Q1 2021 Oaktree Strategic Income Corporation Earnings Call
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Welcome and thank you for joining Oaktree strategic income Corporation's fiscal first quarter conference call.
Today's conference call is being recorded at this time all participants are in a listen only mode, but we will be prompted for a question and answer session. Following the prepared remarks.
Now I would like to introduce Michael on the CTO of Investor Relations, who will host today's conference call. Mr. Hu said you you may begin.
You operator, and welcome to Oaktree strategic income Corporation's first fiscal quarter conference call our earnings release.
Should this morning, and the slide presentation that accompanies this call can be accessed on the investors section of our website at Oaktree strategic income Dot com with US today, our army and other CN, Chief Executive Officer, and Chief Investment Officer, Matt <unk>, President and Chief operating Officer, and Mel Carlisle, Chief Financial Officer and Treasurer.
We will be happy to take your questions following their prepared remarks.
Before we begin I want to remind you that comments on today's call will include forward looking statements, reflecting our current views with respect to among other things the timing or likelihood of the merger closing expected synergies and savings associated with the merger.
<unk> to realize the anticipated benefits of the merger and our future operating results and.
Our actual results could differ materially from those implied or expressed in the forward looking statement. Please.
Please refer to our SEC filings for a discussion of these factors, 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 fund.
Investors and other should note that Oaktree strategic income you see investors section of its corporate website to announce material information.
Company encourages investors the media and others to review the information that it shares on its website with that I will now turn the call over to Matt.
Thank you, Mike and welcome everyone to our first quarter earnings Conference call. We appreciate your continued interest in and support of O CSI and we hope everyone listening as well.
In fiscal year, 'twenty 'twenty 'twenty, one with very strong earnings in originations, while maintaining solid credit quality.
NAV was up 4% to $9.38 per share approximately 97% of its pre pandemic level as tighter credit spreads and the liquid loans and private debt markets drove higher valuations in our portfolio in the December quarter.
Net investment income from the first quarter was 14 cents per share up 7% from the prior quarter driven by lower interest expense that was due to a small decrease on outstanding borrowings as well as lower part one incentive fees, which Mel will explain in more detail.
Based on the strength of Ocs is earnings our board of directors declared a cash dividend of <unk> 15, a half cents per share an increase of 7% from the prior quarter's distribution and the second the second consecutive quarterly distribution increase.
We continued to build momentum and generated another solid quarter of origination activity during the quarter. We originated $55 8 million of new investment commitments exceeding the $34 3 million of proceeds from prepayments exits other paydowns and sales during the quarter.
All of our new investments in the quarter were first lien loans attractively priced and spread across a wide array of businesses and industries. The weighted average yield on new debt investments was eight 2%, which compares favorably to the approximately 5% weighted average yield on the investments that we exited during the quarter.
Our asset quality remains excellent our focus on larger and more resilient companies that we believe are more likely to prove recession recession resistant continues to support our credit quality as of quarter end, excluding the glick JV. We continue to have no investments on nonaccrual and we are confident in the ability of our borrowers to navigate well we hope on it.
Final months of this pandemic.
We also remain well capitalized with ample liquidity to continue to invest and to meet our funding requirements. At December 31 liquidity included $13 6 million of cash and $87 2 million of Undrawn capacity on our credit facilities.
Before I turn the call over to Arvind I wanted to provide an update on ocs is planning to merge with and into Oaktree Oaktree specialty lending Corporation.
The affiliate business development Company and is also managed by Oaktree as.
As we discussed in our last call. We expect this will create a larger more scaled BDC with increased trading liquidity potentially broadening our institutional shareholder base and may improve access to lower cost sources of debt. We also anticipate that it will drive NII accretion over both the near and long term.
We are confident that now is the right time to move forward with this merger both portfolios had strong credit quality and our transition out of non core assets they've been working on since 2017 is nearly complete.
The registration statement has been declared effective the proxy solicitation process has begun and the merger is on track to close by the end of the current quarter with our shareholders and O C. S. L shareholders scheduled to vote on the transaction on March 15th we encourage all shareholders to review the proxy materials and vote your shares accordingly with that.
I will now turn the call over to arm it.
Thanks, Matt and good morning, everyone I'll begin with our view on the environment the recovery in credit and equity markets. The developed in calendar 2020 has continued into this year underpinned by extraordinary fiscal and monetary stimulus and also supported to an extent by gradually improving economic conditions and consumer sentiment.
Investors are also encouraged by the rollout of COVID-19, vaccines and commitments by the new administration to step off the inoculation process in hopes of Vaccinating enough people to end the pandemic later this year.
And yet valuations feel elevated and might not necessarily reflect current macro conditions prevailing outlook for gradual economic growth this year.
We remain cautious about assuming too much about the success of vaccines at this stage or the pace of economic growth in the year ahead.
Such we continue to approach new investments defensively, we think it is important to view marketing from the OSM with caution and approach investment opportunities conservatively.
We remain focused on protecting the downside in our investments from seeking appropriate compensation from risks taken force.
We are able to draw upon oaktree scale and resources to invest across multiple markets with diversified issuer basin, enabling OS CSI to focus on stable on lower risk sectors, including companies, either unaffected or even positively impacted by COVID-19.
We continue to identify compelling opportunities in the life Sciences and technology areas that are delivering health care solutions, we're capitalizing on the increased level of digital commerce.
We're also seeing direct lending opportunities to businesses that are not easily underwritten via traditional cash flow based methodologies as well as companies that need capital to bridge the gap from the pandemic to a normalized post COVID-19 economy.
Now turning to the overall portfolio performance.
At the end of the first quarter the portfolio was well diversified with $521 million invested at fair value across 78 companies 89 per cent of the portfolio consisted of senior secured loans of which 86% were first lien.
Continue to favor larger more diversified businesses and as a result, our median portfolio company EBITDA was approximately $124 million a larger than typical middle market company.
As we have throughout the pandemic, we remain in close contact with management teams on private equity sponsors and we are confident in the ability of our portfolio companies to manage through the current environment and liquidity positions are generally strong and our strong credit quality reflects this.
Turning now to investment activity during the quarter, we found numerous opportunities in companies with attractive risk reward profiles and defensive sectors as well as unique opportunities requiring specialty structured terms.
I'd like to take a moment to discuss in more detail compelling investments. We made on the first quarter. Let me start with a couple of them are more opportunistic originations this quarter.
When core is an independent low cost aftermarket services and parts provider for the commercial aerospace sector working with a diverse base of several hundred airline customers due.
Due to the pandemic and the grounding of over 50% of the global fleet Airlines on deferred maintenance to preserve liquidity.
When cortisol one course on our loans extend from the current challenging environment to what it expects will be a resurgence needed repairs as airline travel rebounds post pandemic amid pent up demand.
She was the sole provider of a 50 million dollar firstly on incremental term loans with a $30 million first lien delayed draw term loan able to be drawn by the company through September of this year.
The term loan was priced at LIBOR plus seven five per cent.
<unk> was allocated $10 million of the loans.
Latam Airlines is one of the world's largest airlines and it is the largest airlines in Latin America.
Company filed for chapter 11 bankruptcy protection to restructure its debt and ensure operational continuity as the business adopted to the pandemic Latam sorts of raise a significant amount of capital as part of its restructuring and this led to an over $800 million total commitment from Oaktree.
CSI participated alongside our flagship opportunities funds in this deal which was attractively priced.
Construction.
The pricing was LIBOR, plus 975% on a cash basis or 11% per well.
CSI was allocated $6 million of the loan.
I want to share one more example that is emblematic of our focus on burgeoning technology businesses thrive.
The value is.
The company's net acquirers Amazon E Commerce brands typically from mom and pop operators that lack the infrastructure to scale and then operate these brands with upgraded marketing product development and supply chain management.
As you know it was acquired about 80 brand since its inception, making it a leader in this arena.
It is at the forefront of modern digital commerce and benefits from the momentum and strength of the Amazon marketplace.
The company, which has a conservative leverage profile and significant equity cushion. So on financing to fund its continued growth and oaktree committed $85 million from the first lien term loans with pricing of LIBOR, plus 7% with CSI was allocated $10 million of loans.
We continue to assess unique and attractive opportunities like these across a range of industries.
Liquidity on the resources of Oaktree, we are in excellent position to pursue new investments now and as part of our merged operations with dose yourself now.
Now I will turn the call over to Mel to discuss our financial results in more detail.
Thank you Armen, Oh suicide delivered another quarter of strong financial performance.
For the first quarter of fiscal year 2021, total investment income was $9 million consistent with the September quarter.
Net expenses for the quarter totaled $5 million down $22 million from the previous quarter.
The decline was mainly due to <unk> 4 million lower interest expense, resulting from lower average borrowings.
And <unk> 3 million lower part one incentive fees.
This was partially offset by <unk> 6 million higher professional fees incurred in connection with the pending merger.
For the quarter Ocs I reported net investment income of 4 million or 14 cents per share up 7% from $3 7 million on 13th cents per share from the fourth quarter of fiscal year 2020.
Turning to credit quality, which remains excellent as Matt noted at quarter end, excluding the Glick JV, we had no investments on non accrual consistent with the prior quarter.
Moving to the balance sheet.
During the quarter refunded $43 million in investments, which was more than the 34 million in payoffs and exits.
However, our net leverage ratio decreased eight seven times from <unk> nine one times at September 30th.
Mainly due to the increase in NAV and approximately $17 million of unsettled purchases.
As of December 31, total debt outstanding was $253 million and had a weighted average interest rate of two six per cent.
Consistent with the prior quarter as LIBOR remained unchanged during the quarter.
At quarter end, we had total liquidity of approximately $101 million, including $14 million of cash and $87 million undrawn capacity on our revolving credit facilities.
Excluding the Glick JV unfunded commitments were 33 million with approximately $29 million of this amount eligible to be drawn immediately the.
The remaining amount is subject to certain milestones that must be met by portfolio companies.
Shifting now to the Glick joint venture as of December 31, the JV had $154 million of assets invested in senior secured loans to 42 companies. This compared to 138 million of total assets invested in 40 companies last quarter.
Two investments held by the JV, which represented one three per cent of the portfolio at fair value were on non accrual status.
Leverage at the JV was one three times at December 31 down.
Down slightly from 1.4 times last quarter.
Although our subordinated note investment in the Glick joint venture remains on non accrual status. We continued to benefit from the earnings power of the Jv's underlying investment portfolio.
Which generated $1 4 million of net investment income during the first quarter consistent with the prior quarter.
This income was used to repay outstanding principal on the subordinated notes of which $1 2 million was distributed to Ocs site in January.
This distribution represented four cents per share and although tsi is still not recognizing interest income.
Its share of the net investment income generated by the JV effectively translates into below the line income and owes DSI.
Given the Jv's continued solid performance over the last three quarters.
We will evaluate the accrual status of the JV at the end of the March quarter, now I will turn the call back over to Matt.
Thank you Mel the day.
Fencing of repositioning that we launched in 2017 has largely been completed and we feel very good about our current holdings is Armen noted our overall pipeline of potential transactions remained strong and we expect to continue to identify compelling investment opportunities throughout fiscal 'twenty and 'twenty one.
We will also continue to position the portfolio for improved deal by rotating out of lower yielding investments priced at LIBOR, plus 400 or lower we've made good progress on this initiative in the quarter as the opportunity opportunistic on.
Opportunistically sold 14 million of these types of investments at December 31, we had 39 million of these lower yielding loans, which we plan to replace over time with higher yielding proprietary investments.
In conclusion, we are very pleased with our strong first quarter performance. We are also looking forward to the pending merger with O C. S. L. As we believe that this combination benefits both sets of shareholders through scale portfolio diversity 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 investment opportunities, enabling us to deliver improved returns to our shareholders. Thank you for joining us on today's call and for your continued interest in Ocs I 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 you touched on so if you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause on.
And Kelly to assemble our roster.
Okay.
Okay.
Your first question comes from Chris got.
A C D E. Please go ahead.
Thank you and congrats on a good quarter another good quarter and also.
Rats on guiding O C S I too nice conclusion on once that merger wraps.
Wraps up I guess on earnings day, you guys will be able to have lunch going forward. Since it's 12 30 times slow the available.
My one question are you able to give any update on the pre merger tax distributions I know there was a number.
And the.
Proxy.
You know if you had any further update at this time.
Okay.
Mel do you want to answer that.
Sure, they're there's not an update the number we are included in the ER.
Proxy.
It should come out pretty close to that.
Okay, great. That's it that's all from me. Thank you.
[laughter].
Again, if you have a question. Please press Star then one.
Having no further questions I'll now turn the call back over to Mike on the Citadel.
Thanks, Melissa and thank you all for joining us on today's earnings conference call. A replay of this call will be available for 30 days on Oaktree strategic Income's website in the investors section or by dialing 87734 475 to nine for U S callers or.
For 12317 0088 for non U S callers with the replay access code 10151 068.
Beginning approximately one hour after this broadcast.
Yeah.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.