Q4 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 will be prompted free question answer session. Following the prepared remarks, now I would like to introduce Michael Mr. Chow of Investor Relations and will host today's conference call Mr. and Mrs. <unk> you may begin.
Thank you operator, and welcome to Oaktree strategic income Corporation's fourth fiscal quarter and full year conference call. Our earnings release issued this morning, and the slide presentation that accompanies this call can be accessed on the investor section of our website at Oaktree strategic income Dot com.
With us today are arm and calcium Chief Executive Officer, and Chief Investment Officer, and President and Chief Operating Officer, and now Carlyle Chief Financial Officer, and Treasurer, we'll be happy to take your questions. Following their prepared remarks.
Before we begin I want to remind you that comments on today's call include forward looking statements, reflecting our current views with respect to among other things the timing or likelihood that the merger closing expected synergies and savings associated with the merger the ability to realize anticipated benefits and the mergers and our future operating results and financial performance.
Actual results could differ materially from those implied or expressed in the forward looking statements. Please refer to our FCC filings for a discussion about these factors and further detail we undertake no duty to update or revise any forward looking statements. I'd also like to remind you that nothing and this call constitutes an offer to sell or supposed to teach and up and offer to purchase any interest in any oaktree.
And.
That's just another she knows that it was the ESI uses the investor section of its corporate website to announce material information.
The company encourages investors day media and others to review the information that it shares on its website with that I would now like to turn the call over to Matt.
Thank you, Mike and welcome everyone to our fiscal fourth quarter earnings Conference call.
I appreciate your ongoing interest and well see a site and we hope everyone listening as well.
Oh see aside generated strong results for the quarter highlighted by solid, earning origination activity and credit quality right.
Risks and that further improved during the quarter and credit markets largely continued to rebound from the loans last March and net.
The coal.
Higher credit spreads and the liquid loan market from higher valuations and our portfolio and the September quarter, boosting NAV per share by 7% and $9.05 per share price.
Actually 93% of its free pandemic level.
Net investment income for the fourth quarter was 13.
18% from the prior quarter, driven by higher yields on new originations as well as high higher make whole interest and prepayment fees.
Right, Yes Bernie.
Correct.
Yes, yes.
This distribution represents approximately 100% Oh see aside taxable income in the quarter.
Given our focus on larger and more resilient company credit quality remains strong and.
Importantly, we remain well capitalized and have ample liquidity to continue to invest and to meet our funding needs.
At September Thirtyth liquidity included 25 million of cash and 83 million and Undrawn capacity on our credit facilities well.
Well, we were mindful of pandemic and the academic and uncertainty and created we continue to identify attractive investment opportunities with favorable yield in the fourth quarter.
We originated $54 million and <unk>.
And then the cross 12 companies during the quarter, 86% were in first lien loans and.
The weighted average yield was 9.5%, which compares favorably to the approximately 5% weighted average yield on the investments that we fully exited during the quarter.
With a healthy pipeline, we continue to selectively deploy capital our ability to invest alongside other oaktree funds gives us additional confidence that we will be able to participate and additional opportunities going forward.
Before I turn the call over to arm and I want to highlight Oh, yes, I plan to merge with and into Oaktree. That's at the London Corporation.
An affiliate business Bell company and it's also managed by Oaktree. We believe this market represents a great opportunity for shareholders about Oh, yes, I, Oh, yes, no and will create a larger more scaled BDC that we expect will have increase creating liquidity and merger could potentially bard and the combined company's share holder base and it may improve actually.
At the lower cost so well that's lower cost sources of debt.
We also anticipate debt old it will drive and I accretion over both the near and long term benefiting shareholders.
We believe Dallas and Rightsized and move forward with this merger both portfolios are in great shape, and our trade and transition out of non core assets that we have been working on the June 2017 is nearly complete as you know we have also focused on defensively positioning both portfolios and lending to more diversified businesses with little exposure.
[laughter] cyclical industry companies that we believe will be resilient through the pandemic.
We appreciate all support and they said we have received to date in terms and next steps, we anticipate filing and 14 joint proxy statement in the coming weeks and expect the transaction will close in the first calendar quarter of 2021 subject to shareholder approval and satisfaction and other closing conditions as outlined in the merger agreement.
All told we are pleased with our fourth quarter results, especially given the economic uncertainty caused by depend and.
While it is difficult to determine the duration and ultimate impact of cold and I think we are proactively investing and managing risk and they believe Oh, yes, I is well positioned to continue to deliver attractive risk adjusted returns to shareholders.
With that I will now turn the call over to arm and.
Thanks, Matt.
After the March quarters historic sell off and risk assets credit and equity markets bounced back in the June quarter, and the recovery continued into our fiscal fourth quarter.
Improving economic conditions, and consumer sentiment reports of progress and cobot, 19, vaccines and extraordinary fiscal and monetary stimulus fueled the rebound these.
These catalyst also boosted investor confidence liquidity and the availability of credit.
And the credit markets, both high yield and leveraged loans rally further from their mortgage loans responding to the market confidence spreads have both high yield bond and senior loans continued to tighten and the wide levels of March.
And it's not necessarily been into smoothed upward trajectory. However.
September and October were relatively challenging as it stands still and Washington on additional fiscal stimulus and the U.S. elections created uncertainty for investors.
Additionally, increased coded cases, and hospitalization rates, new concerns about the intensity and durability of the pandemic.
GAAP noted news this month and a vaccine may soon be available coupled with the culmination of the presidential election fuel new momentum and the equity and credit markets. The economy to continues to forge ahead, albeit gradually and with occasional setbacks.
Against that backdrop, we maintain a conservative posture.
The U.S. and overseas the pandemic remains a highly fluid public health crisis, and the economic recovery is likely to span several quarters.
And when they did unemployment and new to GDP growth are likely to percentage.
Consumer sentiment and spending which is a major driver of the economy will be closely linked the job and income prospects.
More than ever and it's important to be wary of market exuberance and to avoid chasing risky investment opportunities. We remain focused on protecting the downside and our investments and seeking appropriate compensation per risk taking.
We are focused on maintaining our high quality and conservatively positioned portfolio. We continue to rotate out of names and sectors that could be challenged at the recovery slows, we're being cautious and disciplined about deploying capital reserve and dry powder, where possible. So we could go and often quickly and investing opportunities emerge.
We're also tracking themes and uncorrelated areas and the market, including life Sciences investment and companies benefiting from societal shift caused by cold it including businesses and software and information technology.
Now turning to the overall portfolio.
We feel very good about the overall credit quality of our most me personally and portfolio and.
And Matt noted since we took over management of Oh, Yes, I in 2017, we have defensive we repositioned the portfolio by lending to businesses that we believe will be resilient through and economic downturn.
We have increased the overall size of our borrower focusing on larger more diversified businesses with little exposure to cyclical industries.
That and the median portfolio company EBITDA is approximately $140 million, which is higher than that of a typical typical middle market company.
We have and intend to continue to selectively rotate out of lower yielding investments and into new higher yielding opportunities as we identify them.
Were carefully tracking market conditions, and maintaining close contact with our management teams and private equity sponsors and generally our portfolio companies have been necessary liquidity to navigate the environment in the near term loans.
All of that noted we are actively identifying new opportunities to create value for our shareholders I'd like to take a moment to discuss in more detail. A couple of these types of investments that we made in the September quarter.
You and it's a fertilizers and harder cultural chemicals company in Texas, and the exclusive service provider to produce and distribute ammonium sulfate on behalf of B assets, North America's second largest producer and marketer chemicals.
You Axalta construction loans to build a new facility that will serve as collateral for loans. In addition to the guarantee backed by B. I got that.
Oaktree underwrote the entire 135 million dollar first lien loans of which most yes, I was allocated $10 million and.
In addition to the downside protection the four year first lien loans was attractively priced at LIBOR, plus 5.5 per cent cash and 7% Pik.
Immucor is a manufacturer of transfusion and transplant diagnostics products used by hospitals donor centers and reference labs worldwide.
These products are used and tests performed and the typing and screening the blood organs for stem cells to ensure donor recipient compatibility.
The company operates manufacturing facilities in North America, and as both direct and third party distribution arrangements worldwide.
Okay and was asked to participate and they knew $650 million personally and $375 million secondly, and refinancing of the company's debt.
Yes, I was allocated $8 million total, including two and a half million and the first lien loans priced at LIBOR, plus 575, and 5.5 million of the second lien low priced at LIBOR, plus 8% cash and 3.5 per cent pick.
Notably we received 72 million of proceeds from prepayments exits other paydowns and sales and the fourth quarter, primarily driven by active sales and lower yielding investments, we saw more value and selling these loans and their prices rebound and generating proceeds that we can redeploy into private opportunities.
We believe the months ahead, we'll continue to provide those yet side with ample opportunities and both public and private investments and we are confident that we don't trees resources behind us, we will be able to identify attractive transactions.
In summary, the overall credit quality of our mostly personally and investment portfolio remains in excellent shape. Despite the uncertain economic environment with a solid balance sheet and ample liquidity to support our investment plan. We believe those yet side is well positioned to provide attractive risk adjusted returns to shareholders now I will turn the call over to melt and discuss our financial results.
And more detail.
Thank you arm and.
Let's see aside and Liberty another quarter of strong financial performance, which also contributed to solid full year results.
The fourth quarter of fiscal year 2020, we reported net investment income of 3.7 million or 13 cents per share up from 3.2 million or 11 cents per share from the third quarter. The increase was the result of higher investment income and slightly lower net expenses during the quarter.
Our total investment income was 9 million up from 8.6 million in the June quarter and.
The increase was mainly due to higher interest income, resulting from higher yields on new originations and higher make whole interest and prepayment fees.
Net expenses for the quarter totaled 5.2 million debt.
300000 from the previous quarter.
The decline was mainly due to lower interest expense, resulting from lower average borrowings combined with lower LIBOR.
This was partially offset by slightly higher professional fees.
Turning to credit quality, which remains excellent.
As of September Thirtyth, excluding the Glick JV, we had no investments on non accrual.
Down from one in the prior quarter.
Moving to the balance sheet.
During the quarter, we funded 52 million and investments, which was less than the 72 million and pay off and exits.
As a result, our net leverage ratio decreased 2.9 times from 1.1 times at June Thirtyth risk.
Reflecting the smaller portfolio as well as the increase in net.
We've adjusted our target leverage range lower as a result of the current market environment.
We're being very selective and deploying capital due to what we believe to be a disconnect between market valuations and and the underlying fundamentals.
Our new leverage target range is 1.0 times to 1.4 times and we are presently just below the low end of that range.
As a <unk> as of September Thirtyth total debt outstanding was 268 million and heavy weighted average interest rate of 2.6%.
Down from 3% at June Thirtyth.
Primarily due to the decline in line <unk> during the quarter.
At fiscal year, and we had total liquidity of approximately 108 million.
Moving 25 million of cash and 18 million of Undrawn capacity on our revolving credit facility.
Unfunded commitments were 34 million.
Although only approximately 14 million of this and now is eligible to be drawn and immediately.
The remaining amount subject to certain milestones that must be met by portfolio companies.
During the fourth quarter, we reduced our borrowing cost by repaying and terminating our 25 million dollar credit facility with East West Bank and.
And it had a moderately higher cost relative to our other facilities.
In addition, we extended our Deutsche Bank facility, pushing the maturity date by one year and reducing our total commitments to 160 million from 200 million.
Shifting now to the Glick joint venture.
As of year, and the JV had 138 million of assets. That's the net senior secured loans to 40 companies.
This compared to 143 million total assets invested and 41 companies last quarter.
Doing best and tell by the JV, which represented 1.7 per cent of the portfolio at fair value run non accrual status.
Leverage at the JV was 1.4 times at September Thirtyth down from 1.7 times last quarter.
And you May recall, we restructured the glick JV and the March quarter and placed our subordinated note investment and the partnership on non accrual.
Although it remains on non accrual status, let's see if I can can use the benefit from the earnings power of the JV underlying investment portfolio.
Which generated 1.4 million of net investment income during the fourth quarter.
From 1.1 million last quarter.
This income was used to repay outstanding principal and the subordinated notes of which 1 million was distributed to Osha shy in October.
Similar to the July distribution.
These two quarterly distributions each represented approximately three cents per share.
And although she aside it's still not recognizing interest income.
Its share of the net investment income generated by the JV effectively translates into below the line income and all she aside.
Now I'll turn the call back over to Matt.
Thank you Bill we are pleased with the solid operating results that we generated in the fourth quarter and full year. Despite the ongoing and certain buyers. We have essentially completed the defensive repositioning that we launched in 2017, and we feel very good about our current holding.
As arm and noted our overall pipeline of potential transactions remain strong and we expect to continue to identify compelling investment opportunities and physical 2021. However, we will will remain patient and disciplined as we believe there will be an increasing number of opportunities that will arise over time as the pandemic per se.
Well also continue to position the portfolio for improved deal by rotating out of lower yielding investments priced at LIBOR, plus 400, and lower during the fourth quarter and opportunistic sold $14 million of these types of investments.
At year end, we had $52 million of these lower yielding loans, which we we plan to replace over time with higher yielding proprietary investments.
In conclusion, we are proud of our strong fourth quarter and full year results as well as the continued progress we've made towards our ongoing strategic initiative and physical 2020, they're also looking forward to the pending merger with CSL and we believe this combination benefit both benefit folks assets and shareholders through scale portfolio the bar.
Good day and expected 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 and that's an opportunity there are consistent with oaktree disciplined risk and told approach and and they've got to deliver improved returns to our shareholders. Thank you for joining us on today's call.
And for your continued interest and Lcs side with that we're happy to take your questions. Operator. Please open the line.
Thanks, and we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then channel.
At this time, we will pause momentarily to assemble our roster.
Again, if you have a question. Please press Star then one.
[noise] thing no questions I'll hand, it back to Mr. must each yeah.
Great. Thank you for joining us from fiscal fourth quarter 2020 earnings conference call. A replay of this call will be available for 30 days and Oaktree strategic and comes website in the investor section or by dialing 87734475 to nine for U.S. collars or one for one.
2317 0088 from.
Non U.S. collars with the replay access code 10148615, beginning approximately one hour after this broadcast.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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