Q2 2022 Oaktree Specialty Lending Corp Earnings Call

May 5, 2022

[music].

Welcome and thank you for joining Oaktree specialty lending Corporation's second fiscal quarter of 2022 conference call.

Today's conference call is being recorded.

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

But will be prompted for a question and answer questions. Following the prepared remarks.

Now I would like to introduce.

Michael <unk> head of Investor Relations.

Today's conference call Mr. Mr. Shaw you may begin thank you operator, and welcome to Oaktree specialty lending Corporation's second fiscal quarter Conference call. Our 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 today are Armen, <unk>, Chief Executive Officer, and Chief Investment Officer, Matt <unk>, President and Chris Macau, Chief Financial Officer and Treasurer.

Also joining us on the call today for the question and answer session is not Stewart Chief operating officer.

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 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 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 thought.

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 web site.

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

Thanks, Mike and thank you to everyone for joining the call today.

Oh CSL generated solid results in the second quarter adjusted net investment income was up supported by higher prepayment fees and we increased our dividend for an eighth consecutive quarter, we produced robust origination activity, including several new investments in the attractive life sciences sector, while maintaining the portfolio.

Excellent credit quality adjusted.

Adjusted net investment income per share was <unk> 18 for the quarter compared with 17% for the prior quarter.

And the momentum we steadily build throughout the calendar year 2021.

Earnings were supported by the portfolio's improved yield and larger size higher prepayment fees and OID acceleration related to investment exits as well as modestly lower professional fees.

Based on the strength and consistency of our earnings our board increased the quarterly given by 3% to $60.05 per share.

Dividend is now up more than 70% from its pre COVID-19 level.

Reported NAV per share of $7.26 down 1% from the prior quarter. The decrease was primarily driven by the impact of wider credit market spreads and associated mark to market price declines.

We also experienced a modest decline in the valuation of certain equity investments given the broader stock market volatility.

Now turning to the portfolio, we originated $228 million of new investment commitments in the second quarter.

The 72% were first lien loans consistent with the prior quarter and included $162 million in private transactions and $26 million in the new issue primary market.

So took advantage of some volatility in the liquid credit markets by purchasing $40 million of discounted loans and bonds and average versus purchase price of 96%.

The weighted average yield on all of the new debt originations in the quarter was eight 7% up from eight 1% the prior quarter.

Drawing upon the power and reach of the Oaktree platform and our team's deep experience investing across multiple cycles. We expect to continue identifying compelling investment opportunities as always we will focus on deals that are structured and priced attractively.

We received $180 million from prepayments pay down an exit in the second quarter. The average yield of investments that we exited was eight 2% our noncore portfolio continued to run off as we're able to monetize $3 million across three equity positions at slight gains their previous fair values.

This book represented $86 million at the close of the quarter or about 3% of the portfolio at fair value.

Credit quality remains consistent strength with disciplined underwriting we invest selectively across a wide range of opportunities. This allows us to identify compelling low risk opportunities underscoring. This we had no investments on nonaccrual at the close of the second quarter.

Certainly we continue to be rated investment grade by both Moody's and Fitch and we maintained borrowing flexibility and ample liquidity to meet funding needs.

Finished the quarter with $455 million of Undrawn capacity under our credit facilities and $39 million of cash.

The weighted average interest rate on debt outstanding was two 5% in the March quarter, our monthly from two 3% the prior quarter due to higher LIBOR.

In February we entered into an equity distribution agreement for an at the market equity program. During the second quarter. We sold two 6 million shares under this program at a slight premium to NAV generating net proceeds totaling $19 $4 million after giving effect to sales agents commissions and operating expenses.

We believe this program has a cost efficient way to raise equity capital over time, and we will continue to utilize it when.

When market conditions are favorable.

With that I'll turn the call over to Armen.

Thanks, Matt and Hello, everyone I'll begin with comments on the market environment and continue with some additional highlights from our fiscal second quarter.

Overall credit quality held strong throughout the quarter supported by broadly favorable conditions, including low unemployment and steady demand for products and services across sectors.

That noted potential uncertainties remain from the lingering impacts of the pandemic on supply chain.

Surging costs.

The U S inflation rate reached a 40 year high in March.

Warranty brain in western government sanctions against Russia, and protest with the conflict curtailed global oil supply and exacerbated already high gasoline costs. There's conflict has also disrupted already fragile supply chains and boosted other commodity prices, putting even more pressure on the fed to bring down the elevated inflation rate.

At the same time Corona virus flare ups in China, and its renewed restrictions on business and travel threatened to further disrupt supply chains potentially adding to inflationary pressures yes.

Against this backdrop the fed started to raise short term interest rates in March to taper demand and who will be economy and while markets are widely expected these and future rate hikes uncertainties surrounding the pace of tightening and the economic implications of the war created volatility in the calendar first quarter.

<unk> impacting credit spreads across all sectors and leading to the modest write down in our portfolio.

Historically in periods of fed tightening the risk of recession increases given the possibility that policymakers may overreach, raising interest rates too much or too quickly.

At Oaktree, we don't invest based on macroeconomic predictions, but we do believe that it is important to pay attention to the major forces impacting securities markets, the economy industries and individual companies.

If this volatile environment intensifies and causes market dislocations, we are well prepared to act.

Hopefully <unk> roots are in opportunistic credit investing and we have demonstrated over the years, our deep expertise in investing in these types of markets.

This environment May also lead to an increase in demand for private credit solutions debt issuance in the private markets reached record highs in 2021 and is expected to be robust. This year, partly due to the abundance of capital raise to support M&A activity.

However, rising interest rates declining valuation multiples and ongoing inflationary pressures could reduce piggyback deal flow over the near term.

While issuers may favor private over public funding sources to due to the ongoing volatility in public markets competition to provide private financing may be significant.

<unk> opportunities may therefore be found in the non sponsor backed market in situations, where the required financing solutions are bespoke assets are difficult to value and sector specific expertise is rewarded.

And there is less crowded segment of the market, we believe that our scale and capacity to make complex loans as a competitive advantage and can lead to superior investment results.

We also remain focused on identifying deal flow in the life Sciences and technology industries, we expect to see a steady stream of lending opportunities in these sectors as applied Sciences, and digital commerce continued to gain prominence throughout the global economy.

In summary, we are actively but judiciously investing working diligently to make sure that we control risk while delivering strong returns for our shareholders.

Now turning to the overall portfolio.

At the close of the second quarter, our portfolio was well diversified with more than $2 6 billion at fair value across 146 companies.

86% of the portfolio was invested in senior secured loans with firstly loans, representing 69% of the portfolio.

This reflects our emphasis on being at the top of the capital structure.

Nearly 90% of our loans are floating rate positioning us well for rising rates.

As you know we have been lending to larger more diversified businesses to lower risk and bolster credit quality median portfolio company EBITDA at March 31 was approximately $118 million.

Underlying leverage at our portfolio companies was approximately five times lower than middle market leverage multiples, which are near historical highs at around five six times.

The portfolio's weighted average interest coverage is strong at approximately three times, meaning our borrowers are well positioned for a rising interest rate environment.

Moving on to investment activity, our $228 million of new investment commitments were spread across 16, new and nine existing portfolio companies in the second quarter of the 24 portfolio companies, we invested in during the quarter, knowing where private deals three were primaries and the remaining 12, where secondary purchases, which were generally smaller in size.

And purchased at a discount to par.

Our ongoing progress in the life Sciences sector was particularly pronounced in the March quarter, we invested a total of 62 million to three companies that are well positioned for growth in this sector.

These included Intercall, a provider of health care supply chain and emergency preparedness infrastructure services to government and commercial customers.

In Perl, our commercial stage Biopharma company focused on developing transformative therapies for people suffering from central nervous system diseases.

And Si <unk> materials science and advanced material Sciences company that has invented a new technology for the packaging and containment of biological drugs and molecular diagnostics.

These are each compelling investments priced attractively with favorable terms that provide meaningful downside protection.

Our origination activity remains healthy in this sector and across a wide range of industries fueling steady momentum as we progressed further into 2022.

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

Thank you Armen <unk>.

<unk> delivered another quarter of solid financial performance continuing the strong momentum from the first fiscal quarter of 2022 fiscal year 2021 for.

For the second quarter, we reported adjusted net investment income of $32 $3 million or <unk> 18 per share up from $31 2 million or <unk> 17 per share in the first quarter.

The increase was primarily the result of higher income from prepayments and lower professional fees.

Partially offsetting this was higher interest expense related to the impact of rising LIBOR on our floating rate liabilities.

Net expenses for the second quarter totaled $24 2 million down $5 1 million sequentially. The.

The decrease was mainly due to lower incentive fees driven by a $5 $5 million decrease in accrued capital gains incentive fees, resulting from the unrealized losses during the quarter.

And $5 million of lower professional fees.

This was partially offset by $5 million increase of higher interest expense due to an increase in borrowings and our larger investment portfolio.

Turning to our credit quality, which continues to be excellent.

Matt mentioned, we had no investments on nonaccrual at quarter end, that's all of our portfolio companies made their scheduled interest payments.

Now moving to the balance sheet.

Oh Csl's net leverage ratio at quarter end increased moderately from the December quarter to 1.02 times net leverage continues to be at the high end of our target range of <unk> 85 to one times and will tend to fluctuate every quarter, depending on the timing of investment fundings in portfolio prepayments.

As of March 31, total debt outstanding was $1 4 billion and had a weighted average interest rate of two 5% up from two 3% at December 31, due to a rising LIBOR unsecured debt represented 47% of total debt at quarter end down slightly from 50% in the prior quarter.

At quarter end, we had total liquidity of approximately $494 million, including $39 million of cash and $455 million of undrawn capacity on our upsized credit facilities.

Unfunded commitments, excluding unfunded commitments the joint ventures were $195 million with approximately $152 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.

Now turning to our two joint ventures.

At quarter end, the Kemper JV, you had $390 million of assets invested in senior secured loans to 60 companies down slightly from last quarter driven by portfolio payoffs during the second quarter as well as spread widening across the portfolio.

The JV generated $1 $9 million of cash interest income for ocs that well in the quarter and we also received a $700000 dividend up from 450000 in the prior quarter as a result of the portfolio is continued strong performance.

Leverage at the JV was one four times at quarter end in line with prior quarter.

The Glick JV had $150 million of assets at March 31st.

Instead of senior secured loans to 44 companies leverage at the JV was one two times at quarter end.

During the quarter, we received $1 $1 million of principal and interest payments on Ocs L. Subordinated notes in the Glick JV.

In summary.

Continue to be very pleased with our financial results and believe our diverse portfolio and flexible balance sheet positions us well for the future.

Now I will turn the call back to Matt.

Thank you, Chris our strong financial results for the quarter enabled us to generate an annualized return on equity of nine 7%.

Slightly higher than the nine 5% we generated last quarter. While we are very pleased with our results. This quarter. We believe there are still ways for <unk> to increase going forward.

First we remain focused on positioning the portfolio for improved yield by rotating out of lower yielding investments and into higher yielding loans at quarter end, we had $41 million of loans priced at or below LIBOR, plus four 5%, which we will look to opportunistically exit over time, our new investments continued to come.

On the books at attractive yields, which means there is more upside in the yield on that portion of the portfolio that we expect to realize over time.

As we discussed before another ongoing opportunity for us to support our target is to further optimize our joint ventures. We can accomplish this by selectively rotini and a low yielding investments into higher yielding ones as well as the increasing leverage at the JV. We made good progress on this to date as both vehicles are generating an Roe.

CSL of just over 10% that said the joint ventures to continue to have capacity and we will selectively rotate and grow these portfolios over time, which we believe will be accretive to Roe.

Finally, we believe or CSL is well positioned from a rising rate environment with 89% of our investment portfolio was floating rate assets and increase in base rates over our weighted average interest rate floor of approximately 80 basis points may positively impact our net interest margin.

In conclusion, we are very pleased with our strong second quarter financial results. We are excited about our prospects for the remainder of the year and are optimistic that we will continue to be able to identify new attractive risk adjusted investment opportunities, allowing us to provide strong returns to our shareholders.

For joining us on today's call and for your continued interest in ACSF.

That we're happy to take your questions operator, please open the lines.

Thank you.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre 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.

Our first question comes from Kevin Clark with JMP Securities. Please go ahead.

Hi, good morning, everyone.

Clearly there has been a significant slowdown in deal activity. So far in 2022 relative to 2021.

Parsing out sponsor activity versus non sponsor it appears that non sponsor activity levels have been more resilient than on the sponsor side. Just curious if that's what you've seen so far in 2022 and maybe also if you could share your thoughts on why that's been the case.

Yeah.

Thanks for the question this is armen.

Yes, I think it's hard to deduce meaningful conclusions from just one quarter.

Well, what I would say is that and this is more.

Anecdotal, but on the sponsor side I think there was a.

A flurry of activity last year, the debt capital markets were pretty open the private credit markets were quite strong valuation multiples were high.

And then as we got into November and December of last year, there was a little bit of volatility and then a lot more volatility in January and February what we found was that sponsor activity with new <unk>.

As well as repricing activity in the broadly syndicated loan market. Both of those took a really big step back.

Just given the volatility in the markets.

And so very few deals got done on.

With leverage buyout sponsors in the first two months of the year.

And again anecdotally it sort of felt like it was coming back in March and April .

Even in the last two weeks of March were quite strong.

Into April for the first two weeks it was okay and so we did see some new LBO is get announced but.

As we look forward this year and if we look at the broadly syndicated loan market as an indicator of health for the for sponsor LBO activity.

Would suggest that LBO activity is going.

Don.

And that sponsors are taking a little bit of a step back.

<unk> or <unk>.

Prospective sellers are not interested in transacting, a depressed valuation multiples so.

I think I think it is true that on the sponsor side.

Things appear slower.

In comparison to last year, and we would expect that if the current market conditions persist that they will continue to be slow.

On the non sponsor side, it's hard to gauge.

The resilience or lack thereof of that of that part of the market, but the reason it is likely to be resilient.

Relative to the the ups and downs or cyclicality of the sponsor market is that generally speaking on the non sponsor side borrowers are taking.

Credit for strategic reasons, they're not doing it for a transaction theyre not funding dividends, they're doing it to acquire a competitor to build out our manufacturing plan to onshore what was historically offshore production given some of the supply chain disruptions that have occurred over the last couple of years and so those strategic initiatives.

<unk> are typically.

Im not really tied to market conditions or just tied to their return on investment or the return on equity that that particular borrower.

Assesses with the with that initiative and whether they can find a willing private credit or direct lending.

Counterparty to transact at so.

I think the drivers are just different between sponsor and non sponsor, but I do.

I'd be remiss not to say that the total size of the opportunity set of attractive non sponsor deal flow is probably still smaller than the sponsor side of the market. So even though it might be resilient, it's still not likely to pick up with such a.

Alacrity that it would.

I would counter all of the kind of reduction in deal flow on the sponsor side.

Okay. That's really helpful color and then just one follow up in regards to portfolio positioning are there any pockets or industries that you find particularly attractive in the current climate.

Hmm.

Think.

Life Sciences is definitely the one that comes to mind.

Mainly because it's kind of two things one is if you look at the equity index for life Sciences companies. It is down there are over 30% year to date over 50% year over year.

And that volatility in the equity market.

And the depressed valuation multiples for some of these life sciences companies makes it such that those borrowers would prefer to finance themselves.

Differently, rather than tapping equity dilutive equity and.

And so we've seen a meaningful uptick in our in.

And our pipeline of potential deal volume on the life Sciences side and the second reason, we like it.

So the first was just taking advantage of market volatility and we like doing that at Oaktree.

The second is <unk>.

Life Sciences as an industry.

I wouldn't say, it's entirely this way, but it's but it's substantially this way it is fairly uncorrelated with global GDP. The reason is.

If.

The reason is the pace of scientific innovation is what drives the profitability and growth and value of these businesses it isn't.

It isn't kind of a general industrial or consumer packaged goods.

Or a discretionary item it is.

Generally speaking the places that we invest in the life Sciences. These are need to have must have real life saving life changing therapies and drugs and therefore, if a company is successful in innovating in those areas. There is a large unmet need that will buy that product or will need that product.

Irrespective of what's going on in the global economy, so that.

A lack of correlation from a portfolio management perspective is quite attractive. So that you don't have an entirely pro cyclical sponsor only.

A deal flow that will correlate to one in a pandemic type of upsetting or some other global economic slowdown.

I think we are more focused on.

We're more focused on the industries that are the companies that are going to be problematic and that's where we're spending most of our time was just avoiding avoiding landmines to be honest with you were rather than kind of pivoting towards most of what's most attractive I think theres more danger in the market than there is opportunity.

Right now.

Got it I'll leave it there.

For taking my question.

Okay.

Our next question comes from Bryce Rowe.

Please go ahead.

Thanks, Good morning.

Wanted to.

Maybe start on balance sheet leverage.

And prospects going forward, so obviously, you're slightly above your targeted range.

Kind of curious how you think about balance sheet leverage.

At this point and I mean do you see is there some appetite to go even.

Higher if.

If some of these may be secondary market opportunities continue to present themselves or did you feel more comfortable trying to push the balance sheet.

Leverage back into that that 85 to 100 range.

Hey, Brian it's Matt.

Nintendo.

I think while we were at one point or two times and I'm really kind of view that as just one times.

We haven't.

And then coming back after the quarter end we knew.

So that's one of the reasons why we're just we're slightly above but I still kind of thinking of it as you were pointing to one.

We have lots of liquidity and capacity across our capital structure I think we're into.

At the lower range of many of our peers many of our peers. So I feel like we've got a lot of capacity.

There's a great opportunity to invest.

Army you said, we're going to be very very disciplined here, just give us a little volatility in the market.

But as you saw last time going into the pandemic.

And a lot of dry powder and a lot of flexibility and.

We invested pretty aggressively and effectively and took leverage up so I think it's I think it's a little too early to know.

Hum.

That I think but I think we've got the flexibility and the capacity to.

To do what what makes sense here I think we're really really well positioned.

<unk>.

With our leverage and our capital structure and our liquidity and.

So we will be well prepared if an opportunity presents itself, but I think it's too early to call that right now.

Okay. That's that's.

That's helpful. I appreciate it.

And then maybe one other question just around the dividend and the dividend level I certainly appreciate the eighth consecutive.

Dividend increase here.

No.

Just wanted to try to understand kind of what's the thought process might be.

Against the current macro backdrop.

With the with layering in the prospects for higher interest rates, having a positive impact on the revenue stream on and on NII.

Just kind of.

Wondering if we should think about maybe future dividend increases despite.

Murkier backdrop.

And just want to understand how much cushion you might want to have.

For for for any kind of deterioration or downturn.

Sure, It's Matt again, great Great question I think.

The.

And as you pointed out we have been able to increase the dividend for eight quarters now and we don't feel like doing that.

In terms of the future obviously.

It's up to the board.

We explained previously the dividend because the output of the earnings of the portfolio.

To your point.

Interest rates.

Go up.

That is going to that's going to be helpful to the portfolio.

We get more specifics on that.

That being said, we're kind of in a period now as.

Yes.

LIBOR is going out and.

So far it's.

Okay transitioning above the floor similar some loans above Florida below floors.

So.

How that kind of plays out in the dividend is in earnings is a little too early to predict so I think for now and just kind of leave you with.

We feel great about the ability to increase the dividend.

Pretty thoughtful about what we do with the dividend a function of the portfolio.

And.

I don't want I don't think you should necessarily.

Model out a bunch of dividend increases just based on interest rates.

Because rates are obviously proving.

<unk> been pretty dramatically kind of day to day week to week. So.

I just wouldn't do that just yet.

Okay.

For that I appreciate the time this morning.

Our next question comes from Ryan Lynch with <unk>. Please go ahead.

Hey, good morning.

First question I had was just.

Looking at your investment activity this quarter.

After several quarters of basically staying out of the secondary markets you guys.

Got back into that marketplace with $40 million.

Fundings this quarter.

My question is can you explain what is the nature of the investment thesis behind those investments obviously, there was some volatility in the marketplace this quarter.

Is it the intent that you find good companies there that you can get it at a price that that you think will make an attractive return and hold those securities until maturity.

The discounted price will allow you to generate a sufficient return for ocs al or are those more dislocations that you see that are more temporary securities that you can buy what do you think at a discounted price at Lange <unk> <unk>.

Right out of that whether it's a couple of months or a couple of quarters down the road.

Thanks for the questions.

So.

The first statement I would make is that whatever we do buy whether it's primary or secondary as always with the intention of holding it to maturity and feel uncomfortable with both at risk and that return now.

With tradable credit you may be in a situation, where you buy something and it trades up more rapidly than you thought or a trade down because of some sort of change in the picture for the company and you have to reassess because you always need to look at risk adjusted return prospective return at every with any.

A meaningful change in price in those securities. So.

So again, we buy things with an intention to hold them to maturity, but we're happy to trade out of them if they do move the other direction.

<unk>.

The reason you see some elevated activity in secondary purchases because we're always looking for the best relative value in credit for Ocs, all and for all of our clients.

So when we look at the spectrum of what's available in the market. There is sponsor lending non sponsor lending episodically, some sort of opportunistic or rescue lending and then theres tradable credit both loan and bond and when we looked across that spectrum. There really isn't I would say a lot of opportunistic or episodic.

The rescue lending right now.

But on the sponsor side, what we saw was that there was a muted deal flow, but in terms of terms on the deals that did get done they were no different than where they were at and most of 2021 same sort of spreads same sort of return same sort of legal protections. Meanwhile, the publicly traded market was meaningfully backing up.

Spreads were widening in the quarter. They widened maybe 25 to 50 basis points in both bonds and loans.

But the dollar price, especially in bonds moved out a lot because of duration.

So as we looked at the quality of the issuers in bond and loan land, but publicly traded side and we compare them against generally speaking were smaller businesses.

In the private credit side and the opportunities that we were able to source a look out in the quarter.

We found that.

It made a lot more sense.

Our margin to invest in bigger businesses with bigger capital structures, where bonds, especially where trading down today. Some of these bonds are in the eighties now than they were issued.

Two or three years ago, and might've been trading at 105 to 110, just nine months ago, and so that convexity the opportunity to earn convexity and NAV appreciation through.

A combination of good underwriting and solid.

Day to day.

Evaluation of prospective returns through our trading desks and through all of the other adjacent strategies that we have to direct lending at Oaktree, we thought that we would be able to deliver alpha through realm.

Relative value comparison between public and private and so that that's what you see in the activity in the first quarter.

That's why you didn't see it so much in the last five or six quarters.

Okay.

That makes sense that's helpful color, so I would assume.

Based on <unk>.

Markets are kind of acted so far in the calendar second quarter.

Based on your kind of outlook for.

A lot more economic uncertainty.

Assume that you guys anticipate continuing to be fairly active in that secondary market.

And that could become more of a consistent component.

<unk> going forward is that a fair assumption.

Assumption, yes.

I wouldn't go that far, but what I would say is that it is a very active area of interest for us and we will always think about the incremental publicly traded opportunity versus the private opportunity we're seeing.

And I don't want to make any sort of forward looking guidance our statement on that but.

It is it is it continues to be a very attractive opportunity set right now, but you have to understand that there is likely to be continued volatility this year with inflation with fed action.

And.

To be measured and paced approach and always think about what the what the alternative is so.

Ill be able to say about that okay.

Okay fair enough.

I appreciate the time today thanks. Thank.

Thank you.

Our next question comes from Melissa.

J P. Morgan. Please go ahead.

I appreciate you taking my questions. This morning.

The first thing I'm trying to reconcile a little bit is what felt like a somewhat cautious tone on your part in terms of.

Pencil fed policy.

Okay.

And I know that your general approach is also able to keep some dry powder available and yet youre running towards the higher end of your target leverage levels.

You.

Sort of help reconcile that or are there any larger anticipated repayments coming up that we should be thinking about.

Okay.

I mean, we're always getting some repayments I wouldn't want to give any sort of forward guidance on anticipated repayments.

We.

We feel very good about the performance of our portfolio.

We also have as I mentioned is uncorrelated life Sciences book that is.

That is both high yielding and performing quite well.

So we're we will always evaluate the proper makeup of our capital structure, we generally run more conservative than on leverage.

And then a lot of publicly traded Bdcs and we like doing it that way.

But it is just frankly, it's just the blocking and tackling day to day decision.

It isn't.

Our cautious for sure about what we're seeing in the market.

But we're always.

We're very comfortable with the portfolio that we have so.

We're not we're not looking too.

Generate cash or or sit on cash or anything like that if we feel like we have if needed. We feel like we do have ample liquidity to take advantage of opportunities but.

We're staying cautious in building up our portfolio from bottoms up.

And we do have months, it's Matt we do have.

We've talked at that time.

Some very very high quality liquid lower yielding assets that to the extent, we wanted to redeploy that into higher.

High yield investments as we've been doing over the quarters.

We have that lever as well.

Sure I appreciate that.

And I guess another question a.

Bigger picture in nature and.

Given the volatility that we've seen in the forward curve and.

Think back to a couple of quarters ago. When you were talking about.

<unk>.

Potentially investors, there being a greater risk as rate increases or rate hike that werent being priced into the forward curve it seems likely.

Plus circles on that a little bit.

With a lot of volatility in the forward curve. So to the extent that you think about sort of policy mistakes I guess I'm curious about your thoughts if you think that the forward curve is has that overshot to any extent.

Yeah, that's a tough way to <unk>.

Tough one to gauge.

Yes.

I would I would say.

Yes.

I don't know.

Don't know that its that its overshot, but it certainly now reflects.

The feds Hawkishness at least for short in the short run.

For rate hikes to combat inflation.

If you look at the Euro dollar forward curve, which is effectively.

Short term rates.

And the expectation for rate hikes.

It is expected that there will be.

<unk> rate hikes this year.

I would need to pull it up I think it's probably another 75 or 100 basis points that it assumes for the for the rest of this year, but it also predicts a rate decline short term rate decline next year.

And so there's sort of upside down V shape.

On the expectation market expectations on short term rates, which would indicate that inflation is is too high north of 8% and the fed must do something to stop that but.

With some of the.

Inherent issues.

Issues in the economy around around inflation, but also some of the demand destruction that could be caused by higher rates. The market generally thinks that there can be a recession in 2023, and therefore, the federal need to reduce rates.

In 2023.

So I think thats, probably that inflection of when when rates rise to stop inflation versus when they need to decline to combat some sort of recessionary outcome.

I think thats going to create continued volatility.

That's what.

I'm most focused on.

In terms of.

Fed policy and what their tone is.

In terms of long term rates.

The return on the tenure is north of 3% now.

Which is.

Frankly, I mean, if it were to go up to 4%.

At 4% for an extended period of time that would be a dangerously high level.

Which could create significant stress.

Amongst consumers and companies.

Without any sort of fed.

Senator Treasury actions to counter that would need to stay there for a couple of years rather than a couple of months.

But that.

If you were to ask me what keeps you up at night it would be that it would be high rates for a longer than for a longer than expected period of time on the long end of the curve, which impacts real estate values.

Impacts other types of lending.

Could create.

Our need for deleveraging.

I don't think very many consumers are corporations, who are thinking about right now.

Herman I really appreciate that thank you.

Thank you.

But again, if you'd like to ask a question. Please press Star then one at this time.

Having no further questions. This concludes our question and answer session I would like to turn the conference back over to Mr. <unk> for any closing remarks.

Great. Thanks, Sarah 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 fork or 75 $2 nine for U S callers or 141 to three one.

0088 for non U S callers with the replay access code 45880 to five.

Beginning approximately one 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 Corporation's second fiscal quarter 2020, <unk> conference call.

Today's conference call is being recorded.

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

But will be prompted for a question and answer questions. Following the prepared remarks.

Now I would like to introduce.

Michael This is Joe.

<unk> Investor Relations, who will host.

Today's conference call Ms. Thomas.

You may begin.

You, operator, and welcome to Oaktree specialty lending Corporation's second fiscal quarter Conference call our 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 Chris Macau, Chief Financial Officer and Treasurer.

Also joining us on the call today for the question and answer session is Nat Stewart Chief operating officer.

Our actual results could differ materially from those implied or expressed in the forward looking statements.

Please refer to our SEC filings for a discussion of these factors in further detail, 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 thought.

Pastors 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 web site.

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

Thanks, Mike and thank you to everyone for joining the call today.

CSL generated solid results in the second quarter.

Adjusted net investment income was up supported by higher prepayment fees and we increased our dividend for the eighth consecutive quarter, we produced robust origination activity, including several new investments in the attractive life sciences sector, while maintaining the portfolio's excellent credit quality.

Adjusted net investment income per share was <unk> 18 for the quarter compared with <unk> 17 for the prior quarter extending the momentum we steadily build throughout the calendar year 2021.

Earnings were supported by the portfolio's improved yield and larger size higher prepayment fees and OID acceleration related to investment exits as well as modestly lower professional fees.

Based on the strength and consistency of our earnings our board increased the quarterly dividend by 3% to $60.05 per share.

Dividend is now up more than 70% from its pre COVID-19 level.

We reported NAV per share of $7 26 down one.

Percent from the prior quarter. The decrease was primarily driven by the impact of wider credit market spreads and associated mark to market price declines.

We also experienced a modest decline in devaluation in certain equity investments given the broader stock market volatility.

Now turning to the portfolio, we originated $228 million of new investment commitments in the second quarter of <unk>.

The 72% were first lien loans consistent with the prior quarter and included $162 million in private transactions and $26 million in the new issue primary market.

We also took advantage of some volatility in the liquid credit markets by purchasing $40 million of discounted loans and bonds and average prices purchase price of 96%.

The weighted average yield on all of the new debt originations. This quarter was eight 7% up from eight 1% the prior quarter.

We received $180 million from prepayments Paydown and exits in the second quarter. The average yield of investments that we exited was eight 2% our noncore portfolio continued to run off as we were able to monetize $3 million across three equity positions at slight gains their previous fair values.

This book represented $86 million at the close of the quarter or about 3% of the portfolio at fair value.

Credit quality remains a consistent strength with disciplined underwriting we invest selectively across a wide range of opportunities. This allows us to identify compelling low risk opportunities underscoring. This we had no investments on non accrual at the close of the second quarter.

Importantly, we continued to be rated investment grade by both Moody's and Fitch and we maintain borrowing flexibility and ample liquidity to meet funding needs. We.

We finished the quarter with $455 million of Undrawn capacity under our credit facilities and $39 million of cash.

The weighted average interest rate on debt outstanding was two 5% in the March quarter, our monthly from two 3% the prior quarter due to higher LIBOR.

We believe this program has a cost efficient way to raise equity capital over time, and we will continue to utilize it when.

When market conditions are favorable.

With that I'll turn the call over to Armen.

Thanks, Matt and Hello, everyone I'll begin with comments on the market environment and continue with some additional highlights from our fiscal second quarter.

Overall credit quality held strong throughout the quarter supported by broadly favorable conditions, including low unemployment and steady demand for products and services across sectors.

That noted potential uncertainties remain from the lingering impacts of the pandemic on supply chains.

Surging costs.

The U S inflation rate reached a 40 year high in March.

Warranty, Ukraine, and western government sanctions against Russia in protest of the conflict curtailed global oil supply and exacerbated already high gasoline costs. This conflict has also disrupted already fragile supply chains and boosted other commodity prices, putting even more pressure on the fed to bring down the elevated inflation rate.

At the same time Corona virus flare ups in China, and its renewed restrictions on business travel threatened to further disrupt supply chains potentially adding to inflationary pressures yes.

Against this backdrop the fed started to raise short term interest rates in March to taper demanded cool the economy and while markets have widely expected these and future rate hikes uncertainties surrounding the pace of tightening and the economic implications of the war created volatility in the calendar first quarter adversely impacting credit spreads across all sectors.

And leading to the modest write down in our portfolio.

Historically in periods of fed tightening the risk of recession increases given the possibility that policymakers may overreach, raising interest rates too much or too quickly.

If this volatile environment intensifies and causes market dislocations, we are well prepared to act.

Hopefully <unk> roots are in opportunistic credit investing and we have demonstrated over the years, our deep expertise in investing in these types of markets.

Multiples and ongoing inflationary pressures could reduce.

Back deal flow over the near term.

While issuers may favor private over public funding sources to due to the ongoing volatility in public markets competition to provide private financing may be significant.

Compelling opportunities may therefore be found in the non sponsor backed market in situations, where the required financing solutions are bespoke assets are difficult to value and sector specific expertise is rewarded.

It is less crowded segment of the market, we believe that our scale and capacity to make complex loans as a competitive advantage and can lead to superior investment results. We all.

Also remain focused on identifying deal flow in the life Sciences and technology industries, we expect to see a steady stream of lending opportunities in these sectors as applied Sciences, and digital commerce continue to gain prominence throughout the global economy.

In summary, we are actively but judiciously investing working diligently to make sure that we control risk while delivering strong returns for our shareholders.

Now turning to the overall portfolio.

At the close of the second quarter, our portfolio was well diversified with more than $2 6 billion at fair value across 146 companies 18th.

86% of the portfolio was invested in senior secured loans with first lien loans, representing 69% of the portfolio.

This reflects our emphasis on being at the top of the capital structure.

Nearly 90% of our loans are floating rate positioning us well for rising rates.

As you know we've been lending to larger more diversified businesses to lower risk and bolster credit quality median portfolio company EBITDA at March 31 was approximately $118 million.

The underlying leverage at our portfolio of companies was approximately five times lower than middle market leverage multiples, which are near historical highs at around five six times.

The portfolio's weighted average interest coverage is strong at approximately three times many of our borrowers are well positioned for a rising interest rate environment.

Moving on to investment activity, our $228 million of new investment commitments were spread across 16, new and nine existing portfolio companies in the second quarter of the 24 portfolio companies. We invested in during the quarter nine were private deals three were primaries and the remaining 12, where secondary purchases, which were generally smaller in size.

And purchased at a discount to par.

Our ongoing progress in the life Sciences sector was particularly pronounced in the March quarter, we invested a total of $62 million to three companies that are well positioned for growth in this sector.

These included in their call a provider of health care supply chain and emergency preparedness infrastructure services to government and commercial customers.

In Perl, our commercial stage Biopharma company focused on developing transformative therapies for people suffering from central nervous system diseases.

And Si <unk> materials science and advanced materials Sciences company that has invented a new technology for the packaging and containment of biological drugs and molecular diagnostics.

These are each compelling investments priced attractively with favorable terms that provide meaningful downside protection.

Our origination activity remains healthy in this sector and across a wide range of industries fueling steady momentum as we've progressed further into 2022.

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

Thank you Armen.

<unk> delivered another quarter of solid financial performance, continuing strong momentum from the first fiscal quarter of 2022% in fiscal year 2021.

For the second quarter, we reported adjusted net investment income of $32 $3 million or <unk> 18 per share up from $31 2 million or <unk> 17 per share in the first quarter.

The increase was primarily the result of higher income from prepayments and lower professional fees.

Partially offsetting this was higher interest expense related to the impact of rising LIBOR on our floating rate liabilities.

Net expenses for the second quarter totaled $24 2 million.

Down $5 1 million sequentially.

The decrease was mainly due to lower incentive fees driven by a $5 $5 million decrease in accrued capital gains incentive fees, resulting from the unrealized losses during the quarter.

And $5 million of lower professional fees.

This was partially offset by $5 million increase of higher interest expense due to an increase in borrowings and our larger investment portfolio.

Turning to our credit quality, which continues to be excellent.

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

Now moving to the balance sheet.

<unk> net leverage ratio at quarter end increased moderately from the December quarter to 1.02 times net leverage continues to be at the high end of our target range of 85 to one times and will tend to fluctuate every quarter, depending on the timing of investment fundings and portfolio prepayments.

As of March 31, total debt outstanding was $1 4 billion and had a weighted average interest rate of two 5% up from two 3% at December 31, due to a rising LIBOR unsecured.

On secured debt represented 47% of total debt at quarter end down slightly from 50% in the prior quarter.

At quarter end, we had total liquidity of approximately $494 million, including $39 million of cash and $455 million of undrawn capacity on our Upsized your credit facilities.

Unfunded commitments, excluding unfunded commitments, the joint ventures were $195 million.

With approximately $152 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.

Now turning to our two joint ventures.

At quarter end, the Kemper JV had $390 million of assets invested in senior secured loans to 60 companies down slightly from last quarter driven by portfolio payoffs during the second quarter as well as spread widening across the portfolio.

<unk> generated $1 9 million of cash interest income for <unk> in the quarter and we also received a $700000 dividend up from 450000 in the prior quarter as a result of the portfolios continued strong performance.

Leverage at the JV was one four times at quarter end in line with prior quarter.

The Glick JV had $150 million of assets at March 31.

Is that a senior secured loans to 44 companies Leverages. The JV was one two times at quarter end.

During the quarter, we received $1 $1 million of principal and interest payments on our <unk> subordinated notes and the Glick JV.

In summary.

<unk> continued to be very pleased with our financial results and believe our diverse portfolio and flexible balance sheet positions us well for the future.

Now I will turn the call back to Matt.

Thank you, Chris our strong financial results for the quarter enabled us to generate an annualized return on equity of nine 7% slightly higher than the nine 5% we generated last quarter.

While we are very pleased with our results. This quarter. We believe there are still ways for <unk> to increase going forward.

New investments continued to come on the books at attractive yields which means there is more upside than yields on that portion of the portfolio that we expect to realize over time.

As we discussed before another ongoing opportunity for us to support our target is to further optimize 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.

Made good progress on these to date as both vehicles are generating Roes to OS ESL of just over 10%.

That said the joint ventures continue to have capacity and we will selectively rotate and grow these portfolios over time, which we believe will be accretive to Roe.

Finally, we believe <unk> is well positioned for a rising rate environment with 89% of our investment portfolio in floating rate assets and increase in base rates over our weighted average interest rate floor of approximately 80 basis points may positively impact our net interest margin and.

Interest in <unk>.

That we're happy to take your questions operator, please open the lines.

Thank you.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the key.

To withdraw your question. Please press Star then two.

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

Our first question comes from Kevin Clark with JMP Securities. Please go ahead.

Hi, good morning, everyone.

Clearly there has been a significant slowdown in deal activity. So far in 2022 relative to 2021.

Thanks for the question this is armen.

Yes, I think it's hard to deduce.

Deduce meaningful conclusions from just one quarter.

But what I would say is that and this is more anecdotal but on the sponsor side I think there was a.

A flurry of activity last year, the debt capital markets were pretty open the private credit markets were quite strong valuation multiples were high.

And then as we got into November and December .

December of last year, there was a little bit of volatility and then a lot more volatility in January and February and what we found was that sponsor activity with new <unk>.

As well as repricing activity in the broadly syndicated loan market. Both of those took a really big step back.

Just given the volatility in the markets.

And so very few deals got done.

With leverage buyout sponsors in the first two months of the year.

And again anecdotally it sort of felt like it was coming back in March and April .

The last two weeks of March were quite strong.

In April for the first two weeks it was okay and so we did see some new LBO is get announced but.

As we look forward this year and if we look at the broadly syndicated loan market as an indicator of health for the for a sponsor LBO activity.

Would suggest that LBO activity is going.

Out.

And that sponsors are taking a little bit of a step back.

<unk> or <unk>.

Prospective sellers are not interested in transacting at depressed valuation multiples so.

I think I think it is true that on the sponsor side.

Things appear slower.

The comparison to last year, and we would expect that if the current market conditions persist that they will continue to be slow on the non sponsor side, it's hard to gauge.

The resilience or lack thereof of that of that part of the market, but the reason it is likely to be resilient.

Relative to the the ups and downs of cyclicality of the sponsor market is that generally speaking on the non sponsor side borrowers are taking.

<unk> are typically.

Not really tied to market conditions or just tied to their return on investment or the return on equity that that particular borrower.

Assesses with the with that initiative and whether they could find a willing private credit or direct lending.

Counterparty to transact at so.

I think the drivers are just different between sponsor and non sponsor, but I do.

I'd be remiss not to say that the total size or the opportunity set of attractive non sponsor deal flow is probably still smaller than the sponsor side of the market. So even though it might be resilient. It is still not likely to pick up with such.

Alacrity that it would.

I would counter all the kind of reduction in deal flow on the sponsor side.

Okay. That's really helpful color and then just one follow up in regards to portfolio positioning are there any pockets of industries that you find particularly attractive in the current climate.

Think.

Life Sciences is definitely the one that comes to mind.

Mainly because well it's kind of two things one is if you look at the equity index for life Sciences companies. It is down there are over 30% year to date over 50% year over year.

And that volatility in the equity market.

And the depressed valuation multiples for some of these life sciences companies makes it such that those borrowers would prefer to finance themselves.

Differently, rather than tapping equity dilutive equity and.

And so we've seen a meaningful uptick in our in our pipeline of potential deal volume on the life Sciences side and the second reason, we like it.

So the first one is just taking advantage of market volatility and we like doing that at Oaktree.

The second is.

That life Sciences as an industry.

I wouldn't say, it's entirely this way, but it's but it's substantially this way it is fairly uncorrelated with global GDP and the reason is.

If.

The reason is the pace of scientific innovation is what drives the profitability and growth and value of these businesses it isn't.

It isn't kind of a general industrial or consumer packaged goods.

Or a discretionary item it is.

Generally speaking the places that we invest in life Sciences. These are need to have must have lifesaving and life changing therapies and drugs and therefore, if a company is successful in innovating in those areas. There is a large unmet need that will buy that product or will need that.

Irrespective of what's going on in the global economy, so that.

Lack of correlation from a portfolio management perspective is quite attractive. So that you don't have an entirely pro cyclical sponsor only.

Set of deal flow that will correlate to one in a pandemic type of upsetting or some other global economic slowdown.

I think we are more focused on.

We're more focused on the industries that are the companies that are going to be problematic and that's where we're spending most of our time was just avoiding avoiding landmines to be honest with you rather than kind of pivoting towards most of what's most attractive I think theres more danger in the market than there is opportunity.

Right now.

Got it I'll leave it there.

For taking my questions.

Okay.

Our next question comes from Bryce Rowe.

Please go ahead.

Thanks, Good morning.

Wanted to.

Maybe start on balance sheet leverage.

And prospects going forward, so obviously, you're slightly above your targeted range.

Kind of curious how you think about balance sheet leverage.

At this point and.

Do you see is there some appetite to go even.

Higher if.

If some of these maybe secondary market opportunities continue to present themselves or did you feel more comfortable trying to push the balance sheet.

Average back into that that 85 to 100 range.

Hey, Brian if I may.

Nintendo.

I think while we were.

At one point or two times and it really kind of view that as just one times.

And we haven't.

Hello, I'm coming back after the quarter in that we knew.

So that's one of the reasons why we're just we're slightly above but I still think even as you were pointing to one.

We have lots of liquidity and capacity across our capital structure I think we are at the.

At the lower range.

Any of our peers many of our peers. So I feel like we've got a lot of capacity.

There is a great opportunity to invest.

As Army you said, we're going to be very very disciplined here, just give us a little volatility in the market.

But as you saw last time going into the pandemic.

We did a lot of dry powder and a line of flexibility and.

We invested pretty aggressively and effectively and took leverage up so I think it's I think it's a little too early to.

And I predict that I think but I think we've got the flexibility and the capacity.

To do what what makes sense here I think we're really really well positioned.

With our leverage and our capital structure and our liquidity and.

So we will be well prepared if an opportunity presents itself, but I think it's too early to call that right now.

Okay.

It helps on that appreciate it.

And then maybe one other question just around the dividend and the dividend level I certainly appreciate the eighth consecutive.

Dividend increase here.

No.

One wanted to try to understand kind of what's the thought process might be.

Against the current macro backdrop.

With with with layering in the prospects for higher interest rates, having a positive impact on the revenue stream on and on NII.

Kind of.

Wondering if we should think about maybe future dividend increases despite.

Murkier backdrop.

And.

Want to understand how much cushion you might want to have.

For for for any kind of deterioration or downturn.

Sure, It's Matt again, great Great question.

Thank you.

<unk>.

And as you point out we have been able to increase the dividend for eight quarters now and if you like doing that.

In terms of the future obviously.

It's up to the board.

We've explained previously the dividend because the output of the earnings of the portfolio.

To your point intra.

Interest rates.

Go up.

That is going to that's going to be helpful to the portfolio.

We get more specifics on that.

That being said, we're kind of in a period now as.

As LIBOR.

LIBOR is going out.

So far in <unk>.

Okay transitioning above the floor similar some loans above Florida some below floors.

So how that kind of plays out in the dividend is in earnings is a little too early to predict so I think for now.

Just kind of leave you with.

We feel great about the ability to increase the dividend.

We're pretty thoughtful about.

What we do with the dividend a function of the portfolio.

And I don't want I don't think you should necessarily.

Model out a bunch of dividend increases is based on interest rates.

Because rates are obviously.

<unk> been pretty dramatically.

<unk> a week to week so.

I just wouldn't do that just yet.

Okay. Thanks for that guys. Appreciate the time this morning.

Our next question comes from Ryan Lynch with <unk>. Please go ahead.

Hey, good morning.

First question I had was just.

Looking at your investment activity this quarter.

After several quarters of basically staying out of the secondary markets you guys.

Got back into that marketplace with $40 million.

Fundings this quarter.

My question is this.

Can you explain what is the nature or the investment thesis behind those investments obviously there was some volatility.

The marketplace this quarter.

Is it the intent that you find good companies there that you can get it at a price that that you think will make an attractive return and hold those securities until maturity and the discounted price will allow you to generate a sufficient return for ocs al or are those more.

Or dislocations that you see that are more temporary securities that you can buy what do you think at a discounted price at Bang.

Trade out of that whether it's a couple of months or a couple of quarters down the road.

Thanks for the question was arvin.

So.

The first statement I would make is that whatever we do buy whether it's primary or secondary as always with the intention of holding it to maturity and feeling comfortable with both at risk and that return now with.

With tradable credit you may be in a situation, where you buy something and it trades up more rapidly than you thought or a trade down because of some sort of change in the picture for the company. When you have to reassess because you always need to look at risk adjusted return prospective return at every <unk> with any crime.

Meaningful change in price in those securities. So we so again, we by the way with an intention to hold them to maturity, but we're happy to trade out of them if they do move the other direction.

<unk>.

The reason you see some elevated activity in secondary purchases is because we're always looking for the best relative value in credit for Ocs, all and for all of our clients at Oaktree. So when we look at the spectrum of what's available in the market. There is sponsor lending non sponsor lending.

<unk>, some sort of opportunistic or a rescue lending and then theres tradable credit both loan and bond and when we looked across that spectrum. There really isn't I would say a lot of opportunistic or episodic rescue lending right now.

Spreads were widening in the quarter. They widen maybe 25 to 50 basis points in both bonds and loans.

But the dollar price, especially in bonds moved down a lot because of duration.

And so as we looked at the quality of the issuers in bond and loan land the publicly traded side and we compare them again generally speaking what are smaller businesses.

In the private credit side and the opportunities that that we were able to source a look out in the quarter.

We found that.

It made a lot more sense.

On the margin to invest in bigger businesses with bigger capital structures, where bonds, especially where trading down today. Some of these bonds are in the <unk> now than they were issued.

Two or three years ago. It might have been trading at 105 to 110, just nine months ago, and so that convexity the opportunity to earn convexity and NAV appreciation through.

A combination of good underwriting and solid.

Day to day.

Relative value comparison between public and private and so that that's what you see in the activity in the first quarter.

That's why you didn't see it so much in the last five or six quarters.

Okay.

That makes sense that's helpful color, so I would assume.

Based on <unk>.

How markets are kind of acted so far in the calendar second quarter.

Based on your kind of outlook for.

A lot more economic uncertainty.

Assume that you guys are anticipate continuing to be fairly active in that secondary market.

And that could become more of a consistent component.

<unk> going forward is that a fair assumption.

Assumption, yes.

And I don't want to make any sort of forward looking guidance our statement on that but.

It is it is it continues to be a very attractive opportunity set right now, but you have to understand that there is likely to be continued volatility this year with inflation with fed action.

And.

To be measured in inpatient approach and always think about what the what the alternative is so.

That's all I'll be able to say about that.

Okay fair enough I.

I appreciate the time today thanks. Thank.

Thank you.

Our next question comes from Melissa Wedel with Jpmorgan. Please go ahead.

I appreciate you taking my questions. This morning.

The first thing I'm trying to reconcile a little bit is what sounds like if I'm a cautious tone on your part in terms of potential.

Potential fed policy.

Yeah.

And I know that your general approach is also able to keep some dry powder available and yet youre running towards the higher end of your target leverage levels can you.

Sort of help reconcile that or are there any larger anticipated great talents.

Coming up that we should be thinking about.

Okay.

I mean, we're always getting some repayments I wouldn't want to give any sort of forward guidance on anticipated repayments.

We we.

We feel very good about the performance of our portfolio.

We also have as I mentioned this uncorrelated life Sciences book that is.

That is both high yielding and performing quite well.

So we're we will always evaluate the proper makeup of our capital structure, we generally run more conservative than on leverage.

And then a lot of publicly traded bdcs.

Like doing it that way.

But it is just frankly, it's just the blocking and tackling day to day decision.

It isn't.

We are cautious for sure about what we're seeing in the market.

But we're always.

We're very comfortable with the portfolio that we have so.

We're not looking too.

Generate cash or or sit on cash or anything like that if we feel like we have if needed. We feel like we do have ample liquidity to take advantage of opportunities, but we're staying cautious in building up our portfolio from bottoms up.

And we do have most it's Matt we do have.

We've talked at that time.

Sure.

Some very very high quality liquid lower yielding assets that to the extent we.

We wanted to redeploy that into <unk>.

High yielding investments as we've been doing over the quarters.

We have that lever as well.

Sure I appreciate that.

And I guess another question.

Bigger picture in nature.

Given the volatility that we've seen in the forward curve and.

I think back to a couple of quarters ago. When you were talking about.

<unk>.

Potentially investors, there being a greater risk of rate increases or rate hikes that werent being priced into the forward curve it seems likely.

Circles on that a little bit.

Yeah, that's a tough way to that.

Ill point to gauge.

Yes.

I would I would say.

Yes.

I don't know.

Don't know that its that its overshot, but it certainly now reflects.

The feds Hawkishness at least for short in the short run.

For rate hikes to combat inflation.

If you look at the Euro dollar forward curve, which is effectively.

Short term rates.

And the expectation for rate hikes.

It is expected that there will be.

Continued rate hikes this year.

I would need to pull it up I think it's probably another 75 to 100 basis points that it assumes for the for the rest of this year, but it also predicts.

<unk> declined a short term rate decline next year.

And so there's sort of upside down V shape.

On the expectation market expectations on short term rates, which would indicate that inflation is is too high it's north of 8% and the fed must do something to stop that but.

With some of the.

Inherent.

In 2023.

So I think thats, probably that inflection of when when rates rise to stop inflation versus when they need to decline to combat some sort of recessionary outcome.

I think thats going to create continued volatility.

That's what.

I'm most focused on.

In terms of.

Fed policy and what they are told us.

In terms of long term rates.

Sure.

The return on the tenure is north of 3% now.

Which is.

Frankly, I mean, if it were to go up to 4% and stay up 4% for an extended period of time that would be a dangerously high levels.

Which could create significant stress amongst.

Amongst consumers and companies.

Without any sort of.

Fed our treasury actions to counter that would need to stay there for a couple of years rather than a couple of months.

But that.

Impacts other types of lending.

Could create.

Our need for deleveraging that I don't think very many consumers are corporations, who are thinking about right now.

Herman I really appreciate that thank you.

Thank you.

Okay, and if you'd like to ask a question. Please press Star then one at this time.

Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to Mr. <unk> for any closing remarks.

Okay.

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Q2 2022 Oaktree Specialty Lending Corp Earnings Call

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