Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong origination activity with $339 million of new investment commitments, marking the third consecutive quarter of commitments exceeding $300 million.
- Increased coupon income from a predominantly first lien portfolio, with first lien investments rising from 76% to 82% of the portfolio.
- Oaktree's manager waived $3.2 million of part one incentive fees for the quarter, in addition to the $1.5 million of management fees waived each quarter since the OSI II merger.
- Effective July 1, the base management fee was reduced to 1% on gross assets from 1.5%, expected to increase adjusted net investment income annually by approximately $12 million or $0.15 per share.
- The portfolio remains well-diversified across 158 companies, with 86% invested in senior secured debt and first lien positions, and a median portfolio company EBITDA of approximately $147 million.
Negative Points
- Adjusted net investment income (NII) was $0.55 per share, down slightly from $0.56 in the prior quarter.
- Net asset value (NAV) per share declined from $18.72 to $18.19, primarily due to unrealized losses on certain debt and equity investments.
- Investments on non-accrual status increased to 3.7% of the debt portfolio at fair value, up from 2.7% in the previous quarter.
- The weighted average portfolio spread decreased by approximately five basis points due to the rotation into primarily first lien loans.
- Higher interest rates have materially increased the interest burden for leveraged companies, heightening the potential for more borrowers to struggle with servicing debt.
Q & A Highlights
Q: The part one fee waiver this quarter, is that truly one time, or might it relate to something like returns or the dividend for some period of time going forward?
A: (Armen Panossian, CEO & CIO) The part one fee waiver is truly one time. We have done a few waivers in the past relating to transactions, but we viewed it as appropriate to take a one-time waiver this quarter. It is not ongoing.
Q: Can you talk about your vision for Oaktree and if you seek to turn it into more of a volume shop? Would you attribute any platform changes to the recent credit experience?
A: (Armen Panossian, CEO & CIO) Oaktree will continue managing the business with its legacy in mind, focusing on below-investment-grade and unrated debt investments. The recent credit performance is due to idiosyncratic situations in a small handful of credits, not platform shifts. These were businesses that did well during COVID but had stumbles post-COVID.
Q: Your comments about remaining cautious in this environment, but then also looking at the level of net deployment, was that a function of timing or do you expect activity levels to remain high?
A: (Armen Panossian, CEO & CIO) There was some timing involved. We saw a slowdown last year, but as M&A activity picked up this year, we saw elevated originations. We are cautious about new LBOs given the elevated base rate environment and are mindful of valuation multiples and leverage multiples.
Q: Can you remind us how much undistributed NII there is per share?
A: (Christopher McKown, CFO & Treasurer) Our adjusted NII came in at $0.55 per share, which is right in line with the dividend payout.
Q: Can you provide more details on the increase in non-accruals during the quarter?
A: (Armen Panossian, CEO & CIO) The increase in non-accruals was driven by additions of Pluralsight, Auven, and the mezzanine tranche in Dialyze. Pluralsight faced challenges due to the macro environment and increased competition, while Auven's remaining position represents PIK interest. Dialyze's plans to achieve profitability have taken longer than expected.
Q: What is your view on the current market environment and its impact on your portfolio companies?
A: (Armen Panossian, CEO & CIO) The credit markets rallied as investors priced in the end of the interest rate hike cycle. However, higher interest rates have increased the interest burden for levered companies, heightening the potential for challenges in servicing debt. We are closely monitoring our portfolio companies and are well-positioned to manage through this market.
Q: Can you discuss the impact of the fee reductions on OCSL's financial results?
A: (Mathew Pendo, President) Effective July 1, the base management fee was reduced to 1% on gross assets from 1.5%, which we expect will increase OCSL's adjusted net investment income annually by approximately $12 million or $0.15 per share.
Q: Can you provide more color on your investment activity during the quarter?
A: (Armen Panossian, CEO & CIO) We originated $339 million of new investment commitments across 11 new and 9 existing portfolio companies. Examples include Sorenson, TDS, and Adevinta. Our origination activity remains strong, and we have a robust pipeline of opportunities.
Q: How are you managing the risks associated with higher interest rates?
A: (Armen Panossian, CEO & CIO) We are focused on larger, more diversified businesses and investing at the top of the capital structure. The median portfolio company EBITDA was approximately $147 million, and leverage was 5x, well below overall middle market levels. We are closely monitoring all portfolio companies and working with them to address specific situations.
Q: Can you discuss the performance of your joint ventures?
A: (Christopher McKown, CFO & Treasurer) Our JVs continue to deliver strong performance, holding $477 million of investments with attractive annualized ROEs of approximately 13.2%. Leverage at the JVs was 1.4x in aggregate at quarter end.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
