Q2 2020 Earnings Call
[music].
Welcome and thank you for joining oak tree specialty lending corporations second fiscal quarter 2020 Conference call Today's conference call is being recorded.
This time, all participants are in listen only mode, but we'll be prompted for a question and answer session. Following the prepared right.
No I would like to introduce Michael Fishy out of Investor Relations, who will be hosting today's conference call Mr. Michelle you may begin.
Thank you operator, and welcome to Oaktree specialty lending Corporation second fiscal quarter Conference call earnings release, which we issued this morning any accompanying slide presentation can be accessed on the investor section of our web site at Oaktree specialty lending dotcom.
Our speakers today are making that was in chief Executive Officer, and Chief Investment Officer, Matt and go President and Chief operating Officer, and now Carlyle Chief Financial Officer and Treasurer.
We will be happy to take your question following their prepared remarks.
Sure we began how lots of them I do that comments on close call include forward looking statements, reflecting our car Egypt or stop to among other things future operating results of financial performance.
Our actual results could differ materially from those implied or expressed in forward looking statements.
Please refer to our atrophy filings for a discussion of these factors in further detail.
We undertake no duty to update or revise any forward looking statement.
I'd like to remind you that nothing on this call constitute an offer to sell or solicitation of an offer to purchase any interest in any oaktree funds.
That's it another she has that Oaktree specialty lending uses the investor section of its corporate web site, you announced material information the company encourages investors the media and others, if you're getting information that it shares on its corporate website with that I would now like to turn the call over its Matt.
Thank you, Mike and welcome everyone to our second quarter earnings Conference call. We appreciate your interest in and support Oh CSL.
Hello, everyone listening is safe and well the health and safety of our team and the continued effective bad you been up our portfolio remains a top priority as we work with our borrowers shareholders credit providers and all stakeholders to navigate that difficult challenges imposed by the pandemic Oh.
Tree has implemented a firm wide business continuity plan operating says successfully as the virtual company after seamlessly transitioning tour to a remote working environment in mid March.
We are capitalized you got oak trees, first straight technology platform, and our fully operational and well position to safely and effectively manage the portfolio for the duration of this public health crisis.
As we have discussed many times, we have defensively positioned O C itself for environment, which we now find ourselves we have been rotating out of non core investments and redeploying capital into larger companies that operate and less cyclical defensive or structurally growing industries.
We have been running leverage below our 0.6, so times debt to equity maintaining significant dry powder and we believe the size and scale of oak trees investment platform positions us well for this kind of market.
Financially Oh CSL entered this peered in a strong position and while the environment clearly grew challenging in March we generated solid operating results for the full quarter.
Adjusted net investment income was 12 cents per share for the second quarter up 15% from the prior quarter and driven by robust origination activity opportunistic loan purchases in March and higher investment income.
Our earnings strength that ample liquidity support both continued investment and our current dividend level, Our board declared and I didn't have set cash dividend that is consistent with our prior eight distributions.
However, our portfolio wasn't immune to the extreme market disruption volatility in March as risk assets out there valuation deteriorate with historic speed.
We reported second quarter NAV per share a $5 a 34 cents.
Down from $6.61 in the previous quarter.
I'd like to take a moment to discuss this write down in more detail.
As part of our late cycle investment approach, we are focused on letting to lot lending to larger more defensible businesses that we believe will be more resilient in an economic downturn.
Over the past two and a half year that we've been managing Oh CSL. We've also found attractive relative value opportunities and publicly traded liquid debt securities and as a result, our exposure to these types of investments has been higher than that of a typical BDC.
While we generally invest with the expectation their investments will be held to maturity one of the benefits happy liquid that investment is that allows us to actively manage risks in the portfolio and move in and out of positions. When we believe it is optimal.
One drawbacks is active management approach is that our portfolio is notably impacted by mark to market volatility as we experienced in the March quarter.
Following the sharp price decline in the leverage low and bond markets, resulting from the pandemic the prices of our liquid debt investments declined 13% during the March quarter.
It's impacted NAV by $114 million for 81 cents.
Another driver of the decline in after the quarter was Lcs cells investments in the Kemper JV as a reminder, the joint venture primarily in fast and liquid firstly loads and it utilizes leverage to increase its investment capacity.
The JV underlying portfolio experienced unlevered mark to market price declines of 13% in March and when factoring leverage which was 1.3 times at December 31st Oh, CSL investment in the JV declined by $36 million or 28% during the March quarter.
And finally, NAV was adversely impacted by right out in some of our non core equity investments, which include businesses with higher risk profile.
As a result of these headwinds we wrote down the value of these investments were approximately $20 million.
Following the broader credit market rally, we have experienced some recovery in the prices of our quoted debt investments, which rebounded by approximately 3% during April.
We remain very well capitalized with ample liquidity in February we tap the capital markets and priced our inaugural 300 million dollar public note offering that was attractively priced at a coupon of 3.50%.
The proceeds of the note offering were used to redeem our higher coupon bonds as well as reduced our revolver borrowings our old bonds totaled approximately $160 million at and had a blended interest rate of around 6%.
So this transaction significantly reduced our cost of funding.
As a result of the senior note financing, we close the core it with a very strong liquidity position totaling approximately $385 billion, including $90 million in cash.
We were active on the investment front during the quarter, particularly in March with the markets dislocated. We originated 272 million of new investment commitments in the quarter of which 77% first lien loans nearly 8% were second liens and the remainder consist of subordinated debt investments in March we made.
$64 million of opportunistic secondary market purchases at an average purchase price of 82%.
Page eight of the earnings presentation provides more detail on our originations activity by month.
Although we received $154 million from the prepayment pay downs and other exits our portfolio grew during the quarter and our leverage expand it to 0.82 times net of cash upfront 0.56 times at December 31st.
We have continued to find compelling investment opportunities in this environment and originated hundred $32 million in April including a co investment with our flagship opportunities funds are minimal discuss this transaction the others in a few moments with that I'll now turn the call over to arm and.
Thanks, Matt and good morning, everyone.
Before I share our view on the overall market environment I'd like to amplify mats opening message, we hope everyone listening is healthy and managing well through this challenging period.
Individuals businesses and markets experienced a number of unprecedented events in the first quarter of 2020.
More than a quarter of the national economy went idle amid the pandemic due to government imposed lockdowns.
Investor sentiment soured as macroeconomic conditions grew weaker.
Good business closures.
Unemployment and forecast for GDP contraction risk outside in both equity and fixed income markets sold off with speed and severity in March.
The liquid credit markets sold off dramatically as the high yield bond and leverage loan markets were down over 12% for the quarter as measured by their most widely followed indices.
As Matt noted this weighed on our portfolio and put downward pressure on end Avi.
However, extensive fiscal stimulus and monetary policy action of lifted equities and some credit sectors from their lowest sports and we have experienced some recovery in prices of our debt investments as well.
That said dependent because not run its course and the timing of a recovery remains unknown.
The sustained volatility in the liquid credit markets is also impacting private credit and direct lending and we're seeing a decline in deal flow.
M&A activity has come to a whole we believe the most that most of the investment opportunities. In this segment of the market will be highly structured financing involving businesses that are in need of liquidity for our seeking to bolster their balance sheets.
This is especially apparent in the non sponsored space, where traditional capital market avenues may not be available that certain borrowers.
We have already participated in a few financings, where we have found attractive risk adjusted returns.
Now turning to the overall portfolio.
Generally we feel good about the quality of our portfolio in the health of our borrowers.
Over the past two plus years, we have defensively positioning the portfolio by lending the larger businesses that operate in less cyclical defensive or structurally growing industries.
That we believe will be resilient through a down cycle.
That said our portfolio is not immune to market pressures and we're closely monitoring all the position in the portfolio. Our analysts are staying on top of each credit speaking with management teams private equity sponsors industry experts and advisors.
Fortunately, we have largely avoided significant levels of exposure to challenged industries.
Energy was limited to 4.6% of the portfolio at fair value at quarter end, a four portfolio companies.
The bulk of our current energy holdings are in large diversified businesses operating in the midstream and refinery sectors, which we believe have limited downside due to strong structural protections significant asset coverage and generally low commodity risk.
In fact, this is an area of the market that we're finding some interesting opportunities with attractive risk reward profile, which I will discuss in a few moments.
Hotels restaurants, leisure and entertainment position collectively accounted for approximately 1.4% of the total portfolio at fair value at March 30 Onest.
I also want to update you on or non core portfolio.
We continued to make progress reducing exposure to noncore investments in the second quarter as we monetize $70 million noncore positions in the quarter and non core investments represented $142 million or 11% of the portfolio at fair value.
The reduction in the quarter was driven by the sale of our common stock and yeti, which accounted for $14 million of proceeds. We also received $5 million and proceeds from our exit of Ltchs.
In addition, we restructured our position in Dominion diagnostics as you May recall Dominion is a specialty talks called the laboratory that faced headwinds following the Medicare reimbursement rate changes in 2015, resulting in the previous manager, placing the subordinated term loan on nonaccrual in March 2016.
During the quarter, we close other restructuring their converted our existing senior and subordinated debt investments to a mix of secured debt and equity. We believe this restructuring puts us in the best positioned to maximize recovery in the long term.
Turning now to investment activity as I suggested earlier, we believe this is one of the most interesting markets for investing that we've seen in recent history.
The March quarter with strong overall with the $273 million of new investment commitments as Matt noted and we continue to see opportunities.
In this new market environment.
Since the volatility took hold in March we had been active in the public markets via our trading Doug and I've been investing in businesses that operate in defensive industries.
She is in health care farmer infrastructure and telecom.
The pace of originations remain stable steady in April while we're maintaining modest overall exposure to energy and other viruses packet sectors. We have identified some unique opportunities in these industries with very attractive risk reward profiles.
Our recent investment in New Star Energy fits this bill we participated alongside our flagship opportunities funds and several other oaktree strategies in a $750 million unsecured term loan.
Newstar is one of the largest independent liquids pipeline and storage operators in the U.S. that primarily transports and stores crude oil refined products and specialty liquid.
The company need its managers capital structure do the near term maturities, creating an opportunity for oaktree to provide a capital solution.
The deal is attractively priced with a 12% coupon and the structure provides us with significant downside protection.
Including strong covenants short duration of three years and a priority position for our debt in the event of asset sales.
And another deal Oh, CFO was allocated $60 million of a $120 million oak tree investment in a $1 billion first lien club transaction to air being be the platform that connects travelers with property owners for bookings.
The company decided to bolster liquidity to provide a cushion as a result of coated.
The transaction price at 97, and a half with a LIBOR plus 750 coupon has a very good structure, including two years of call protection.
While this business is of course under near term pressure, we believe the company's best in class platform popularity and strong growth profile prior to the pandemic provided a solid foundation for recovery when travel resumes.
And lastly, we were allocated $34 million of a $90 million oak tree investment in a term loan to open a private equity fund that owns a portfolio of therapeutic drugs and as several prominent life Sciences investments.
The loan is very well structured with loan to value just 10%.
With our upfront investment along with tight covenants.
This 12% loan.
Is secured by all of the outside of the fund.
We believe the coming weeks and months will provide owes CSL with substantial opportunities in both public and private investments with the duration of the shutdown the nature of the recovery uncertain. We have focused on a few investment themes that we believe should succeed in this environment.
In particular, we have been looking to companies that were on a solid footing prior to the pandemic and are well positioned to manage through the pandemic. Those are the irreplaceable assets. These values should be unaffected by widespread shutdowns businesses, particularly in life Sciences that may turn to credit markets given their desire to avoid equity linked financing.
I want to emphasize again that we had defensively positioned O CFL for an environments such as this and we believe that are ample liquidity along with the scale in resources of Oaktree position us well to take advantage of attractive opportunities in this new market.
Now I will turn the call over to melt and discuss our financial results in more detail.
Thank you arm and for the second quarter fiscal 2020, we reported net investment income of 22.8 million.
Or 16 cents per share.
Up from 7.8 million or six cents per share for the first quarter.
The increase was the result of higher investment income and lower net expenses.
The lower expenses were mainly due to reversal of accrued part to incentive fees in the quarter due to and realize depreciation on investments.
As you May recall GAAP requires us to take unrealized gains and losses into account when accruing or this quarter's case, reducing the accruals of part to incentive fees.
As we had a significant amount of unrealized losses in our portfolio this quarter.
All part to incentive fees, which were previously accrued on a GAAP basis have been reversed.
Adjusted net investment income, which excludes the impact of part to incentive fees was 16.2 million or 12 cents per share for the quarter.
Up from 14.1 or 10 cents per share from the prior quarter.
The increase was primarily due to higher investment income I was partially offset by higher interest expense.
During the quarter total investment income was 34.2 million up from 31 million in the previous quarters.
The increase was due to several factors, including higher interest income, resulting from a larger portfolio higher prepayment fees and away the acceleration on pay offs and higher origination fees on new investments.
Partially offsetting these increases with downward pressure on the average yield of our floating rate debt investments, mainly due to continued decreases in linerboard.
Net expenses, excluding part to incentive fees totaled 17.9 million in the second quarter.
Up 1.1 million sequentially. The increase was mainly driven by higher interest expense due to increased borrowings as a result of our larger portfolio.
Turning to credit quality.
During the quarter all of our portfolio companies made their scheduled interest payments with the exception of one companies the modified its interest payment to pick in order to preserve liquidity.
As of March 31st Nonaccruals represented 0.5% of the total portfolio at fair value.
Up from 0.1 person in the prior quarters.
The increase was due to two liquid debt investments totaling 5 million a fair value that were added to nonaccrual after experiencing price deterioration in the quarter.
Moving to the balance sheet as Matt noted our leverage ratio increased 2.94 times from 0.58 times at December 30 Onest.
Reflecting growth in the portfolio during the quarter as well as the decline in energy.
Additionally, we held nearly 90 million in cash on our balance sheet at quarter end.
So our net leverage ratio was 0.82 times.
We funded $252 million in investments, which was greater than the 154 million in pay offs and exits.
As of March 31st total debt outstanding was 699 million and had a weighted average interest rate of 3.1%.
The weighted average interest rate was down from 4.5% at December 31st.
In part due to the successful financing that we completed in the quarter.
Issuing 300 million of senior notes at a 3.5% coupon and using part of the proceeds to retire all 161 million of our unsecured bonds, which had an average rate of around 6%.
In addition, Moody's and Fitch affirmed our investment grade credit ratings, reflecting our strong liquidity position and lower leverage.
At quarter end, we had total liquidity of approximately 385 million in.
Including 90 million of cash 295 million of Undrawn capacity on our revolving credit facility.
Unfunded commitments were 92 million, although we note that.
At approximately 60 million of this amount is eligible to be drawn.
Our liquidity position remained solid through the end of April.
As of April Thirtyth, we had 328 million of liquidity to support our funding needs.
Broken down by $68 million of cash and $260 million available capacity under the credit facility.
Unfunded commitments eligible to be drawn as of April thirtyth.
Were 75 million.
Shifting now to the Kemper joint venture.
Our investments in the JV totaled 92 million at March 31st down from 128 million last quarter.
As Matt touched on earlier.
The leverage the Levered nature of the JV, coupled with unrealized price declines and the underlying investment portfolio, resulting from the broader market volatility contributed to the decline and the value of our investments in the vehicle.
Excluding the impact of leverage the JV underlined investment portfolio at fair value declined 13% during the quarter.
And has recovered by approximately 4% in April.
As of quarter in the JV had 330 million of assets invested in senior secured loans to 53 companies.
This compared to 352 million of total assets can best and 51 companies last quarter.
Leverage at the JV was 1.8 times at March 30 Onest.
Up from 1.3 times last quarter.
And it's 250 million credit facility at 56 million of Undrawn capacity at quarter end.
Now I'll turn the call over to Matt.
Thank you Michelle.
All the environment has certainly become more challenging for many of our portfolio companies. We nonetheless generated solid operating results for the second quarter.
We entered this crisis in very good financial shape that offensive repositioning that we carried out over the last two and a half years has largely been completed we have been running leverage low at keeping a lot of dry powder and as a result, we are very well capitalized with strong liquidity.
Given the significant size and scale of Oaktrees investment platform, we are well positioned to invest in this market environment as opportunistic special situation credit lending is a hallmark of oak trees investment approach.
As arm and noted we have already invested in a few of these opportunities since quarter end and expect to be active going forward. However, we will remain patient and disciplined in our deployment of capital as we believe there will be an increasing number of opportunities that will rise overtime as the crisis persists and the economic fall up continues.
As a result, we are adjusting our leverage target hired to a range of <unk> 0.85 times to 1.0 times. We believe that this range is reasonable given our near term outlook and the increased investment opportunities that we are saying.
In addition, we have placed a renewed emphasis on further positioning the portfolio for improved yield by rotating out of quoted senior secured loans with healed at or below LIBOR, plus 450 basis points in April we sold 18 million of these lower yielding broadly syndicated loans.
Pro forma for these exits approximately 239 of these investments remain in the portfolio at fair value as of April Thirtyth, which we plan to replace overtime with higher yielding proprietary investments that we expect to make given current market conditions.
In conclusion, we are generally pleased with our overall performance for the second quarter given the extreme circumstances, we remain confident that we will be able to manage through any challenges that may arise in our portfolio as well as identified new attractive risk adjusted divestment opportunities, enabling us to deliver improved returns to our shareholder.
Yes.
Thank you for joining us on todays call and for your continued interest in L. CSL with that we're happy to take your questions. Operator, Please open the lines.
Thank you we will now begin the question and answer session.
To ask your question. Please press Star then one on your Touchtone phone.
If your question has been addressed and you would like to withdraw your question. Please press Star then too.
Our first question save will come from Rick Shane with JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions this morning and.
Look you guys have positioned ourselves well ultra <unk> for this environment I am curious as you sort of moved through things both from an origination and from a portfolio management perspective, how you look at the.
Syndicated loans versus the private loans one of the things that we're starting to believe that is that sponsors are going to be he's very significant buffer over the next six to nine months.
Related to transactions and I'm curious if you think that in your syndicated deals you have as much influence with her contact or influence with the sponsors and if that's a risk arm that we should be considering within the portfolio.
Thanks for the question or if this is arm and so we're looking at both public and private situations we are.
Considering the relative value between the two and obviously on the public side.
Prices are moving everyday and and we found some good opportunities in March some opportunities in April and frankly exited so operative to some situations that had moved up.
We are engaged with sponsors are both companies both for companies that have publicly traded that as well as privately placed loans.
We are not sure right now in terms of.
Hey, the depth of the of the of the for challenges around Corona virus and how long they may last and B I don't think said sponsored by and large have a have a lot of clarity on.
How deep of a pocket they are willing to dig into to help out. These businesses. So I think it's I think it's in a state of flux on we have very close relationships with a lot of sponsors and we do think that we.
Have a good call into them for a rescue finance as far as our comments indicated we are already engaged we have already engaged in several rescue financings.
So I, it's I think it's too early to to make too much of a.
You know statement around where the opportunities may lie or where there are there where the risk may lie.
Well, we do have a very active trading desk, we are looking at opportunities all over the time and working with the other strategies at Oaktree to gauge the the.
Attractiveness of those opportunities and Meanwhile, through our sourcing engine are working closely with companies and sponsors for to provide liquidity to businesses that we think.
We would like to lend to.
At a certain attachment point.
Got it okay that makes sense you'd made the comment that some of the value within the the JV has rebounded as we move through April I'm curious how to think about that in the context of the secondary market prices that you show on slide eight.
Which.
Were 82% in March and 72% in April is that just because the 82% pricing was sort of your acquisition costs as you move through the month than it might have been cheaper at the end of the month than we've seen a rebound since then.
Yeah. So what do shows is in terms of the far right column on page eight our secondary purchase prices of UBS Securities.
In March.
As the markets did dislocate we.
Began buying in the middle of March obviously.
The merger was quite volatile, we just see a little bit of a rebound by the end of March.
April our are buying activity was in a variety of different types of securities. A we were looking for those opportunities that were the continued to be dislocated that we saw us had assets and other value that would support to the the recovery.
On our position. Meanwhile, as the rest of the market moved up we did take sort of in some chips off the table and sold a little bit. So it was more portfolio management and looking for for.
Discounted.
But good upside opportunities and that's that's kind of the reason the peak the numbers look the way they do.
So is this just looking for looking for opportunities that we thought I'd add better upside.
April as the markets kind of rallied.
Terrific, Yeah, I think only there are lot of moving parts right now.
Hey, Reckons, Matt It's Matt hopefully can hear me the the as it relates to the JV the way I think about the asset there is those those aren't on this page eight but as I said I'm prepared remarks, the the in April our our liquid kind of quoted assets were up 3% at the asset level.
So you can use that they're going to get a sense of how that translates into that the JV.
Got it thank you very much guys.
Good.
Our next question will come from Kyle Joseph with Jefferies. Please go ahead.
Hey, good morning, guys. Thanks, very much for for having on taking my questions entered I just wanted to get a sense for your outlook for yields here I'm. Obviously makes came down in the quarter can you remind us you know you're.
It's a year portfolio exposure or what percentage of your portfolio has LIBOR floors are have there been engaged and then given some of the the opportunistic secondary transactions a you've been able to.
She idea, but kind of your overall outlook for the yield for the portfolio going forward from here.
Sure. This is armen so first of all about 90% of our portfolios floating rate.
I don't have the numbers right in front of me in terms of LIBOR floors, I don't know map Stewart, yet, it's about 60% about 60% have 1% floors.
Sure.
Okay. That's helpful thing and that and and I do I mean, I do you know kind of LIBOR decided to look at where where we see an opportunity to invest you know, it's obviously at yeah at.
Let you know relative seemingly higher yields than than the existing portfolio, even even with LIBOR going down.
Yeah that's helpful.
And then you know we were seeing a number of other BDC report Moody's report.
Can you give us a sense for a competitive dynamics within the industry. Obviously, you guys had been active in terms of originations on the secondary side and your your outlook for the BDC industry in any potential consolidation opportunities.
You know this is our man I don't think we could comment on our strategic initiatives vis-a-vis M&A.
And certainly would be a forward looking statements in terms of the.
Competitive dynamics in the Bdcs I think my only comment that I can make is that.
Oh CSL came into this period pretty defensively positioned in pretty lightly levered. We were I don't know anybody anticipated proto virus being what it is but we.
Being part of Oak tree and with that DNA affirm running through this BDC I think has created an opportunity for us to be to patiently invest and look for pretty nice discounted opportunities and rescue lending opportunities in the market.
And I think were pretty differentiated in that in that way and that's kind of all I would say about it's about.
The competitive dynamic.
Yeah, and Kyle it's Matt just to add on to that if you know and page eight of our deck I think.
As we discussed earlier in my question is it lays out I think pretty well activity in both March April and you can see that the volume and the price and then on page seven if you look at our April analysis. It's.
We originated and some assets in non inside land in north of 10%. So that gives you a sense it kind of what we're doing their fan.
Yeah, that's great color. Thanks, a lot at <unk>.
Thank you.
Our next question will come from Chris York with JMP Securities. Please go ahead.
Morning, guys and thanks for taking my questions. So I think seen investors maybe please see that were quite active in the secondary markets for leverage loans and bombs March and April is that a credit spreads have tightened, but why should we expect the longer term outcomes of these investments will.
Different than previous liquid purchases like Cpk, and Copia, which are now mark that losses.
Sure. This is armen cpk as a non core assets, but you do bring up a good point that.
Like investing of broadly boats and public and private markets there's risk.
You can make mistakes in private loans or public.
Thus means.
I can.
You know they make promises the mistakes won't be made but with the benefit of the broader oaktree platform.
Our trading desk or various different groups here as well as the strategic credit group that is that is Dan day out managers portfolio.
We are looking for a very attractive investments.
In the case of Covia that was an energy oriented investment that was.
I'm not something that we've done a lot of we have not we don't have a significant amount of energy exposure in the portfolio. In this particular period of time energy obviously has been.
Ground zero.
For what we've seen in the market and so you know where we are looking for opportunities are where companies have hard to replace assets.
But we can structure around orkin attached to.
Whether it's a private I'm a private loan.
Or a publicly traded loans, we're really looking for a diversified portfolio.
That is outside of the riskiest sectors, which which would be energy as kind of point number one.
Then in the case of restaurants were really not doing much in terms of restaurants, either out as I mentioned syndicate wasn't on core, but we're really not looking to add into in the restaurant space right now.
Okay helpful. And then just clarifying preparing the non core comment just.
Can you remind us what that noncore definition is and then was non so so let's see B.K., a fifth street investment or was it a oaktree investment.
It was it was a fifth street investment.
The definition of noncore that essentially if we improve the legacy positions and Vetstreet that we ourselves would not have put all in and it was defined.
Two plus years ago or was it was.
Differentiated two plus years ago.
Okay.
And then following up but you know investors are likely to appreciate the ability to co invest with other oaktree funds in this environment and it's a big strategic advantage.
But some curiosity how is the fee structure for your opportunities fund compared to the Bdcs fee structure.
Yeah, it's not meaningfully different I would say, it's within the same zip codes.
Right I I want to be mindful of certain regulatory reasons not to discuss fees of other of other funds in a period.
But I'm happy to refer you to our marketing group to to find out more but.
It's not too different.
And we have a very.
Bill Tauscher compliance framework here to make sure that co investment are shown to the bdcs and and to the team that was responsible for for investing the BDC times, the independent judgment to participate in though.
Okay and those are profits are those processes are monitored and approved by the board on a regular basis.
Got it moving just the leverage if you think the investment opportunities set has improved and then expected to rise over time from further dislocations what is holding you back from increasing your target target leverage above one times.
Hey, Chris It's Matt you know I think I think the.
At this point.
We've taken at 10.85 to one which is up from 7.85, So you know up meaningfully.
Lot of uncertainty.
Regarding the virus spend down like how long it last so at at and cannot based on the assets were seeing.
And also our ability given you know kind of the good news bad news see the delinquent nature of our book creates more volatility as you've seen but it also creates liquidity. So we do we do have the ability to rotate you know a meaningful part of the book from lower yielding to to high yielding opportunities. If we see those so you know it.
It's where we're not totally dependent upon leverage to.
By new assets. So at this point again, just given the uncertainty. We thought this is that this is the right level agencies are comfortable with that are banks are comfortable with it we're comfortable with it.
And we also have the ability given illiquid nature of our portfolio. If if we see lots and lots of great opportunities, we can use that to create liquidity as well.
Got it not that helps lap question, presumably you've been hoping that.
The markets would would soften and create opportunities for more strategic initiatives to grow the BDC.
This environment should create those opportunities. So what was the thought process and not asking shareholders to issued stock below now to allow you to finance the potential transaction.
Well I'd I.
Yeah that that assumes yeah, we'd we'd have to one issue shares to do a senior transaction, which may or may not be necessary to if there was is treating transaction. We can go to the shareholders and asked for approval to do it.
So we just we just don't view that right now is kind of a key diveley issue shares below NAV as kind of but yeah, something we need to do for a strategic purposes or others, knowing that we always cut.
So you know will we have that in the Arsenal. If we if we need to go to shareholders and if he did did sort of some sort of kind of stock base merger, there would be most likely to be a share of the vote. We acquired on one one or both sides. So I'm not sure that yeah, the timing would save anything.
Okay, just to clarify you would apps for a special meeting if the opportunity set created something where you wanted to be strategic to allow you to potentially issue equity if that well I'm just all hypothetically.
Yeah, I'm, just saying we could like if we if if.
Yes, we could do that if we need if there was not but if there was the situation opportunity where.
We had to issue shares below NAV for an acquisition we could go to the Sheryl is an extra people do that asked approval to do the transaction, depending if that's required et cetera. So.
But my point is we can always we got let's call a special meeting.
Fishing shares below now if you know if we need to.
Okay interesting that's it for me thanks, Matt Thanks Arvind.
Thank you.
As a reminder to we'd like to ask your question. Please press Star then.
Our next question will come from Ryan Lynch with KBW. Please go ahead.
Hey, good morning, guys and thanks for taking my questions have you guys are all doing well.
First question I have a couple of questions regarding a slide number eight.
In March out of the.
In the March April months out of the 118 million and hundred 32 million and you got support us. So some of those are secondary market purchases, a decent amount, but rather the non secondary market purchases.
Do you have a rough dollar amount of out of the deployments and those two months that would that were either revolver draw downs from existing commitments or delayed draw term loans from you're just seeing borrowers.
And also on that how do you guys for see that how how the trends going in and that has to be kind of look forward use do you expect those the revolver. Obviously delayed draw degree have some you know are subject to some some provisions in there, but but what is kind of the.
Your outlook for.
You know People's moderations, or the cadence of people pulling down those delayed draw term loans going forward or the excuse me the revolvers going forward.
Sure So preserve and PJ does not include revolver draws or a delayed draw term loan.
Request. So it's a is really a new investments that we made not not follow ons do exist to existing commitments now.
Before we did get hit on some revolvers. So for us Undrawn revolvers are not a material or not a material portion of our of our book So.
You know about 18 million.
Yes.
So two of our of our revolver is about 18 million or I'm trying to go through my notes here I.
That's right was 18 cents men 18 million, we funded 18 made a revolver draws in March.
There we don't go so was it shows that garments weisel.
April definitely Lewis is many tiny or any time yeah.
Yeah in April as I said in my prepared remarks or is there was 75 million.
Eligible to be drawn of unfunded commitments on revolvers.
How long ones are actually gone down do you see that from from the 18 never fund in margin has there been less funded in April Im just trying to get up yeah. Yeah.
A million, it's only a couple of only 2 million yeah.
Okay perfect.
And then as again as I look at slide number eight as far as a secondary market purchases Ah 64 million in March and as 16 million in April you know obviously.
Every loan is gonna be different but at the general sense that that that you're not planning on holding those loans to maturity and those are more kind of relative value trading you got your planning on EXINI throughout 2020, obviously dependent on the price you could exit at or are those sort of opportunistic purchases that you're really kind of like the.
Long term prospects and plan or are holding them yield to maturity or you're comfortable with him and trying to hold new maturity just a general sense I know every loan to probably different.
Sure. So it's a combination of both.
It is.
Everything we buy is with a view that we're happy to hold isn't maturity, but we also recognize them when they move up into perspective returns are on attractive relative to the to the other opportunity set out there, especially in opportunistic private loans rescue loans.
That's when we would look to monetize those positions and redeploy into something that has a better prospective return, but we don't we not real by anything with the view that is just a market timing event, we buy it we buy with a view that we're happy to own it up back creation value and if it moves up and moves up and we'll try to find something else to do that has a better return.
A better risk adjusted return about point.
Okay.
Makes sense you know.
Kind of a higher level question on your platform.
Regarding the deal sourcing and originations obviously, you know Oaktree has a a platform as I had a huge broad reach and ended the credit markets. You know you guys made a lot secondary market purchases this quarter and intra quarter to date Air B B. It's an interesting loan you made a sizable don't to new star.
Recent public traded company those drops you a lot it's different sort of investments in strategies. You also mentioned you're trading desk.
I would assume that that doesn't fit under the strategic credit group I would assume that there's a different you know that that's a different part of oaktree that the strategic credit group is working with but but correct me if I'm wrong in that and so I'm just trying to get a sense of.
There are lot of different things going on in ocean or a lot of the different kind of investments that are going to go CSL, which I think is a good thing speech your platform Kian just pull back to current in kind of.
Give us some information on how you guys are kind of viewing everything and how the different teams are working together, particularly with like a trading desks and the liquid loans versus you know these these these.
Private transactions like that the air be or even though the publicly traded company like Newstar.
Sure I appreciate the question so.
First of all so our traders are organized by product specialty. So we have dedicated traders in loans dedicated traders and bonds. We have distressed debt dedicated traders that work with special situations oriented parts of the banks.
So we cover every trading desk on Wall Street, a multiple different ways is on its not a small operation.
Those traders are obviously, they face off with similarly oriented folks on the other side they are.
They work for all groups at Oaktree, They look for a distressed group or high yield group loans grew strategic credits emerging markets et cetera. So.
There's a lot of information flow from the traders to every strategy at Oaktree.
There's a lot of information flow across strategies at Oaktree.
And that's part of my role as head to head of performing credit at Oaktree I actually sit on top of what we do hit our performing credit strategies, both on a liquid and illiquid basis of on the liquid side, that's high yield bonds us loans convertibles globally.
And so we have a lot of information sharing tools that.
Hello.
Transfer information from one group to another 200 to understand what risks they may see in a particular industry. We're in a particular credits we will have often two or three sets of eyes are groups looking at the same credit or the same industry from a different risk tolerance perspective, because we out here have a distressed analyst and health care.
Performing credit analyst and health care, and senior loans and in high yield will have an analyst and strategic credit as well so.
Looking at looking at health care for for example.
And so it is on all of us and and it is a.
Very important part of my role at Oaktree to make sure that that information has been very fluid Lee shared the analysis is being is being shared the.
When we do interface with companies sponsors banks intermediaries advisors.
It is very important that each strategy includes the others. So long as we don't have information walls that restrict our ability to do so and so I could tell you. There's there's a lot of eyes looking at credit at Oaktree.
All times and we do a very good job of sharing that those ideas and.
It is not uncommon and it was not uncommon in March, especially.
As our senior loan in high yield bond funds or look at credits of industries as those traded often and babies were being thrown out with the bathwater. There were a lot of emails lying around to the strategic credit teams with the team manages the bdcs, saying Hey. This is this doesn't make any sense you ought to take a look here's what I've done on it.
And and the reverse would also.
The reverse would also take place where our strategic credits you would identify certain price movement.
We would flag it for our high yield and senior loan team just in case they owned it.
If they did noted there would share the information obviously didnt noted they too would take a look and there was a lot of cross through collaboration.
Which which is.
Especially powerful during periods of dislocation on the private side. We have we have a variety of different teams are oak tree that that work on a privately negotiated transactions they might be equity they might be structured equity.
Might be dead right as you know, we have a middle market direct lending and mezzanine team.
That is that it's not a very long track record in a track record in investing in sponsor backed deals both on a senior secured and or the subordinated basis their relationships have of contract with them about potential deal flow, we've seen some potential opportunities from them and frankly helps them I understood.
And what else we are seeing on the more opportunistic side, both in public and private markets.
So there too on the private side, there is information sharing and aren't in the case of Newstar energy, we have an infrastructure private equity team at Oaktree. The that we also have a power opportunities private equity team to treat.
The cases newstar it was a relationship from that strategy, because they invested and in energy infrastructure, which is really what newstar is I wouldn't say that so it's really an energy business. It's it's company those pipeline and storage attached a very important refineries.
In the U.S.
And it was that who's going to that relationship that that we sourced that transaction at oaktree as a whole took down $750 million in a private deal and so.
We were only able to do that because of the breadth of our platform, but also within each strategy the depth of experience that resides there sorry.
We think we do a pretty good job of of making sure. We see a lot of deal flow, we do pretty good job of making sure everybody at Oaktree knows the various risk adjusted return profile of the strategies that participated oaktree, whether it's our distressed up business or special situations or a private equity businesses, where the case of our bdcs as well so.
That's kind of the.
The.
I don't know multivariate nature of the way, we go about sourcing those in public and private.
And we have dedicated resources as well attached to Bdcs that are that are looking for sourcing all day long. In addition to the other strategies of the firms or it's a it's a it's exercise in collaboration everyday and it becomes.
Sure.
Active for sure during times of dislocation given oak trees orientation of the market.
That's a that's really helpful color and great detail, you know broadly across the oak tree platform and I think definitely show some of the benefits you know that that you've got can access than you had to do you see has the ability to access just one quick follow up on on that that coin in my question.
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Because just because in your prepared Thomas you mentioned, you know potentially you know being in contact with we're doing some rescue financing you know I would think in a normal environment over the last several years you guys probably wouldn't partner too much with any of your distressed funds.
Given the you know just the environment that were area, which is.
Given that the change that we're in today with a lot of companies.
You know quickly dramatically becoming distract.
Do you guys have the ability and willingness to start partnering with any of your stress funds or you know for for some opportunities going forward in this environment.
Well I mean, absolutely the of the Newstar deal is in partnership with our distressed funds overtime.
So the and the other area potential partnership as of Brookfield asset management, which is as a majority investor at Oaktree now so we have.
Brookfield meaningful touch points in the market I mean, there they are.
But he lives in in real estate in private equity infrastructure and renewables.
And as you can imagine with the region collector the remember that they have there's a lot that.
That that they see that may not fit their world, but dusted hours.
So we if we I do expect that we will see more in partnership with our distressed funds and I think you're right that historically given the market environment, we did a little bit less because.
Their investments were of other nature that were far more you know distressed opportunistic had risk of restructuring that we were not willing to take on to the Bdcs, we really want to stick to performing credit for the season and we are finding performing credit that is dislocated and priced attractively. This market. So we'll.
I'll take that opportunity, but at times when that opportunity doesn't exist were not going to stretch on risk just to.
Do stuff with our distressed.
Okay.
It makes sense.
Those are all my questions I appreciate the time today and hope you guys all stay well.
Thank you likewise, thank right.
This will conclude today's question answer session. As we're out of question I would like to turn the conference back over to Mr. usage.
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