Q4 2020 Oaktree Specialty Lending Corp Earnings Call
[music].
Welcome and thank you for joining Oaktree specialty lending Corporation's fourth fiscal quarter and full year 2020 conference call.
Today's conference call is being recorded at this time.
All participants are in a listen only mode, but well the project for a question and answer session. Following the prepared remarks.
Now I would like to introduce Michael most of that shell of Investor Relations, who will host today's conference call. The most.
Thank you you may begin.
Thank you operator, and welcome to Oaktree special people on the Corporation's fourth fiscal quarter Conference call.
Our earnings release, which we issued this morning and accompanying slide presentation can be accessed on the investor section of our website at Oaktree specialty lending dot com our.
Our speakers today are our mix of never see on Chief Executive Officer, and Chief Investment Officer.
The President and Chief operating Officer, and Bell Carlisle, <unk>, Chief Financial Officer on Treasurer.
We'll be happy to take your questions following their prepared remarks.
For began I want to remind you that comments on todays call include forward looking statements, reflecting our current views with respect to among other things on the timing or likelihood of the merger closing the expected synergies on savings associated with the merger.
What do you realize that the speed of benefits of the mergers and 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.
Okay, 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 in any Oaktree fund.
Bastards in other she knows that Oaktree specialty lending use at the investors section of its corporate website to announce the material information.
The company encourages investors the media and others to review the information that the chairs on its web site.
That I would now like the turn the call over to Matt.
Thank you, Mike and welcome everyone to our fourth quarter and full year of 2020 earnings Conference call.
Appreciate your interest and support of both yourself and we hope everyone listening as well.
We're pleased to report our fiscal year 2020, you did on the strong note we reported NAV per share at year end of $6.49 up over 6% during the quarter and down less than two per cent for the year on.
Our NAV stage of impressive recovery from the decline in the March quarter, when the market's concern over the impact of bad debt was at its peak.
The rebound was the dollar on 50 was the dollar of 15 cents per share recapturing 91 per cent of the decline in that quarter.
We had another strong year of originations during the year, we originated over $800 million of new investments representing over half of the value of our portfolio at the start of the year, notably a large portion of our originations occurred during the post called the cobot period.
We have been focused on defensively positioning the portfolio by lending to more lending to more diversified businesses with little exposure to the cyclical industry companies that we believe will be resilient through the recession neighbors.
Many of our new investments have been in the form of directly originated private placement transactions, where where we have co invested alongside other oaktree funds.
By leveraging the extensive firm wide resources and expertise of Oaktree for origination due diligence and credit selection, we have been able to the structure and the burst portfolio with high conviction investments position to generate attractive risk adjusted returns across market cycles.
That's the deliberate shift on our portfolio has led to higher yielding investments the average yield on our new debt investments increased over the course of the year and was 10.6 per cent for investments made in the fourth quarter. This all occurred against the backdrop of decreasing interest rates went live for declining by over 180 basis points in the same timeframe.
We are proud of our portfolio performance this fiscal year, particularly given the challenging environment created by the pandemic our credit quality remains strong, but the only two out of our 113 portfolio companies on non accrual status, representing 110th of 1% of the total portfolio at fair value.
We continued our portfolio repositioning during the year and successfully monetize $50 million of non core investments, which resulted in the aggregate proceeds of $59 million at year end non core investments represent represented only 9% of the portfolio at fair value.
Another major accomplishment in fiscal year 2020 was the further improvements we made to our capital structure, reducing funding costs and improving on financing flexibility in February we successfully completed a $300 million public note offering that was the attractively price of the coupon of 3.5 per cent part of the proceeds were used to.
The redeem our higher coupon bonds, which had a blended interest rate of around 6%.
Also during the fiscal year, both Moody's and Fitch assigned O C. S. L investment grade ratings, citing our successful progress to date in exiting non core investments the strength and quality of Oaktree and our lower leverage relative to peers.
Subsequent to year end, we increased the borrowing capacity under our revolving credit facility by $75 million. Following a commitment from the new lender, bringing the total revolver commitment site to 775 million, which we believe the sufficient to fund our future capital needs.
Finally, as you know Oh see us sell the Oaktree strategic income Corp entered into a merger agreement with those yourself to be the surviving company.
We believe this merger represents a great opportunity for shareholders about Oh, CSL and L.C. Aside we expect it will create a larger more scale BDC with increased trading liquidity potentially broaden our institutional shareholder base and they improve access the lower cost sources of debt.
We also anticipate debt it will drive and I I accretion over both the near and long term.
We feel that now is the right time to move forward with this merger both portfolios are in great shape, and our transition out of non core assets that we've been working on some 2017 is nearly complete.
We appreciate all the support theories that we've received to date in terms of the next steps, we anticipate filing the IND 14 joint proxy statements in the coming weeks and expect the transaction will close in the first calendar quarter of 2021 subject to shareholder approval and satisfaction of other closing conditions as outlined in the merger agreement.
Now turning to our fourth quarter results.
The CSL delivered excellent results for the quarter highlighted by solid earnings strong origination activity and excellent credit quality.
Adjusted net investment income per share was 17 cents of significantly from the 12 cents per share for the prior quarter.
The increase was primarily driven by higher investment income, which included the higher prepayment fees and Oh by the acceleration.
Based on our consistent performance and our expectations for continued strong earnings our board increased our quarterly dividend by 5% to 11 cents per share the second consecutive quarter with the dividend increase.
Following the market disruption last March valuations continue to improve the September quarter, resulting in an average increase of 6% from the June quarter, the $915 million, reflecting price recovery in our liquid debt investments and tighter credit spreads. In addition, our investments in the kept for joint venture for written up.
The $7 billion for seven per cent, reflecting continued appreciation in this mostly first lien loan portfolio are.
Our liquidity position remains strong we had more than $320 million of drypowder, including 285 million availability on our credit facility and 39 $39 billion of cash at quarter end.
The solid foundation enabled us to once again actively pursue new investments during the quarter leveraging oaktrees platform to find several compelling opportunity we.
We made a $148 million of new investment commitments during the quarter, including 90 million in private transactions 57 million in the primary markets and 2 million in secondary market purchases.
New investments in the quarter were attractively price was at weighted average yield of 10.6%, notably above the 6.8% weighted average yield on the investments that we exited during the quarter.
We received the $184 million from pay downs and exits in the quarter, including $36 million for my ex the Newstar and 15 million from Sorento equity sales.
The exercise warrants and sold shares that's the rental stock price appreciate the following the recent <unk> positive called would really didn't news from the company on the company.
Credit quality remained solid as we have no new non accruals in the fourth quarter low.
Average decline 2.74 times net of cash from 0.83 times at June 30, primarily driven by the NAV increase and net pay downs in sales.
Despite the net portfolio declined which reflects our conservative posture on underwriting we expect to continue to identify compelling investment opportunities in fiscal 2021.
Overall, we are very pleased with our fourth quarter results and our performance for the full year and we are confident the scale. The Oh CSL will have post merger will help drive further benefits for our shareholders with that I will now turn the call over to arm and.
Thanks, Matt and good morning, everyone.
After the March quarters historic sell off in risk assets credit the equity markets rebounded over the late spring and through the summer months.
This was fueled by improving economic conditions on consumer sentiment reports of progress on COVID-19 vaccine, an extraordinary fiscal and monetary stimulus, which boosted investor confidence liquidity and the availability of credit.
Equity valuations remain lumpy, especially on the tech sector and in the credit markets spreads of both high yield bond and senior loans continued to tighten the the wide levels of March.
What's the of the improvement however occurred during the first two months of the quarter the.
Remember in October approved Rockier, the confluence of concerns, including the standstill on Washington on additional fiscal stimulus and the U.S. elections weighed on investors. Additionally, confirmed covert cases, and hospitalizations continued to rise across much of the U.S.
However, given the recent news of progress towards the vaccine and with the uncertainty of the election behind us the equity and credit markets have resumed the rally the.
Part of me too right as the head, but its still facing some headwinds given.
Given this backdrop, we continue to approach new investment defensively, we believe the economic strain produced by covered the 19 will be felt for several more quarters elevated unemployment and muted GDP growth are likely to persist.
For the never is important to be wary of market exuberance, it's the board chasing risky investment opportunities.
The focus on protecting the downside of their investment and seeking appropriate compensation for risks taken.
Because oaktree invests across multiple markets with diversified issuer basis, we were able to skew our portfolio's toward more stable and lower risk sectors for.
Currently dozens of book is on companies that are largely unaffected or even positively impacted by cobot, you're finding interesting opportunities in life Sciences, and technology companies, which are helping to provide health care solutions on cater to the stay at home the economy.
In addition, we're seeing direct lending opportunities and support of leveraged buyouts of businesses that are proving resilient in the face of the pandemic.
We're also lending the businesses that are not easily underwritten via traditional cash flow based of methodologies.
Italy, we're monitoring the rescue lending landscape in the area in which we were active earlier in the year.
This opportunity set is less attractive today, but we're tracking a variety of potential deals and we expect some of these may materialize over the next several months.
As we maintain the portfolios conservative positioning we not only are emphasizing deemed would be we will be more resilient, but are also looking to exit positions, where we believe there is limited further upside potential on the market is not pricing risk appropriately for.
Overall pipeline remains strong we continue to pursue unique opportunities, where we don't see much competition. As we believe this is the best way for us the generates attractive risk adjusted returns.
Now turning to the overall portfolio performance.
We feel good about the quality of our portfolio and the health of our borrowers over the past three years, we have been focused on defensively positioning the portfolio. We increased the overall size of our borrower focusing on larger more diversified businesses would be little exposure to the cyclical industries or median portfolio company of the dogs approximately $131 million.
Larger than the typical middle market company.
Credit quality of the solid as Matt noted non accruals are virtually non existent and amendment an interest payment modifications continued to be very low.
We remain in close contact with management teams and private equity sponsors and generally our portfolio companies of the necessary liquidity to navigate the current environment in the near term the sponsors are supportive.
Turning turning now to the investment activity.
During the quarter, we were able to identify several interesting opportunities and companies with attractive risk reward profile for all of which were consistent with our thematic investing in recession resistant sectors, such as life Sciences, and technology for and unique specialty structured situation.
I'd like to take a moment to discuss in more detail a couple of key investments we made in the September quarter. The we think are compelling.
You AG is the fertilizers and agricultural chemicals company in Texas. It is the exclusive service provider to produce and distribute ammonium sulfate on behalf of D.A.S. on North America, the second largest producer and marketer of chemicals.
You actually out of construction loans to build the new facility that will serve as collateral for the low in addition to the guaranteed backed by B.A.S. Oh.
So true you underwrote the entire $135 million first lien loans of which owns the I saw was allocated $40 million the.
In addition to the downside protection the for your first lien loans was attractively price of LIBOR, plus 550 cash and 700 pick.
You for its a manufacturer of transfusion interest diagnostics product for use by hospital donor centers and reference labs worldwide. Its product for use in test performed on the typing and screening the blood organs or stem cells to ensure donor recipient compatibility.
The company operating manufacturing facilities in North American as book direct and third party distribution arrangements worldwide.
Oaktree was asked to participate in the new $650 million first lien $375 million secondly, refinancing of the company's debt.
Let's see I saw was allocated $23 million total, including 7 million of the first lien loan price of LIBOR, plus 575, and 15 million of the secondly, low priced at LIBOR, plus 800, cash and free and a half per cent pick.
We expect to see a number of opportunities on both public and private investments in the months ahead. We are focused on companies that were in the strong financial position prior to the pandemic and that are now demonstrating the ability to manage through this environment.
For example, liquidity combined with the resources of Oaktree put us in an excellent position to identify and pursue attractive opportunities in this environment and post the pandemic now I will turn the call over the bell to discuss our financial results in more detail.
Thank you on it and let's see of cell delivered another quarter of solid financial performance, which also contributed to strong full year results for.
For the fourth quarter of fiscal year 2020, we reported adjusted net investment income.
Of 24.5 million or 17 cents per share up significantly from 16.8 million or 12 cents per share for the third quarter.
We the increase was the result of higher investment income and was partially offset by higher net expenses.
During the quarter total investment income was 43.6 million up from 34.4 million in the June quarter.
The increase was due mainly.
The higher interest income, resulting from increased make whole interest on the acceleration and higher prepayment fees on the loan pay offs.
We also experienced a slightly higher average yield on our floating rate debt investments.
Despite life for being down again for the quarter.
The higher make whole interest in fee income quarter over quarter was mostly due to the prepayment of the newstar low.
Which generated over 8 million of non recurring interest income and fees in the fourth quarter.
Net expenses for the quarter totaled 19.1 million.
The 1.4 million sequentially the.
The increase was primarily driven by higher part one incentive fees.
Mainly due to the income increasing investment income.
This was partially offset by lower interest expense due to the decrease in LIBOR and lower borrowings outstanding.
Turning to credit quality.
During the quarter all of our portfolio companies meet their scheduled interest payments with the exception of one company that consistent with prior quarters meet its interest payment in Conway.
As of September Thirtyth, we had two investments on non accrual representing 0.1 per cent of the total portfolio at fair value.
Yeah on from 0.2 per cent in the prior quarter.
Moving to the balance sheet.
During the quarter, we funded 146 million of investments and received 184 million of payoffs and exit.
Our net leverage ratio decreased the 0.74 times <unk> 0.83 times the June Thirtyth we.
Reflecting both the increase in that 30.
38 million and net pay off the exits.
We are presently just below the low end of our leverage targets range of 0.85 times to 1.0 times.
As of September Thirtyth total debt outstanding was 715 million and had a weighted average interest rate of 2.7 per se.
On secured debt represented 42% of our total debt at year end at our next scheduled maturity of in 2020 for what our credit facility comes up for renewal.
At year end, we had total liquidity of approximately 300 of 24 million.
Moving 39 million of cash and 285 million of Undrawn capacity on our revolving credit facility.
Unfunded commitments for 158 million all.
Although only $94 million of this amount is eligible to be drawn on immediately.
As the remaining amount the subject to certain milestones that must be met by portfolio companies.
As Matt noted in October we expanded the capacity of our revolving credit facility by 75 million, adding a new lender.
Our total commitment is currently 775 million.
And our pro forma availability.
On the facility of 360 million.
Shifting now to the can for joint venture.
As of September Thirtyth, the JV had 313 million of assets invested in senior secured loans the 56 companies.
This compared to 315 million of total assets invested in for 53 companies last quarter.
Assets were basically flat quarter over quarter as the increase in the market value of its investments was offset by pay offs exits.
The leverage at the JV was 1.3 times at year end down slightly from the June quarter.
Now I will turn the call back the math.
Thank you Mel while the environment continues to be uncertain, we nonetheless generating the strong operating results for the fourth quarter and full year.
The defense the repositioning that we have carried out since 2017 has largely been completed the.
The actively deployed capital of during the year and we feel good about our current holdings.
As already noted our overall pipeline of potential transactions remains strong and we expect to continue to identify compelling investment opportunities in fiscal 2021. However, we will remain patient and disciplined as we believe there will be an increasing number of opportunities that will arise over time as the pandemic persists.
We believe the Oh CSL continues to be well positioned to increase the return on equity going for it.
We will continue to position the portfolio for the improved yield by rotating out of lower yielding investments and into higher yielding proprietary low.
On the fourth quarter, we sold $57 million of these types of investments.
As of year end of $145 million of senior secured loans price at or below LIBOR plus 4.5% remained in the portfolio.
We also have the ability to 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 0.85 to 1.0 times. So we would expect to continue to enhance returns as you make incremental investments and the play higher leverage however, we will only grow the port.
Although as we find opportunities that are consistent with our investment approach that we believe offer an attractive risk reward for.
Finally, the Kemper JV continues to present, an opportunity for us to improve returns as of yearend. The JV was Levered 1.3 times and had $82 million of investment capacity, we believe that the prudent growth of the JV will also be of crude accretive to our OE overtime.
In conclusion, we are proud of our strong fourth quarter results and the progress we've made towards our ongoing strategic objectives. In fiscal 2020. We are also looking for to the pending merger with the OTSR as we believe that this combination of benefits shareholders of both Oh, CSL and O C OSI through scale portfolio diversity and expect.
The earnings accretion.
We are excited about the future for the combined company and remain confident that we will continue to identify new attractive risk adjusted investment opportunities that are consistent with the oaktree is disciplined risk controlled approach, enabling us to deliver improved returns to our shareholders. Thank you for joining us the date today's call and for your continued interest of Oh CSL.
With that we're happy to take your questions. Operator, Please open the line.
Total now began the question and answer session asking the question you May Press Star then one on your Touchtone phone. If you are using the speakerphone. Please pick up your handset before pressing Nicky till the try your question. Please press Star then kill.
Our first question today comes from Devin Ryan with JMP Securities.
[noise] great good morning, everyone.
Good morning.
The first question here just on liquid credit markets I'm. Just curious what you guys are seeing there at the moment and whether you're still seeing good risk reward the putting capital work, obviously that pretty pretty substantial snap back and valuation. So im just trying to think about kind of going forward I'm proud of.
Do you expect the position there.
Yeah. Thanks for the question. The covenants are and then yeah, I mean look the liquid credit credit markets of rebounded pretty meaningfully.
We started seeing it in the summer months with the fed action signaling I'm pretty strong support for the markets that was created the technical that.
The resulting in meaningful inflows into the high yield mutual funds the need yes.
That really lifted bond prices and in July, especially in a pretty strongly in August as well below market lagged a little bit, but but ER has out of strong of a few months overall and Ah that's been really fed by sea yellow origination C.L. of new issuance coming back pretty low.
Draw on as a senior loans the on the summer months were trading in the high Eightys low ninetys and that's on the Levered basis. The waste. The yellows are the pretty attractive return there on equity for CLL was and so we saw a lot of the yellow issuance, which lifted prices you know I would say that today the deeply does.
Got the names in the liquid credit markets are deeply discounted for good reason and in our estimation generally are not providing attractive risk adjusted returns, we do see pockets of value here in there, but broad based if you were to look at a discount of names on the bond market or the low end market.
You know the the general of feedback would be that.
Prices of probably rallied in excess of what fundamentals would suggest Ah, but again, you know oaktree relies on bottoms of credit analysis. So it's not like our liquid credit businesses, nor our strategic credit business that the overseas a management of the BDC is not finding some opportunity here and there, but I I, it's not a.
It's not deeply discounted I wouldn't say the terribly liquid either.
Right. Okay, I appreciate that and just thinking bigger picture here around credit obviously, the habit the big recovery in price of yet we're in some pockets maybe going to a little bit more stress on except there's another locked out of the across parts of the U.S. and I'm curious.
How you think about kind of keeping some dry powder to the potentially.
Participate if you do get dislocation or or maybe you guys don't expect that to happen I'm curious kind of the outlook there.
We expect some dislocation we can we can point to a specific catalyst the other than the rising cases globally of the Corona virus. If you look historically.
On the lag in hospitalizations and unfortunately doubts from for on a virus versus when the rise in cases are diagnosed picked up of usually about three or four weeks. So there there may be a little bit of.
Pending spiked here in hospitalizations.
Heading into the heading into yearend so that may be a catalyst of the downside on.
But away from that it appears that the election volatility and potential social unrest right on the election is behind us.
So I think that's kind of a more near term catalyst. The in terms of the co bid situation longer term I think there are many industries that did lever up during the pandemic period on that May have a tough times on producing the cash flows in the sort of medium term to sustain those debt loads.
And there may be stress on those capital structures.
And so we're watching that closely you're not seeing it right now because the market is essentially not looking out far enough.
True to determine solvency or or valuation for a lot of these businesses on a year or two down the line with their most of what the market is more focused on is month over month improvement in performance on management of liquidity in the short term by these companies.
And generally speaking most businesses, even those that are directly impacted by the growth of ours have had at least month over month improvements generally speaking other than maybe one or two very hard goods sector.
So you know what the so the net of it is we do expect volatility we do have dry powder, you'll notice that our leverage our levered loans were actually came down in the quarter I'm really because the our pace of origination slowed in the quarter versus prior quarters. This year, we saw fewer attractive rescue lending offered.
Unity and there's a lot of such a lot of other positions that we took on during the second and third calendar quarter on you know third and fourth quarter fiscal third and fourth fiscal quarter I traded up nicely on the prospective return given the risk associated with some of those names didnt make sense for us to continue holding them.
So we were known for sellers of paper in our fourth fiscal quarter. So that's not the kind of explains why our leverage is down quarter over quarter and also with the expectation that we'll see some volatility in the coming few quarters, even though there is positive news around the vaccine we don't think the side.
Positive news will translate into a positive performance fundamental performance of a lot of these businesses for several quarters ahead.
Yeah.
Terrific of to the exactly what I was looking for on and then just a quick follow up here on the EPS will lap. The JV appreciate some of the detail I'd be curious if there's any expectation that the fund will resume paying dividends at some point in the coming quarters.
Not for Mel do you want to pick the holiday.
Sure. This is Mel [laughter] go ahead go ahead the.
Yes the.
The.
Yeah for for this total of JV or the we're we're happy with that portfolio and you know, we we expect that it's going to continue.
You know putting cash to Oh CSL going forward.
Okay perfect.
Thank you up it for me I appreciate it.
Good day.
Our next question comes from Kyle Joseph for with Jefferies.
Hey, good morning, guys congratulations on that.
Nice quarter and the nice a wrap up for the last year.
Yeah, I think first question for Mel appreciate the the color you gave in terms of the I think you said there was the 8 million in terms of.
Kind of one time interest and fee income.
Can you give us the sense or how that was broken down between interest and fee income on just kind of asking.
Asking for what your run rate interest income would have been in the quarter.
Yeah.
Good question so [laughter].
The the fees were primarily from the new star repaying on a.
It was about 4.7 of make whole interest and the 1.5 million.
Oh I be acceleration.
And on prepayment fee of about 2.2 million. So you know that that was reflected the above the line.
And our net investment income.
Very very helpful. And then you know in terms of originations in the quarter, obviously the yields on the summer were very strong and above the portfolio yield but at the same time.
They are primarily first lien. So you know that's not something you typically see when you're moving up the capital structure and get a corresponding lift in yields on you know is that.
Or you just able to source unique deals is there any change in terms of the competitive environment out there.
I mean, the it's definitely complements the you're able to do that but on and kind of understand how you're able to do that.
[laughter] a lot I appreciate the question was Arvind so.
So no originations in the quarter. We're certainly we were very actively using the oaktree resource not work for and and no market.
Market reputation and.
I've looked at some interesting and large situations during the quarter that ended up pricing on a pretty wide you know.
We did talk about the Q I'm sort of big bigger deals of that we did in the quarter in new core and new AG.
And you know in the <unk> in both of those cases.
Pretty.
Pretty good pretty attractive risk adjusted returns, but frankly hard to understand the situation at first blush. If you were to spend 30 minutes, a especially on the new AG and you were to look at it I think a lot of.
On a lot of more traditional direct lending of oriented investment managers would say a you know that's just not that's not what I want to do there's there's some construction risk associated with the no for restructuring perspective, that's that's one of the Oaktree strong suits and we structured that incredibly well with the low.
Lot of downside protection, the I don't want to get into too much into the the the the details of of how we're getting that downside protection for a variety of reasons, but we were able to get a very attractive return on that investment with a level of downside protection that one would.
The quake closer to being more of an from an investment grade counterparty and we were you know it just took a lot of turning over stones to find out to find the deal like that in the case of the nucor on the wherever close relationship with a variety of different private equity firms TPG being one of them.
And this was a of life sciences business that we knew well have tracked for years in our liquid credit businesses and when the pandemic. Good we reached out to the company and the TPG and ask you know what can we do broadly on the portfolio of what can do specifically with the nucor knowing what the maturity.
Schedule look like on what the performance of the business looked like retrospectively as well as prospectively because of the company had gone to the refresh cycle in its products and felt really good about that because we just knew the credit well and leverage the you know the power of the liquid performing credit part of Oaktrees plot for him to give us your insights on.
And the you know sort of first in line frankly with with the sponsor on the company, there and and we were able to leverage the entirety of the oaktree platforms the right.
The speed for the entirety of the of the the second lien there as well as a very large personal the supposedly on.
That's the way, we were able to really deliver a solution to the TPG that they were able to build around so that's why we did yes, well there and Ah you know rescue lending generally you know.
We've done a lot we did a few deals in the summer months and that was the during a period of time that a lot of investment managers in direct lending side were you know, having a little bit of indigestion with current portfolio as well as no a mismatch between their assets and liabilities with with the mark to market on there.
Liabilities, which generally tend to be short short term liabilities the universe of some potential issues rising up into the portfolio. So we find that you know on the in the second and third.
Oh, the calendar quarter of that the the the competitive dynamic was certainly more attractive for for the for like Oaktree, where we tend.
Tend to run less levered portfolios, we tend to have the pretty conservative underwriting and so we were able to step in and take advantage of that air pocket in the markets.
Got it and then last question for me you know repayments were were elevated in the quarter from from your commentary. It sounds like that was more you guys being proactive in taking advantage of market conditions, rather than the companies being taken out for refinanced and I know how flow.
The what the market is but you know given your commentary we expect.
Sort of repayments of remain at elevated levels are kind of come down on the falling here.
I want to be careful not to provide forward looking guidance I would say market conditions. Currently you know post the election or continue to be very strong we would expect to see some level of repayments on some level of rotation out of our liquid credit portfolio I.
You know I I don't want to comment on our pipeline, but we do have a pipeline that is they're attracted in the robots that we continue to work on that as you know we do focus a lot on non sponsor lending and it's the left the little bit chunkier and harder to predict the timing of so that's why it's hard.
For me to give any sort of guidance, even if I were allowed to go forward basis, just given the nature of our of our originations being so heavily weighted towards non sponsor, but yes. The markets are pretty strong on and I would expect some of our even some of our private situations may repay just just because of very large portion of our portfolio is actually performed very well through.
But frankly above our expectations. So I think we're going to I think you should have you should expect that there will be somewhere of payments I just can't quantify how much.
Understood very helpful. Thanks for answering my questions.
The good.
Our next question comes from 10 in the O'shea with Wells Fargo Securities.
Oh.
Hi, everyone on a good afternoon. Thanks for taking my question.
For the first one on the on the leverage target of 85 to one.
Ken.
Can you expand on.
You know kind of what goes behind keeping that there I think Matt you talked a bit about how far the the portfolio has come on on the quality perspective, and then leverage facility improvements as well is the.
Is there anything still holding.
Holding back on more normal target of.
You know say one to 125 visit a ratings consideration.
Or is it just.
You know the the market environment or do you see this as a long term.
By the sub one to one leverage to the accrual.
The color there on you know if if this is the journey for you and and leverage or if this is the more permanent state.
Sure sure fin, it's Matt. Thanks, Thanks for the question So zone.
I think.
You know looking out kind of longer term I don't you know.
No I don't really comment on that because I don't I don't think really looking on it that way I think you know we look at it really in the in the quarter.
For the next six months or you know that environment and you know we feel we feel comfortable that based on what we see right now <unk> 0.85 to one.
It is it is the right level, we like it the reading is the blanket interest it just feels right and you know what level of change that really be kind of the the investment environment you know when when the industry environment improves like he did you know in March April we actually took our leverage that's when we took on.
The liver job.
Firemen now you know as you've seen the taking the leverage down so as we see things right now on the point of five to one you know seems seems like the rent level kind of work trend for kind of all of our constituents, but it doesn't it doesn't I guess, we could that could change you know I don't think of change tomorrow for the next.
The change down the road, if we see kind of.
You know on more interesting investment environment. So I wouldn't I wouldn't say, it's always going to be you know plenty of time to one it really depends what we're seeing on the on the on investment design and we have plenty of capacity phones, you know in our in our credit facilities loans, we had.
Great receptivity net coupon market. So it's it's not it's it's not really driven by the end of capital its really driven by the investment environment that we're seeing and I think that will dictate when we kind of leaning in the now as it relates to the leverage.
So that's the other than answers your question I wouldn't I don't think I'd do it for ever this way, but kind of right now it feels it feels good sales right.
Oh, Okay sure that's helpful and then.
The two too you know.
Well part of the.
Part of the same broader topic on the dividend.
The is.
That's still the very low a portion of the book I think your sorry.
Starting to pay a little bit of ex.
The excise tax there.
The does.
Yes for for one part one day because your.
Oh, the understanding those the OSI will will reduce your.
Spill over for <unk> or <unk> per share.
You know the the does that.
For for one of your you'll be in a better spillover situation, which you seem to be building up and then as well you know if you don't lever that much higher the the <unk> income doesn't go that much higher all else equal.
What are we you know that the this delay the these two things delay the trajectory of.
Raising you know continuing to raise the dividend.
I think as a sort of what's expected understandably, we just went through.
You know called the 19 volatility in LIBOR of getting cut.
[music].
So some of this first.
In a while dividend raise is.
Like the appreciated, but but does it continue and in one of the moving parts there.
Sure sure. So the we raised the dividend in the last two quarters of and you know part of that.
Actually you know the driven by by Cold It in terms of taking advantage of the investment environment called the greeted and.
Put more assets on the on the in the BDC at higher yields.
Generally the more income so you know Coke Coleman actually was helpful. In terms of the dividend for us given the investment activity, we did and during that period of.
The Livewatch is obviously the the level coming down obviously, you know the headwind.
So you know I think I think for us as we've done about the dividend for this quarter I'm, just given the debt and.
The strength of the core of the portfolio and as we saw on things like for without any sense increased the dividend.
We did you know the quarter there was the there's no mention depend on the debt. The the one time items non recurring items around the new star. So we want to do you know adjusted for that.
But it's not the dividend was not for the dividends really kind of as we as we think about the portfolio on the income coming out of the portfolio.
To date, you know the tax has not been of and it's not been an issue items, it's been one of them or other and our dividend and I don't think I think with the Oh design merger on she's I will kind of clean out all of the spill over so that I don't think that will have an impact. So I don't think it's tax depending on who is driven by the.
Investment income coming out of the portfolio, how we see things progressing adjusting for one time items and you know I think being conservative on the dividend with the view that you know that increasing the happens is it the thing as well. So those are going to all of the thing that debt.
We put into the equation as we speak to the born in thinking about the dividend.
Okay, great. Thank you.
Our next question comes from Ryan Lynch with KBW.
Hey, good morning, Thanks for taking my questions.
The first one was just in your prepared comments you kind of spoke about I would say they are two different investment strategies you had the the one strategy, where you were going to focus on companies that were really on affected or benefited from the cold. The downturn that made you know kind of being the life science for technology sectors.
I would think that the strategy, where almost all direct collectors are really what can detect piling on right. Now are two of these aren't affected areas, which could create some for some pretty fierce competition.
And then on the other end of the spectrum you talked about seeing some companies that are not easily underwritten by traditional cash cash flow method of gotten might fit into the category of on new average. So can you maybe just talk about those are kind of different ends of the spectrum I would say of of you know kind of an investment track.
How did you as you guys look out at your current pipeline today or are you seeing more opportunities more on that add value to those kind of spaces that are mostly not affected by cove. It are you seeing more of the east unique opportunities debt that that are more complex issues.
Yeah. Thanks for the question of deserve and so life Sciences can we could actually fall into both of those categories.
So the reason life sciences or.
Hard to.
You know underwriter understand is lot of life Sciences businesses, just don't have on a consolidated basis the positive free cash flow. So when you look at it from a debt to EBITDA perspective, where the cash flow yield perspective the yield.
The start kind of twisting yourself up in the not so so.
But life Sciences.
It is also the sector that is either neutral or positively correlated the covance I wouldn't I wouldn't separate life sciences of between one bucket of the other in fact, it's I would say more squarely in the bucket of hard to understand hard to underwrite on.
On the industries that are of neutral or positive the correlated you're right that we are seeing a lot of competition.
On the sponsor side for sure so the to the extent there's leverage buyout activity.
And were being approached by intermediaries are sponsors to provide pricing for new loans I would say generally speaking two observations. One is the of note. The the number of deals that sponsors are considering today are lower than they were pre coven and the reason is covered sensitive industries or no.
The other candidates for L. B O. The at least for now and so that part of the market as you know kind of quiet, but to the extent that the sponsor is looking at the deal that is doing fine through co bid what we're finding is.
Most of the direct lenders out there on our back end business on looking for deals and frankly on are competing very heavily for those types of deals.
And so we are seeing pricing and legal terms on that subset of the of the deal flow of that.
That is the almost the entirety of the deal flow that we're seeing in the on the sponsor side of our origination business. We are seeing those legal and financial terms back to pre co. The types of and so we are finding it challenging to play it out of.
On a consistent way.
Across all sponsors today, because we think that there is just a tremendous amount of competition and requiring underwriting that were just not comfortable with by and large so we're being very tactical about it there are certain sponsors that we are very close to and are and how the I've subject matter expertise that we value.
Of we're staying very close to those folks and trying to help drive deals of for them.
But we're not going to be all things to all the people certainly not on the sponsor finance side. So we're very we're gonna Where's the stay true to our of our knitting and an underwriter, we feel comfortable on the non sponsored side, we are turning over many stones.
Seeing a lot of potential deal flow, we're getting a lot of inbounds into our guitar distress group, which as as those deals migrate to the higher or lower risk threshold. Yeah. We we may scrubbing, we may take a look on our rejection rate is as high as ever so we're.
We're we're staying quite conservative, but you know being part of Oaktree. There's there's a market reputation that we have and benefit from in two ways. One is to get to move quickly on very challenging situations and provide solutions and to the potentially provide a very deep pocketed sales.
Lucian you know there are you know we have a a very large distressed debt funds. We have very large performing credit strategy of their liquid we have very large direct lending strategies as well that can do sponsor and non sponsor lending. So we were able to write very large checks to to the to provide solutions in book.
On the large companies and so it's a nice place the said in terms of seeing the deal flow of and so we don't we don't feel the need to just chase the LDL sponsor.
Opportunity tighter and tighter we'll do some of it from time to time, but we're not going to we're not going to just be one of the I don't know 30, 40, 50, a direct lenders that are providing commodity capital out there.
Okay I understood that that's really a really good detailed commentary I just had one one kind of quick a housekeeping follow on or can.
Can you talk about what what caused the the temperature for you to be written up in the quarter. It looked like a leverage decreased standard distribution decrease so what was driving that increase.
Sure. This is Oh I'll take that one yes free the price of the the JV is a function of the the values of the underlying portfolio of show there was a recovery.
On a mark to market basis in the underlying portfolio, which.
Led to the the write up in the the value of the most yourselves books.
Okay.
Understood or the.
Those are all my questions I appreciate the time and really nice quarter guys.
Thank you.
Our next question comes from Rick Shane with JP Morgan.
Good morning, everybody and thanks for taking my questions I just wanted to focused on three investments and the it's I would describe this as incremental but when we look at sort of the marks on the company's I'm about to hit on and are thinking about the markets I'm curious if.
On the directionality of fair value versus cost. So on the first is moving more as its marked above the cost of given what's going on in the entertainment industry. Just curious what you're seeing there and then the other two are zap and Dominion diagnostics, they're marked a low cost on and given their business on focus.
I would actually think that they might be benefiting from the current environment and just curious about the directionality of those remarks.
Sure. It does on an thing thanks for the question so I'll.
I'll give you whatever I can on on the three I've got to be a little bit mindful about about publicly disclosing information, but you know William Morrison of you're familiar with is a leading entertainment management and media rights company, you're right that Directionally, a with a vaccine news.
And.
You know why the van starting to come back and be a in the bubble baseball et cetera. That's generally a good thing for William Morris.
And you know our loan is the is the has nice call protection has on a pretty rich coupon relative to the Perry pursued LIBOR plus 275% or enrollment the company has and that term loan is something that can be observed in terms of trading prices in the market and it's moved.
The up nicely consistent with your intuition, there I think thats, all I would say about William Morris I I would hesitate to brought forward guidance. Because you know we also think that you know cobot cases are going to spike so there's going to be some choppiness in the next few quarters, but the company has taken out of.
You know some cost and as managing very well in terms of its liquidity needs for the foreseeable future.
Zapped, so is that the cleaning materials company. It did have some execution issues over the the pre coded that resulted in the company on looking more levered.
As a result of the EBITDA decline Directionally, you're right people are cleaning more and sanitation products are doing better on as is that now it remains low levered and that's why we haven't worked the way we do but the leverage is at least you know the postcode bid heading into right direction of then.
Down, but we don't feel comfortable.
You know mark and get more aggressively because we do still think that the company is more levered. The we would like it to be and that's that's the reason why is the up is.
Where it is not dominion is a little bit of a different.
Different issue. It is the diagnostic lab Laboratory company.
They are modestly helped by by the Corona virus, but there's some puts and takes because although there is no more work being done around credit virus and the company certainly benefits from that there is a decline in HM.
Active surgeries elective cases going to the doctor for a checkup et cetera, because of growth of ours as well. So there are puts and takes on that business of God you know to use the basketball analogy, it's not nothing but net it's it's a there's some there's some countervailing pressures as well. So are we and you know as you know we're going to be.
Fair and err on the side of conservatism generally on the way, we mark things and we'd like to be proven wrong, and if and when it's appropriate that the company's performance.
Necessitates the markup, but we don't want to be ahead of that curve.
Great very helpful context on I apologize if you caught some of the background noise. The dark goes again, thank you guys.
Thank you.
Our next question will come from Bryce Rowe with the National Security.
Thanks, Good morning wanted to right to ask this morning about somebody exit to exit activity, we saw on the third quarter.
Obviously, if you sold some of your structured positions as well as some some other exited out of structured positions as well as some of the somebody the other investments on the balance sheet shows. She just curious if you could speak to the exit value is relative to the.
The the March day, yet that you carried on that as of as of June.
Sure. This is arm and generally speaking of the exits in the fourth fiscal quarter we're done.
At or above the marks in June as they were not across the board of meaningfully the work across the board higher than June I mean, some of them were right on top of June in the structured credit space. The marks are you know its hard the market positions the they're very unique instruments by issuer.
But generally speaking they were sold against the cost as well as against the Mark If you look kind of in totality across the entirety of that of of either of the structured credit book for the corporate book.
Okay. That's helpful. I mean, thanks, and then you maybe maybe along the same line yeah.
Just wondering if it's some of the repayment activity in the quarter would of been kind of the surprise to you all on something that you may not of the expected as soon as you as soon as you got repaid.
Yeah, we did have one repayment of the quarter that was [laughter] I mean, it's it's disappointing to get repaid on something you really like but it was kind of a testament to the oaktree platform as the Newstar energy deal Yeah, So new store, where we.
We're in negotiations of the company in late March and early April committed unfunded that one of the most of that loan in April as the markets recover as people understood the value of the business. The the the company was able to tap the public markets on essentially we pay our position.
At par plus make wholes. So it was a very quick an in and out very very good I are already very good times money, but I would have traded that to the kind of hold the position for another two or three years of 12%. So that that's probably the biggest surprise, we do out of other situations in the portfolio that that's the.
Price of the upside of performance and we think that there's a decent chance. The you know our alone which was done kind of earlier in the lifecycle of the company made me look expenses on the next couple of quarters. So we have a we we don't think at the end of it but newstar was probably the biggest.
And most sort of glaring in.
In our book that you know something we originated on it just seemed to.
Too good to be true in it and it turned out that it was a.
Just in terms of that in terms of the length of hold.
Okay. That's helpful. And then maybe maybe one more on I'm not sure. If this is going to make a whole lot of sense or not but.
You've got more of a.
Cautious or conservative tone in the and I think that that's clearly just help oaktree operate but is your line is the is the caution that you are approaching.
On the business is where it is it is it is it related to.
I guess for casting of co the cases spiking or are.
Are there underlying weaknesses you know beyond just what were kind of facing from not from a co the perspective.
No were not forecast were not epidemiologists. So we can't really forecast that the then he's a the level of certainty on.
It's it's a few things first of all of some businesses were already challenged heading into coded covert didnt help the.
And so you know we are the that's there's a fair part of the publicly traded market that means that type of descriptions of where we were cautious about it would be for coated were even more cautious about the Africa. The with the rallying in low than bond prices of the markets. It doesn't help the situation.
There are other situations, where if the more if the market continues to do what it's doing which is to focus on liquidity over solvency, we could get into a situation in the two quarters for quarters for now where a company ex why v. the tap the public markets, where even the private markets for rescue loans.
Levered up but then the business model changed as a result of coded or of the business model has been delayed as the result of kind of that.
Therefore in two quarters for quarters, maybe six quarters, you look at the capital structure. You say you know I don't other this company is actually worth of the debt. So even though the liquidity is fine the solvency of valuation picture is not fine and it's the we're we're mindful of that we're mindful of you know in when you look at when you look at the value of companies or the <unk>.
Or the trade for the fairness of trading value is really three things you look I know one of the fundamental performance.
Of the business. The second is valuation for whether that's fair. We're not you know in the historical context, and the third of the technicals in the market and I would say the.
The technicals on the market are so strong right now that they're leading up to the condition, where the valuation. If you look forward 12 loans in some instances isn't appropriate. So that's why we don't want to get into a situation, where we're lending for example, Perry pursue with the company's existing first lien instruments, but in combination with the new loans.
There that they're seeking to issue debt the company in its new business model post co. The did whatever that may mean, so in some cases in intact for life Sciences, it's been accelerated for the positive sort of the most cases, it's fine but in other situations. It couldn't be true that the company has a muted path forward.
Third in terms of its cash flow projections, and you might see yourself in a situation where the business is no longer worth the debt within a reasonable timeframe.
So you know I for example, a very easy example, there would be you know cruise line. The airlines I'm, not saying cruise lines of airlines will never come back, but it's going to take a very long time for the cruise line. The airlines to return to any semblance of a of of what they were like in in 2019 business travel is gonna be lower for.
The longer you on travel on an airline for cruise line for just vacationing is going to take some time to come back. So you know it's easy to say, while he's got the these companies of a lot of assets the school lend against on provide them. The liquidity, but you have to think about within a reasonable timeframe. What are the cash flow is going to be income that good or the reasonable if the valuation for.
Spectra of or.
We're not.
That's a great answer on the thank you.
The problem. Thank you.
This concludes our question and answer session of like to turn the call back over the next domestic yeah.
Great. Thank you again for joining us for fiscal fourth quarter conference call. A replay of this call will be available for 30 days I know see yourselves website in the investors section or by dialing 8773 for for 75 to nine for U.S. collars or one for 12317.
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[laughter].
The conference call for all concluded. Thank you for attending today's presentation you may now disconnect.