operating results and financial performance. Our actual results could differ materially from those implied or expressed in the forward looking statements.

Speaker 1

Please refer to our SEC filings for a discussion of these factors in further detail. We undertake no duty to update or revise any forward looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any Oaktree fund. Investors and others should note that OCSL uses the Investors section of its corporate website to announce material information. The company encourages investors, the media and others to review the information that it shares on its website.

Speaker 1

With that, I would now like to turn the call over to Matt.

Speaker 2

Thanks, Mike, and welcome, everyone. Thank you for joining us today and for your interest in and support of OCSL. Our second quarter was highlighted by robust origination activity that drove a positive shift in the composition of our portfolio, steady earnings and progress on several non accruals that led to an improvement in credit quality. Adjusted NII was $0.56 per share, roughly in line with the $0.57 per share for the prior quarter. These results reflect the ongoing strength in the earnings power of OCSL, including solid interest income from our predominantly floating rate portfolio.

Speaker 2

However, our results were impacted by the timing of repayments, which primarily occurred at the start of the quarter and capital deployments, which were concentrated towards the end of the quarter. In addition, our continued rotation into primarily 1st lien loans reduced our weighted average portfolio spread by approximately 10 basis points in the quarter. Our 1st lien investments have increased from 71% at September 30, 2022 to approximately 81% today. At the same time, second lien investments decreased from 16% to 5% over the same period. We declared a dividend of $0.55 per share, consistent with the past 5 quarters.

Speaker 2

We also work closely with the management teams of our underperforming portfolio companies and made important progress repositioning several investments during the quarter.

Speaker 3

Drawing upon

Speaker 2

our long history and proven expertise in turning around challenge investments and leveraging the deep resources of Oaktree, we are confident that we can continue to successfully maximize outcomes and deliver value for our shareholders. Some of our non accrual positions as well as no new non accruals enabled us to drive improved credit quality during the quarter. Investments on non accrual status at quarter end represented 2.4% of the portfolio at fair value and 4.3% at cost. That was down from 4.2% of the portfolio at fair value and 5.9% at cost the prior quarter. NAV per share declined to $18.72 from $19.14 per share for the prior quarter.

Speaker 2

The decline reflected further markdowns on certain of our non performing investments due both to restructurings on some as well as lower valuations on others. Our robust investment activity consisted of $396,000,000 of new commitments in the quarter, building on the momentum from the prior quarter when we originated $370,000,000 of new investments. We continue to find attractive opportunities across sponsor, non sponsor and publicly traded credit investments, bolstering healthy deal flow even as we maintain our highly selective approach to investing amid the uncertainty in this current higher for longer interest rate environment. Importantly, our new originations were made at attractive yields with lender friendly deal structures. This included lower leverage and loan to values.

Speaker 2

To that end, the weighted average yield on our new debt investments was 11.1%. On the repayment front, we received $323,000,000 from pay down and exits in the 2nd quarter. Our portfolio continues to receive steady levels of repayments even in a less active M and A environment. We have also been capitalizing on the strength in the liquid credit markets by opportunistically selling out of certain public debt investments. Over the past 2 years, over 50% of our portfolio has turned over, which we believe reflects the strength of our investment underwriting and selection process.

Speaker 2

Exits occur largely when these companies prove successful They have the ability to pay down debt, refinance at lower rates or sell at attractive valuations to larger competitors. We pursue opportunities and make investment decisions with these outcomes in mind. Before I turn the call over to Armin, I wanted to highlight a significant action that our managers in support of OCSL. As part of our strong commitment to aligning our interest with shareholders, we announced yesterday that Oaktree has agreed to a significant and permanent reduction in our base management fee to 1% on gross assets from 1.5%. As a reminder, Oaktree has been waiving $1,500,000 of management fees each quarter as part of the OSI II merger that closed in January of last year.

Speaker 2

For the original agreement, those fee waivers were decreased to $750,000 per quarter for the 2nd year following the close of transaction, which occurred this January. However, Oaktree agreed to keep the fee waivers at $1,500,000 per quarter for both the March June 2024 quarters. We expect this reduction will increase OCSL's adjusted net investment income per share by approximately $0.15 annually. This equates to an estimated improvement in our return on adjusted net investment income of 0.8% annually. Bottom line, this lowers our cost of operations and allows a larger share of investment income to flow directly to our shareholders.

Speaker 2

With that, I would like to turn the call over Armen to provide more color on our portfolio activity and the market environment.

Speaker 3

Thanks, Matt, and hello, everyone. I'll begin with comments on our portfolio activity and then conclude with observations regarding the market environment. Our portfolio was well diversified with $3,000,000,000 at fair value across 151 companies close of the quarter. We remain focused on investing at the top of the capital structure with 86% of the portfolio invested in senior secured loans consistent with the prior quarter. 1st lien loans accounted for 81% of the portfolio at fair value.

Speaker 3

We also continue to emphasize investments in the larger more diversified businesses to further mitigate risk. Median portfolio company EBITDA as of March 31 was approximately $134,000,000 roughly in line with the prior quarter and leverage in our portfolio companies was steady at 5.2 times well below overall middle market leverage levels. The portfolio's weighted average interest coverage based on current base rates was also steady at nearly 2.0 times. In the March quarter, we leveraged Oaktree's platform to originate $396,000,000 of new investment commitments across 35 transactions. Our originations were dispersed across a broad array of opportunities spanning the private credit and public debt markets, including 14 private deals, 6 primaries and 15 secondary purchases.

Speaker 3

Notably, we participated in 5 private sponsor led transactions, where Oaktree's size, reputation and ability to underwrite and fund quickly enabled us to participate. We also found compelling relative value in the public credit markets purchasing $191,000,000 across primary new issues and secondary market purchases. 92% of our originations in the quarter were 1st lien investments, reflecting our defensive investment approach and the average yield for all of our originations was 11.1%. Our origination activity remains steady in the current quarter, supported by a robust pipeline of opportunities across sponsor and non sponsored borrowers. Turning to credit quality.

Speaker 3

As Matt noted, our non accruals decreased during the quarter as we made significant progress working through these situations. This was driven in part by the removal of OTG Management from non accrual status. As a reminder, this company operates a concession business across several airports in the U. S. OTG has a solid business model and is performing well, but was struggling to meet its higher interest expense burden from the increase in base rates.

Speaker 3

As a result, it restructured its balance sheet out of court in February, resulting in lenders forgiving a portion of their debt in exchange for equity in the company. We placed this investment back on accrual status following the restructuring, but wrote it down quarter over quarter to reflect cash declines tied to the restructuring costs. Additionally, we partially removed from non accrual our investment in all web leads, which generates leads for insurance companies. As a reminder, this is a non core position we inherited from the prior manager in 2017. The company completed a restructuring of its debt in March.

Speaker 3

We placed 2 tranches of the restructured debt back on accrual status as the company is back on solid financial footing and focused on executing on its strategic initiatives. We also removed CPC Acquisition Corp, a small public second lien from non accrual after we sold out of our position following an improvement in its secondary trading levels. I also wanted to provide an update on Brazio, an Amazon aggregator that we placed on non accrual last quarter. We have been working with the management team and lenders to support liquidity and position the company for long term success. In late February, the company filed for bankruptcy protection to strengthen its financial position and deleverage its balance sheet in a protected lender led financing.

Speaker 3

As a result of this, we wrote off our preferred equity investment and mark down our term loan. Our overall portfolio is in solid shape. We view recent challenges faced by companies placed on non accrual as idiosyncratic and not indicative of broader or systemic issues within the portfolio. Of course, we are closely monitoring all of our investments, given persistently high interest rates and the potential for these increased borrowing costs to create stress for some companies. With that in mind, I'll turn to our view on the market environment.

Speaker 3

Over the past 6 months, credit markets have experienced widespread rally, leading to historically tight spreads across the leverage loan and private credit market. The market strength has multiple drivers, including supportive capital influence, but the overall trend remains driven by investor confidence in the soft landing that will lead to a meaningful decline in interest rates. While we aren't overly bearish about the U. S. Economy or the inflation outlook, we believe downside risks may outweigh the upside, given that markets have already priced in overly optimistic expectations.

Speaker 3

Specifically, we are skeptical about the pace and extent of interest rate declines, anticipating a more modest trajectory than what is currently priced in. As such, rates could remain elevated compared to where they were prior to 20 22, which could pose challenges for borrowers with high debt loads or companies that will need to refinance their debt in the coming years. Against this backdrop, we continue to exercise caution. We will remain selective and prudent as we apply our investment approach that prioritizes relative value, drawing upon Oaktree's substantial resources and expertise to selectively invest across private and public credit markets. Importantly, we remain well capitalized with ample liquidity to navigate near term volatility and continue to construct the portfolio for strong long term performance on behalf of shareholders.

Speaker 3

Now, I will turn the call over to Chris to discuss our financial results in more detail.

Speaker 4

Thank you, Armin. As Matt noted, we reported adjusted net investment income of $44,700,000 or $0.56 per share as compared with $44,200,000 or $0.57 per share in the Q1. The slight increase on a dollar basis was primarily driven by a modest decline in net expenses due to lower Part 1 incentive fees, professional fees and interest expense in the quarter. This was partially offset by slightly lower adjusted total investment income. The per share decrease for the quarter was driven by an increase in weighted average shares outstanding.

Speaker 4

Adjusted total investment income decreased by $700,000 in the quarter and was adversely impacted by a $1,900,000 decrease in interest income due primarily to the result of the timing of capital deployment and spread compression primarily resulting from the rotation out of higher yielding second liens. This is partially offset by a $1,200,000 increase in fee income resulting from prepayment and amendment fees and higher OID acceleration from investment repayments. We'd note that our GAAP financial results were lower due to purchase price premium acceleration from the par repayments of certain investments required in the mergers with OCSI and OSI II. Net expenses for the 2nd quarter totaled $52,700,000 down $1,100,000 sequentially. The decline was mainly driven by $600,000 of lower Part 1 incentive fees, dollars 300,000 of lower professional fees and $300,000 of lower interest expense.

Speaker 4

As Matt highlighted, Oaktree agreed to waive a total $3,000,000 of base management fees over the March June quarters at a rate of $1,500,000 per quarter. Starting on July 1, 2024, our new one percent base management fee will go into effect and will be calculated net of the base management fees that Oaktree agreed to waive as part of the OSI2 merger. Shifting to our balance sheet, we maintain a strong capital position with ample liquidity. Our net debt to equity remains on the low end of our target range at about 1.02x, providing us plenty of room to grow leverage should we find more compelling opportunities in the market. Newly funded investment activity of $377,000,000 exceeded proceeds from repayments, exits and sales of $323,000,000 enabling us to grow the portfolio.

Speaker 4

As of March 31, total debt outstanding was 1 point $6,800,000,000 and had a weighted average interest rate of 7.0%, including the effect of our interest rate swap agreements, consistent with the level at the end of the December quarter as interest rates remained steady during the quarter. Unsecured debt represented 57% of total debt at quarter end, also in line with the prior quarter. Our balance sheet was further bolstered through continued share issuance under our ATM program. We were able to capitalize on the constructive market environment to raise $46,000,000 of common equity in the quarter to fund our pipeline. These shares were issued at an average 104% premium to our NAV.

Speaker 4

Our liquidity is strong with approximately $1,000,000,000 at quarter end, including $125,000,000 of cash and 888 $8,000,000 of undrawn capacity on our credit facilities. Unfunded commitments excluding unfunded commitments to the joint ventures were $209,000,000 with approximately $179,000,000 eligible to be drawn immediately, whereas the remaining amount is subject to certain milestones that must be met by portfolio companies before funds can be drawn. Turning now to our 2 joint ventures. Our JVs again delivered another quarter of strong performance. Together, the JVs hold $504,000,000 of investments, primarily in broadly syndicated loans spread across 56 portfolio companies.

Speaker 4

For the quarter, the JVs again generated attractive annualized ROEs, which combined were nearly 14%. Leverage at the JVs increased to 1.3 times in aggregate at quarter end due to the addition of assets to the portfolios in connection with our partners. In summary, we are pleased with our financial results and the progress we've made to date on our challenged investments and continue to believe that our strong balance sheet positions us well for the second half of fiscal year twenty twenty four. Now, I will turn the call back to Matt for some closing remarks.

Speaker 2

Thank you, Chris. We are pleased by the growth in our earnings over the past several years and our financial performance for the Q2 further demonstrates the resilience of those earnings. Our return on adjusted net investment income for the quarter was 11.7%, which once again is at the higher end of our targeted range and our dividend continues to be covered by earnings. Looking ahead, we are being proactive with our non accrual investments and have plans in place that we believe will optimize the recovery for each investment. In addition, our new fee structure and ongoing fee waivers will be accretive to our ROE effective immediately.

Speaker 2

All in all, we are quite optimistic about our future and look forward to building upon our long term track record of delivering attractive returns to our shareholders. As always, we appreciate your participation on the call today and for your interest in OCSL. With that, we're happy to take your questions. Operator, please open the lines.

Operator

Our first question comes from Brian McKenna with Citizens JMP. Please go ahead.

Speaker 1

Okay, great. Thanks. Good morning all. So a question on the dividend and the management fee reduction. So if I annualize second quarter results and then add the $0.15 to that for the fee change, dividend coverage is still less than 110%, and that's before any reduction in interest rates and then any other changes in underlying credit across the portfolio.

Speaker 1

So what makes you confident you'll be able to fully earn the dividend looking out over the next 12 to 18 months assuming the forward curve plays out? And then can you remind us what your earnings sensitivity is to every 100 basis point moving rates?

Speaker 2

Sure, Brian. Thanks for the question. So at a high level, we feel very comfortable given the change in the management fee, which is given to 1% as of July 1, and our ability in the future to cover our dividend and feel good about the dividend. One of the things this quarter that impacted the results was just some inter quarter timing in terms of repayments and then fundings. So there was a little bit I wouldn't just necessarily take this quarter and just annualize it.

Speaker 2

So as we think about and adjusting for that timing difference, as we look at our pipeline and the fundings that we've done this quarter as well as already this quarter, but then for the balance of the quarter, the fee waiver, etcetera, we feel add up altogether, we feel very comfortable with covering the dividend. So I think the one thing is just focus on kind of the timing of the quarter and then just our pipeline as we see it.

Speaker 5

Got it. Okay, helpful.

Speaker 1

And then shifting gears a bit here, just looking at the investment portfolio, it's experienced solid growth year to date, it's up about 5%. So what's your expectation around new investment activity as well as prepayments for the next couple of quarters? And I'm just trying to get a sense

Speaker 5

of the trajectory of the portfolio from here.

Speaker 3

This is Armin. We have already funded $100,000,000 this quarter, so the 2nd calendar quarter. We do have a pretty healthy pipeline for the balance of the quarter in terms of new fundings. I don't have a very good sense for unexpected repayments obviously, but I do think that the market is opening back up and we are seeing more M and A deal volume or deal activity that we could potentially consider as part of or for a direct loan. And our public market activities are we remain quite active there.

Speaker 3

We will deploy when it makes sense in the public markets as well. We continue to watch that for periods of opportunity or potential volatility that makes sense. But I think that this quarter, we will have a pretty another strong quarter for origination just based on what we know about the pipeline. Not sure I could guide to a more specific number, but the $100,000,000 in the month of April, I think is

Speaker 6

a good start so far.

Speaker 7

All right. I'll leave it there.

Speaker 1

Thanks for taking my question. Thanks.

Operator

The next question comes from Finian O'Shea with Wells Fargo. Please go ahead.

Speaker 8

Hey, everyone. Good morning. So first question looking at origination this quarter, it's some private participation, some public deals, there's not much spreader OID. So does this combining that with the fee cut, does this mean things are going this way and the fee cut is just sort of an offset to the returns you expect to be generating?

Speaker 3

Fin, it's Armin. The portfolio over the last couple of years has migrated to a substantially higher percentage of first lien, kind of a reflection of our view of kind of risk in the markets. We are now 80% 1st lien, we were 60% 24 months ago, 36 months ago. And for a portfolio that is largely 1st lien and I would say on balance might even increase in our 1st lien exposures. As we looked at sort of the appropriate aligning level of management fee, over the long run, we thought that 1% was more adequate or more consistent.

Speaker 3

And I think the markets are going to ebb and flow. I think the spreads will obviously, they have tightened over the last 18 months. They may widen. We're not making a prediction on that. But we do think that the best way to deliver a low volatility and dependable dividend for our shareholders is to continue to do what we have been doing around the 1st lien migration, which we thought that now would be a good time as any to reduce the fee and deliver that continued stability to our shareholders.

Speaker 3

That's really what's driving it. It's not a forward prediction about spreads. I mean that we're not it's just very hard to make any sort of prediction on that. But the market certainly has tightened over the last 18 months visavis spreads.

Speaker 8

It's helpful. Thank you. A follow-up on the related non traded BDC or group runs that looks to be moving along at say $150,000,000 a month. Can you talk about perhaps resources that you and Brookfield are putting into it, the platforms you're on, the distribution force and like where you're sort of hoping this goes to as a say a monthly cadence or total size?

Speaker 3

Yes. Fin, I don't really have a projection on what we hope or expect for the monthly cadence to go to. I could tell you that our investment team and teams at Oaktree continue to grow in terms of resources, both in terms of sourcing and analytics. Brookfield Oaktree do have a partnership on the wealth solutions channel called Brookfield Oaktree Wealth Solutions, Bose, that is responsible for our activities on the non traded BDC side, as well as other products for the retail channel. It's not something that is a distraction or burden for the investment team at all.

Speaker 3

And I think that as we have grown across our multiple channels, including institutional, it's just made Oaktree a more, I would say, powerful counterparty in the markets, providing the whole capital structure solutions and then also in partnership with our operator.

Speaker 8

Okay. Yes. Sorry to interrupt, but at what level would it be a distraction or burden if say $150 a month is just a sort of breeze for you like where should we be alarmed or looking at it or

Speaker 2

I would just hey Fin, it's Matt. So we've been raising about $150 a month for 2 years. So that's been a steady cadence. Like I don't as Armisen, what are my predictions about where that's going to go, but that's where it's been and it's worked just fine and works fine for that BDC, works fine for the rest of Oaktree and our resources. So I don't I wouldn't spend too much time kind of hypothesizing what could happen to this and everything.

Speaker 2

It's been 150 that works well for that PDC works well for Oaktree and that's just kind of how we're thinking about it.

Speaker 8

Awesome. Thank you both. And I'll hop back in the queue.

Speaker 2

Thanks, Dan.

Operator

The next question comes from Kyle Joseph with Jefferies. Please go ahead.

Speaker 7

Hey, good morning. Thanks for taking my questions. Just on the decline in interest income, I know you guys talked about both spreads and then timing, but just in terms of modeling, would you attribute the majority to either of those or was it really more of a timing thing than the spreads? And then how do we factor that in that your I think your reported portfolio yield was stable quarter on quarter, if I'm not mistaken?

Speaker 9

Hi, it's Matt Stewart. So I know in our prepared remarks, we talked about the 2nd lien portfolio impacting our spreads by about 10 basis points. But overall, we had spread compression within our book of in and around 15 bps on our weighted average yield. That was offset by a lot of the progress we've made on the non accruals and work we did throughout the quarter. And then as Armin noted, we did have back weighted deployments, about $330,000,000 of our deployments during the quarter were kind of mid February to March.

Speaker 9

And that will always have some level of what I'll call friction between deployments and repayments. But that on average probably amounted to about $0.01 a half this quarter of impact that we probably normally wouldn't see in a normal quarter.

Speaker 7

Got it. Very helpful. And then just a follow-up for me on the unrealized depreciation in the quarter, it sounds like the majority of that was tied to NPAs and just give us a sense for ex the NPAs how portfolio performance and valuations have been trending?

Speaker 4

Hey, Kyle, it's Chris. I would just say that ex the NPA, the portfolio was relatively flat quarter on quarter. You're right to point out

Speaker 6

that that's really the driver.

Speaker 9

Yes. I mean predominantly the write downs during the quarter were in Thracchio, Impal and OTG, all of our non performing assets from twelvethirty one.

Speaker 7

Got it. Very helpful. Thanks for taking my questions.

Operator

The next question comes from Paul Johnson with KBW. Please go ahead.

Speaker 6

Hey, good morning. Thanks for taking my question. Congrats on the fee cut announcement. On the fee cut, I mean, with this announcement, some of the developments, obviously, with the restructuring, some of that's still ongoing, some of it was completed during the quarter. But the timing of such an announcement, I mean, are you pretty confident that you've got a handle on any of the remaining credit issues in the book and pretty confident in the plan for Premier.

Speaker 3

Yes. This is Arvind. We do feel confident that we have both a good plan for maximizing recoveries for our challenges in the portfolio. We do have a process that we engage in regularly with just evaluating the quality of the portfolio as well, just to try to anticipate any sort of issues or even repayments that we may get faster than expected. We feel good about the marks in the portfolio.

Speaker 3

We feel good about the quality of the portfolio and are positioned well in the market to continue to deploy. So I think, we've taken a pretty conservative view on the very small handful of challenges that we do have in the portfolio and have marked them in a way that we think is reflective of that conservatism. But we will continue to work hard maximize recoveries and hopefully even outperform those marks. It certainly is our goal to do better than where we have it marked and really leverage Oaktree's capabilities to execute on an outcome that is favorable for shareholders.

Speaker 6

Okay. Thanks for that Arvind. And then, switching over to just activity in the quarter, fairly high level of repayment activity. I was wondering if you can kind of give some sort of color as to what kind of the balance has been in terms of repayments and exits that you've had. Have you spent more liquid assets or higher yielding season stuff?

Speaker 6

What was kind of what we kind of observed that we've taken out in the market?

Speaker 3

Yes. Just in terms of payoffs, it's kind of a mix. There are some chunky repayments on the private side, including a position in Melissa and Doug, which is probably the largest single payoff. And then we had a repayment in a company called Ardona. And we had some small repayments in or not small, but a reasonably sized second lien repayment in Blackhawk Networks.

Speaker 3

So it's been the repayments have been pretty strong. On the exits in terms of public side, we are pretty active in trading and have benefited from the markets, especially the senior loan markets rallying this year, this calendar year. And so we did take some chips off the table with respect to both loans and bonds that we have in the portfolio. And that was about $56,000,000 of par in the public side, about $201,000,000 of par on the private side in terms of the total exits and the proceeds that we realized across the portfolio was driven it was actually a better than par recovery in those exits, really driven by some higher than par exit prices on the private side as we saw some repayments.

Speaker 6

Got it. Appreciate the detail there. That's all the questions for me. Thanks.

Operator

The next question comes from Melissa Woodall with JPMorgan. Please go ahead.

Speaker 10

Good morning. Thanks for taking my questions today. Most have actually been asked and answered already. But just to follow along the thread of repayment activity. When we think about prior cycles, I think there were some elevated prepayment fee income just because of the pace of rate cuts that we had seen in the prior cycle.

Speaker 10

Given that this one is likely to be more extended, you've been talking about the potential for sort of a higher for longer rate environment for a long time. Should we be thinking about prepayment income in a more normalized way than what we've seen in previous rate decline cycles?

Speaker 3

Thanks Melissa. It's Armin. It's a good question. I don't think that we have a strong enough handle on making such predictions on prepayments. But I think your instinct is right that, if base rates remain elevated for an extended period of time, where you will see repayments are when a company just outperforms and or a sponsor wanting to sell a business just because it needs to return capital.

Speaker 3

The historic trend of enterprise valuation multiples rising, interest rates being low, either declining or ultra low and not driving prepayments, that's no longer the case. So when you do see a prepayment, it's really because of something idiosyncratic to the upside, most likely. Like in the case of Melissa and Doug, that was a business that was a loan that we did about a year ago or a little bit over a year ago. It repaid faster than we thought it would. And it was because the company was performing well or had performed well through COVID.

Speaker 3

And there was a strategic acquirer for that business that was willing to pay a price that was accretive to the sponsors view of that business. So but I wouldn't say that there's a long line of conversations that are being teed up with us that indicate that there's this short term M and A deal volume wave happening. But I would also say that M and A deal volume is slightly elevated in terms of our forward pipeline as we look at it today versus maybe 12 or 18 months ago. So prepayments should be higher over the next 12 months than they were in, let's say, late 2022 and most of 2023. I would expect for sponsor to sponsor transactions to pick up, sponsor to strategic sales to pick up.

Speaker 3

But I don't think it's going to be quite at the same speeds that we were used to pre COVID especially.

Speaker 2

And Melissa, one of the reasons it's hard to predict this, if you go back over the last 2 years, over 50% of our portfolio is actually turned over, which all that occurred during a rising rate environment. So one would have thought it would be a little bit lower. So it's really difficult to predict. It's idiosyncratic, as Amari mentioned, like Melissa and Doug. So it's tough to kind of project out for the

Speaker 5

next year on that point.

Speaker 10

Yes, fair enough. That's really helpful though. I hope I didn't miss this, but I know you talked about median EBITDA in the portfolio and leverage being pretty steady quarter on quarter. Just curious what you're seeing in terms of your portfolio company revenue and EBITDA trends generally, sort of on a year over year basis? Thank you.

Speaker 3

Yes. Most of this is going to be like 20,000 feet, 30,000 feet. But I would say, generally speaking, revenue is revenue generally for the portfolio is sort of stable to increasing modestly. EBITDA, I would say, is stable. I wouldn't say it's materially higher by any stretch and certainly not weaker in any sort of consistent way or observable way across the portfolio.

Speaker 3

So I would say unlevered performance of businesses. So ignoring the elevated cost of borrowing and how much that's gone up over the last 2 years, companies generally have seen higher revenue over the last 2 or 3 years by a few percentage points annually and EBITDA sort of flat to slightly up generally.

Speaker 10

Thanks,

Operator

Emmett. Our next question comes from Bryce Roe with B. Riley. Please go ahead.

Speaker 5

Thanks a bunch. Good morning. Maybe wanted to start with this discussion around spreads and some level of spread compression that you've seen. Can you speak to the level of spread that you've seen with the $100,000,000 that you funded here in April? And then how the pipeline looks from a spread perspective maybe relative to what you've seen over the last 6 months?

Speaker 3

Yes. It's a good question. So in this $100,000,000 that we have funded in April, spreads are in the mid-500s. I think that this is

Speaker 4

kind of just to give you

Speaker 3

some directional feedback. In late 2022, early 2023, that's probably where the top tick was spreads and where we saw a typical 1st lien or unitranche sponsor led financing. Even though the deal flow was pretty light during that timeframe, the spreads were $650,000,000 maybe to as much as $700,000,000 spread at that point in time. But since then, I think the market is trending towards more of a 500 to 550 spread. In really lightly levered situations, you might even see an occasional deal print even inside of 500, but that would be, I would say, atypical.

Speaker 3

But there's certainly the market is not at 650 anymore or even above 600 anymore. It's certainly more in the low 500 low to mid-500s at this point as we look at the market going forward.

Speaker 5

Okay. That's helpful. And then wanted to ask about balance sheet leverage both at OCSL and then within the JVs. You noted an uptick in balance sheet leverage at the JVs. I think it was up 1.1 to 1.3.

Speaker 5

Is there more appetite to take leverage at the JVs higher? And then from a, I guess, an on balance sheet OCSL perspective, no real change from a balance sheet leverage perspective year over year or quarter over quarter. What's the appetite there? Are you still trying to manage to maybe the lower end of your targeted balance sheet leverage range?

Speaker 9

Hi, it's Matt Stewart. As you noted, we did raise leverage at the JV to 1 point 3 times

Speaker 4

on the back of the heavy new issue

Speaker 9

volume and the new facility that we put in last year. Our target there is to get to 1.5 to 1.75 as we rotate into a more first lien broadly syndicated portfolio. So we do have additional room to grow the JV and ROE at those JVs. And then on balance sheet, we ended the quarter a little bit over one times net leverage. So we do have capacity.

Speaker 9

As Armin noted, we did fund about $100,000,000 so far this quarter. So we are closer to $1,100,000,000 currently. But we will operate and leave capacity for additional fundings if we do get some volatility even at 1.1, we have significant room to get to the top side of our leverage target at 1.25.

Speaker 5

Okay. All right. Last one for me. If you look at the slide deck and the secondary public market activity, dollars 92,000,000 for the Q2, it's one of the heavier quarters from an origination perspective within that secondary public. And the secondary market price looks like $0.98 so a little bit higher than what you might have done in the past.

Speaker 5

Just kind of wanting to kind of understand the thought process there, being that that's typically a little bit more opportunistic and you see maybe a lower secondary purchase price when you see that level of volume associated with it?

Speaker 3

Yes, this is Arvind. We've made some rotations in the publicly traded book. We had some sort of higher spread names that are atypical of public markets, just kind of higher than average in the public. We also bought some CLO BBs in the new issue market that were in the high 90s. So these are performing loan positions and solid CLO portfolios in structured credit where we were getting sort of better than normal public spreads.

Speaker 3

In the case of CLOBBs, our spreads are in the mid-700s. These aren't like a big change in the portfolio, but when we do see some CLO issuance that is strong, really fueled by a big demand or a strong demand for AAA CLOs. Sometimes we find the BB tranche has choppy replacement, and we're able to get sort of step in there in partnership with our structured credit team and trading activities to be able to get some outsized pricing on CLOBBs as again as the CLO market opens up in terms of new issuance. So we saw that opportunity in the 1st calendar quarter and we took it and feel pretty good about some of those purchases today.

Speaker 5

Okay. Thanks for taking the questions.

Speaker 4

Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Michael Mosticchio for any closing remarks.

Speaker 1

Great. Thanks, Dave, and thank you all for joining us on today's earnings conference call. A replay

Speaker 4

of this call will be available

Speaker 1

for 30 days on OCSL's website in the Investors section or by dialing 877-344-7529 for U. S. Callers or 1-four twelve-three seventeen-eighty eight for non U. S.

Speaker 4

Callers with the replay access code 2,416,934

Speaker 1

beginning approximately 1 hour after this broadcast.

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Earnings Conference Call
Oaktree Specialty Lending Q2 2024
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