Release Date: November 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Oaktree Specialty Lending Corp (OCSL, Financial) reported adjusted net investment income (NII) of $45 million or $0.55 per share for the fourth fiscal quarter, consistent with the previous quarter.
- The company successfully restructured two investments, removing them from non-accrual status, demonstrating effective portfolio management.
- OCSL's first lien investments increased to 82% from 76% at the end of fiscal year 2023, indicating a strategic shift towards more secure investments.
- The company originated $259 million in new investment commitments during the fourth quarter, reflecting strong investment activity.
- OCSL maintained substantial liquidity with $908 million of undrawn capacity under credit facilities and $64 million in cash and cash equivalents, ensuring financial flexibility.
Negative Points
- OCSL experienced an increase in investments placed on non-accrual status, impacting earnings and net asset value.
- Net asset value per share decreased slightly to $18.09 from $18.19 last quarter, indicating a decline in shareholder value.
- The company waived $1.2 million of Part 1 incentive fees for the quarter due to the impact of non-accruals and write-downs.
- The weighted average yield on new investment commitments decreased to 9.9% from 11.1% in the prior quarter, reflecting a challenging market environment.
- OCSL's net leverage ratio remained at 1.07 times, indicating limited reduction in leverage despite repayments and sales outpacing new investments.
Q & A Highlights
Q: Just on the incentive fee waiver this quarter. Is this going to be something that the adviser is committed to on a go-forward basis to the extent that NII trends below the $0.55 dividend?
A: Hey, Paul. It's Matt Pendo. We view those as discretionary, not permanent. The management fee was reduced to 1% starting July 1, which is permanent. So that's how we approach the incentive fee waiver.
Q: On a few credits in the portfolio, nThrive going on non-accrual this quarter, but it was marked incrementally higher. How comfortable are you with where these loans are, especially Thrasio?
A: This is Armen. Thrasio is an execution story that will take a few more quarters. For nThrive, there was a positive press release recently, and we think the business is well-positioned but has some execution to do. Thrasio and nThrive are in different positions.
Q: On Pluralsight, is there anything that restricts the borrower from borrowing on the revolver to pay the interest on the restructured loan?
A: The revolver does have covenants and restrictions. It's not intended to pay coupon interest but to support the business as it strengthens its position.
Q: If 2025 ends up being a good year with a wave of activity, how do you feel about terms and covenants in the market?
A: In the lower and core middle market, we should expect good covenants. In larger markets, there has been covenant erosion. As deal flow picks up, some covenants will return, but it won't completely undo the legal protections or spread compression.
Q: Regarding your comments on the investment environment, are you expecting activity to pick up in early '25 rather than a large December quarter?
A: This is Armen. It's hard to predict one quarter over the next. Conversations with sponsors and companies have picked up, but predicting specific quarters is challenging.
Q: On the JVs, do you see an opportunity to optimize them further in a compressed spread environment?
A: We're always looking to optimize the JVs. There are ways to get more return, but expansion is a partnership with our JV partners. We're constantly reviewing portfolio allocation and leverage.
Q: Can you update us on the current leverage in the JVs and if there's an opportunity to increase capacity through higher leverage?
A: The combined leverage is about 1.4 times. We think there's capacity to increase leverage given the nature of the portfolios, which are largely publicly traded debt. We're looking to rotate out of privates and increase leverage beyond 1.4 times.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
