Q2 2021 Oaktree Specialty Lending Corp Earnings Call

[music].

Welcome and thank you for joining Oaktree specialty lending Corp.

Second fiscal quarter 2021 conference call today's conference call is being recorded.

At this time all participants are in a listen only mode.

Be prompted for a question and answer session. Following the prepared remarks, now I would like to introduce Michael My CTO of Investor Relations, who will host today's conference call. Mr. <unk> you may begin.

Thank you operator, and welcome to Oaktree specialty lending Corp, second fiscal quarter conference call for.

Earnings release, which we issued this morning and the accompanying slide presentation can be accessed on the investors section of our website at Oaktree specialty lending dot com.

Speakers today are meant to nosy and Chief Executive Officer, and Chief Investment Officer, Matt <unk>, President and Chief operating Officer, and Mel Carlisle, Chief Financial Officer, and Treasurer, we.

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 include forward looking statements, reflecting our current views with respect to among other things.

Moving to realize the anticipated benefits of the merger and our future operating results and financial performance for 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 in further detail, we undertake no duty to update or revise any forward looking statements.

I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any oaktree funds.

Investors and others should note that Oaktree specialty lending uses the investors section of its corporate website to announce material information the company encourages investors the 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. We appreciate your interest in and support of Oc S. L and we hope everyone listening as well.

We continued to generate momentum in the second quarter with earnings origination activity and credit quality are strong.

We reported NAV per share of $7.09 on 4% from the prior quarter. The increase reflected both continuing market spread tightening and price appreciation on certain liquid debt investments during the quarter.

As with last quarter, our NAV continues to exceed its pre COVID-19 high and is up more than 7% from the end of calendar 2019.

We continued to produce steady strong results adjusted net investment income per share, which excludes the impact of asset acquisition accounting related to the merger with Oaktree Strategic income Corporation was 14 cents up slightly from the prior quarter.

Based on our consistent performance and confidence in the potential to further improve earnings our board increased our quarterly dividend by 8% to 13 per share.

Fourth consecutive quarterly increase this also marked our 37 per cent increase from a year earlier.

We continue to actively identify attractive new deals during the quarter and excluding the assets, we acquired as part of the Ocs I merger.

We originated 303 hundred $18 million of new investment commitments of these 80 per cent were first lien loans.

Originations this quarter demonstrated the breath of Oaktree sourcing platform as new deals were spread across a variety of industries real estate software industrials and to a mix of sponsor and non sponsor businesses.

We received $229 million from Paydowns and exits in the quarter. These were mostly composed of second liens unsecured debt and lower yielding investments, notably exits included our position in Airbnb, which generated $2 million for prepayment income that contributed to earnings.

The weighted average yield on our new debt investments in the quarter was eight 2%, which compared favorably to the average yield of six 8% on investments that we exited.

We continue to identify opportunities and structured deals with attractive yield despite the low interest rate environment.

That noted we are approaching new investments cautiously given some lingering uncertainty about the pandemic and both the timing and durability of a full recovery with that in mind, our credit quality remains exceptional we further reduced non core holdings during the quarter X gene three positions non core divestments, including the 32.

Dollars of non core investments acquired from Ocs I now represents $164 million or only about seven per cent of the portfolio at fair value.

Before I turn the call over to arm and I like to spend a few moments discussing the closing of the merger with O CSI, which occurred on March 19th.

We have emphasized previously we believe that this transaction has resulted in several benefits to ocs out, including a larger more scaled BDC with $2 $3 billion of assets up from $1 7 billion in the prior quarter and a proven and portfolio diversity, including an increase in first lien loans 68 per cent of the portfolio.

At fair value from 60 per cent.

Increased trading liquidity and we also expect the merger to be accretive to NII over both the near and long term through cost savings and the two year fee waiver.

In addition, part of our rationale for the merger was improved access to more diverse lower cost funding sources since quarter end, we have been hard at work, making improvements to our capital structure for it.

Earlier this week, we amended our syndicated credit facility, increasing the size for $950 million from $800 million and extending the maturity by two years to 2026. We also retired a higher cost credit facility that was acquired from O. T. S. I, while there is still some more to be done.

We believe these actions position us well to optimally fund investments and will help reduce our overall cost of debt capital.

Overall, we are very pleased with the quarter and our results year to date and the completion of the merger. We are confident the scale. We now have half will help drive further benefits for our shareholders with that I'll now turn the call over to Armen.

Thanks, Matt and good morning, everyone.

For credit and equity markets continue to advance a law with declining unemployment and improving economy and forecast for strong GDP growth in the second half of 2021.

Vaccine rollout programs, while varied by country have proven successful to date overall in the United States and other developed countries, adding to optimism.

We share in the confidence and yes ours is cautious optimism exceptional fiscal and monetary stimulus has supported the recovery and help fuel investor confidence liquidity and the availability of credit we believe equity valuations already reflect expectations for strong economic growth and therefore, maybe inflated as the ultimate success.

For vaccinations and corresponding GDP expansion still remain uncertain.

For that uncertainty, we continue to approach new investments defensively guarding against the downside and our investments in securing appropriate compensation for risk.

All of that noted we are actively investing in generating strong risk adjusted returns for our shareholders. We are drawing upon the full breadth of oaktree scale and resources to invest across multiple markets with a diversified group of issuers we are.

For further building the portfolio with investments from consistently performing companies and in sectors that present relatively low risk, notably, including those that proved resilient throughout the pandemic from life Sciences to application software.

We're also lending businesses that are not easily underwritten via traditional cash flow based methodologies and we continue to carefully study the rescue lending landscape an area in which we have found appealing opportunities. We also continue to pursue unique opportunities where competition is limited leveraging oaktree the ability to negotiate and structure customized private deals.

That provide downside risk management by mitigating specific risks of the issuer.

Now turning to the overall portfolio.

At the end of the second quarter, the portfolio was well diversified with $2 3 billion at fair value across 137 companies portfolio grew as a result of the 500 for millions of assets, we acquired from Ocs Si and net new investment fundings.

86 per cent of the portfolio was invested in senior secured loans. Our median portfolio company EBITDA at March 30 for 31 was approximately $100 million as we continue to focus on lending to larger more diversified businesses.

Credit quality continues to be excellent. In addition to having no portfolio companies on non accrual amendments and modifications are very low.

Turning now to investment activity.

During the quarter, we saw numerous opportunities and companies with attractive risk reward profiles as well as unique opportunities requiring specialty structured terms.

I'd like to highlight our investments in and incorporated as an excellent example.

And then incorporated as a diversified industrial company that designs manufactures and sells high position components for a variety of industries, including the electrical automotive general industrial Aerospace defense and medical markets and there's a number of growth initiatives underway and is poised to stand alongside several of its end markets the company sort of tone.

A $265 million in new credit to pay off maturing debt and to fund its ongoing growth.

Oh for you provided a $150 million term loan due 2026 was attractive pricing at LIBOR plus 6875 per cent.

As a condition to providing our loan the borrower was required to raise preferred equity that would be subordinated to our position, who CSL was allocated $60 million of the loan total.

Other compelling investments during the quarter all attractively priced included a $40 million loan to sunland asphalt and construction, which provides specialty contract services for roads parking lots on artificial sports field surfaces.

A 30 million dollar loan to invent this power, which engineers and manufacturers battery packs in power supplies for the commercial medical and government markets.

And a $13 million follow on preferred equity investment in <unk>, which consolidates popular brands that sell their goods, mainly via Amazon's marketplace.

Our strong liquidity, coupled with the resources of Oaktree positions us very well to continue identifying unique and attractive opportunities in both public and private investments now I will turn the call over to Mel to discuss our financial results in more detail.

Thank you Armen.

Morning, everyone.

Before getting into the discussion of the income statement I would like to discuss the GAAP accounting that is related to our merger with old CSI.

Because of its unique treatment of asset valuations.

Although the merger was structured as a NAV for NAV exchange.

Under GAAP for merger was accounted for using the asset acquisition methods.

Under this framework the fair value of the consideration paid by CSL to acquire well CSI was based on the number of old CSL shares issued.

And stock price immediately prior to the merger close.

With a small adjustment for OS yourselves capitalized merger cost.

Because those years so it was trading at a discount to NAV at closing.

The final consideration paid resulted in a $34 1 million purchased discount for the net assets of Ocs side relative to their fair value.

This purchase discount was allocated pro rata based on a fair market value to former Odysseus I assets.

As a result, ocs cells initial cost basis for the assets equaled their fair value at the time of the merger.

Yes, the purchase discount on me.

Upon the close of the merger Ocs sell recognized a onetime unrealized gain equal to the total purchase discount of $34 1 million.

As we remarked the asset back to their fair value.

This one time gain with a noncash event.

Going forward each individual debt investment required from Osha Si.

Ties from its new cost pieces as established by the purchase accounting treatment back to par over its remaining lives on.

Or will be accelerated if the investment is exited before maturity.

Importantly, we've amended our investment advisory agreement.

Revised the calculation of incentive fees to ensure that any net accretion income.

Our net realized gains arising solely from the merger accounting treatment.

Have no impact on the incentive fees payable to Oaktree. Once again this will be a noncash event every quarter in the second quarter. In addition to the onetime unrealized gain we also recorded $665000 of discount accretion income as a result of the merger accounting.

We have introduced several non-GAAP measures to supplement our GAAP financials in order to make the company post merger financial results easier to understand and more comparable to our results prior to the merger. These.

These non-GAAP measures are intended to remove the impact of the income accretion as well as any net realized and unrealized gains or losses arising solely from the merger accounting adjustments.

More information about these supplemental disclosures can be found in our earnings release and site presentation.

Now turning to the financial results for the second quarter.

After removing the merger related accretion.

Total investment income was $41 3 million up from $38 2 million in the prior quarter.

The $3 1 million increase was mainly due to our larger portfolio, resulting from both stronger originations Andy Ocs side portfolio that we acquired.

Net expenses for the second quarter totaled $23 8 million down for 4 million sequentially. The decrease was driven by lower accrued part II incentive fees.

This was partially offset by higher interest expense.

And base management fees, mainly due to an increase in borrowings outstanding and our larger investment portfolio respectively.

Additionally, part one incentive fees and professional fees were both modestly higher on a sequential basis.

For the quarter <unk> reported adjusted net investment income of 21 1 million up slightly from $19 6 million in the December quarter.

Adjusted NII was <unk> 14 per share for both quarters.

During the second quarter, Olivia sell accrued a total of $3 6 million in part two incentive fees.

This amount was mostly due to $37 million and net realized and unrealized gains in the portfolio during the quarter, excluding the onetime unrealized gain of $33 4 million due to the merger accounting.

As a reminder, while GAAP requires us to take unrealized gains into account when accruing part two incentive fee expense each quarter Ocs. So we'll only pay part two incentive fees annually.

And to the extent that it has realized gains that exceed realized and unrealized losses at Ocs sells to September 30 fiscal year end.

Good day, we have accrued $13 1 million of part two incentive fees under GAAP.

However, if part two incentive fees were hypothetically calculated as of March 31, 2021 under the investment Advisory agreement the amount payable would have been $3 1 million.

Turning to credit quality, which continues to be very strong at quarter end, we had no new no investments on non accrual.

This is down from one investment in the prior quarter.

Which represented three basis points of the total portfolio at fair value.

During the quarter all of our portfolio companies made their scheduled interest payments.

And only two companies have converted their cash interest payments to pik since the onset of dependent on it.

Moving to the balance sheet.

During the quarter, we funded $302 million of investments and received 229 million in payoffs and exits.

Our net leverage ratio increased to eight four times from seven zero times at December 31.

Reflecting the larger portfolio.

Net leverage is still at the low end of our target range of eight five for 1.0 times.

As of March 31, total debt outstanding was $1 1 billion and had a weighted average interest rate to 6%.

Unsecured debt represented 27% of total debt at quarter end.

At March 31, we had total liquidity of approximately $365 million, including $40 million of cash and 325 million of undrawn capacity on our credit facilities.

Unfunded commitments for 257 million with approximately $192 million of this amount eligible to be drawn immediately as the remaining amount is subject to certain milestones that must be met by portfolio companies.

As Matt noted subsequent to quarter end, we amended and extended our syndicated credit facility.

Increasing its size to $950 million and extending the maturity by two years to 2026.

We also achieved favorable turns removing the pricing grid, while maintaining the rate at LIBOR plus 2%.

In addition, we retired a higher cost SPV facility that we inherited from OS CSI.

Shifting now to the joint ventures.

As of March 31, the Kemper joint venture had $352 million of assets invested in senior secured loans to 57 companies this compared to $341 million of total assets investing in 56 companies last quarter.

Assets increased quarter over quarter, mainly due to the increase in the market value of its investments and net portfolio growth as purchases exceeded sales and repayments.

As a result of the underlying portfolio depreciation ocs sales investment.

And the JV were written up by $5 million or 4% from the prior quarter.

Leverage at the JV was one three times at quarter end.

Slightly from one two times in the December quarter.

Given our strong balance sheet and earnings power at the Kemper JV, we anticipate that we will begin to receive quarterly dividends starting next quarter.

Regarding the Glick joint venture.

It had $137 million of assets at March 31 day.

These consisted of senior secured loans for 36 companies.

Leverage at the JV was one two times at March 30 <unk>.

Ocs sell subordinated note the glick joint venture totaling $55 million is current and we expect to receive ongoing payments.

Consisting of coupon interest and principal repayments of $1 3 million per quarter on a run rate basis going forward.

Now I will turn the call back to Matt.

Thank you Mel over the last three quarters, we have generated and an improved return on equity compared to prior year quarters, which is evidence that our efforts in this area are paying off operating results have been strong following a robust origination activity and credit quality continues to be excellent.

The defensively positioning debt, we have carried out since 2017 has largely been completed and our pipeline of potential transactions remained solid as.

As a result of this strong performance, we have increased the dividend from $9.05 to <unk> 13 per share in the past year that said, we continue to believe that <unk> is well positioned to grow our lead further from here.

First we remain focused on positioning the portfolio for an improved yield by rotating out of lower yielding investments and into higher yielding proprietary loans.

We continue to make good progress here in the second quarter exiting 49 million on these types of investments as of the quarter and $163 million of senior secured loans priced at or below LIBOR plus four 5% remained in the portfolio, including approximately $102 million of loans that we acquired in the Ocs high merger.

Our new investments during the quarter came in at an average yield of eight 2%. So there is continued upside to be realized.

At a time.

Another opportunity for us to increase our E is by deploying more leverages debt portfolio level as of March 31st we were operating just below the low end of our long term target of 85 to 1.0 times. So we would expect to continue to enhance returns as we make incremental investments and to play higher leverage however.

We will only grow the portfolio as we find opportunities that are consistent with our investment approach that we believe offer an attractive risk reward.

We also have the opportunity to further optimize both of our joint ventures. We can accomplish this by not only to get judiciously, increasing leverage at the JV, but also by rotating out of lower yielding investments into higher yielding line. We believe that disciplined growth for the JV will also be accretive to ROE over time.

Finally, we expect to realize synergies from our recent merger with <unk>, which we anticipate will benefit are we going for these.

These include approximately $2 million of annual expense savings and the waiver for the $750000 per quarter and management team and management fees for eight quarters further as I mentioned earlier, we are working on streamlining streamlining our capital structure to reduce our overall cost of capital while enhancing our funding flexibility.

In conclusion, we are very pleased with our strong second quarter results. We are happy to have completed the seamless merger with Oh CSI as we have achieved further scale portfolio diversity and expected earnings accretion we.

We are excited about our future and remain optimistic that we will continue to identify new attractive risk adjusted investment opportunities, which will allow us to deliver improved returns to our shareholders.

Thank you for joining us on today's call and for your continued interest in Ocs out with that we're happy to take your questions. Operator. Please open the line.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were 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 momentarily to assemble our roster.

And the first question will come from Devin Ryan with JMP Securities. Please go ahead.

Yeah.

Great Good morning, everyone.

Maybe just to start off here.

Sure.

Kind of a market question I heard the commentary.

Didn't call just around.

Where valuations are and maybe how on the mixed use the implied outlook is.

And so you're always appreciate hearing your views on what you're seeing in the market.

And if possible just good to be get a good to get.

Some delineation between what you're seeing on the sponsor side versus the non sponsored guidance. If there is any.

Just where are kind of some of those more attractive opportunities are today, just given that backdrop you started with.

Thanks for the question Devin This is armen.

So I've mentioned this on prior calls, but when we look at the opportunity said, we look at fundamentals technicals and valuation.

When we look at the fundamentals I would say sequentially.

We've had three quarters of improved performance in most businesses.

In the U S and globally.

Quarter over quarter, a lot of cut.

Companies on the energy space, even if it had really solid performance in the last couple of quarters with rising oil prices.

So the fundamentals I would say are trending on the right direction, but not yet reflective of a complete recovery.

From the pandemic one of the issues.

Still holding back the fundamentals as a high it's actually two issues one is.

A labor shortage, especially at skilled labor in the United States.

And then the second is there have been supply chain disruptions over the last few quarters.

And so getting certain types of products.

It has been a little bit of a challenge to some businesses.

We see it especially on luxury products, we see it in chips, there's been a lot of talk about.

About a global chip shortage.

So the fundamentals.

Certainly heading on the right direction, but still not to post pandemic levels.

In terms of valuation.

The tremendous amount of stimulus that's been pumped into the economy valuations have gotten really high.

Generally.

And so there was a little bit of a pull back a couple of months ago.

On valuations of some of the.

Higher flying Tech.

Companies on on.

On the stock exchange really commensurate with a rising interest rate environment on the 10 year Treasury touched just about one seven percentage has come back down but that that little moment there.

It was a little bit of a sign of potential times to come where.

The conditions that we're seeing in the economy today could give rise to inflation could give rise to higher interest rates.

And therefore, where our expectation would be that.

Very high multiple valuation companies on stocks.

We will potentially have some downside if we do see net rising rate environment play through on the heels of what's likely to be at.

At least the transitory inflationary backdrop.

So we are very cautious about valuations I think a lot of private equity firms are also cautious about valuations.

We are we're seeing some deal flow on the LBO side for sure but.

Think folks for kind of <unk>.

Wondering what happens on valuations if the rising rate environment does kick in in terms of technicals.

There is a lot of capital out there both on the public markets as well as the private.

Private debt markets.

And we are seeing the impact of that capital in.

In terms of the recent deal flow that's been making it into the market recently and then definitely.

In 2021 prior to that.

And I would say that generally speaking.

Legal and economic terms of deteriorated over the last couple of months.

Because there are.

Several managers out there that have raised very large funds that are looking for deals on the and the most kind of consistent way of sourcing that deal flow is through the LBO sponsor backed market and by providing large solutions large loans in support of those that'll be OS at terms.

That are tighter.

And more flexible on from a legal perspective.

Then they were even pre pandemic. So we are very cautious about the quality of the deal flow, we're seeing on the LBO sponsor side.

And we are participating in it but I would say that we are finding better opportunity on the non sponsor side. These days as I've said on prior calls, it's very hard to predict the timing of our non sponsored deal activity.

But our pipeline today is largely composed of non sponsor deals really leveraging the oaktree platform.

And in some of the off the center of the fairway type of deal flow that we see as an institution.

So it'll be balance going forward, we'll try to do is we'll try to find some good LBO opportunities as well, but I would say that.

The trend in terms of legal and economic terms on that side of our origination is heading.

Has had towards a less attractive position.

Okay, great color on it. Thank you very much as a follow up.

Meaning the $164 million on non core investments in the portfolio I'd imagine those are primarily in less liquid at this point in the liquid positions were sold off leading into ore.

Following the merger or just want to make sure that that's a fair assessment and then whether there's any transparency kind of into a time line for rotation from there.

Yes, I think your I think your statement is correct that they are less liquid.

It's challenging to determine the timing of an exit but you should know that we are very focused on exiting those positions.

I think.

The good news is with the recovery in the economy those positions are.

Their valuations have improved since the bottom.

So we would hope and expect that we will see some resolution over the coming quarters, but it's.

It wouldn't be able to provide forward looking guidance on what that could look like again, Devin it's Matt.

Our strategy with the non core from the beginning was rather than to do kind of on.

Large portfolio sale at a relatively low price.

We'll keep situation independently and try to maximize value, which I think we've done a good job of it.

And we'll continue to do that the army point every day every quarter.

We're exiting working on exiting investments for exiting the non core investments.

And so thats been good.

Some of the some of the investments then let up materially last quarter, given given the performance of the company.

So we're focused on it.

Every day.

John's point is tough to pick a time line, but it is something.

And we want to keep making progress towards.

Every quarter.

Yeah, Okay, well I appreciate the color and I'll leave it there thanks guys.

Thank you.

The next question will be from Kyle Joseph with Jefferies. Please go ahead.

Hey, good morning, Congrats on a good quarter and getting the merger across the finish line.

Yeah repayments are obviously difficult to predict but just can you give us a sense given you talked about on a hot market and just your expectations for repayments this year versus maybe last as a benchmark.

Yes.

Good question, but.

It requires a little bit of a crystal ball.

We haven't we.

We havent been hit with a lot of repayments, but we expect that.

Just given the nature of some of our origination debt.

Some of our portfolio companies are good stack candidates some of our portfolio companies.

Our good refi candidates on the LBO side.

So I wouldn't be surprised if we see elevated repayments.

This calendar year versus last year, but I, but I wouldn't be able to dimensionalize the size of that unfortunately.

Got it fair enough.

And then obviously your credit has been very strong looking at your NPA, but just.

On the underlying portfolio performance.

Just a sense for whether it's revenue or EBITDA growth in the first quarter and how that compared to the fourth quarter and kind of the outlook here.

We have lapped some of the more difficult comps in and kind of given that what your expectations are for a credit for the remainder of the year.

Sure. So I would say that in the third and fourth quarter of last year I'm talking calendar quarter last year.

Most companies had revenues down.

5% to 25%.

What I'm, saying just brought economically and I think our hour.

Portfolio was in that range as well.

However, I think very good managers.

A very strong businesses took out a lot of cost during that time frame as well.

And.

We're able to.

Run with a cash flow generation profile that.

Resulted in them not having any sort of issues around restructurings.

So it was more of a cost containment story in the back half of last year in the first quarter I think that cost containment story has continued to play through.

And that they have not.

And that costs are still pretty low they haven't they don't seem to have taken out additional costs in the first quarter, but the revenue line has certainly picked up.

Sequentially. So when you compare first quarter first calendar quarter revenue this year versus third and fourth quarter last year, it's higher it's higher probably by.

On ballpark in Florida, 10% for to 8% in that range.

And so if you combine that type of revenue growth with pretty good cost containment youre seeing nice EBITDA growth as well.

On a sequential basis on a year over year basis, I would say most businesses.

Our best are flat.

First calendar quarter of 'twenty, one to first calendar quarter of 2020.

But most of them frankly are still down from where they were pre pandemic. So.

It's an important distinction because.

Valuation multiples of companies terms on new loans are all at pre pandemic types. Meanwhile, the performance of businesses is not quite where it was pre pandemic.

Is that helpful.

Very helpful. That's great color, thanks, very much for answering my questions.

No problem. Thanks, Scott.

And the next question will be from Bryce Rowe with hub group. Please go ahead.

Thanks, Thanks, Good morning wanted to.

To ask about kind of the comment.

The comments around it.

The.

The cautious optimism from an outlook perspective and.

And how you think about.

Where you want to where you want to be.

In terms of your balance sheet leverage target on the low end middle middle Middle Middle part of it or towards the higher end of that debt balance sheet leverage target.

Given given the outlook.

Yeah.

Thanks for the question right. So.

Going into March of last year, we were running.

At or below our leverage target and that really allowed us to get pretty opportunistic in our investments with rescue loans with public market trading activities in a variety of different asset classes.

And.

That was really because we were entering that period.

Feeling that terms and conditions in the private credit markets broadly, we're just not as attractive as we would like them to be.

We're still finding pretty attractive investments from the private credit markets right now, especially the non sponsored space but.

Would expect given our.

Tone of cautious optimism will be.

Probably closer to the low end of our target range.

Hum.

Barring any sort of surprises to the upside in terms of non sponsored deal flow that we may be able to find that we think is.

Mispriced risk.

So we're always looking for those types of idiosyncratic opportunities day.

They could present themselves.

Even when the markets are pretty strong on some.

The harder to understand or harder to underwrite businesses, we do still see a lot of deal flow in our life Sciences area and some of the other.

Some of the other areas that are outside of the LBO sponsor activity area.

So.

If we did see some some surprises to the upside on our on our origination on the non sponsor side I could see us trending towards the middle part of our range.

I don't think that will be on the high end of our range.

In the in the in the next couple of months, it's hard to predict beyond what our what I see on our pipeline today, though.

Yes. This is Matt that's helpful.

Yes.

Traveling benefit our target range is <unk> 85 to one.

And we're still very comfortable with that range.

Got it okay. That's helpful.

Let's see I wanted to ask about about the liability structure of the capital structure. Obviously, it's been a it's been a point of emphasis.

Over the.

Last last couple of quarters with the with the pending <unk>.

Transaction with the CSI now that that's done obviously youre, making some progress in having net.

Having having remixed some of the liability structure already.

Just kind of curious how youre thinking about the.

The one remaining SPV there now.

And how you how you might try to take advantage further take advantage of what we're seeing in the <unk> and the unsecured debt markets right now.

Okay. Thanks price, it's Matt I appreciate the question so.

As you referenced we like and have had a very balanced capital structure.

And I'll tell you referenced we amended and extended our revolving credit facility and get very very positive reception from from both our existing.

<unk> banks as well as new banks.

We're able to do something.

Horton and attractive things on on.

On the pricing and the borrowing base et cetera. So that was that was one piece of it and then you know as you referenced.

We retired one of our <unk> facilities that was very expensive.

Plus $2 65.

Versus our revolving facility, which is LIBOR plus 200.

The existing <unk> facility.

We still have in place that's that's much more attractively priced than than the DB facility that we repaid so well.

We like that and plan to keep that and then turn it to your point, we continue to be thoughtful about our capital structure.

A year plus ago, we did a very successful unsecured bond deal.

So that's obviously an option that debt that we consider going forward, but yes, I think we've made good progress to date and we will keep it will keep being thoughtful about it and be in a position like we were a year ago.

To take advantage of any opportunities in the market to invest attractively.

Thanks for that and that and maybe one more from now now you mentioned the.

Kemper JV, possibly paying a dividend here in the I guess your third fiscal quarter.

Any guidance around what that dividend might look like.

Okay.

Okay.

Can't give you guidance on the.

Out of the dividend at this time.

We're going to monitor it over the next quarter end.

Consult with our partner.

So more to come on that.

Okay fair enough. Thank you all.

Thank you and the next question is from Ryan Lynch with <unk> dumping. Please go ahead.

Hey, guys.

Good morning, Thanks for taking my questions.

Just wondering how do you guys kind of balance your guys' target of <unk>.

Kris seeing your return on equity would you talk about kind of increasing leverage levels.

On the main components of that.

It's sort of the cautious the more cautious outlook for deploying capital because it just seems to me.

If you guys aren't super excited about the sponsored by new environment.

That's certainly a risk.

<unk>.

On the level of deals you guys are going to be putting on your books and then you guys also have the other.

Goals are.

Or divesting some of the lower yielding investments.

Actually in some of the non core investments plus the general market just has a lot of strength on the DSL market.

That's going to provide I think a lot of.

And I, probably already has had some refinancing risks out there that could that could have some portfolio repayments.

So how are you balancing that out.

Wanting to add on additional leverage.

To increase the ROE.

But it sounds like there could be.

At least from everything that I've heard it sounds like it may be tough to actually add net net.

Net growth over the coming quarters.

Yes, it's a good question Ryan this is armen.

So we have a variety of levers we can pull to help drive Roe.

We do have part of our portfolio and low yielding assets that are publically traded that are that are a source of cash.

Portion of the Ocs Psi portfolio that was merged into CSL is such a source.

So that's one area, where if we just rotated from the lower yielding.

On the lower yielding nature of some of those assets into even just average yielding LBO in non sponsor deals deal flow that we're seeing.

That will be accretive to the.

<unk> Roe without even increasing leverage.

There is the leverage opportunity.

To increase leverage what I would just say is.

For us too.

Drive up leverage to the top end of our target or even through the top end of our target to do LBO deals specifically, firstly there'll be OS now are pricing at LIBOR, plus 475 to 500 in the middle market.

For the more traditional first lien pretty low levered.

For us that's not a optimal use of <unk>.

Increasing leverage we'd rather increased leverage in connection with originating eight 910% type of paper in the non sponsor area and.

We've talked about this in the past, but just being part of Oaktree, we do see a lot of deal flow that.

Traditional sponsor chasing managers typically don't see or don't spend the time to try to originate and Thats, where we are able to.

Drive some incremental.

Growth in ROE through higher yielding.

Higher yielding opportunities.

And <unk>.

Getting paid.

On attractive return for what we assess is being lower risk than other situations and then incorporated is a good example of a deal that we did in the quarter. I mean this is a public company.

We the investment came actually through our special situations group initially that was potentially discussing a junior.

Or debt solution for the company.

It changed into a senior solution for us with less than three turns of leverage.

And a requirement for the company going raise a preferred equity beneath us so.

We got paid a nice return that was wide of LBO.

Sponsor loans, especially if it's a company with under three turns of leverage.

And in a sponsored deal that would be LIBOR, plus 450 to 500.

And we were paid close to LIBOR plus 700 with.

OID and fees so.

That's kind of a long way of saying that we just have to get more creative on the origination side.

Rather than relying on.

The market the private credit market delivering us the beta of the market. We really are looking for alpha opportunities, we're finding alpha opportunities.

In 2020, when when when the economy was in disarray, we were able to find a lot in the rescue lending area.

And we were and even though that particular opportunity has waned on a broad basis in terms of across industries.

It is still there in pockets and there could be on the energy space that could be in other areas.

We're still seeing some pretty pretty nice deal flow or potential deal flow.

In the situation of lending area. These are companies that are hard to understand hard to underwrite, we're seeing a fair bit of deal flow there.

They don't fit nicely in the.

And the underwriting standards of other managers, because there isn't fresh equity capital coming in or there there isn't a clean sort of debt to EBITDA story, but.

As a result, we're able to get very tight legal terms and wide economic terms. So we're spending a lot of our time on the sides of the fairway rather than in the center of the fairway and we're finding the ability to still continue to net net originate.

Originated on a positive basis, so rather than contracting the portfolio, we're still expanding and the first calendar quarter. This year you saw that we did expand the portfolio, even though a lot of.

The competitive dynamics that I had mentioned earlier, we are still in play this quarter. So.

It's really being part of Oaktree that is the.

The competitive advantage for us and we will continue to utilize our competitive advantage to drive ROE higher without having to simply rely on higher leverage to deliver that Roe.

Just one last point before I get off my soapbox.

Last year higher Levered <unk>.

Higher leverage proved to be a disadvantage because as that as the economy kind of tumbled leveraged providers did pull back and we did see folks have to issue equity at discounts to NAV.

And we saw a lot of managers, whether BDC or non BDC pullback from the market because they were unsure about what sort of issues. They were going to have in their portfolio with their leverage providers et cetera, and we didn't we were we were extremely active in trading extremely active in origination and we think we could strike a balance between now.

And that next dislocation to still be.

To still go on the offensive when that happens as well.

Yeah, Brian and Matt just picking up on that last point.

We would agree with you that it is tagging on to your comments. It is hard it's hard to originate but that's OK and one of the things that I think has happened and hit it a little bit less comment but.

Going into the pandemic post pandemic.

We're very very active during the pandemic and.

Across Oaktree and particularly in <unk> I think that's really helped increase.

Our market share and mind share.

Kind of conversations both sponsor and non sponsor.

And has definitely created a tailwind in terms of just our presence in the marketplace and direct lending.

I think thats.

That's really helped us and will continue to yes, and just to be clear this arm and again just to be clear on the <unk> side, we will do some LBO deals. This year next quarter. The following quarter. So don't get me wrong, what I, what I would what I would like to point out though is that our hit rate will be lower we will see a lot more deals.

And our look to book will be just lower.

And thats, Okay, and we're going to fill what we don't do on the LBO side with what we are able to find on the non sponsor side.

Gotcha.

That's really helpful.

Color and really good commentary on how you got your thinking on office space.

I can certainly appreciate it and I think investors should also appreciate that you all are looking to be direct lenders that are generating trying to generate alpha versus just being asset gatherers and I think thats, a really yy's approach.

That's all I had today so I appreciate the time this morning.

Okay.

Thank you.

The next question is from Melissa Wedel with JP Morgan. Please go ahead.

Good morning, Thanks for taking my questions today.

On one of the things that jumped out and going through your slide deck.

And remember.

New companies that you allocated capital to their.

In the March quarter.

<unk> stood out about that is that we seem to be hearing from a line of teams that there is increased confidence or increased comfort and deploying capital to existing portfolio company.

E.

It's been working with already and you can see growing out of environment I'm curious if there's anything in particular that drove that.

On.

This.

Hi allocation for 18, new companies on the portfolio is that indicative of sort of a return to normal on here.

Interest process for any company. Thank you.

Yes, thanks for the question Melissa.

There wasn't any sort of macro theme oriented.

<unk> influence on our origination in the quarter.

We just frankly saw a lot of deal flow.

In a variety of different areas.

And that we were able to structure appropriately.

We did do some LBO sponsor deals in the quarter for sure. But we also were very active tapping the oaktree platform for a lot of other deals that were.

Proprietary in nature.

Still on situations that we were negotiating in the fourth quarter that got funded in the first quarter, so still suffering from a little bit of dislocation in some of the traditional lending areas.

Net debt that ordinarily would have supported that type of issuance. We did do some real estate deals for example.

In the last couple of quarters that.

Hum.

<unk>.

We're very well structured very well price really because the dislocation on the real estate market went a little bit longer than on.

On the dislocation in the corporate credit markets. So it wasn't.

Our origination wasn't really with a macro view to sort of chase recovery. It was that we were able to find well structured well price deals.

And not really tremendously cyclical businesses, either so we feel really good about about what it is but it's but oaktree generally and certainly <unk> is a bottoms up fundamental credit by credit.

Analytics shop.

It is we don't really take a macro view on really anything we do we don't really predict macro and we certainly don't.

Have the macro drive our risk taking we certainly acknowledge what the macro environment is and feed that into our underwriting to assess the risks, but we don't say hey, you know the Sun is shining, let's make hay in the Cisco originated as broadly and as actively as we can because you really can't lose money in this environment that to us is the recipe.

For disaster.

Thank you and the next question is from Jordan <unk> with Wells Fargo Securities. Please go ahead.

Hey, guys its fan oshea on for Jordan This afternoon.

Thanks for having me on I, just wanted to try to squeeze a little bit more.

Out of the leverage topic, which was extensive and helpful.

Can you just putting that altogether.

Summarizing it is.

You are comparatively low leverage target is.

As a function of.

The ability to find.

Quality deals.

Even with even those deals being higher spreads.

And that juxtaposes, a bit versus the space, which most of your peers.

Lower leverage.

Leverage win in higher yielding arenas.

Raise leverage in.

And lower yielding strategies so it does.

The first parts of the question it does sound.

On a bit on quite a bit different for you and your approach is that fair to say that your target is.

As a function of the tariffs.

Of attractive non sponsor and specialty deals and so forth.

Yes, I wouldn't say, it's a dearth of opportunity, but it's certainly harder to find in a predictable and consistent way the non sponsor deal flow versus sponsor deal flow for.

For I agree.

I equate the thinking around originating and the sponsor area to what it is.

<unk> underwriter does win when an insurance company says I want to have more I want to have more premium under management under under in the business day loosen their underwriting terms of except for and they are able to turn it on and turn it off with pretty controllable regularity.

And.

That's a little bit of an analogy to the sponsor business is we see a lot of deal flow on the sponsor side and we could easily turn it up and we could easily turn up leverage and have the leverage manufacturer the returns, but it also creates an additional area of risk.

And we don't think it's prudent at all times to dial up return win win when it's hard to know when you have to work harder to find deal flow. It doesn't mean that you could just.

Resorts are just dialing up leverage in making the leverage work for you.

I think we will be within our target.

Our leverage target.

I do think that we have a lot of deals on our non sponsor pipeline.

That will show the power of the Oaktree platform over the coming quarters I think we've already shown on the power of the Oaktree platform over the last few quarters.

So, yes, I mean I.

Think that if we were a more traditional.

Manager that was only doing leverage buyout activity and was maximizing leverage as a result.

And more focused on <unk>.

Cumulated in market share in the LBO area, Yes, we would run leverage higher than we run today, it's because we do non sponsor deals.

Which are harder to time.

But higher yielding and more attractive from a legal perspective that we run leverage lower.

Yes.

So total.

Totally understood and I think I.

I think your dialogue with Brian suggested.

Net.

We're working to grow that funnel.

I don't know if its more.

Create more access to non sponsor or or go wider and do things like.

Life Sciences, and real estate as you mentioned with others.

But.

Regardless like that should be one would think that that's all.

Becoming more difficult as well with the with the growth of private markets.

The institutionalization and maturation so forth.

I at least would imagine that these deals are becoming more and more shop in more and more competed on.

So.

Waiting for it to come back to you to grow.

To grow the book to a to an improved Roe.

It seems like at least.

A plan that would require a lot of patience. So would you say are you being.

Ah patients to see more of those deals or is there sort of on average.

<unk> game plan.

To find.

On attractive arenas that would compel you to grow into a normal let's say.

120 debt.

Debt to equity ratio.

Well, we have an active gameplan to originate deal flow that we are definitely not waiting around for somebody to throw something over the transom to us.

So I hope that's not the deduction that anybody receives from any of my commentary.

The.

Yes. It is it is hard to find the deal flow.

I wouldn't say that it's getting more competitive actually.

Just because these are harder to understand situations, we don't find ourselves getting a term sheet from the from an intermediary, saying Hey will you hit this on this non sponsor deal it's literally come.

Company sponsor.

Family Office management team coming to us and saying, Hey, I need a strategic partner.

To help me grow.

On a transitional period in my company I need somebody who is going to take the time to understand how to what I need an infrastructure something that works in size and.

We find that that it is a highly competitive market there but.

But it takes time it takes time it takes or people who are on the ground originating it takes time of people around oaktree across all strategies at Oaktree, saying this isn't a good fit here, but it might be a good fit over and another area of affirm that I work in <unk>.

So we benefit from having.

Many more people.

Then then what is kind of on the page, helping us originated in this non traditional area.

So it's not a it is not a passive activity for us it is not a.

Wait and see what advisors throw our way.

We're finding a lot of deal flow and we are actually also leveraging the brookfield relationship as well to drive some deal flow.

That is proprietary so.

Will we get to one two times or above our range, it's possible, but I think we're focusing on walking before we run I mean, we have lower yielding assets that we could sell we have we have non core assets that we're looking to exit we have a lot of room between the 0.84 turns of leverage we're at right now versus north of <unk>.

One to one.

To get through before we before we talk about going through our leverage target.

So I don't know if im answering your question or not but it's but it's.

It's a blocking and tackling.

Exercise every quarter.

And we have a lot of folks in place constantly looking for deal flow and were able to originate in tough environments.

And I do I do think it.

If you go to.

Pages, five and six in our Investor deck, I think we do lay out some good data in terms of originations growth.

On a quarter and then for the release included the month. So you can see for the current quarter with a very competitive environment, where we originated.

On the private side $2 45.

Public side, 63% in secondary <unk>.

<unk>.

And.

Quota for that those numbers 180 $184 22.

So I think that gives you a good sense of of quarter by quarter month month by month.

Most recent month, because obviously the competitive environment that we are finding attractive things to investing.

It's probably going to be thoughtful and prudent.

You can do all the things that leveraging with kind of the oaktree platform on our.

Our market share and mind share gains over the last year to do that.

Yeah.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Michael most PTO for any closing remarks.

Great. Thanks, Chad 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 <unk> website in the investors section or by dialing 877, three for for 75 to nine for U S callers or.

One for 123170088 for non U S callers with the replay access code 10153868, beginning approximately one hour after this broadcast.

Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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