Q3 2021 Oaktree Specialty Lending Corp Earnings Call

August 5, 2021

[music].

Welcome and thank you for joining Oaktree specialty lending corporation, so its fiscal quarter of 2021conference call.

This conference call is being recorded.

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

And will be prompted for a question and answer session. Following the prepared remarks.

Now I would like to introduce Michael and most teach you of Investor Relations, who will host today's conference call.

Mr must be chosen you may begin.

Okay.

Thank you operator, and welcome to Oaktree specialty lending Corporation's third fiscal quarter Conference call 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.

Our speakers for their army 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'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.

Ability to realize the anticipated benefits of the merger 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 SEC filings for a discussion of 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 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.

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.

Okay.

Thank you Mike and welcome everyone. We appreciate your interest in and support of O C. S. L and we hope everyone listening as well.

We continue to build momentum throughout the third quarter generating strong origination activity and maintaining excellent credit quality. We again grew NAV produced record earnings and increased our dividend.

We reported NAV per share of $7.22 up 2% from the prior quarter. The increase reflected the continued market spread tightening and price appreciation and certain liquid debt investments during the quarter as well as successful realization of a few non core equity positions.

Importantly, our NAV continues to exceed its pre COVID-19 high and is up more than 9% from the end of calendar 2019.

Adjusted net investment income per share was <unk> 19 cents up from 14 cents for the prior quarter driven by higher adjusted investment income that included higher prepayment fees and OID acceleration.

Based on the ongoing earnings growth and strengthening earnings profile, our board increased our quarterly dividend by 12% to 14 of the half cents per share. This marks the fifth consecutive quarterly increase and of 38 per cent increase from a year earlier. The dividend is now up 53 per cent for them its pre COVID-19 run rate.

Of 9 and a half set.

Looking at the portfolio of more detail, we made $107 million to $8 million of new investment commitments.

Of these nearly 80% and were first lien loans and included a $104 million and private transactions $70 million and the new issue of primary market and $5 million and secondary market purchases, notably robust origination activity continued into July giving us a great start on the current quarter.

Armen will discuss this more and a few moments.

And we received $171 million from Paydowns and exits and the quarter. This included our position and William Morris endeavor, which generated $7 million of prepayment income that contributed to earnings.

We also exited some low yielding investments and made further progress on the exiting non core investments.

Of the ties of $19 million across 3 equity position non.

Non core investments represented just 6 per cent of the portfolio at fair value at quarter end.

The weighted average yield on our new debt investment commitments with an attractive 9.2% and compares favorably to the average yield of $6.1 per cent on investments that we exited.

As we selectively invest our credit quality remains exceptional there were no investments on non accrual at quarter and.

I also want the highlight several improvements made to the capital structure since the closing of the merger with the Ocs Si that for.

Further bolstered our funding flexibility and reduced our cost of debt capital.

First and May we issued $350 million of senior notes at a 2.7 per cent coupons, which we subsequently swapped to floating rate at LIBOR, plus 166% and our.

And to better match, the floating rate nature of the underlying investment portfolio.

The ability to access the investment grade unsecured debt markets is the competitive advantage as it provides us with long term low cost and flexible debt capital.

Second we amended our syndicated credit facility, increasing the size to $950 million from $800 million and extending maturity by 2 years to may 2020.6.

Third we retired a higher cost of credit facility with pricing at LIBOR, plus 265 per cent that was acquired for most of the ESI.

Finally in early July we amended the city facility to reduce our cost of funding some of our lower yielding quoted loans and.

In total these actions reduced our weighted average interest rate on debt outstanding to 2.4% from 2.6% improved our funding profile by more than doubling of our unsecured borrowings outstanding and boosted our liquidity by over $300 million. Overall, we are very pleased with our results and believe that improvements.

Made to the capital structure position us well for future investment opportunities.

Before turning the call over to arm and we want to let you know that Mel has now and people stepped down as CFO and treasurer of <unk> at the end of November to assume another senior management role within Oaktree.

Subject to the approval of <unk> Board of Directors, we expect a Christmas count of managing director at Oaktree will become Oh, Csl's CFO and treasurer effective upon mel's resignation. Chris currently serves as the Oce S. L. Assistant Treasurer and has worked closely with the mouth. Since we took over management nearly 4 years ago and the meantime.

And now we'll work to ensure a seamless transition I want to thank bill for his many contributions to <unk> over the years. He has played an important role on our leadership team and we of course wish them well and this new position at Oaktree.

And I would like to turn the call over to arm and.

Thanks, Matt and good morning, everyone.

Markets further advanced in the June quarter supported by a rebounding economy that pushed the equity markets. The all time highs and lead to further spread compression and declining default rates in the credit markets.

If the economy heats up we are watching inflation closely the consumer price index rose by 5.4% and the 12 months through June the fastest pace and over a decade, yet most investors don't appear overly concerned the yield on the 10 year Treasury declined by almost 30 basis points and the second quarter after jumping.

By roughly 80 basis points and the previous 3 months.

Moving forward, we remain cautiously optimistic about the global economic recovery given the success of vaccines and pent up demand for a wide range of goods and services that should drive spending into next year.

However, we also believe.

The investor Complacency, particularly with regard to the persistence of rising inflation poses a risk to credit markets.

Yep markets seem to view of inflation is transitory and do not appear to be pricing and much risks to the downside.

In addition, while overall progress is encouraging the delta variant of the coronavirus is slowing economic reopening and parts of Asia, and Europe, and it could current momentum and the United States.

Its ultimate impact on global demand remains the major unknown, even though investors appear to believe that the recent spread of the Delta is only a minor of risk.

Against this backdrop, we remain cognizant of relative value and are investing where we can find the best risk adjusted returns drawing upon the full breadth of oaktree scale and resources to invest across multiple markets with the diversified group of issuers.

In particular, we continue to focus on identifying opportunities and less trafficked areas of the market by lending to non sponsor owned businesses. We are leveraging oaktree 's ability to negotiate and structure customized private deals that provide downside risk protection by mitigating specific risks pertaining to the transaction and the issuer.

We also continued to identify compelling opportunities among life Sciences and technology companies that are delivering health care solutions or capitalizing on the increased level of digital commerce and enduring trend that the pandemic only amplified.

In addition, we continue to evaluate investments and the sponsored lending market focusing on partnering with select private equity firms that we think of and operational advantage and certain industries.

Now turning to the overall portfolio.

At the end of the third quarter, our portfolio was well diversified with $2.3 billion at fair value across 135 companies.

87 per cent of the portfolio was invested in senior secured loans, including 68% and first lien.

Median portfolio of company EBITDA at June 30th was approximately $102 million as.

As we continue to lend to larger more diversified businesses credit quality as Matt noted is excellent.

Moving on to the investment activity.

Despite the more competitive market environment, we leveraged the oaktree platform to originate $178 million of new investment commitments across 9 new and 1 existing portfolio of company.

I'd like to highlight our investment in Maryland of pharma is a strong example.

Meredith for them is a pharmaceutical company dedicated to the development of innovative therapeutics to treat seizure disorders Oaktree partnered with Mariners to provide of $125 million commitment to support the company's upcoming clinical and commercialization activities and $15 million was drawn upon closing with the balance subject to certain milestones that must be met by the.

Yeah.

Oh, CSL was allocated $29 million and and attractively priced 11.5% fixed rate.

As Matt noted the pace of originations remained strong and July continuing the steady momentum we have built over the course of calendar 2021, we originated $224 million of investment commitments and 12 deals and the month of July.

In total these deals were attractively priced with a weighted average yield of 7.7% and 90% were first lien loans.

When taken together with our June quarter originations the yield on new investment commitments was about $8.4 per cent.

All told our strong liquidity, coupled with the resources of Oaktree positions us well to continue to find unique and compelling opportunities of both public and private investments.

Lastly, I want to Echo Matts comments and thank Mel for his important contributions to Ocs L and wish him all of the best and his new role at Oaktree.

Now I will turn the call over to Mel to discuss our financial results in more detail.

Thank you arm and good morning, everyone.

Before getting into the discussion of the financials I would just like the think arm and and that for their kind words.

I've been fortunate to have worked with such a great team here at all the CSL ever since Oaktree took over the management of the company.

While it is a bitter sweet to be leading us yourself and moving on within the Oaktree organization.

It is an ideal opportunity at this stage of my life and career.

I plan on staying through the end of November to help ensure a seamless transition. So you will be hearing from me again on our fourth quarter and your and call.

Before I turn to our financial results I want to remind you that last quarter. We introduced several non-GAAP measures to supplement our GAAP financials to make the companies post merger financial results easier to understand and more comparable to our results prior to the merger.

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 the supplemental disclosures can be found in our earnings release and slide presentation.

Now to our financial results, which were once again quite strong.

After removing the merger related accretion total investment income was $60.4 million up from $41.3 million and the prior quarter the.

And the $19.1 million increase was mainly due to a full quarter of earnings from Ocs size of investment portfolio, and approximately $7 million and prepayment fees and OID acceleration related to the W. N. The payoff.

Net of expenses for the third quarter totaled $29.1 million up $5.3 million sequentially.

The increase was driven by higher interest expense and base management fees.

Mainly due to an increase and borrowings outstanding and a larger investment portfolio.

In addition, part 1 incentive fees were higher on a sequential basis, mainly due to the increase and investment income.

These increases were partially offset by lower accrued part II incentive fees.

During the quarter Ocs sell accrued a total of $2.8 million and part 2 incentive fees.

The amount was mostly due to $16 million and net realized and unrealized gains and the portfolio during the quarter.

Excluding the $5 million loss due to the due to the merger accounting.

As a reminder, while GAAP requires us to take unrealized gains into account when accruing part 2 incentive fee expense each quarter or CSL will only pay part 2 incentive fees annually and to the extent that it has realized gains that exceed realized and unrealized losses and what's yourself September 30.

Fiscal year and.

To date, we have of crude $16 million of part 2 incentive fees under GAAP.

However, as part 2 incentive fees were hypothetically calculated as of June 32021, under the investment and under the investment Advisory agreement and the amount payable would have been $7.2 million.

Turning to credit quality, which continues to be excellent.

As Matt mentioned, we had no investments on non accrual at quarter end and all of our portfolio of companies made their scheduled interest payments.

Now moving to the balance sheet.

Ossia sales net leverage ratio decreased to 7.9 times from point of 8.4 times at March 31.

Reflecting the cash balance we had drawn to fund new investments in early July.

Net leverage is still slightly below our target range of 8.5 times to 1.0 times.

As of June 30, total debt outstanding was $1.1 billion and had a weighted average interest rate of 2.4%.

Unsecured debt represented 58% of total debt at quarter end.

From 27% as of March 31st.

Following our 2027 note offering.

At June 30, we had total liquidity of approximately $720 million, including $85 million of cash and $636 million of undrawn capacity on our credit facilities.

Unfunded commitments ex excluding.

Excluding the unfunded commitments the joint ventures were $239 million.

With approximately $166 million of this amount of eligible to be drawn immediately.

As the remaining amount the subject to certain milestones that must be met by portfolio companies.

As Matt noted during the quarter, we made several improvements to our capital structure.

I won't repeat them, but I do want to reiterate that these actions further improved our funding flexibility and meaningfully reduced our interest cost.

Now turning to our 2 joint ventures.

The Kemper JV had 387 million of the assets invested in senior secured loans to 57 companies and this compared to $352 million of total assets invested and 55 companies last quarter.

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

And.

As a result of the underlying portfolio appreciation okay.

Net sales of investments and the JV written up by $3 million or 2% from the prior quarter to $133 million.

Leverage at the JV was 1.4 times at quarter end up slightly from 1.3 times and the March quarter.

Given the strong balance sheet and earnings power of the Kemper JV.

Yes, they'll received a 450000 dividend this quarter.

We anticipate we will receive a dividend and this amount going forward.

The Glick JV had $148 million of assets at June 30th.

These consisted of senior secured loans to 38 companies.

Average at the JV was 1.1 times at quarter end.

Ocs sales subordinated note and the Glick joint venture.

And $55 million continues to be current.

We expect to receive ongoing coupon interest and principal repayments of approximately $1.3 million per quarter on a run rate basis going forward.

In summary, we're very pleased with our financial results this quarter and believe our diverse and flexible balance sheet positions us well for the future.

Now I will turn the call back to Matt.

Thank you Mel we continued to build momentum and position <unk> for stronger returns and I wanted to take a few moments to highlight some investment performance metrics that we believe demonstrates the value of that Oaktree brings to ocs L and what differentiate us from our peers first.

Our ability to grow NAV and dividends over the course of the pandemic and since taking over management has been exceptional.

As I mentioned earlier, our NAV is up over 9% from its pre pandemic high in December 2019.

We also have increased our dividend for 5 consecutive quarters and it has grown by 53% from it from its pre pandemic run rate.

Taken together.

S. L has generated and attracted 12% annualized return on equity since December 31.2017.

Our strong performance is due in part to our ability our ability to invest and add value during market dislocations and challenging times as you may recall, we were actively investing during the market volatility and the spring and summer of 2020 and investing in a range of opportunities spanning the public and private markets, including rescue.

Financings, the company's need of liquidity or customized financing solution.

Our loan to William Morris endeavor, which was repaid this quarter was 1 such example of.

Our willingness and ability to step in and and respond during that volatile and uncertain period has really paid off we generated a 27% IRR on $376 million of investments funded debt cost from March 1 and 2020 through September 30 of 2020.

Just on realizations to date and using June 30, valuations and positions that we still hold.

Over half of these COVID-19 originations had been fully realized.

Finally, since we took over management, we have generated a gross unlevered IRR of 13, 4% and $2.8 billion invested and Oaktree originated investments.

We are proud of this accomplishment as it demonstrates the power of the Oaktree platform and our ability to actively invest both in periods of market strength and distress that being said, we continue to see a number of opportunities to further increase returns overtime.

We remain focused on positioning the portfolio for and improved yield by rotating out of lower yielding investments and into higher yielding proprietary loans. We made good progress on this and the third quarter exiting $39 million of these types of investments as.

As of quarter end of $142 million of senior secured loans press priced at or below LIBOR plus 4.5 per cent remained and the portfolio including.

Approximately $67 million of loans that we acquired in the Oc Assai merger.

Our new investments during the quarter came in at attractive yields which means that there was significant improvement and yield on that portion of the portfolio that can be realized over time.

Another opportunity for us to increase our O E is by deploying more leverage at the portfolio level.

As of June 30, our net leverage was below the low end of our long term target of 8.5 to 1 we would expect to continue to enhance returns as we make incremental investments and the play higher leverage. However, we will only grow the portfolio as we find the opportunities that are consistent with our investment approach and that we believe offer attractive risk.

Reward.

And also have the opportunity to further optimize both of our joint ventures.

We can accomplish this by selectively rotating out of lower yielding investments into higher yielding ones as well as increasing leverage at the JV. We made good progress on this front and the quarter growing the JV portfolios by $36 million. In addition, as Mel mentioned this was the first quarter of the Kemper JV paid a dividend of <unk>.

C S L and nearly 3 years, which we anticipate will continue going forward. Finally, we are already realizing synergies from the merger with the Ocs side, which we believe will benefit already going forward and in addition to the fee waiver and expense savings and made good progress and the June quarter on streamlining of our capital structure to reduce our overall cost of capital.

While enhancing our funding flexibility and conclusion, we are very pleased with our strong third quarter results. We remain excited about our future prospects and are optimistic that we will continue to be able 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 and Ocs L. With that we're happy to take your questions. Operator, Please open the lines.

We will now begin the question and answer session to ask a question make the Star then 1 on your Touchtone phone. If you are using a speakerphone. Please pick up the handset before pressing the keys.

And that anytime you have a question has been interest and you would like to withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble roster.

The first question comes from Finian O'shea with Wells Fargo Securities. Please go ahead.

Hi, good morning, everyone and congrats on the quarter.

And I guess for a question for matter of arm and.

I wanted to ask about 1 of the larger loans suite of this quarter with Pearl site and and tied into some of your introductory or more recent comments Matt on.

And your willingness to.

Leaning into the market the opportunistic for shareholders as you certainly have done.

In the past and and.

In contrast to generally not.

Jumping into these.

Large well.

Well marketed or trafficked sponsor D.

Deals.

Large cap.

Typical direct lending down the fairway deals something you've obviously.

<unk> been very selective and.

If you follow.

Where did the sort of fit into.

Yeah, the the compelling proposition for shareholders was was this.

Just 1 of those very very high quality deals that the sponsor wanted to go private and called you up and and it was just a very good opportunity.

Or was this more of a deal where.

You really the.

And pursued helps.

Helps you know create the deal pursuit of the transaction.

As you would more typically with the say something non sponsor or lower middle market sponsor.

I apologize that was a bit long winded if you follow.

Hey for this arm and I do follow up and I appreciate the question.

So I would say the.

Floral side deal in particular and sort of in between we are of very close relationship with Vista.

And as well as a handful of other sponsors that we do a lot of repeat business with we feel that Vista and others like them have pretty deep subject matter expertise and particular industry verticals.

And in the case of floral side, we felt that that was coming through it is not a deal that we reversed and to Vista and said Hey, you know you really ought to go buy floral side of this public company you should take a look.

It was the deal more of that.

Vista was and pursuit of the called us up as of close relationship and.

And those early whether we would be interested and in participating and so we were kind of around the hoop for a pretty long time and and if you follow some of the.

The historical.

Bidding that was known and the public market over the last several months.

We were sort of this does hip knowing what was happening.

And every step of the way.

It is not however, a center of the fairway sponsor deal.

This is of recurring revenue software deal I know more people are doing that but this is the LIBOR plus 800 with the 1% floor first lien.

And I compare that with the more center of the fairway sponsor deal at LIBOR, plus $4.75 to 600, depending on whether it's for true first lien or unit tranche. So meaningfully wide of what the sponsor deals are typically pricing.

And the universe of investors that are comfortable with the recurring revenue software deals.

And if we lower than just more traditional debt to EBITDA free cash flow oriented lenders. So it's not a non sponsor situation where it is bespoke. It is oaktree driving the process, taking down all or most of the loan.

But it's also not a highly trafficked highly competitive middle market sponsor deal and the pricing kind of shows through the other thing that shows through is the Vista.

Best of paid a pretty hefty price for floral side and recognition of the value that the business has and the growth prospects that and have.

And as a result road and equity check that was roughly 70% of maybe a little bit more than 70% of the total enterprise value you don't really see that and typical middle market sponsor deals for us.

The sponsor as well as the size of the sponsor checks are part of the underwriting process and theyre not dispositive of making the investment decision at all but when we do see of well heeled sponsor that is vertical the deep vertical expertise in the in that industry.

And they're willing to put their money where their mouth is we decided to take a pretty hard look when those things line up and and sometimes they'll work for us. They often don't the date, but they are sometimes willing and the case of Vista. We are of very good relationship and history with investing and their deals and felt compelled to invest and this 1.

Thank you it's of a very helpful and I guess, the sort of a follow on there.

Matt also mentioned a pretty healthy.

And pipeline and activity in July.

You know the there there are at least the good handful of of similar such deals.

Going on out there right now too to our observation.

Or are you you know.

And a lot more of these or is your is your post quarter of back to sort of.

Now the.

The more typical oaktree.

Life science so forth.

Are you talking of specifically for July or.

Kind of looking forward.

I guess, just yeah more broadly pipeline right now.

Yeah look I mean, our recurring revenue software deals as you know, it's under 10% of our portfolio, we're not looking to meaningfully add to 1 of the will take a look at the deals that are that are appropriately structured.

From a covenant standpoint appropriately structured from a from a capital structure standpoint.

I Wouldnt expect for us to the.

Chasing a whole bunch of these deals going forward.

But.

We also don't have this macro overlay, saying that we will no longer be doing these deals are or that we are we're topped out either we were a bottoms up credit.

And the shop and there will be deals that come through that might be recurring revenue might be life sciences and otherwise.

So.

We will take a look at all of it with respect to July and the pipeline for US there really isn't too much of the software type of deal flow. There are a couple of names, but not it's not the driving force of our origination and July 4 and our pipeline going forward.

We did we do and did have.

Some of our life Sciences deals in July we have a few that we're looking at and the pipeline, but I wouldn't say, they're high probability right now at least and the life sciences space, but it's pretty well diversified.

And across a variety of different industries.

Good amount of non sponsor and.

And some sponsor deals as well but.

Not the traditional LIBOR, plus 475 or 501st lien deals. It just tend to be the sponsor deals that are a little bit wider for for whatever reason.

And our sponsors of the close relationship of the firm I would say that that's the characteristic of the sponsor deals that we do but we're finding after a fairly quiet second calendar quarter that a lot of the deal flow that we have been working on and the first half of the of really.

Really heated up in July and and the pipeline is pretty robust as we sit here looking forward.

Hard to determine given so much of our deal flow is non sponsor it's hard to determine how much of that closes and August or September we're never but we certainly have.

The pipeline in the and the first few weeks of August I would expect we'll close and will be another we'll round out to a pretty solid.

Third calendar quarter, or our fourth fiscal quarter of pretty solid origination.

Great. Thanks, so much congrats on the quarter and to Mel as well.

Thank you.

Our next question comes from Devin Ryan with JMP Securities. Please go ahead.

Okay great.

Everyone. First question, if we just look back over the past year, I believe and debt portfolio of company EBITDA has come down from the $150 million to $160 million range to now just.

North of a 100 million over the past couple of quarters and more recently.

I would think that at least partially the result of the O CSI merger, but the probably not entirely. So I'm. Just curious if you could give a little more color on what's driving that change and scale of borrowers or anything else stuff related to that thank you.

Sure Devin this is arm and so on.

The answer is that as we over the last 12 months have trial.

Try and a lot of interesting opportunities and true privates.

We have rotated out of publicly traded positions like broadly syndicated loans for example that are bigger borrowers, but lower yields and we've cycled out of those lower yielding situations into true privates that are higher yielding but the businesses are a little bit smaller and the true private area and so that's what's driven the and the average lower it's really of Roku.

Patient out of predominantly broadly syndicated loans.

And and into higher yielding situations.

Partially why the average yield of the portfolio has kind of crept higher.

Okay.

Great color, Thanks, and then.

And just the follow up here, so clearly you've been able to grow investment income nicely, while also maintaining a relatively low leverage.

And the current environment do you expect the stay at the lower end of your target range of the.

The net leverage and the 25 to 1 time suggested youre right just under that the 0.79 times right now so I guess do you have an appetite to grow leverage over the next few quarters.

How should we think about where you want to be.

And that range, just given the current opportunity set and and the risk reward as well.

Yeah, and we feel comfortable with to be operating within that range I know that we're currently just below the low end of the range.

We.

Your intuition is right, though that given the market conditions.

Specialty and sponsor oriented lending being as tight and as and as competitive as they are that.

<unk> is probably not going to be.

The hot and heavy sponsor lender and driving with the originating those types of loans and driving leverage higher.

With that said, though our non sponsor pipeline is pretty strong and I would expect that our leverage will tick modestly higher I don't think debt will be blowing through the high end of the range but.

I would expect that our leverage levels will be stable to modestly higher from here and we and we will be operating within the range, but probably.

On the lower and for at least the next few months, it's hard to predict what deal flow looks like going forward or market conditions.

The present, but.

With the visibility we do have our expectation would be a modest increase of leverage.

Yeah, Okay perfect I appreciate that I will I'll leave it there thanks guys. Thank.

Thank you.

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

Hey, good morning, Congrats and I am very good quarter.

And I just wanted to pick your brain on the on the competitive environment. Obviously, the the pipeline remains strong, but just walk us through in terms of how the competitive environment trended over the last year and.

And really I get the sense of that being balanced by demand for credit and in your markets.

Thanks Kyle.

I mean the law.

Loaded question.

So.

If we walk through pre pandemic through the pandemic and then today I think the the.

The competitive dynamic would show as being back to the types or even inside of the pre pandemic types of the market.

A lot of that is driven by AUM growth within the direct lending landscape there have been.

Pretty creative vehicles.

<unk> by investment managers that have had meaningful growth over the last 12 months and and we've seen that impact the market, especially the more traditional first lien 4 to 5 times leverage part of the sponsor lending market and to put some numbers around it I would say that pre pandemic a true.

Additional first lien.

Something like 4 to 4.5 turns of leverage would have priced around LIBOR plus 500, maybe.

As long as LIBOR, plus 475 to as high of 525 or $5.50 for more risky situations, but LIBOR for 500, 525 was sort of a good indication pre pandemic.

And obviously that blew out after March of 2020, there really wasn't much activity and the second calendar quarter.

But then and the third and fourth calendar quarter of the market came back strong and with the growth of AUR and and.

And direct lending and vessel managers, we've seen.

Yields and economic terms of the legal terms deteriorating in that part of the market, especially.

And at this 0.1st lien for years before and after the leverage with the good sponsor of <unk>.

<unk> was 475, we're seeing it all day long, we're rarely seeing anything.

That is $5.50, and that area, a similar story and unit tranche unit tranche was LIBOR plus $575 to 700 pre pandemic.

You're now seeing LIBOR, plus $5.50, and even pressure to bring that even lower and unit tranche. So LIBOR plus $550 of maybe 625 or 600, and where we're seeing unit tranche. So I would say it's back to kind of pre pandemic types or even tighter at this point.

And the in the more traditional sponsor area. The other reason for the competitive dynamic of that with the expectation that rates were going to rise and that was sort of the market convention or market belief and earlier this year February through April and we.

We did see a lot of inflows into floating rate accounts, such as broadly syndicated loan accounts Etfs CLO funds and so there was a lot of CLO issuance and the broadly syndicated loan.

The asset class, which is the adjacent area of finance for private equity sponsors.

For larger deals they consider the alternatives of going with the broadly syndicated loan versus a direct loan and as.

And that AUM increase and CLO formation was.

Abundant as it was we saw tighter pricing in broadly syndicated loans, which in turn drove down direct lending yields as well.

And so there is there is a lot of pressure.

And the market.

And a lot of deal flow, but I would say right now there's probably more demand for direct loans from the investment managers and there is supply and we're seeing that play out with and the sponsor area pretty significantly.

Yeah, that's very helpful.

And then 1 follow up for me and obviously your credit is very strong, but if he could give us a sense for.

High level of portfolio of trends in terms of of what youre seeing and year over year, Rev and EBITDA growth and how you kind of anticipate that trending throughout the year as we kind of lap some of the COVID-19 comps and and kind of implications for credit longer term.

And that's a good question Karl so.

Our largest industries or and this is not.

This is not predicted but our largest industries through the pandemic.

Software and life Sciences, and those happen to be the industries that were most stable or improving through the pandemic.

And that helped us a lot with.

Experiencing lower volatility and our existing portfolio and created the opportunity along with lower lower leverage and our and our BDC to total.

The more opportunistic and especially in the secondary market and and <unk>.

Really driving NAV growth over the last 12 months.

So I would say that our portfolio actually performed remarkably well through the pandemic, we definitely had a handful of names of small handful of names that were impacted.

Very directly.

By the pandemic for I would think I would say the the.

The most challenged business, where these indoor Trampoline Park Circus tricks.

And.

They went to the being completely shut down and at this point there are roughly 75% to 80% reopen now.

So we're even and the pandemic impacted names, we've seen significant improvement and performance and in our non pandemic impacted names. If performance has been really stable or life sciences companies are doing well, our IP and software businesses are doing more than just well.

And so where we are knock on wood pretty thankful of the pro.

For most of the businesses and our portfolio over the last 12 months.

I would expect just given.

And generally speaking in the market. So this isn't this isn't necessarily a part of our portfolio, but we obviously have a very large credit business below investment grade credit business, and Oaktree and tradable tradable credit and high yield bonds senior loans et cetera.

And so we see what how companies are performing broadly and I would say generally speaking companies are doing better than they were in 2020 by a pretty wide margin.

And as compared to 2019, there is still a little bit down generally again on the.

The revenue side, and EBITDA side, but what I would say as most companies that we track took out a lot of costs in 2020 that I don't think come back fully when the when.

And the economy is fully reopened and we.

Each case I would expect for modest revenue growth and 2022.

Generally speaking and the in the below investment grade issue of market with more meaningful growth and EBITDA.

And then what we had seen previously.

And I would also expect a pretty muted experience and defaults and losses and the tradable credit markets, mainly because the most challenged credits actually exited the benchmark indices.

With the market in 2020, because they defaulted and Thats true of a lot of the the most levered energy names, especially.

And then those that survived.

The even some tougher situations like and the theme park space or the cruise line space, They were able to extend maturities and and really bolster their liquidity profile for many years and so even those businesses are likely to default and the near term. So I think it's going to be a pretty benign environment for at least the near term and the credit markets were.

And Youll see low defaults low losses, and I would say generally speaking stable revenue up a couple percentage points, probably from 2020 sorry.

For 2022 versus 2021.

And then I will.

I think generally speaking of more meaningful increase in cash flow.

And then what the revenue line would indicate given some costs that have come out.

Really helpful. Thanks, very much for answering my questions.

The problem. Thank you.

As a reminder, if you have a question. Please press Star then 1.

Our next question comes from Ryan Lynch with JP the video please.

Go ahead.

Okay.

Good afternoon, and thanks for taking my questions.

First 1 just has to do with <unk>.

Your guys' decision to swap out the interest rate on the.

On the new unsecured notes into a floating rate interest rate.

Can you talk about what was what was driving that decision was it wasn't and overall call on what you guys think short term rates are going to do what's the just an attractive swap rate or are you guys just trying to better match.

Match fund the composition of the assets and then.

The second part of that question.

Can you or is there any desire to also swap out the rate on your 2025 notes.

Hey, Ryan and fast and.

That's what I got.

Thanks for your question so the.

And.

The the main impetus and swap and it was really just the match our assets and liabilities.

Most of our assets not not all of the most are floating rate and LIBOR based.

The decision on swap and really just the to match assets and liabilities.

It was also just kind.

And to be.

Very attractive time, both and the swap market and the interest rate market to swap it out but it was.

And that was the benefit but the main goal, which is the match assets and liabilities.

As it relates to the 25 notes, we did not swap does.

And again, primarily just the asset and liabilities, we have we have some some fixed rate assets.

So keeping some fixed rate liabilities fixed rate assets maintenance also at the time, just the kind of the technicals and the swap market.

The debt swap just less less attractive versus kind of the technicals.

For the 2027 notes when we swap them.

And then just south of the design level, you were able to swap the huh.

The notes from a flow.

The rate that's inside of our bank credit facility, So that was announced with just the.

The very attractive feature of the keywords.

We like the where interest rates were and forwards where and this is what market.

But net net it was really all of this is driven by kind of asset liability matching.

Okay. So the.

2000.22025.

Probably not be swapped and the future is that fair.

At this time I would not anticipate them being swapped okay.

Got you and then.

Just a question on kind of of the overall kind of market activity, obviously at the very active market.

So there's a lot of activity going on which which could increase the level of repayments in your portfolio.

And with the selective market approach that you have kind of and.

Investing in those less traffic the areas non sponsor deals and I know you said, yet you have a pretty decent pipeline.

But I'm just wondering how do you guys think about growing the portfolio given those 2 dynamics as well as you have of $142 million of lower price loans.

And so that's another kind of conflicting factor that you guys.

Have a desire to get out of those loans.

But the basket come at the cost of portfolio of growth. So how do you manage all of those factors while trying to also maintain.

<unk>.

Our leverage level within your targeted range.

Those are of minutes of its a great question.

So I would say the following.

Yes.

We do receive repayments from time to time and even in the quarter.

We received some unexpected repayments in.

A couple of situations for example, our William Morris.

And that we did last year, we originated it.

About a 5 point discount and repay debt.

At 111 in the quarter. So it happens from time to time and and we would expect.

Just given the nature of our highly structured loans that we would get some participation in excess of par when that does happen and so it's both an opportunity and a challenge.

And to redeploy however.

However, I would say by and large our experience. This year. So far has been that as we have originated new loans we.

Have we haven't been.

Saddled with a lot of unexpected repayments, we are our repayment activity of our exits during the quarters. This calendar year have really been at our option, where we have sold.

Publicly traded securities that debt.

We're at lower yields or had rallied and that we had bought during the pandemic and had rallied this year and we were redeploying into.

Or wider spread.

Divot 1 so.

You know it hasnt been a problem I guess is what I would say up until now we haven't really.

Seeing a situation, where we had these mass repayments that of that of hurt us on on keeping our asset level high.

That could change and I would I wouldn't want to hazard, a guess as to how or when or what or what volume. It would change, but you should know that the way. We're operating is generally speaking we are first looking to a lower yielding portfolio as of as a source of cash to fund our private loan.

Pipeline.

And then you would be looking to modestly increase leverage.

And if we get repayments that we understand that that's the name of the game, but given.

And the nature of a lot of our deal flow being non sponsor.

And with significant call protection of either non call protection or elevated call protection for multiple years, we have a little bit more of a moat around us we're not we're not completely immune from repayments, but but we.

We don't have kind of generally speaking unfettered ability to get repaid on our portfolio and a very rapid clip. So.

And we're managing it as best as we can but it hasn't been an issue yet, but we can't really make predictions about the future.

Okay, and just the just a follow up on that.

Of the $142 million of kind of lower yielding loans do you have on your balance sheet and the $79 million of lower yielding loans and the jbs are those mostly broadly syndicated loans for you guys can sort of exited at any time as long as you guys like the price levels.

For those low debt that you guys are mostly just waiting for.

Right.

Of accident of those position basically I'm, just wondering how much control of the half on the exit of those.

From a liquidity standpoint.

Yes, generally they are broadly syndicated loans that are tradable with pretty liquid market. Okay.

Okay.

Alright, I appreciate the color and and the discussion today, that's all for me.

Thank you.

And.

This concludes our question and answer the question I would like to turn the conference back over to Michael of TTM for any closing remarks.

Thanks functionality 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, and the investors section or by dialing 8.7 and 7.3 for for 75 to 9 for U S callers or 1 for 1.2.

3170088 for non U S callers with the replay access code 101, and 5.8% 1.7 and for beginning approximately 1 hour. After this broadcast.

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

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Welcome and thank you for joining Oaktree specialty lending Corp.

The quarter 2021 conference call.

Today's conference call is being recorded.

At this time all participants are in English.

And on the mode.

You'll be prompted for a question and answer session. Following the prepared remarks.

Now I would like to introduce Michael and the teacher of and next generation and will host today's conference call.

And that's too much can change the name again.

Thank you operator, and welcome to Oaktree specialty lending Corporation's third fiscal quarter conference call. The 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 or.

Our speakers today are Armen, <unk>, Chief Executive Officer, and Chief Investment Officer, Matt <unk>, President and Chief operating Officer, and Mel Carlisle, 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.

Ability to realize the anticipated benefits of the merger 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 SEC filings for a discussion of 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 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 of the information that it shares on its website.

With that I would now like to turn the call over to Matt.

Okay.

Thank you Mike and welcome everyone. We appreciate your interest in and support of Ocs L and we hope everyone listening as well.

We continued to build momentum throughout the third quarter generating strong origination activity and maintaining excellent credit quality. We again grew NAV produced record earnings and increased our dividend.

Importantly, our NAV continues to exceed its pre COVID-19 high and is up more than 9% from the end of calendar 2019.

Adjusted net investment income per share with 19 of.

Up from 14 and for the prior quarter driven by higher adjusted investment income that included higher prepayment fees and OID acceleration.

Based on the ongoing earnings growth and strengthening earnings profile, our board increased our quarterly dividend by 12% to 14 of the half cents per share. This marks the fifth consecutive quarterly increase and of 38% increase from a year earlier the dividend is now up 53% from its pre COVID-19 run rate.

And of 9 and a half set.

Looking at the portfolio of more detail, we made of $107 million to $8 million of new investment commitments.

Of these nearly 80% of of first lien loans and included a $104 million and private transactions $70 million and the new issue of primary market and $5 million and secondary market purchases, notably robust origination activity continued into July giving us a great start on the current quarter.

Armen will discuss this more and a few moments.

And we received $171 million from Paydowns and exits in the quarter. This included our position and William Morris endeavor, which generated $7 million of prepayment income that contributed to earnings.

We also exited some low yielding investments and made further progress on the exiting non core investments monetize a $19 million across 3 equity positions non.

Non core investments represented just 6% of the portfolio at fair value at quarter end.

The weighted average yield and a new debt investment commitments with an attractive 9.2% and compares favorably to the average yield of 6.1% on investments that we exited.

As we selectively invest our credit quality remains exceptional there were no investments on non accrual at quarter and.

I also want to highlight sell of improvements made to the capital structure since the closing of the merger with the Ocs Si that further bolstered our funding flexibility and reduced our cost of debt capital.

First and May we issued $350 million of senior notes at a 2.7% coupon, which we subsequently swapped to floating rate at LIBOR, plus 166% and order to better match, the floating rate nature of the underlying investment portfolio. The.

And the ability to access the investment grade unsecured debt markets is the competitive advantage as it provides us with long term low cost and flexible debt capital.

Second we amended our syndicated credit facility, increasing the size to $950 million from $800 million and extending maturity by 2 years to May 2026.

Third we retired a higher cost of credit facility with pricing at LIBOR, plus 265% that was acquired from OS ESI.

Finally in early July we amended the city facility to reduce our cost of funding of some of our lower yielding quoted loans.

Overall, we are very pleased with our results and believe that improvements made to the capital structure position us well for future investment opportunities.

Before turning the call over to arm and we want to let you know that Mel has announced he will step down as CFO and treasurer of <unk> at the end of November to assume another senior management role within Oaktree.

Subject to the approval of <unk> Board of directors, we expect that Chris Macau, and managing director and Oaktree will become <unk>, CFO and treasurer effective upon mel's resignation.

<unk> currently serves as the <unk> assistant Treasurer and has worked closely with the mouth. Since we took over management nearly 4 years ago and the.

The meantime, now we'll work to ensure a seamless transition I want to thank bill for his many contributions to <unk> over the years and has played an important role on our leadership team and we of course wish them well and his new position at Oaktree.

Now I would like to turn the call over to arm and.

Thanks, Matt and good morning, everyone.

And it gets further advanced in the June quarter supported by a rebounding economy that pushed the equity markets. The all time highs and lead to further spread compression and declining default rates in the credit markets.

As the economy heats up we are watching inflation closely the consumer price index rose by 5.4% and the 12 months through June the fastest pace and over a decade, yet most investors don't appear overly concerned the yield on the 10 year Treasury declined by almost 30 basis points and the second quarter after jumping by rough.

The 80 basis points and the previous 3 months.

However, we also believe.

The investor Complacency, particularly with regard to the persistence of rising inflation poses a risk to credit markets.

Yes markets seem to view inflation is transitory and do not appear to be pricing and much risk to the downside.

In addition, while overall progress is encouraging the delta variant of the Corona virus is slowing economic reopening and parts of Asia, and Europe, and it could curb momentum and the United States.

Its ultimate impact on global demand remains the major unknown, even though investors appear to believe that the recent spread of the delta variance as only a minor of risk.

And in particular, we continue to focus on identifying opportunities and less trafficked areas of the market by lending to non sponsor owned businesses. We are leveraging oaktree 's ability to negotiate and structure customized private deals that provide downside risk protection by mitigating specific risks pertaining to the transaction and the issuer.

In addition, we continue to evaluate investments from the sponsor lending market focusing on partnering with select private equity firms that we think of and operational advantage and certain industries.

Now turning to the overall portfolio.

At the end of the third quarter, our portfolio was well diversified with $2.3 billion at fair value across 135 companies 8.

And 87 per cent of the portfolio was invested in senior secured loans, including 68% and first lien.

Median portfolio of company EBITDA at June 30 was approximately $102 million.

As we continue to lend to larger more diversified businesses.

Credit quality as Matt noted is excellent.

Moving on to investment activity.

Despite the more competitive market environment, we leveraged the oaktree platform to originate $178 million, new investment commitments across 9 new and 1 existing portfolio of company.

I'd like to highlight our investment and Meredith pharma as a strong example.

Meredith pharma as a pharmaceutical company dedicated to the development of innovative therapeutics to treat seizure disorders Oaktree partnered with Meredith to provide of $125 million commitment to support the company's upcoming clinical and commercialization activities and $15 million was drawn upon closing with the balance subject to certain milestones that must be met by the <unk>.

<unk>.

Oh, CSL is allocated $29 million and attractively priced 11, 5% fixed rate.

In total these deals were attractively priced with a weighted average yield of 7.7% and 90% were first lien loans.

When taken together with our June quarter originations the yield on new investment commitments was about 8.4%.

All told our strong liquidity, coupled with the resources of Oaktree positions us well to continue to find unique and compelling opportunities in both public and private investments.

Lastly, I want to Echo Matt's comments and thank Mel for his important contributions to <unk> and wish him all of the best and his new role at Oaktree.

Now I will turn the call over to Mel to discuss our financial results in more detail.

Thank you Armen good morning, everyone.

Before getting into the discussion of the financials I would just like the think arm and and that for their kind words.

I've been fortunate to have worked with such a great team here at CSL ever since Oaktree took over the management of the company.

While it is bittersweet to be leading the CSL and moving on within the Oaktree organization.

It is an ideal opportunity at this stage and my life and career.

I plan on staying through the end of November to help ensure a seamless transition. So you will be hearing from me again on our fourth quarter and your and call.

Before I turn to our financial results I want to remind you that last quarter. We introduced several non-GAAP measures to supplement our GAAP financials to make the Companys post merger financial results easier to understand and more comparable to our results prior to the merger.

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 the supplemental disclosures can be found in our earnings release and slide presentation.

Now to our financial results, which were once again quite strong.

After removing the merger related accretion total investment income was $60.4 million up from $41.3 million and the prior quarter.

The $19.1 million increase was mainly due to a full quarter of earnings from Ocs size of investment portfolio, and approximately $7 million and prepayment fees and OID acceleration related to the WMD payoff.

Net expenses for the third quarter totaled $29.1 million up $5.3 million sequentially. The.

The increase was driven by higher interest expense and base management fees.

Mainly due to an increase and borrowings outstanding and a larger investment portfolio.

In addition, part 1 incentive fees were higher on a sequential basis, mainly due to the increase and investment income.

These increases were partially offset by lower accrued part II incentive fees.

During the quarter Ocs sell accrued a total of $2.8 million and part 2 incentive fees.

And this amount was mostly due to $16 million and net realized and unrealized gains and the portfolio during the quarter.

Excluding the $5 million loss due to the due to the merger accounting.

As a reminder, while GAAP requires us to take unrealized gains into account when accruing part 2 incentive fee expense each quarter or CSL will only pay part 2 incentive fees annually.

And to the extent that it has realized gains that exceed realized and unrealized losses at <unk> September 30 fiscal year and.

To date, we have of crude $16 million of part II incentive fees under GAAP. However, if part 2 incentive fees were hypothetically calculated as of June 32021, under the investment and under the investment Advisory agreement and the amount payable would have been $7.2 million.

Turning to credit quality, which continues to be excellent.

As Matt mentioned, we had no investments on non accrual at quarter end and all of our portfolio of companies made their scheduled interest payments.

Now moving to the balance sheet.

<unk> sales net leverage ratio decreased to 7.9 times from 8.4 times at March 31.

Reflecting the cash balance we had drawn to fund new investments in early July.

Net leverage is still slightly below our target range of <unk> <unk>.

8.5 times to 1.0 times.

As of June 30th total debt outstanding was $1.1 billion and had a weighted average interest rate of 2.4%.

Unsecured debt represented 58% of total debt at quarter end of.

Up from 27% as of March 31.

Following our 2027 note offering.

At June 30, we had total liquidity of approximately $720 million, including $85 million of cash and $636 million of undrawn capacity on our credit facilities.

Unfunded commitments ex <unk>.

Excluding the unfunded commitments to joint ventures were $239 million.

With approximately $166 million of this amount of eligible to be drawn immediately.

As the remaining amount is subject to certain milestones that must be met by portfolio companies.

As Matt noted during the quarter, we made several improvements to our capital structure and.

I won't repeat them, but I do want to reiterate that these actions further improved our funding flexibility and meaningfully reduced our interest cost.

Now turning to our 2 joint ventures.

The Kemper JV had $387 million of assets invested in senior secured loans to 57 companies.

This compared to $352 million of total assets invested and 55 companies last quarter.

Assets increased mainly due to the increase.

And the market value of its investments and net portfolio growth as purchases exceeded sales and repayments.

As a result of the underlying portfolio appreciation ocs sales investments and the JV written up by $3 million or 2% from the prior quarter to $133 million.

Leverage at the JV was 1.4 times at quarter end up slightly from 1.3 times and the March quarter.

Given the strong balance sheet and earnings power of the Kemper JV Ocs they'll received a 450000 dividend this quarter.

We anticipate we will receive a dividend and this amount going forward.

Okay.

The Glick JV had $148 million of assets at June 30th.

These consisted of senior secured loans to 38 companies.

Leverage at the JV was 1.1 times at quarter end.

Ocs sales subordinated note and the Glick joint venture totaling $55 million continues to be current.

We expect to receive ongoing coupon interest and principal repayments of approximately $1.3 million per quarter on a run rate basis going forward.

In summary, we're very pleased with our financial results this quarter and believe our diverse and flexible balance sheet positions us well for the future now and I will turn the call back to Matt.

Thank you and that we can.

Continued to build momentum and position <unk> for stronger returns.

I wanted to take a few moments to highlight some investment performance metrics that we believe demonstrates the value of that Oaktree brings to ocs L and what differentiate us from our peers first our ability to grow NAV and dividends over the course of the pandemic and since taking over management has been exceptional as I mentioned the earlier.

Our NAV is up over 9% from its pre pandemic high in December 2019.

We also have increased our dividend for 5 consecutive quarters and it has grown by 53% from it from its pre pandemic run rate.

Taken together, our CSL has generated and attracted 12% annualized return on equity since December 31.2017.

Our strong performance is due in part to our ability our ability to invest and add value during market dislocations and challenging times.

As you May recall, we were actively investing during the market volatility and the spring and summer of 2020, investing and a range of opportunities spanning the public and private markets, including rescue financings the companies need of liquidity or a customized financing solution.

Our loan to William Morris endeavor, which was repaid this quarter was 1 such example.

Our willingness and ability to step in and and respond during that volatile and uncertain period has really paid off we generated a 27% IRR on $376 million of investments funded the cost from March 1.2020 through September 30 of 2020 based on realizations to date and using June.

Dirty valuations and positions that we still hold.

Over half of these COVID-19 originations have been fully realized.

And finally since we took over management, we have generated a gross unlevered IRR of 13, 4% to $8 billion invested and Oaktree originated investments. We are proud of this accomplishment as it demonstrates the power of the Oaktree platform and our ability to actively invest both in periods of market.

<unk> and distressed that being said, we continue to see a number of opportunities to further increase returns overtime.

As of quarter end of $142 million of senior secured loans suppressed priced at or below LIBOR plus 4.5 per cent remained and the portfolio including.

Approximately $67 million of loans that we acquired in the OS CSI merger.

Our new investments during the quarter came in at attractive yields which means that there was significant improvement and yield on that portion of the portfolio that can be realized over time.

Another opportunity for us to increase our ROE is by deploying more leverage at the portfolio level.

As of June 30, our net leverage was below the low end of our long term target of 8.5 to 1 we would expect to continue to enhance returns as we make incremental investments and the play higher leverage. However, we will only grow the portfolio as we find opportunities that are consistent with our investment approach and that we believe offer attractive.

Reward.

And also have the opportunity to further optimize both of our joint ventures.

The CSL and the only 3 years, which we anticipate will continue going forward.

<unk>, we are already realizing synergies from the merger with the Ocs side, which we believe will benefit our <unk> going forward and addition of the fee waiver and expense savings and made good progress and the June quarter on streamlining our capital structure to reduce our overall cost of capital while enhancing our funding flexibility and conclusion, we are very pleased with that.

Our strong third quarter results, we remain excited about our future prospects and are optimistic that we will continue to be able to identify new attractive risk adjusted investment opportunities, enabling us to deliver improved returns for our shareholders.

Thank you for joining us on today's call and for your continued interest and Ocs L. With that we're happy to take your questions. Operator, Please open the lines.

We will now begin the question and answer session to ask a question you made the Star then 1 on your Touchtone phone.

And are using a speakerphone please pick up your handset before pressing the keys.

And that anytime your question has been of interest and you would like to withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble the roster.

The first question comes from Finian O'shea with Wells Fargo Securities. Please go ahead.

Hi, good morning, everyone and congrats on the quarter.

And I guess for a question for matter of arm and.

I wanted to ask about.

And 1 of the larger loans suite of this quarter with Pearl site.

And and tied into some of your introductory or more recent comments Matt on.

Your willingness to.

Lean into the market be opportunistic for shareholders as you certainly have done and.

In the past and.

And.

In contrast to generally not.

Jumping into these.

Large well.

Well marketed or trafficked sponsor.

Deals.

Large cap typical direct lending down the fairway deals something you've obviously.

<unk> been very selective and.

If you follow.

Where did the sort of fit into.

Yeah, the the compelling proposition for shareholders was was this.

And just 1 of those very very high quality deals that the sponsor wanted to go private and called you up and and it was just the very good opportunity.

Or was this more of a deal where.

You really.

And pursued.

Helps create the deal pursuit of the transaction.

As you would more typically with the say something non sponsor or lower middle market sponsor.

I apologize that was a bit long winded if you follow.

Hey, and fitness arm and I do follow up and I appreciate the question.

So I would say the <unk>.

Total site deal in particular and sort of in between we are of very close relationship with Vista.

And in the case of portal side, we felt that that was coming through it is not a deal that we reversed and to Vista and said Hey, you know you really ought to go buy floral side of it is public company you should take a look.

It was the deal more of that.

Vista was and pursuit of it called us up as of close relationship and ask those early whether we would be interested and in participating and so we were kind of around the hoop for a pretty long time and and if you follow some of the.

Historical.

Bidding that was known and the public market over the last several months.

We were sort of this does hip knowing what was happening.

Every step of the way.

It is not however, a center of the fairway sponsor deal.

This is the recurring revenue software deal I know more people are doing that but this is the LIBOR plus 800 with the 1% floor first lien.

And I compare that with them or center of the fairway sponsor deal at LIBOR, plus 475% to 600, depending on whether it's for true first lien or unit tranche. So meaningfully wide of what the sponsor deals are typically pricing.

And the universe of investors that are comfortable with the recurring revenue software deals.

And if we lower than just more traditional debt to EBITDA for cash flow oriented lenders. So it's not a non sponsor situation where it is bespoke. It is oaktree driving the process, taking down all or most of the loan.

But it's also not this highly trafficked highly competitive middle market sponsor deal and the pricing kind of shows through the other thing that show through as Vista.

Vista paid a pretty hefty price for floral side and recognition of the value that the business has and the growth prospects that it has.

And as a result wrote and equity check that was roughly 70%, maybe a little bit more than 70% of the total enterprise value you don't really see that and typical of middle market sponsor deals for us.

The sponsor as well as the size of the sponsor checks are part of the underwriting process theyre not dispositive of making the investment decision at all but when we do see of well heeled sponsor that is vertical that of deep vertical expertise and the in that industry.

And they're willing to put their money where their mouth is we decided to take a pretty hard look when those things line up and and sometimes they'll work for us they often don't the date, but they sometimes will and in the case of Vista. We are of very good relationship and history with investing and their deals and felt compelled to invest and this 1.

Thank you it's of.

Very helpful and I guess, the sort of a follow on there I think Matt also mentioned a pretty healthy.

The pipeline and activity in July.

You know the there are at least the good handful of of similar such deals.

Going on out there right now too to our observation.

Are you you know.

And a lot more of these or is your is your post quarter back to sort of.

The.

The more typical oaktree.

Life science so forth.

You're talking of specifically for July or kind of looking forward.

I guess, just more broadly pipeline right now.

Look I mean, our recurring revenue software deals as you know.

Under 10% of our portfolio, we're not looking to meaningfully add to it but we'll take a look at the deals that are that are appropriately structured for.

On the covenant standpoint appropriately structured from a from a capital structure standpoint.

I Wouldnt expect for us to the.

You know chasing a whole bunch of these deals going forward.

But.

We also don't have this macro overlay, saying that we will no longer be doing these deals are or that we are topped out either we were a bottoms up credit and that's.

And the shop and there will be deals that come through that might be of recurring revenue might be life sciences and otherwise.

So.

And we did we do and did have.

Our life Sciences deals in July we have a few that we're looking at and the pipeline, but I wouldn't say, they're high probability right now at least and the life sciences space, but it's pretty well diversified.

And across a variety of different industries.

Good amount of non sponsor some sponsor deals as well but.

Not the traditional LIBOR, plus 475% or 501st lien deals. They just tend to be the sponsor deals that are a little bit wider for for whatever reason.

And our sponsor that the close relationship of the firm I would say that's the characteristic of the sponsor deals that we do but we're finding after a fairly quiet second calendar quarter that a lot of the deal flow that we have been working on and the first half of the of really.

And really heated up in July and <unk> and the pipeline is pretty robust as we sit here and looking forward.

Hard to determine given so much of our deal flow is non sponsor and its hard to determine how much of that closes and August or September we're never but we certainly have.

The pipeline in the and the first few weeks of August I would expect we'll close and will be another we'll round out to a pretty solid.

Third calendar quarter or as our fourth fiscal quarter of pretty solid origination.

Great. Thanks, so much congrats on the quarter and to Mel as well.

Thank you.

Our next question comes from Devin Ryan with JMP Securities. Please go ahead.

Okay great.

Everyone first question, if we just look back over the past year I believe median debt portfolio of company EBITDA has come down from the $150 million to $160 million range to now just.

North of a 100 million over the past couple of quarters and more recently.

We think that's at least partially the result of the O CSI merger, but that's probably not entirely. So I'm. Just curious if you can give a little more color on what's driving the change of scale of borrowers or anything else related to that thank you.

Sure that and this is <unk> and so.

The answer is that as we over the last 12 months have tried a lot of interesting opportunities and true privates.

We have rotated out of publicly traded positions like broadly syndicated loans for example that are to bigger borrowers, but lower yields and we've cycled out of those lower yielding situations into true privates that are higher yielding but the businesses are a little bit smaller and the true private area. So that's what's driven the and the average lower it's really a <unk>.

Patient out of predominantly broadly syndicated loans.

And and into higher yielding situations, that's partially why the average yield of the portfolio has kind of crept higher.

Yes, okay.

Great color, Thanks, and then.

Just the follow up here. So clearly you have been able to grow investment income nicely, while also maintaining our relatively low leverage.

And just in the current environment do you expect the stay at the lower end of your target range of.

Net leverage and the 5 to 1 time and suggest that youre at just under that the 0.79 times right. Now. So I guess do you have an appetite to grow leverage over the next few quarters.

How should we think about where you want to be.

And that range, just given the current opportunity set and the risk reward as well.

Yes, I mean, we feel comfortable with to be operating within that range I know that we're currently just below the low end of the range.

We.

And your intuition is right, though that given the market conditions.

Especially and sponsor oriented lending being as tight and as and as competitive as they are that.

Oaktree is probably not going to be.

And a hot and heavy sponsor lender and driving with originating those types of loans and driving leverage higher.

With that said, though our non sponsor pipeline is pretty strong and I would expect that our leverage will tick modestly higher I don't think that we will be blowing through the high end of the range but.

I would expect debt our leverage levels will be stable to modestly higher from here and we will be operating within the range, but probably.

On the lower and for at least the next few months, it's hard to predict what deal flow it looks like going forward or market conditions.

The present, but.

With the visibility we do have our expectation would be a modest increase of leverage.

Yeah, Okay perfect I appreciate that I will I'll leave it there thanks guys. Thank.

Thank you.

The next question comes from Qiagen, that's net.

Please go ahead.

Hey, good morning, Congrats and I am very good quarter.

Thanks Kyle.

I mean the law.

Loaded question.

So if.

If we walk through pre pandemic through the pandemic and then today I think the the.

The competitive dynamic would show as being back to the types or even inside of the pre pandemic types of the market.

A lot of that is driven by AUM growth within the direct lending landscape there have been.

Pretty creative vehicles.

<unk> by investment managers that have had meaningful growth over the last 12 months and and we've seen that impact the market, especially the more traditional first lien and 4 to 5 times leverage part of the sponsor lending market and to put some numbers around it I would say that pre pandemic a true.

Additional first lien.

Something like 4 to 4.5 turns of leverage would have priced around LIBOR plus 500, maybe.

As long as LIBOR, plus 475 to as high of 525 or $5.50 for more risky situations, but LIBOR for 500, 525 was sort of a good indication pre pandemic.

And obviously that blew out after March of 2020, there really wasn't much activity and the second calendar quarter.

But then and the third and fourth calendar quarter of the market came back strong and with the growth of AUR and and direct lending and vessel managers we've seen.

Yields and economic terms of the legal terms are deteriorating and in that part of the market, especially.

And at this 0.1st lien for before and after the leverage with the good sponsor.

LIBOR plus 475, we're seeing it all day long, we're rarely seeing anything.

That is $5.50 and.

And that area similar story and unit tranche unit for hours was LIBOR plus $575 to 700 pre pandemic.

Youre now seeing LIBOR of plus $5.50, and even pressure to bring that even lower and unit tranche. So LIBOR plus $550 of maybe 625 or 600, and where we're seeing units right and so I would say it's back to pre pandemic types or even tighter at this point.

In the and the more traditional sponsor area. The other reason for the competitive dynamic is that with the expectation that rates were going to rise and that was sort of the market convention or market belief and earlier this year of February through April and.

And we did see a lot of inflows into floating rate accounts, such as broadly syndicated loan accounts Etfs.

Hello funds and so there was a lot of CLO issuance and the broadly syndicated loan.

Asset class, which is the adjacent area of finance for private equity sponsors for.

And for larger deals they consider the alternatives of going with the broadly syndicated loan.

Versus a direct loan and as that AUM increase and CLO formation was.

Abundant as it was we saw tighter pricing and broadly syndicated loans, which in turn drove down the direct lending.

Yields as well.

And so there is there is a lot of pressure.

And the market.

Yeah, that's very helpful.

And then 1 follow up for me and obviously your credit is very strong, but and he can give us a sense for.

And that's a good question Karl so.

Our largest industries or and this is not.

This is not predicted but our largest industries through the pandemic.

Software and life Sciences, and those happen to be the industries that were most stable or improving through the pandemic.

And that helps us a lot with.

Experiencing lower volatility and our existing portfolio and created the opportunity along with lower lower leverage and our and our bdcs to be.

It would be more opportunistic and.

And especially in the secondary market and and really driving NAV growth over the last 12 months.

So I would say that our portfolio actually performed remarkably well through the pandemic, we definitely had a handful of names of small handful of names that were impacted.

Very directly.

By the pandemic for I would think I would say the.

The the most challenged business, where these indoor trampoline parks circus tricks.

And.

They went to the being completely shut down and at this point there are roughly 75% to 80% reopen now.

So we're even and the pandemic impacted names, we've seen significant improvement and performance and in our non pandemic impacted names. If performance has been really stable or life sciences companies are doing well, our ikea and software businesses are doing more than just well.

And so where we are knock on wood pretty thankful of the performance of the businesses and our portfolio over the last 12 months.

I would expect just given.

Generally.

Speaking in the market. So this isn't this isn't necessarily a part of our portfolio, but we obviously have a very large credit business below investment grade credit business at Oaktree, and tradable tradable credit and high yield bonds senior loans et cetera.

And so we see what how companies are performing broadly and I would say generally speaking companies are doing better than they were in 2020 part of pretty wide margin.

And as compared to 2019, there is still a little bit down generally again on the revenue side and EBITDA side, but what I would say as most companies that we track took out a lot of costs in 2020 that I don't think come back fully when the when the economy is fully reopened and.

And which case I would expect for modest revenue growth and 2022.

Generally speaking and the and the below investment grade issue of market with more meaningful growth and EBITDA.

And then what we had seen previously.

And I would also expect a pretty muted experience and defaults and losses and the tradable credit markets, mainly because of the most challenged credits actually exited the benchmark indices.

Market in 2020, because they defaulted and that's true of a lot of the the most levered energy names, especially.

And then those that survived.

Even the even some tougher situations like and the theme park space or the cruise line space. They were able to extend maturities and really bolster their liquidity profile for many years and so even those businesses are likely to default and the near term. So I think it's going to be a pretty benign environment for at least the near term and the credit markets were.

Youll see low defaults low losses, and I would say generally speaking stable revenue up a couple percentage points, probably from 2020 sorry.

The 2022 versus 2021.

And then I would think generally speaking of more meaningful increase in cash flow.

And then what the revenue line would indicate given some costs that have come out.

Really helpful. Thanks, very much for answering my questions.

No problem. Thank you.

As a reminder, if you have a question please press star.

And then 1.

Our next question comes from Ryan range with JV that from you. Please go ahead.

Okay.

Good afternoon, and thanks for taking my questions.

First 1 just has to do with.

Your guys' decision to swap out the interest rate on the.

On the new unsecured notes into a floating rate interest rates.

And match fund the composition of your assets and then as the.

The second part of that question.

Can you or is there any desire to also swap out the rate on your 2025 notes.

Hey, Ryan is that the.

Thanks, and thanks for your question so the.

The the main impetus and swap and it was really just the match our assets and liabilities.

Most of our assets not not all of the most are from floating rate and LIBOR based and so the decision on swap and really just the to match assets and liabilities.

And also just just happens to be.

Very attractive time, both and the swap market and the interest rate market to swap it out but it was.

And that was the benefit but the main goal, which is the match assets and liabilities.

As it relates to the 25 notes, we did not swap does.

And again, primarily just the asset and liabilities, we have we have some some fixed rate assets.

So keeping some fixed rate liabilities fixed rate assets made sense also at the time, just the kind of the technicals and the swap market.

And that swap just less less attractive versus kind of the technicals.

For the 2027 notes when we swap them.

And then just your thoughts of the design level, you were able to swap the huh.

The notes from our float.

The rate that's inside of our bank credit facility. So that was also just.

Very attractive feature of the keywords.

And we looked at where interest rates were and forwards where and this the swap market.

But net net it was really all of this is driven by kind of asset liability matching.

Okay. So the.

2000.22025.

Probably not be swapped and the future is that fair.

At this time I would not anticipate them being swapped.

Yes.

Got you and then.

Just a question on kind of the overall kind of market activity, obviously at the very active market.

So there's a lot of activity going on which which could increase the level of repayments in your portfolio.

And with the selective market approach, if you have kind of and.

Investing in and those less traffic the areas non sponsor deals and I know you said, yet you have a pretty decent pipeline.

But I'm just wondering how do you guys think about growing the portfolio given those 2 dynamics as well as you have of $142 million of lower price loans.

And so that's another kind of conflicting factor that you guys.

Have a desire to get out of those loans.

But for the basket.

But the cost of portfolio of growth. So how do you manage all of those factors while trying to also maintain.

<unk>.

Our leverage level within your targeted range.

Those are of minutes of great question.

So I would say the following.

Yes, we do receive repayments from time to time and even in the quarter.

We received some unexpected repayments in.

A couple of situations for example, our William Morris.

And that we did last year, we originated it.

About a 5 point discount and repay debt.

At 111 in the quarter. So it happens from time to time and and we would expect.

And just given the nature of our highly structured loans that we would get some participation in excess of par when that does happen and so it's both an opportunity and a challenge.

And to redeploy however.

However, I would say by and large our experience. This year. So far has been that as we have originated new loan we.

Have we haven't been.

And saddled with a lot of unexpected repayments, we are our repayment activity of our exits during the quarters. This calendar year have really been at our option, where we have sold.

Publicly traded securities that debt.

We're at lower yields or had rallied and that we had bought during the pandemic and had rallied this year and we were redeploying into.

Or wider spread.

Divot 1 so.

You know it hasnt been a problem I guess is what I would say up until now we haven't really.

Seeing a situation where we've had these mass repayments that of that of hurt us on on keeping our asset level high.

That could change and I would I wouldn't want to hazard, a guess as to how or when or or what or what volume. It would change, but you should know that the way. We're operating is generally speaking we are first looking to a lower yielding portfolio as a source of cash to fund our private loan.

Pipeline.

And then would be looking to modestly increase leverage.

And if we get repayments that we understand that that's the name of the game, but given.

And the nature of a lot of our deal flow being non sponsor.

We don't have kind of generally speaking unfettered ability to get repaid on our portfolio and a very rapid clip. So we're managing it as best as we can but it hasn't been an issue yet, but we can't really make predictions about the future.

Okay, and just the just a follow up on that.

Of the $142 million of kind of lower yielding loans do you have on your balance sheet and the $79 million of lower yielding loans and the jbs are those mostly broadly syndicated loans for you guys can sort of exited any time as long as you guys like that but the price levels.

For those low debt that you guys are mostly just waiting for.

Right.

Of accident of those position basically I'm, just wondering how much control of the Avalon and the exit of those.

From a liquidity standpoint.

Yes, generally they are broadly syndicated loans that are tradable with pretty liquid market.

Alright, I appreciate the color and and the discussion today, that's all from me.

Great. Thank you.

Yeah.

This concludes our question and answer the question I would like to turn the conference back over to Michael of TTM for any closing remarks.

Ex fashion IV and thank you all for joining us on today's earnings conference call. A replay of this call will be available for 30 days I know the <unk> website, and the investors section or by dialing 8.7 and 7.3 for for 75 to 9 for U S callers or 1 for 1.2.

And 3170088 for non U S callers with the replay access code 101, and 5.8% 1.7 for the beginning approximately 1 hour. After this broadcast.

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

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