Oaktree Specialty Lending Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
February 4, 2025
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Operator

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

Operator

Cleven, you may begin.

Dane Kleven
Dane Kleven
SVP & Head of Investor Relations at Oaktree Specialty Lending

Thank you, operator, and thank you all for joining our call. We appreciate your support of Oaktree Specialty Lending Corporation. This morning, we issued our earnings release and accompanying slide presentation, which can be accessed on the Investors section of our website at oaktreespecialtylending.com. We encourage investors, the media and others to review the information posted on our website. Joining us on the call today are Amit Panossian, Chief Executive Officer and Co Chief Investment Officer Raghav Khanna, Co Chief Investment Officer Matt Pendo, President and Chris McCown, Chief Financial Officer and Treasurer.

Dane Kleven
Dane Kleven
SVP & Head of Investor Relations at Oaktree Specialty Lending

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 our future operating results and financial performance. Our actual results could differ materially from those implied or expressed in the forward looking statements. 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 a solicitation of an offer to purchase any interest of an Oaktree fund.

Dane Kleven
Dane Kleven
SVP & Head of Investor Relations at Oaktree Specialty Lending

Before we turn to our results, I want to address the recent fires and the impact they've had on our community. We're heartbroken by the devastation caused by the fires in Los Angeles, Oaktree's headquarters and our home since our founding in 1995. In response to these tragic events, we've deployed a variety of resources to ensure the safety and well-being of our employees and Oaktree will continue to support the long and challenging road to recovery for them as well as the broader Los Angeles community. Despite these challenging circumstances, we've kept our operations running without interruption, allowing us to continue to serving our clients. With that, I would like to now turn the call over to Matt to discuss our results.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

Thanks Dane. Welcome everyone and thank you for joining us today. I want to begin the call by discussing some of the strategic actions we took this quarter to best position OCSL for future success. First, on February 3, Oaktree purchased from OCSL $100,000,000 of newly issued common stock at a price of $17.63 per share, which is equal to OCSL's net asset value as of January 31, 2025. This represents a 10% premium to the stock price and resulted in a nearly 7% increase to NAV.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

2nd, we permanently amended our fee structure instituting a cap, also known as a total return hurdle, in the calculation of our Part 1 incentive fee to consider capital gains and losses. The total return hurdle includes a look back provision that commences effective October 1, 2024 and will build over time to a rolling 12 quarter look back by the company's 2027 fiscal year end. Under the new incentive fee structure, we are waiving $6,200,000 of Part 1 incentive fees this quarter. 3rd, we amended our dividend policy to include a base dividend and a supplemental dividend. For the upcoming quarter, our Board declared a base dividend of $0.40 per share, plus a supplemental dividend of $0.07 per share, which are both payable in cash on March 31, 2025, the stockholders of record as of March 17, 2025.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

We generally expect that the supplemental distributions will be equal to approximately 50% of the amount by which adjusted NII exceeds the base quarterly distribution of $0.40 per share, subject to the Board's approval. Taken together, we believe these actions bring several benefits and position OCSL for future success. The equity raise will help grow our asset base and further diversify the portfolio. 2025 is shaping up to be a more active year than 2024 for deal flow and the equity capital plus the associated impact of leverage give us the dry powder to capitalize on the attractive opportunities within our growing pipeline. Regarding the amended fee structure, although we have voluntarily waived fees over the past 3 quarters, the new incentive fee structure is permanent, providing the market and shareholders with more clarity.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

Lastly, the change to the dividend policy establishes a stable base dividend that we believe is sustainable through market cycles amid fluctuations in rates and spreads. In addition, we expect our approach to the supplemental dividend to help us grow NAV going forward. Turning now to financial results. Adjusted NII was $45,000,000 or $0.54 per share for the fiscal Q1, down slightly from $0.55 per share in the prior quarter. Our net asset value per share declined to $17.63 from $18.09 last quarter.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

I'll now turn the call over to Armin to provide more details on our portfolio and the market environment.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

Thanks, Matt, and hello, everyone. Before I cover the portfolio and our outlook on the market, I wanted to add my thoughts on the changes Matt outlined. Our private credit platform is a core focus for Oaktree and OCSL is a critical part of our franchise. While we acknowledge the challenged performance over recent quarters, we remain committed to OCSL. We believe the equity purchased by Oaktree at a significant premium to the market price is a clear signal of our support.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

I firmly believe that the actions we laid out today demonstrate our commitment to position OCSL for further growth and success. With that said, I'll begin with an overview of our portfolio activity in the quarter before addressing our view on current market conditions. Our portfolio remains well diversified with $2,800,000,000 of fair value invested across 136 companies as of December 31, 2024, and the weighted average yield on our debt investments remains healthy at 10.7%. During the Q1, we invested $198,000,000 in 5 new and 8 existing portfolio companies, in line with our strategy to invest at the top of the capital structure. 82% of our portfolio is now in 1st lien position, up from 78% a year ago.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

We remain focused on investing in larger companies and strong sectors that further diversify our portfolio. In the Q1, the median EBITDA of our portfolio companies was $142,000,000 and the median leverage was 5.4 times. The leverage ratios for our portfolio companies increased slightly from the previous quarter, but remained below the average for middle market companies. The vast majority of our portfolio companies are performing well in the current environment with a weighted average interest coverage ratio of 2.1 times assuming current base rates. I'll now address the credit quality of the portfolio.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

In the Q1, one investment was restructured and removed from non accrual status. However, we classified one new investment as non accrual and took further write downs on other investments. As a result, the investments on non accrual status at quarter end were 3.9% of the portfolio at fair value and 5.1% at cost, relatively unchanged from the prior quarter. The new addition to the non accrual list this quarter is Dominion Diagnostics, a clinical toxicology testing company in which we hold a 1st lien terminal and a revolver. Although the company continued to pay cash interest in the December quarter, it has struggled to grow EBITDA and faces liquidity challenges looking ahead.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

So we felt it was prudent to place it on non accrual. We're working closely with management to address these matters. Although not new to our non accrual list, we placed the 1st lien term loans for Dialyze on non accrual. As a reminder, Dialyze provides hemodialysis services directly to patients in skilled nursing facilities. Our original investment in Dialyze included a 1st lien term loan and warrants.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

In connection with amendment activity and funding incremental amounts on the term loan, we received a relatively small mezzanine loan at 0 cash cost. We put this smaller mezzanine loan on non accrual last summer as the company's plans to achieve profitability was taking longer than originally forecasted. Unfortunately, the situation has not materially improved and given the ongoing cash needs of the company, we placed the 1st lien term loans on non accrual. We are in ongoing discussions with the company and are evaluating all options. Along with the investments on non accrual, we further wrote down several underperforming assets.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

These write downs are concentrated in a handful of struggling investments. We continue to monitor these names closely while taking a conservative approach to their valuation. Next, I want to highlight some of the positive developments in the portfolio. I will begin with a discussion on FinThrive, which was removed from the non accrual list. FinThrive is a software company that helps healthcare clients manage their revenue and cash flow and was successfully restructured in November of last year.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

As part of the transaction, the company raised new capital, extended the maturity of its revolving credit facilities and delevered its balance sheet. In addition, we continue to make progress with several other names on non accrual. For example, EBITDA trends have remained positive for all web leads and Avery successfully closed additional condo sales in 2024, including a penthouse unit. We are optimistic these positive trends in these portfolio companies will continue into the New Year. Turning to our view of the market environment.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

Although the Fed lowered rates by 50 basis points in the last quarter of 2024 and may reduce rates further in 2025, elevated interest rates remain a challenge for many borrowers, especially those with levered balance sheet. Even with inflation beginning to subside, we do not believe interest rates are going back to ultra low levels. During the fiscal Q1, spreads continued to tighten compared to the Q4. Competition between broadly syndicated loans and private credit drove spreads lower, which now seem to be stabilizing as many companies have already repriced or refinanced their debt. We believe a more favorable regulatory environment and an expected increase in private equity activity will increase opportunities for M and A and IPOs over the years ahead.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

This increased deal flow should help fix the supply and demand imbalance we have seen between lenders and borrowers in the private credit space, easing the competitive pressure that has contributed to spread compression in recent years. The uptick in deal making is also likely to create a strong pipeline in 2025. At the same time, private equity firms are sitting on over $2,000,000,000,000 of dry powder. Conditions for deal volume are recovering with declining rates along with valuation gaps between buyers and sellers improving. We believe all of these factors combined suggest a positive outlook for the sector in 2025.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

I'll now turn the call over to Raghav to share details on our originations for the quarter.

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

Thanks, Arvind, and hello, everyone. It's a pleasure to join you on the call today. Turning to our investment activity for the Q1. As Arvind mentioned, we originated $198,000,000 of new investment commitments with a weighted average yield of 9.6 percent, a slight decline from last quarter given the move lower in reference rates. We are encouraged by the still healthy level of origination activity even at these lower yields that reflect today's more competitive environment.

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

We continue to see many compelling investment opportunities that meet our underwriting standards across sponsor and non sponsored companies alongside undervalued publicly traded credits. This allows us to take a selective and relative value approach to new portfolio investments. Paydowns, exits and sales in the Q1 generated $352,000,000 up from $338,000,000 in the 4th quarter, primarily reflecting a higher level of refinancing activity

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

across the

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

broader market. This high level of pay downs underscores the strength of the portfolio, the Oaktree platform and the quality of our underwriting process. These pay downs also reflect the success of our portfolio companies in executing their business and fiscal management plans, which include refinancing debt and more favorable terms, reducing leverage or selling their businesses. In addition to pay downs, we also took advantage of the recent strength in the liquid credit markets and sold certain positions at prices that we believe reflect significant value. Next, I will discuss some noteworthy investments in the quarter, starting with Encore, a global leader in audiovisual and corporate event production services owned by Blackstone.

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

Encore is a preferred provider for many of the largest hotel chains around the world and has contracts with more than 2,200 venues across 20 countries. Oaktree participated in a $2,900,000,000 refinancing to improve the existing capital structure. Oaktree was a co leader ranger and book runner for this deal, which included a $2,400,000,000 term loan and $250,000,000 revolving credit facility. Oaktree provided $452,000,000 of the term loan, which has a coupon of SOFR plus 5% and $48,000,000 of the revolving credit facility. And OCSL was allocated $62,000,000 of this deal.

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

Next, we also made an investment in Team Technologies. The company is an outsourced manufacturer of non discretionary consumable products for large medical and dental OEMs. This financing supported Arlington Capital Partners acquisition of Team Technologies. This facility consists of a $330,000,000 term loan, a $90,000,000 delayed draw term loan and a $50,000,000 revolving credit facility. Oaktree provided $67,000,000 of the term loan, $18,000,000 of the delayed draw term loan and $10,000,000 of the revolving credit facility.

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

The term loan has a coupon of sulfur plus 4.75 percent and OCSL was allocated $22,000,000 of this deal. Another notable origination for the quarter was a large refinancing for Optimizely, which is the top player in the digital experience space that provides cloud based software to enterprise and middle market customers to manage websites, content and marketing campaigns. This financing includes a $673,000,000 term loan with a coupon of sulfur plus 5% as well as a $100,000,000 revolving credit facility. Oaktree provided $101,000,000 of the term loan and $15,000,000 of the revolving credit facility. And OCSL was allocated $18,500,000 of this deal.

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

These transactions reflect the deal sourcing power of Oaktree's platform and our ability to participate in larger deals, which we believe is a competitive advantage today. As Armin just mentioned, we are optimistic about continued deal flow into 2025. And with the additional equity provided by Oaktree, we are well positioned to participate in these attractive opportunities. Now, I will turn the call over to Chris to discuss our financial results in more detail.

Christopher McKown
Christopher McKown
MD, CFO & Treasurer at Oaktree Specialty Lending

Thank you, Raghav. In our 1st fiscal quarter ending December 31, 2024, we reported adjusted net investment income of $44,700,000 or $0.54 per share, down slightly from 45,200,000 dollars or $0.55 per share in the prior quarter. The decrease was primarily driven by lower total investment income, partially offset by reduced interest expense, management fees and Part 1 incentive fees during the quarter. Adjusted total investment income in the quarter declined $8,000,000 compared to the prior quarter, primarily due to a decrease in non recurring revenue, a decline in reference rates and the impact of investments on non accrual status. All told, these factors resulted in a $5,500,000 decrease in interest income and a $2,200,000 decrease in fee income.

Christopher McKown
Christopher McKown
MD, CFO & Treasurer at Oaktree Specialty Lending

Additionally, there was a $300,000 reduction in dividend income, largely driven by the Kemper JV. As I mentioned in my remarks last quarter, our September 30th quarterly results benefited from larger than usual non recurring income, whereas our December quarter results reflect a more typical level of non recurring income. To provide some additional context, non recurring income is generally composed of prepayment fees and OID acceleration on successful investment exits, and we generally see it in the neighborhood of $0.03 to $0.05 per quarter. Our non recurring income for the September December quarters was about $0.09 $0.05 respectively. Net expenses declined $7,700,000 from the prior quarter, driven by a $6,200,000 decrease in Part 1 incentive fees, net of fees waived as a result of the newly implemented incentive fee structure that Matt described.

Christopher McKown
Christopher McKown
MD, CFO & Treasurer at Oaktree Specialty Lending

We also saw a $1,500,000 decline in interest expense driven by lower reference rates on our floating rate liabilities. Now moving to our balance sheet. OCSL's net leverage ratio at quarter end was 1.03x, down from 1.07x last quarter. Prepayments and sales of $352,000,000 outpaced our newly funded investments of $201,000,000 which resulted in a slight decline in the size of our portfolio. As of December 31, total debt outstanding was $1,610,000,000 and had a weighted average interest rate of 6.2%, including the effect of our interest rate swap agreements.

Christopher McKown
Christopher McKown
MD, CFO & Treasurer at Oaktree Specialty Lending

This is down from last quarter, primarily reflecting lower interest rates on our floating rate liabilities. Unsecured debt represented 59% of the total debt at quarter end, up from last quarter. We have plenty of dry powder to fund investment commitments with liquidity of approximately $1,100,000,000 including $113,000,000 of cash and $958,000,000 of undrawn capacity on our credit facilities as of December 31. Unfunded commitments excluding those related to the joint ventures were $275,000,000 approximately $244,000,000 of which can be drawn immediately as the remaining 31,000,000 dollars is subject to portfolio companies meeting certain milestones before the funds can be drawn. Our liquidity and purchasing power was further bolstered by the $100,000,000 of newly issued common shares on February 3rd, which will help diversify the portfolio and position us well to take advantage of what we believe will be an active deal flow environment in calendar year 2025.

Christopher McKown
Christopher McKown
MD, CFO & Treasurer at Oaktree Specialty Lending

I would also note that our leverage our target leverage ratio remains unchanged at 0.9 times to 1.25 times. And so as we add leverage to the newly issued equity, we expect it to generate a little over $200,000,000 of additional purchasing power. Turning now to our joint ventures. Together, the JVs currently hold $470,000,000 of investments, primarily in broadly syndicated loans spread across 44 portfolio companies. During the 1st fiscal quarter, the JVs again generated attractive annualized ROEs, which were approximately 12% in aggregate.

Christopher McKown
Christopher McKown
MD, CFO & Treasurer at Oaktree Specialty Lending

Leverage at the JVs was 1.2 times, down modestly from the last quarter. In addition, we received a $700,000 dividend from the Kemper JV. In closing, we made solid progress in the Q1, strengthening our portfolio while also generating a healthy level of new originations. However, we acknowledge the current challenges within our portfolio and remain committed to working through these situations and maximizing recovery. In combination with the shareholder friendly measures we implemented, we believe OCSL is well positioned to navigate the current market environment and to deliver attractive risk adjusted returns to our shareholders over the long term.

Christopher McKown
Christopher McKown
MD, CFO & Treasurer at Oaktree Specialty Lending

We appreciate your participation on our call today, and we'll now take your questions. Operator, please open the line.

Operator

We will now begin the question and answer session. And the first question will come from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Finian O'shea
Finian O'shea
Analyst at Wells Fargo

Hey, everyone. Good morning. First question on the $100,000,000 this quarter equity investment. Any color you could give on where that came from? And then the future plans for that?

Finian O'shea
Finian O'shea
Analyst at Wells Fargo

I think the filing says that the entity agreed not to sell until February 26. So if that's in the plan or on the other hand, if you might continue to add more going

Finian O'shea
Finian O'shea
Analyst at Wells Fargo

forward?

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

Thanks. Thanks, Fin. It's Matt. So on the last point regarding the sales plan, that's just a standard lockup, just a 1 year standard lockup.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

So I wouldn't read anything into that other than normally when you have purchases like this, there's a lockup provision. So it's basically prevents OCSL or Oaktree from selling for the next year. And then beyond that, obviously Oaktree has been a shareholder in OCSL for a long time and hasn't sold any stock today. So I wouldn't read too much into that part of it other than just kind of a standard lockup provision. In terms of the kind of the $100,000,000 just some more color on that, We felt just kind of given the market environment where we're seeing deployment opportunities that would be helpful to have some significant dry powder and equity buying power that we could combine with leverage and really deploy into the pipeline.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

And Raghavarman can talk a little bit more about the market environment. But the market environment was in terms of investing is attractive. So we thought having the Oaktree GP by the equity and purchase it at NAV. I just want to be clear that the purchase was at the January 31 NAV, made a ton of sense. It gives us kind of 5% to 10% additional liquidity or buying power for assets and just seemed to make a lot of sense all the way around as we looked at it.

Finian O'shea
Finian O'shea
Analyst at Wells Fargo

Okay. That's helpful. Thanks. And maybe one for, Armin as an extension of that. We heard some more language on it this quarter with upmarket senior.

Finian O'shea
Finian O'shea
Analyst at Wells Fargo

Can you sort of talk about the why behind the strategic credit group's ongoing push toward more of the plain direct lending, larger company, more senior participations if that's a change in the market or your platform driving that? And how we should think of that as the better risk adjusted opportunity?

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

Yes. Thanks, Fin. So I don't think it's a change in philosophy or what we're kind of doing writ large at the firm or in the strategic credit group. We continue to have capabilities that are sort of sector focused. We continue to invest in life sciences and in other sectors on a dedicated basis.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

However, I think with the rapid increase in rates and the continued sustained fairly high sulfur rates, we think that 1st lien sponsored lending that is sort of high single digit and into the low double digits represents really good value relative to other things we're seeing. So really leaning into firstly in there because we don't think that picking up the extra return by going junior is usually worth it. Now why is that? It's because when rates did go when SOFR was above 5% and spreads were 6% to 6.5%, that implied 1st lien lending was returning something like 11% or 12%, where the cost of borrowing for borrowers was 11% or 12%. To go junior would mean we would have to charge 14% or 15% to those same borrowers.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

And private equity sponsors and frankly other borrowers that are non sponsor owned, when they looked at that pricing, they said, you know what, that's the cost of my equity anyway. I'd rather over equitize than to pay you 14%, 15%, 16%. And so if you did want to kind of hold firm to the junior positioning, it usually meant some sort of inadequacy, either in the sponsor or in the company that caused them to want to borrow at that cost of borrowing. So we really pushed heavily into First lien because we thought that it was lower risk, attractive return. So on a relative basis, the best risk adjusted return we saw in the market.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

And now that the rates are going down, spreads have declined, we're seeing an increase in M and A deal volume. We think some junior opportunities will become more interesting as 1st lien lending goes to sort of 8% to 10%. And so there could be some junior opportunities at 10% to 12% or maybe 10% to 13% that could be interesting. But we're always evaluating the quality of those situations versus the 1st lien. And as for now, without a meaningful increase in the potential deal flow of junior debt or the potential deal flow of teens returning non sponsored direct lending in a really in a very significant way in terms of additional deal flow, we still getting sort of 9 ish percent on 1st lien lending is pretty attractive relative to other things we could be doing.

Finian O'shea
Finian O'shea
Analyst at Wells Fargo

Great. It's helpful. Thank you so much.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

Thank you.

Operator

Our next question will come from Matthew Hurwitz with Jefferies. Please go ahead.

Matthew Hurwit
Equity Research Analyst at Jefferies & Company Inc

Hi, everybody. Just a quick one. That upcoming debt maturity this month, maybe I missed it, but can you talk about the options you're considering there?

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

Sure, sure. So we have a bond maturity at the end of February. And we're looking at really all of our options. We have plenty of liquidity, existing liquidity between we have almost $1,000,000,000 of capacity on a revolver. We have ABL facilities.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

We obviously have the equity we just raised. And OCSL has been a frequent and successful issuer in the unsecured market. So we'll continue to look at that and really kind of post earnings just take a sense of all the various markets and opportunities to us and then kind of take course of action, I think makes the most sense. But the good news is we have plenty of liquidity through in all of our facilities. So we'll just look at the market environment and make a decision.

Matthew Hurwit
Equity Research Analyst at Jefferies & Company Inc

Okay, great. Makes sense. And then, just sort of high level, could you talk about what the short term and medium term goals are for the company at this point with your reset dividend and management fee structure?

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

Can you be a little bit more specific about I mean, in terms

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

of our goal I'll be general

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

and then if you have a specific question, please feel free to follow-up. But I think the general goal of the BDC is to cover our dividend in a comfortable way. It is to grow the asset base and further diversify the portfolio. It is to take our non accrual assets and those equities that aren't paying dividends and coupons and convert them into interest income earning performing credit assets. So working through the troubled assets as quickly and as efficiently as we can.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

And that would really be the summary of it. I mean that's why we've changed the dividend in a manner where it's the base dividend is kind of reset lower where we think we could comfortably cover it and any excess will both kind of add to the dividend and help improve NAV. So we decided to roll out all of these changes all at once to really improve both the stability of the dividend and the ability of OCSL to improve NAV. But we continue to separate and apart from that block and tackle to turn those some of the troubled assets into good assets. So if you have specific questions beyond that, happy to take them.

Matthew Hurwit
Equity Research Analyst at Jefferies & Company Inc

Okay. No, that's sort of

Matthew Hurwit
Equity Research Analyst at Jefferies & Company Inc

what I was looking for. Thanks very much.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

Thank you.

Operator

And our next question comes from Melissa Weddell with JPMorgan. Please go ahead.

Melissa Wedel
Melissa Wedel
Vice President, Equity Research at JP Morgan

Good morning. Thanks for taking my questions. When we think about the supplemental dividend level going forward, can you help us better understand how much of the excess earnings above the base you're aiming to pay out versus retain? Is it should we think of half half or something a little bit more than that?

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

Yes. Melissa, it's Matt. Thanks for the question. I would assume half half. So roughly 50% of the income above the base would be paid in the supplemental dividend.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

So I would use 50%.

Melissa Wedel
Melissa Wedel
Vice President, Equity Research at JP Morgan

That's helpful. Okay. And then just looking at sort of existing cash balances and interesting timing on the equity injection from Oaktree, I would think there we should be expecting some sort of multiple quarter deployment period for that. So should we think of there being potentially a bit of cash drag over the next couple of quarters?

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

Hey Melissa, it's Raghu. I can take that. So we do have a pretty strong pipeline that we've been building into in anticipation of the equity raise, both on the private side as well as public side. So you're right, it will take us a couple of quarters. But given the pipeline we have, I think we can deploy the new equity plus the associated leverage fairly quickly.

Melissa Wedel
Melissa Wedel
Vice President, Equity Research at JP Morgan

Okay. And so when you think of the pipeline, that's not just on a gross basis, but also in that, just to clarify?

Raghav Khanna
Raghav Khanna
Co-Chief Investment Officer at Oaktree Specialty Lending

Correct. So net anticipated repayments on the existing portfolio.

Melissa Wedel
Melissa Wedel
Vice President, Equity Research at JP Morgan

Okay. Thanks. I'll hop back in the queue.

Operator

Our next question comes from Mike Whitaker as a Private Investor. Please go ahead.

Analyst

Thank you so much for taking my call. I was kind of curious, I noticed in your announcement that you bought back shares at net asset value, while it's obviously available in the marketplace at give or take a point about 13% discount. Now I'm sure that there's a reason for that, but I was just kind of curious as to what that reason is.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

Sure. It's a great question, Mike. And as you mentioned, we did the Oaktree, the manager purchased the shares at the January 31 NAV, which was at the time roughly a 10% premium to market and versus buying it in the market at the discount. And just kind of reiterating and digging a little deeper into the rationale for that. So what we think is super interesting opportunity, the great way, the best way to add value to OCSL is to continue to invest in the current environment and pipeline we're seeing.

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

And so if we were just the manager just to buy in the market doesn't create any equity or any kind of asset growth to the BDC. Whereas by investing at NAV, putting the equity in, we haven't changed our leverage target. So we can borrow against that equity and deploy that into assets and grow the asset, create more diversification and asset growth on the balance sheet in OCSL. We think that was better than just buying and the manager buying in the market, even if it was at a discount. So that was the rationale behind that action.

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

Yes. And we recognize this

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

is Armin. We recognize that in us buying at NAV versus a stock price that's trading at a discount to NAV is a great thing for shareholders. And that's something that Oaktree felt very comfortable doing as a sign of support for OCSL, as a sign of support for our NAV in the BDC. And it made sense for us in that scale to press forward and to really, as Matt said, deploy capital on behalf of OCSL into a very attractive market environment. So we know it's a very positive thing for shareholders and that's something we felt very comfortable doing.

Analyst

And it wasn't nearly as positive as being able to buy it at a discount?

Armen Panossian
Armen Panossian
CEO at Oaktree Specialty Lending

Well, it's more positive for shareholders doing it the way we did it than it is to buy at a discount. And as Matt said, this puts dry powder on the balance sheet of OCSL rather than buying existing shares from other shareholders. So we really wanted to grow the size of OCSL, the deployment, the additional deployment, I think that's also a good thing for the shareholders. So I think it's doubly good the way we did it.

Analyst

Okay. I'll accept that. Is there somebody that I could talk to after the call just so I get a better understanding on that? I have a pretty substantial investor in OCSL and 2 of the private placements and I would just like to drill down on that a bit just to make me a little bit smarter in that area. And then I do have one other question is, if I understood you correctly and I didn't read them, I apologize, the full announcement, but it sounded to me earlier on the call that you have issued more shares in OCSL.

Analyst

And if so, at what price were those shares issued?

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

Sure. So we issued $100,000,000 of shares of OCSL to Oaktree, the manager at $17.63 a share, which was the net asset value at January 31, 2025 and at a premium to the market price. So all of those are 1 in

Matt Pendo
Matt Pendo
President at Oaktree Specialty Lending

the same. Everything we're talking about is part of a single transaction where every bought

Analyst

That kind of became the next question. Why are you doing that? But and I don't want to take up time here on the call just to answer my stupidity here, but it's an unusual transaction. I think you have to agree. And I would just like to drill down on that a little bit further.

Dane Kleven
Dane Kleven
SVP & Head of Investor Relations at Oaktree Specialty Lending

Hey, Mike, this is Dane. I'll happily give you a call after this and we can walk through it.

Analyst

That'd be super, Dana. Thank you so much.

Dane Kleven
Dane Kleven
SVP & Head of Investor Relations at Oaktree Specialty Lending

Not a problem.

Operator

And our next question comes from again Melissa Wedel with JPMorgan. Please go ahead.

Melissa Wedel
Melissa Wedel
Vice President, Equity Research at JP Morgan

Thanks for the follow-up. I just wanted to clarify with the new look back feature on the incentive fee, when you're incorporating the impact of any losses, I realized I think the Q indicated that's both realized and unrealized. Should we be including any of the foreign currency gains and losses on there too?

Christopher McKown
Christopher McKown
MD, CFO & Treasurer at Oaktree Specialty Lending

Melissa, it's Chris. Thanks for the question. And yes, it will include all capital gains and losses, including the foreign currency movements. And I think you may have touched on it before, but we those foreign currency movements, did you see broken out for our foreign currency board contracts that we're using for hedging purposes? So kind of net net that foreign currency impact is kind of de minimis on our results.

Melissa Wedel
Melissa Wedel
Vice President, Equity Research at JP Morgan

Yes. Okay. Thank you.

Operator

With no further questions, this concludes our question and answer session. I would like to turn the conference back over to Dane Clement for any closing remarks.

Dane Kleven
Dane Kleven
SVP & Head of Investor Relations at Oaktree Specialty Lending

Thank you all for participating on our call today. Please don't hesitate to reach out if you have additional questions. Have a great day and thank you for your continued support of OCSL.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Executives
    • Dane Kleven
      Dane Kleven
      SVP & Head of Investor Relations
    • Matt Pendo
      Matt Pendo
      President
    • Armen Panossian
      Armen Panossian
      CEO
    • Raghav Khanna
      Raghav Khanna
      Co-Chief Investment Officer
    • Christopher McKown
      Christopher McKown
      MD, CFO & Treasurer
Analysts
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Earnings Conference Call
Omnicell Q1 2025
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