Q3 2020 Oaktree Strategic Income Corporation Earnings Call
Today's conference call is being recorded.
At this time all participants are in listen only mode, but we'll be promoted for question and answer session. Following their prepared remarks.
Now I would like to introduce Michael must achieve.
In relation to host today's conference call.
Mr., Joe you maybe get.
Thank you operator, and welcome to Oak Tree Strategic income Corporation third fiscal quarter Conference call.
Earnings release, which we issued this morning and the slide presentation that accompanies this call can be accessed on the investor section of our web site at Oaktree strategic income Dot com.
Let's say army.
Chief Executive Officer, and Chief Investment Officer.
And though president and Chief operating Officer, and no Carlyle Chief Financial Officer and Treasurer.
And we'll be happy to take your questions following their prepared remarks.
Before it again I want to remind you that our comments today will include forward looking statements, reflecting our current views with respect to.
Another thing our future operating results and financial performance.
Actual results could differ materially from both an implied or expressed in forward looking statements.
Furthermore, we see filings for a discussion of these doctors, we undertake no duty to update or revise any forward looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any oaktree funds.
Investors another she knows that Oaktree strategic income uses the investor section of its corporate website to adopt material information.
A copy encourages investors the media and others to review the information that it shares on its website.
I will now turn the call over to that.
Thank you, Mike and welcome everyone to our fiscal third quarter earnings Conference call. We appreciate your ongoing interest in L.C.S. side.
Hello, everyone listening as well the health and safety of our team and the effective management of our portfolio remain top priorities as we navigate the cobot 19 pandemic.
We're capitalizing on Oaktree first rate technology platform and while the team continues to work remotely we have been very successful to date as a virtual company Anvil, we remain fully operational or the duration of this public health crisis.
Turning to our results.
June quarter stood in contrast to the March quarter, as global risk sentiment improves significantly and equity and credit markets, partially rebounded from their low.
<unk> portfolio was not immune to the extreme market disruption in March tighter credit spreads the liquid loan markets drove higher valuations in our portfolio in the June quarter, leading to an 18% increase in NAV per share.
Yes represented $39 million recovery of the March quarter Nab right Yeah.
As we detailed on our call last quarter, our portfolio has a large exposure to liquid loans one of the benefits of having these liquid that investment is that allows us to actively manage risk in the portfolio and move in and out of positions Opportunistically.
One potential drop back. This approach is that our portfolio from time to time, well be impacted by mark to market volatility, which is what we experienced in the March quarter.
However, following the rebound the liquid credit markets. The prices of these investments increased by 9%, which contributed $31 million to the improvement in Dallas.
With that investments continue to experience price depreciation of approximately 1.5% during the month of July.
Also contributing to the NAV increased where our investments in the Glick JV, what's written up by $8 million or 21%, reflecting improvements in the underlying investment portfolio, which is primarily comprised composed of liquid first lien loans.
Earnings for the quarter were primarily impacted by lower library, which has declined by over 150 basis points. This calendar year and lower original issue discount income acceleration, resulting from pre payments as a result net investment income for the third quarter was 11 cents per share down from 15.
Since the prior quarter.
Board of directors declared a cash dividend of 12, and a half centsper share consistent with the prior quarters dividends.
Given our focus on larger and more resilient companies our credit quality remained strong only one new investment was placed on nonaccrual status during the quarter.
Excluding the Glick JV nonaccruals represented 0.5% of the debt portfolio cost and 0.4% at fair value Importantly, we remain well capitalized and have ample liquidity to continue to invest and to meet our funding needs at June thirtyth liquidity totaled $123 million.
Including 30 minded $30 million of cash and $93 million undrawn capacity on our credit facilities.
While we remain very disciplined in our investment approach given the current levels economic uncertainty, we continue to identify attractive investment opportunities with favorable yields in the third quarter. We originally <unk> originated $42 million, a new investment commitments during the quarter. Fortunately all in first lien loans.
The weighted average yield was 9.5%, which compares favorably to the approximately 5.5% weighted average yield on the investments that we exited during the quarter.
Our pipeline is strong and the continued to selectively deploy capital our ability to invest alongside other oaktree funds gives us additional confidence that we'll be able to participate in additional opportunities going forward.
Before I turn the call over to arm and I wanted to provide an update on the new initiative that will enhance our firm wide sourcing efforts in June Oaktree announced the formation of a new group to source in originate private credit opportunities across all the Oaktree strategies in North America. This new team will support our existing sourcing.
In origination function going forward, which will will facilitate and deepened oak trees already strong reputation as a go to lender. We believe that this will continue to widen the federal law for opportunities that Oh C. S. I will see enabling us to selectively grow our portfolio and deliver improved returns.
All told we are pleased with our third quarter results in light of the economic uncertainty caused by debt caused by the pandemic significant declines in livewatch, while the market continues to evolve and it's difficult to determine the timeframe and ultimate impact of Carbonite team. We are proactively investing managing risks that may arise and ARPU.
Folio and believe Oh, she has a is well positioned to continue to deliver attractive risk adjusted returns to shareholders with that I'll now turn the call over to Armen.
Thanks, Matt.
After the March quarters historic sell off in risk assets credit an equity markets bounced back in the June quarter, following extraordinary fiscal and monetary stimulus actions, which boosted liquidity and the availability of credit, thereby supporting individuals businesses and markets.
In the credit markets, both high yield and leverage loans rallied from their workflows responding to the market's confidently implicit backstop provided by the federal reserve given its commitment to ensure the markets remain liquid and functioning and orderly manner.
We maintain a conservative posture, however, because the optimism evident in the markets interview doesn't know why would the company fundamentals or the current state of the broader economy.
The U.S. the pandemic remains a highly fluid public health crisis.
When cases at hospitalizations up continue to rise across much of the country halting reversing reopening.
Uncertain topped the recovery companies may make temporary or permanent cuts to payroll or capital expenditures. We expect numerous industries to experience several years of stress and distress that's companies reassess their business models, including how they use real estate, who they employ in where and how they distribute their product.
Consumer sentiment and spending which is a major driver the economy will be closely linked a job and income prospects and aside from the pandemic the potential impact at the upcoming U.S. elections represents another area of uncertainty.
So, let's say that we anticipate further volatility in the markets.
Remain focused on maintaining or high quality and more conservative conservatively positioned portfolio.
We continue to rotate out of names and sectors that have outperformed expectations and could be challenged at the recovery slows.
Being cautious and disciplined about deploying capital reserving dry powder, where possible. So we can go on all fronts quickly if another buying opportunity presents itself.
We're also tracking things the non correlated areas of the markets, including life Sciences investments businesses with pent up demand that will benefit when the economy reopened and company benefiting from coated including businesses in software and information technology.
Now turning to the portfolio.
Feel good about the overall credit quality of are mostly first lien portfolio.
Since we took over management. It goes yes, I in 2017, you have been focusing defensively positioning the portfolio by lending businesses that we believe will be resilient through an economic downturn.
We have increased the overall sides of our borrower focusing on larger more diversified businesses with little exposure to cyclical industries.
To that end the median portfolio company EBITDA <unk>.
Approximately $130 million larger than the typical middle market company.
The downturn of course is affected companies within the portfolio and we are closely monitoring all of our positions that said, we continue to have limited exposure to industries impacted by the pandemic very carefully tracking market conditions and meet any close contact with our management teams and private equity sponsors and generally or portfolio companies of the necessary liquidity to navigate.
The environment in the near term.
All of that noted we are actively identifying new opportunities to create value for our shareholders overtime, we intend to selectively rotate out of lower yielding investments and into new higher yielding opportunities as we identify them.
We were active deploying capital in the June quarter, as we were able to find interesting opportunities in companies with attractive risk reward profile.
So I originated $42 million of new investment commitments during the quarter.
Aside from a few opportunistic secondary market purchases in April we made.
Most of our new investment commitments were in the primary and private credit markets.
We discussed one of these air Bnb last quarter I'd like to take a moment to discuss in detail. A couple of these types of investments that we made in the June quarter.
The Phoenix is a publicly listed global clinical stage bio pharma company with an extensive manufacturing and development platform focused on discovery and commercializing novel cancer treatments. The company was seeking to refinance existing see your dad and raise additional capital to provide it with runway for the development of new medications.
I'm sure you underwrote $225 million of six year senior secured debt of which shows here sorry. It was allocated $15 million, 40% of this loan was funded at close and the remaining tractors are subject to certain milestones that must be met by the company.
This woman's attractively priced with 11% cash coupon and include three points of already in a 2% exit fee at maturity.
In early August we sold 22% of our position to another lender at a modest gains.
William Morrison Denver is a privately held global entertainment sports and Karthik company generates revenue through your rights sales sponsors sponsorships subscription license fees ticket sales and pay per view programming.
Impacted by restrictions put in place to slow the spread of the kroner buyers the company needed to learn to bridge the gap to economic recovery would oppose pandemic demand resurgence for life event should drive improved performance in cash flow.
The company has significant equity cushion in our loan was priced attractively at LIBOR plus 8.5%.
Oh tree was the largest lender in the $260 million secured debt financing.
And those yes, I was allocated $8 million.
Payoffs paydowns and exits for the quarter were $91 million, which included the sale of 76 million of low yielding investments and opportunistic investments in March.
We saw more value in selling these loans as their prices rebounded and we sought to redeploy the proceeds into private opportunities.
We believe the months ahead, we'll continue to provide who see upside with ample opportunities in both public and private investments and are confident that with oaktrees resources behind us, we will be able to identify attractive transactions.
In summary, the overall credit quality of our mostly first lien investment portfolio remains sound about amid the uncertain economic environment with a solid balance sheet and ample liquidity to support our investment plan. We believe those yes, I is well positioned to provide attractive risk adjusted returns to shareholders now I will turn the call over to build to discuss our financial results.
Results in more detail.
Thank you arm and for the third quarter fiscal year 2020, we reported net investment income of 3.2 million or 11 cents per share.
Down from 4.6 million or 15 cents per share for the second quarter.
The decline was due to lower investment income, partially offset by lower expenses.
During the quarter total investment income was eight point sixmillion down from 10.3 million in the previous quarter.
Approximately 1.1 million of the decline was driven by lower interest income, resulting from downward pressure on the average yield of our floating rate debt investments.
Due to the decline in LIBOR or any smaller portfolio size.
Remaining 600000 was driven by lower <unk> income acceleration from prepayments and lower fee income.
Net expenses for the quarter totaled 5.5 million down 300000 from the previous quarter.
The decline was mainly due to lower interest expense, resulting from lower average borrowings combined with lower lied bore.
We also recorded lower management fees due to the smaller portfolio and professional fees and gene expenses were also down from the prior quarter.
Turning to credit quality, excluding the quick JV only one company, who was on nonaccrual status at quarter end.
This investment is a relatively small position represent 80.5% of the debt portfolio at cost and 0.4% at fair value and it was placed on nonaccrual during the June quarter.
Moving to the balance sheet during the quarter, we funded 35 million investments, which was less than 91 million to pay offs and exit.
As a result, our net leverage ratio decreased to 1.1 times from 1.4 times at March 31st.
Reflecting the smaller portfolio as well is the increase in that.
We're presently just below the low end of our target leverage range of 1.2 times the 1.6 times.
As of June Thirtyth total debt outstanding was 312 million and had a weighted average interest rate of 3%.
Down from 3.8% at March 31st.
Primarily due to the decreases in lie board during the June quarter.
At quarter end, we had total liquidity of approximately 123 million, including 30 million of cash and 93 million of undrawn capacity on our revolving credit facilities.
Unfunded commitments for 32 million, although only approximately 9 million of this amount is eligible to be drawn immediately.
As a remaining is subject to certain milestones that must be met by portfolio companies.
Shifting now to the GLIC joint venture as of quarter in the JV had 143 million or assets invested in senior secured loans to 41 companies.
This compared to 153 million total assets invested in 44 companies last quarter.
Two investments held by the JV, which represent 1.6% of the portfolio at fair value run nonaccrual status.
Leverage at the JV was 1.7 times at June Thirtyth.
Down from 2.3 times last quarter.
As you may recall in light of the market volatility last quarter, we restructured the glick JV and play starts subordinated note that Smith and the partnership on non accrual.
Although it remains a nonaccrual status Oh suicide continues to benefit from the earnings power of the Jvs underlying investment portfolio.
Which generated 1.1 million of net investment income during the quarter.
This income was used to repay outstanding principal on the subordinated notes of which 1 million was paid to owes you decide in July.
Now I'll turn the call over to Matt.
Thank you Michelle we entered this crisis and solid financial shape, we have largely completed the defensively positioning Oh see asides portfolio and we feel good about our current holdings, we continue to be well capitalized into the ample liquidity, which is a loud oh see aside is.
Against this challenging environment.
Oaktree has a proven track record investing in private credit across market cycles and as a result, we believe well. She has a is well positioned to participate in attractive transactions that ensure downside protection.
As arm undoubted, they've continued to invest throughout the pandemic and we expect to remain to remain active going forward. However, we will continue to be patient and disciplined as we believe there will be an increasing number of opportunities that will arise over time as the crisis persist.
We believe that Oh see ESI is well positioned to increase we turn equity going forward.
We will continue to position the portfolio for improved yield by rotating out of lower yielding investments priced at LIBOR, plus 400 or lower during the third quarter, we opportunistically sold $56 million. If these types of investments.
As of quarter end, we had approximately $70 million of these loans, which we plan to replace overtime with higher yielding proprietary investments.
In addition, we can increase returns by deploying more leverage at the portfolio level as Mel mentioned, we were operating just below the low end of our long term target of 1.2 times to 1.6 times. So we have the ability to enhance returns as we continued to make investments and deploy a higher leverage however.
We will only grow the portfolio as you find opportunities that are consistent with our investment approach that we believe our offer attractive risk reward.
In conclusion, we are pleased with our overall performance is a third quarter given the ongoing uncertainty surrounding the pandemic remain confident that we'll be able to manage through any challenges that may arise in our portfolio as well as identify new attractive risk adjusted investment opportunities, enabling us to deliver improved returns to our shareholders.
Thank you for joining us on todays call and for your continued interest in L.C. ESI.
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 a question you May Press Star then one on your Touchtone phone. If you are you see speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble thereafter.
The first question today comes from Cris Gaut, well see T. advisors. Please go ahead.
Yeah, Hi, guys. Congrats on a good quarter my question relates to the quick JV.
Last quarter, you indicated that it could not will be could potentially go back on accrual and I believe it was October and it was just wondering if that with another quarter behind you if you're still feeling like that.
The reasonable timeframe and then if it does go were when it does go back on accrual is already recapture of accrued interest at that time. Thanks.
Hi, This is no Oh I'll take that question. Our original plan was where the JV to start paying again in October.
However, given the uncertainty it's hard to say definitively.
Well reevaluate things at the end of a corridor.
If we were to put the.
Safety back on accrual status, we recognize interest income just for that September thirtyth quarter, there wouldn't be any recapture.
Thank you that's all for me.
Again, if you have a question. Please press Star then one then next question comes from Bill Calvert you'd be please go ahead.
Good morning, what would you mind, expanding a little bit on Dean.
Yeah.
Are you going to have access smart wider.
Network.
Deals.
I'm, sorry, you broke out liver.
But there aren't that I I, you broke up a little bit I think you're asking about the sourcing in origination.
I'm kind of organization changes or was there something no just they then the announcement announced within Oaktree in June about the new sourcing.
Network is you're going to have.
Sure. So what we did there you know we have a variety of sourcing professionals across oaktree.
Embedded in a variety of different groups here well, we decided to do is to lift out all of those sourcing origination folks up to speed for the entirety of the burden rather than for specific strategies.
In addition, we or adding numbers to that team to cover particular industries or geography. So the overall number of sourcing and origination professionals will continue to grow the reason to do that was you know I think it gives us a better and more cohesive way of speaking with the market.
Whereby individuals now speak for the entirety of the from all the way from lower risk lower returning.
Funds under management that we have at Oaktree, Oh, we have to the higher returning and higher risk funds that we have debt or equity like in nature and offerings that a suite of solutions across the spectrum is really provides us the ability to to offer a pretty create.
It is set of solutions to the market.
And we're seeing.
A lot more kind of engagement with the market as a result, because we are.
Able to see pretty cohesively, rather than confusing the market would be the various different groups in various different people that have touch points with the market. So the thought is that if we speak a in a more unified voice, we bring more assets under management across the firm to invest in further sourcing it origination.
Capacity and resources will really improve how much reach we have.
Yes, I infer a all of our individual businesses as well.
Thank you very much.
Okay.
Again, if you have a question. Please press Star then one.
He has no further questions at this time Mr. must achieve.
Thank you for joining us for fiscal third quarter 2020 earnings conference call. A replay of this call will be available for 30 days I don't see aside website in the investor section or by dialing 8773, or 475 to nine U.S. collars or one for one to me one seven years.
Eight eight or non U.S. color.
The replay access code 10145, 870, beginning approximately one hour after this broadcast.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.