Q4 2023 Oaktree Specialty Lending Corporation Earnings Call
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Speaker 1: Welcome, and thank you for joining Oak Tree Specialty Lending Corporation's fourth fiscal quarter and year-end 2023 conference call.
Welcome and thank you for joining Oaktree specialty lending Corporation's fourth fiscal quarter and year end 2023 conference call.
Speaker 1: 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 session following the prepared remarks.
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 session. Following the prepared remarks.
Speaker 1: Now, I would like to introduce Michael Mustaccio, head of investor relations, who will host today's conference call. Mr. Mustaccio, please begin.
Now I would like to introduce Michael Must've trio head of Investor Relations, who will host today's conference call. Mr. Mr. Steele. Please begin.
Speaker 2: Thank you, operator, and welcome to Oak Tree Specialty Lending Corporation's fourth fiscal quarter and year-end 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 OakTreeSpecialtyLending.com.
Thank you operator, and welcome to Oaktree specialty lending Corporation's fourth fiscal quarter and year end 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 dotcom.
Joining us on the call today are army chief.
Chief Executive Officer, and Chief Investment Officer, Matt <unk>, President, Chris Mccown, Chief Financial Officer and Treasurer.
And that Stuart our Chief operating officer.
Speaker 2: 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 expected synergies and savings associated with the merger with Oaktree Strategic Income II, Inc., the ability to realize the anticipated benefits of the merger, and our future operating results and financial performance.
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.
Synergy savings associated with the merger with Oaktree strategic income to Inc. The ability to realize the anticipated benefits of the merger and our future operating results and financial performance.
Speaker 2: Our actual results could differ materially from those implied or expressed in the forward-looking state.
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.
Speaker 2: Please refer to our SEC filings for discussion of these factors in further detail. We undertake no duty to update or revise any forward-looking statement.
We undertake no duty to update or revise any forward looking statements.
Speaker 2: 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 oak tree funds.
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.
Speaker 2: Investors and others should note that Oaktree Specialty Lending uses the investor section of its corporate website to announce material information. The company encourages investors, the media and others to review the information that it shares on its website. With that, I would now like to turn the call over to Matt.
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 of its shares on its website with that I would now like to turn the call over to Matt.
Speaker 3: Thanks, Mike, and welcome, everyone. Thank you to all on the call for your interest in and support of OCSL.
Thanks, Mike and welcome everyone. Thank you to all on the call for your interest in and support of Ocs L.
Speaker 3: We generated strong fourth quarter and full year results, supported by attractive new deployment activity, elevated repayment,
We generated strong fourth quarter and full year results supported by attractive new deployment activity elevated repayments tailwind from higher interest rates.
Speaker 3: tailwinds from higher interest rates, as well as the completion of our merger with Oak Tree Strategic Income 2, Inc. or OSI 2 in January .
As well as the completion of our merger with Oaktree strategic income to ink or OSI to in January.
Speaker 3: Full year fiscal 2023 adjusted NI was $2.47 per share, up from $2.12 for fiscal 2022.
All year fiscal 2023 adjusted NII was $2 47 per share up from $2 12 for fiscal 2022.
Speaker 3: These results reflect growth in the earnings power of our portfolio over the course of the year, driven by higher interest income from our predominantly floating-rate portfolio, combined with wider spreads on new investments, and bolstered by synergies from the OECD.
These results reflect growth in the earnings power of our portfolio over the course of the year driven by higher interest income from our predominantly floating rate portfolio combined with wider spreads on new investments and bolstered by synergies from the OSI to merger.
Speaker 3: We delivered our highest annual level of adjusted net investment income under Oak trees management, building upon the momentum we have generated since taking over management of the company six years ago.
We delivered our highest annual level of adjusted net investment income under Oak trees management building upon the momentum we have generated since taking over management of the company six years ago.
Speaker 3: Based on the ongoing strength of our earnings, our board approved the quarterly dividend of 55 cents per share, which was consistent with the prior few quarterly distributions.
Based on the ongoing strength of our earnings our board approved a quarterly dividend of 55 per share which was consistent with the prior few quarterly distributions. Our board also declared a special distribution of <unk> seven per share in an effort to pay out substantially all taxable income for the year and minimize the possibility.
Speaker 3: Our board also declared a special distribution of $0.07 per share in an effort to pay out substantially all taxable income for the year and minimize the possibility of paying excise tax.
We are paying excise tax.
Speaker 3: Now, looking at our fiscal fourth quarter results, adjusted net investment income per share was $0.62 for the quarter, consistent with the prior quarter.
Now looking at our fiscal fourth quarter results adjusted net investment income per share was 62 cents for the quarter.
With the prior quarter.
Speaker 3: We reported NAV per share of $19.63 of $0.05 per share from the prior quarter.
We reported NAV per share of $19.63 of <unk> <unk> per share from the prior quarter.
Speaker 3: The quarterly increase was mainly the result of earnings in excess of our quarterly dividend and steady marks in our portfolio.
Quarterly increase was mainly the result of earnings in excess of our quarterly dividend and steady marks in our portfolio.
Speaker 3: Our investment activity was lighter in the fourth quarter at $87 million of new investment commitments.
Our investment activity was lighter in the fourth quarter and $87 million of new investment commitments.
Speaker 3: ARMIN will provide more detail, but in summary, the relatively modest origination total for the fourth quarter reflected the seasonal summer slowdown in our market, as well as our highly selective approach to investing amid the uncertainty in the current economic environment. That said, we continue to see a steady stream of opportunities and overall deal flow is healthy as we move into our new fiscal year.
Armen, who will provide more detail, but in summary, the relatively modest origination picking up for the fourth quarter reflected the seasonal summer slowdown in our market as well as our highly selective approach to investing amid the uncertainty in the current economic environment.
That said, we continue to see a steady stream of opportunities that old world deal flow was healthy as we move into our new fiscal year.
Speaker 3: Despite the more muted quarter, we had solid originations in full year 2023 as we leveraged the Oak Tree platform to originate over $700 million of new investment commitments, representing about 25% of the portfolio today.
Despite the more muted quarter, we had solid originations and full year 2023, as we leverage the oaktree platform.
To originate over $700 million of new investment commitments, representing about 25% of the portfolio today.
Speaker 3: This is particularly noteworthy given these assets were originated during one of the most attractive environments for private credit that we've experienced in recent memory, driven by higher interest rates resulting in attractive deal characteristics such as lower leverage and loan-to-values, better terms, and wider spread.
This is particularly noteworthy given these assets were originated during one of the most attractive environment for for private credit that we've experienced in recent memory.
Driven by higher interest rates result, again attractive deal characteristics, such as lower leverage and loan to values better terms and wider spreads.
Speaker 3: On the repayment front, we received $364 million from paydowns and exits in the fourth quarter.
On the repayment front, we received $364 million from Paydowns and exits in the fourth quarter.
Speaker 3: While market activity has been generally slower given higher interest rates and fewer M&A transactions, we continue to receive steady levels of repayments, including in some of our junior debt positions. We have also been opportunistically selling out of public debt investments.
Market activity has been generally slower given high given higher interest rates and fewer M&A transactions, we continued to receive steady levels of repayments, including in some of our junior debt positions and we have also been opportunistically selling out of public debt investments.
Speaker 3: In total, about 30% of our portfolio turned over in fiscal year 2022.
In total about 30% of our portfolio turned over in fiscal year, 2020 three.
Speaker 3: We believe this is attributable to our differentiated portfolio of private loans, and we have also been opportunistically selling some of our public debt based on the recent strength in the credit market.
We believe this is attributable to our differentiated portfolio of private loans and we've also been opportunistically selling some of our public debt.
On the recent strength in the credit markets.
Over the course of the fiscal year, our portfolio turnover has resulted in a positive shift in our investment composition.
Speaker 3: Over the course of the fiscal year, our portfolio turnover has resulted in a positive shift in our investment composition.
Speaker 3: we've seen our first lane investments increase from 71% as of September 30, 2022, to 76% as of September 30, 2023. At the same time, we've experienced a decline in second lane investments, which decreased from 16% to 10% over the same period.
We've seen our first lien investments increased from 71% as of September 32020 to be 76% as of September 32023.
At the same time, we've experienced a decline in second lien investments, which decreased from 16% to 10% over the same period.
Speaker 3: This shift underscores our emphasis on improving the risk return profile of our portfolio and aligning our investments with the ever evolving market condition.
This shift underscores our emphasis on improving the risk return profile of our portfolio and aligning our investments with the ever evolving market conditions.
Speaker 3: Credit quality improved modestly during the quarter and remained solid overall, with four investments and non-accrual status at quarter end representing just 1.8% of the portfolio at fair value and 2.4% of the portfolio at cost.
Credit quality improved modestly during the quarter and remained solid overall with four investments on nonaccrual status at quarter end, representing just one 8% of the portfolio at fair value and two 4% of the portfolio at cost.
Speaker 3: As I noted earlier, the merger with OSI2 continues to positively impact our business.
As I noted earlier the merger with OSI to continues to positively impact our business. We have been realizing the benefits of scale gain from the transaction remains on track to achieve $1 $4 million worth of operating expense synergies synergies on an annual basis.
Speaker 3: We have been realizing the benefits of scale gained from the transaction, remain on track to achieve $1.4 million worth of operating expense synergies on an annual basis.
Speaker 3: We've also been working to further bolster OCSL's capital structure post-merger.
We've also been working to further bolster oce yourselves capital structure post merger.
Speaker 3: In the June quarter, we increased the size of our syndicated credit facility to $1.2 billion from $1.0 billion and extended the maturity by two years to 2028 without an increase to the spread that we borrow at of 200 basis points over so far.
In the June quarter, we increased the size of our syndicated credit facility. The $1 2 billion from 1.0 day in and extended the maturity by two years to 2028 without an increase to the spread that we borrow at a 200 basis points over sofa.
Speaker 3: We also consolidated a credit facility acquired from OSI2 with our existing Citibank facility and pushed out the maturity by two years to 2027.
We also consolidated our credit facility acquired from OSA too with our existing Citibank facility and pushed out the maturity by two years to 2027.
Most recently in August we.
Speaker 3: successfully issued 300 million dollars in senior notes due in 2029.
We successfully issued $300 million in senior notes due in 2029.
Speaker 3: Together, these transactions improved our funding profile by boosting our unsecured borrowings to 57% and investment capacity to over $1 billion, which allows us to pursue continued growth in the years ahead.
Together these transactions improved our funding profile by boosting our unsecured borrowings to 57% and investment capacity to over $1 billion, which allows us to pursue continued growth in the years ahead.
Speaker 3: With that, I would like to turn the call over to Armin to provide more color on our portfolio activity and the market environment.
With that I would like to turn the call over to Arvind to provide more color on our portfolio activity and the market environment.
Speaker 4: Thanks, Matt, and hello, everyone. I'll begin with comments on the market environment. The economy grew in the calendar third quarter, supported by a strong U.S. job market. However, broader macro conditions remain vulnerable due to the presence of higher interest rates and slowing earnings growth. This is particularly evident in the leveraged credit markets, where we believe investors are increasingly exposed to tail risk.
Thanks, Matt and Hello, everyone.
I'll begin with comments on the market environment.
The economy grew in the calendar third quarter supported by a strong U S job market, however, broader macro conditions remain vulnerable due to the presence of higher interest rates and slowing earnings growth. This is particularly evident in the leveraged credit markets, where we believe investors are increasingly exposed to tail risks.
Speaker 4: These risks arise as borrowers struggle to service increasingly expensive debt, especially those that are burdened with high costs on floating rate loans, which have become more expensive following the Fed's aggressive campaign to raise interest rates over the past two years.
These risks arise as borrowers struggled to service increasingly expensive debt, especially those that are burdened with high costs on floating rate loans, which have become more expensive. Following the fed's aggressive campaign to raise interest rates over the past two years.
When we examine this further we see that many companies, particularly those with outstanding leveraged loans or private debt.
Speaker 4: When we examine this further, we see that many companies, particularly those with outstanding leveraged loans or private debt, borrowed heavily at a time when interest rates were near zero.
Road heavily at a time when interest rates were near zero as.
Speaker 4: As a result, they now have capital structures that may be unsustainable in today's higher-for-longer interest rate environment.
As a result, they now have capital structures that may be unsustainable in today's higher for longer interest rate environment.
Speaker 4: Importantly, the amount of debt represented by these markets is substantial. Not only have the U.S. broadly syndicated loan and private credit markets grown roughly two-fold and seven-fold respect
Importantly, the amount of debt represented by these market is substantial not only have the U S broadly syndicated loan and private credit markets grown roughly twofold and seven fold respectively. Since the global financial crisis in 2008, but the proportion of lower quality that in these markets has also increased by.
Speaker 4: since the global financial crisis of 2008, but the proportion of lower quality debt in these markets is also.
Speaker 4: By the end of the third calendar quarter, loans with credit ratings of B or below represented almost 75% of U.S. leveraged loans, compared to roughly 35% prior to the financial crisis.
The end of the third calendar quarter loans with credit ratings of B or below represented almost 75% of U S leveraged loans compared to roughly 35% prior to the financial crisis.
Speaker 4: When the weakest segment of the credit markets is both sizable and more vulnerable than usual, investors face a heightened risk of increased defaults and lower than anticipated recovery.
When the weakest segment of the credit markets as both sizeable and more vulnerable than usual investors face a heightened risk of increased defaults and lower than anticipated recovery rates. If this were to happen both performing and distressed credit investors are likely to encounter an expanded set of challenges and opportunities.
Speaker 4: If this were to happen, both performing and distressed credit investors are likely to encounter an expanded set of challenges and opportunities.
Speaker 4: At Oaktree, as we have navigated through many economic cycles, we've gained valuable experience that has allowed us to capitalize on opportunities, which is why we are optimistic about what might be ahead for OCSL. Our ample capital and commitment to navigating short-term volatility have been instrumental in our success to date and of our strategy moving forward. To be sure, we believe...
At Oaktree as we have navigated through many economic cycles. We've gained valuable experience that has allowed us to capitalize on opportunities, which is why we are optimistic about what might be ahead for ocs L. Our ample capital and commitment to navigating short term volatility have been instrumental in our success to date and of our strategy moving forward.
To be sure we believe caution remains necessary.
Speaker 4: but we are confident in the resilience of our portfolio that is well-equipped to endure any potential economic downturn.
But we are confident in the resilience of our portfolio that is well equipped to endure any potential economic downturn.
Speaker 4: This is evidenced by our elevated repayment activity throughout the fiscal year, highlighting the strength of our portfolio. We expect to continue selectively investing across both the sponsor and non-sponsor backed markets, methodically pursuing attractive opportunities as they arise. Now.
This is evidenced by our elevated repayment activity throughout the fiscal year, highlighting the strength of our portfolio.
We expect to continue selectively investing across both the sponsor and non sponsor backed markets methodically pursuing attractive opportunities as they arise.
Now turning to the overall portfolio.
Speaker 4: At the end of the fourth quarter, our portfolio was well diversified to $2.9 billion at fair value across 143 companies. We continue to focus on investing at the top of the capital structure, favoring larger, more diversified businesses to contain risk.
At the end of the fourth quarter, our portfolio was well diversified with $2.9 billion at fair value across 143 companies. We continue to focus on investing at the top of the capital structure favoring larger more diversified businesses to contain risk.
Speaker 4: 86% of the portfolio was invested in senior secured loans, with first lien loans representing 76% of the portfolio at fair value.
86% of the portfolio was invested in senior secured loans with first lien loans, representing 76% of the portfolio at fair value.
Speaker 4: Median portfolio company EBITDA as of September 30th was approximately $109 million, and leverage in our portfolio companies was steady at five times, well below overall...
Median portfolio company EBITDA as of September 30th was approximately $109 million and leverage our portfolio of companies was steady at five times well below overall middle market leverage levels.
Speaker 4: The portfolio's weighted average interest coverage based on trailing 12-month performance was steady at 2.2%.
The portfolio's weighted average interest coverage based on trailing 12 month performance was steady at two two times.
Speaker 4: In the September quarter, we originated $87 million of new investment commissions across three new and three existing portfolio companies.
The September quarter, we originated $87 million of new investment commitments across three new and three existing portfolio companies.
Speaker 4: All of these originations were first leaned, including a $41 million add-on commitment to Keter, an end-to-end recycling and waste-managed services.
All of these originations were firstly, including a $41 million add on commitment to Kedar and end to end recycling and waste managed services company.
Speaker 4: We also committed $30 million across two prominent application software.
We also committed $30 million across two prominent application software companies Force point, a provider of network security and fenestra, a global financial software company.
Speaker 4: Forcepoint, a provider of network security, and Finastra, a global financial software
Speaker 4: I wanted to spend a few moments to delve into our approach to lending to the software.
I wanted to spend a few moments to delve into our approach to lending to the software sector, which now represents 16.5% of our total investments.
Speaker 4: which now represents 16.5% of our total investment.
Speaker 4: First, we focus on lending to large enterprise software businesses with mission-critical solutions that deliver significant added value to their customers.
First we focus on lending to large enterprise software businesses with mission critical solutions that deliver significant added value to their customers.
Speaker 4: Second, we look for companies with a diverse customer base, reducing their reliance on any single industry and enhancing overall performance stability.
We look for companies with a diverse customer base, reducing their reliance on any single industry and enhancing overall performance stability.
Speaker 4: Third, we generally partner with a select group of private equity sponsors that have significant domain experience in the sector.
Third we generally partner with a select group of private equity sponsors that have significant domain experience in the sector.
Speaker 4: And finally, we have deliberately steered clear of the more aggressively priced transactions prevalent in the market in 2021 and 2022.
And finally, we have deliberately steered clear of the more aggressively priced transactions prevalent in the market in 2020, one and 2022 as an experienced investor in this space, we believe that the risk reward proposition in most of these deals wasn't favorable as a result, we passed all of the software transactions.
Speaker 4: As an experienced investor in this space, we believed that the risk reward proposition in most of these deals wasn't favorable.
Speaker 4: As a result, we passed on all of the software transactions we evaluated from September 2021 through September 2022.
Evaluated from September 2021 through September 2022.
Speaker 4: As we begin the new fiscal year, our origination activity is steady. We have a strong pipeline of opportunities that we anticipate will fund prior to calendar year end.
As we begin the new fiscal year, our origination activity is steady we have a strong pipeline of opportunities that we anticipate will fund prior to calendar year right.
Speaker 4: Turning to credit quality, we've experienced positive developments in our non-accruals, which declined to 2.4% and 1.8% of the portfolio at cost and fair value, respectively.
Turning to credit quality, we've experienced positive developments in our non accruals, which declined to two 4% and 1.8% of the portfolio at cost and fair value respectively.
Speaker 4: These improvements were largely attributable to the successful resolution of Athenx, which was fully repaid during the fourth quarter.
These improvements were largely attributable to the successful resolution of a Phoenix, which was fully repaid during the fourth quarter as.
Speaker 4: As you may recall, we placed our investment in this company on non-accrual earlier in the year, after it was unable to secure approval of a key prescription drug.
As you May recall, we placed our investment in this company on nonaccrual earlier in the year. After it was unable to secure approval of a key prescription drugs.
Speaker 4: We had structured the loan with strong downside protections and held a senior position, which allowed us to secure repayment at par plus accrued interest and fees as the company sold assets and used the proceeds to pay off what it owed to OCSL, resulting in a realized IRR.
We have structured alone with strong downside protection and held the senior position, which allowed us to secure repayment at par plus accrued interest and fees as the company sold assets and use the proceeds to pay off what it O to O C. S L, resulting in a realized IRR.
Of about 20%.
Speaker 4: Another portfolio company, SiO2, emerged from bankruptcy in August . We restructured our investment, which allowed us to place the first lean tourmaline back on accruals.
Another portfolio company S. I O two emerged from bankruptcy in August we restructured our investment which allowed us to place the first lien term loan back on accrual status.
Speaker 4: However, we did add a new investment to non-aggrual status in the
However, we did add a new investments in non accrual status in the quarter.
Speaker 4: Continental Intermodal Group, a provider of integrated logistics infrastructure and solutions to the oil and gas.
Continental intermodal group, a provider of integrated logistics infrastructure and solutions to the oil and gas industry.
Speaker 4: This investment, which was made just prior to the onset of the COVID pandemic in January 2020, involved the financing from Oaktree to refinance existing...
This investment which was made just prior to the onset of the Covid pandemic in January 2020 involved the financing from oaktree to refinance existing debt over.
Speaker 4: Over the past few years, the company has faced challenges related to the evolving landscape in oil and natural gas exploration.
Over the past few years the company has faced challenges related to the evolving landscape in oil and natural gas exploration.
Speaker 4: Nevertheless, because of structural protections in our loan, OCSL has been repaid on roughly 70% of its original funded amount to date, and the position had $16 million of fair value as of September 30, 2022.
Nevertheless, because of structural protections in our loan Oh C. S. L. I had been repaid on roughly 70% of its original pointed them out to date and the position had $16 million of fair value as of September 32023.
Speaker 4: While the company is exploring options, we felt it was prudent to place it on non-accrual status.
While the company is exploring options, we felt it was prudent to place it on nonaccrual status at this time.
It is important to note that our overall portfolio is in solid shape.
Each of these non accruals were leveraging oaktree has extensive experience of workouts to achieve successful outcomes on behalf of our shareholders in short our robust capital and liquidity position, coupled with the resources of Oaktree give us tremendous confidence in our ability to succeed in the years ahead now I will turn the call over to Chris discuss our financial results in more.
Dale.
Speaker 5: OCSL delivered another quarter of strong financial performance, finishing the fiscal year 2023 on a high note. For the fourth quarter, we reported adjusted net investment income of $47.8 million, or $0.62 per share, up from $47.6 million and consistent with $0.62 per share in the third quarter.
Thank you Armen.
CSL delivered another quarter of strong financial performance, finishing the fiscal year 2023 on a high note.
For the fourth quarter, we reported adjusted net investment income of $47 $8 million or 62 per share.
From $47 6 million and consistent with 62 per share in the third quarter.
Speaker 5: The slight increase on a dollar basis was primarily driven by higher adjusted total investment income and lower base management fees, which was partially offset by higher interest expense.
The slight increase on a dollar basis was primarily driven by higher adjusted total investment income and lower base management fees, which was partially offset by higher interest expense.
Speaker 5: Net expenses for the fourth quarter totaled $54.4 million, up $0.9 million sequentially. The increase was mainly driven by $1.5 million of higher interest expense due to the impact of rising interest rates on the company's floating rate liabilities and was partially offset by lower base management fees due to a slightly smaller portfolio and continued realization of operating synergies from the OSI 2 merger.
Net expenses for the fourth quarter totaled $54 $4 million of 0.9 million sequentially. The increase was mainly driven by $1.5 million of higher interest expense due to the impact of rising interest rates on the company's floating rate liabilities and was partially offset by lower base management fees due to a slightly smaller portfolio.
<unk> and continued realization of operating synergies from the OSI to merger.
Speaker 5: As a reminder, we waived $1.5 million in fees during the quarter as part of the OSI-2 merger.
As a reminder, we waived $1.5 million and fees during the quarter as part of the OSI to merger.
Now moving to our balance sheet.
Speaker 5: OCSL's net leverage ratio at quarter end was 1.01 times, down from 1.14 times at the end of the June quarter, as proceeds from repayments, exits, and sales exceeded funded investment activity by $247 million in the quarter. That said, our net leverage continues to be within our targeted range of 0.9 to 1.25 times.
Oh Csl's net leverage ratio at quarter end was 1.01 times down from $1. One four times at the end of the June quarter as proceeds from repayments exits and sales exceeded funded investment activity of $247 million in the quarter.
That said, our net leverage continues to be within our targeted range of 0.9 to 1.25 times.
Speaker 5: As of September 30th, total debt outstanding was $1.7 billion and had a weighted average interest rate of 7.0%, including the effect of our interest rate swap agreements, up from 6.6% at June 30th due to the impact of higher interest rates. Unsecured debt represented 57% of total debt at quarter end, up from 36% at the end of the prior quarter.
As of September 30th total debt outstanding was $1 $7 billion and had a weighted average interest rate of 7.0%, including the effect of our interest rate swap agreements up from six 6% at June 30th.
The impact of higher interest rates unsecured debt represented 57% of total debt at quarter end up from 36% at the end of the prior quarter.
Speaker 5: The mix has shifted due to our successful senior note offering in August , where, as Matt noted, we raised $300 million of senior unsecured notes due in 2029 at a rate of 7.1%.
The mix has shifted due to our successful senior note offering in August where as Matt noted, we raised $300 million of senior unsecured notes due in 2029 at a rate of seven 1%.
Speaker 5: In connection with the notes offering, we entered into an interest rate swap agreement whereby we received a fixed interest rate of 7.1% and pay a floating rate based on a three-month SOFR plus 3.126% on the entire notional amount of the notes.
In connection with the notes offering we entered into an interest rate swap agreement, whereby we received a fixed interest rate of seven 1% and pay a floating rate based on a three months soper plus $3, 126% on the entire notional amount of the notes.
Speaker 5: We view this as a natural hedge against our primarily floating rate assets in the event short-term rates decline down the road.
We view this as a natural hedge against are primarily floating rate assets in the event short term rates declined down the road.
Speaker 5: At fiscal year end, we continue to have ample liquidity to meet our funding needs with total dry powder of approximately $1 billion, including $136 million of cash and $908 million of undrawn capacity on our credit facility.
At fiscal year end, we continued to have ample liquidity to meet our funding needs with total dry powder of approximately $1 billion.
Including $136 million of cash and $908 million of Undrawn capacity on our credit facilities unfunded.
Speaker 5: unfunded commitments, excluding the unfunded commitments to the joint ventures, were $206 million with approximately $154 million eligible to be drawn immediately, whereas the remaining amount is subject to certain milestones that must be met by portfolio companies before funds can be drawn.
Unfunded commitments, excluding the unfunded commitments to the joint ventures were $206 million with approximately $154 million eligible to be drawn immediately whereas the remaining amount is subject to certain milestones that must be met by portfolio companies before funds can be drawn.
Now turning to our two joint ventures.
Speaker 5: Our JVs continue to deliver robust performance to OCSL. Together, the JVs currently hold $446 million of investments, primarily in broadly syndicated loans, spread across 50 portfolio companies.
Our JV continued to deliver robust performance to O C. S. L. Together with the JV is currently hold $446 million of investments primarily in broadly syndicated loans spread across 50 portfolio companies.
Speaker 5: For the quarter, the JVs generated ROEs of over 15%, a testament to the solid underlying credit quality and the positive impact of higher interest rates on the predominantly floating rate loan.
For the quarter, the JV generated ROE of over 15% a testament to the solid underlying credit quality and the positive impact of higher interest rates on the predominantly floating rate loans.
Additionally, we received a $1 1 million dollar dividend from the Kemper JV, which was consistent with the prior quarter.
Leverage at each of the Jv's remained generally in line with the prior quarter one two times.
Speaker 5: During the quarter, we drove down funding costs at our JVs by refinancing the credit facilities in each vehicle. We put in place new three-year facilities with a new lending partner and were able to reduce pricing by 75 basis points, SOFR plus 200 basis points.
During the quarter, we drove down funding costs better jb's by refinancing our credit facilities in each vehicle, we put in place new three year facility with a new lending partner and were able to reduce pricing by 75 basis points Doper plus 200 basis points.
Speaker 5: We were pleased with this outcome as it will be accretive to the ROEs of the JV.
We're pleased with this outcome as it will be accretive to the ROE of the J D.
Speaker 5: In summary, we are very pleased with our financial results for the quarter and the fiscal year, and we continue to believe that our strong balance sheet positions us well for fiscal year 2024. Now, I will turn the call back to Matt for some closing remarks.
In summary, we were very pleased with our financial results for the quarter and the fiscal year and we continue to believe that our strong balance sheet positions us well for fiscal year 'twenty 'twenty four.
Now I will turn the call back to Matt for some closing remarks.
Speaker 3: Thank you, Chris. Our strong financial performance for both the quarter and full year has enabled us to generate an annualized return on adjusted net investment income of 12.6 percent during the September quarter and 12.1 percent for the full year. Our results have been underpinned
Thank you, Chris our strong financial performance for both the quarter and full year has enabled us to generate an annualized return on adjusted net investment income of 12, 6% during the September quarter, and 12, 1% for the full year.
Our results have been underpinned by several factors, we've been experiencing the benefits of rising interest rates and have had successful investment repayments in sales, while maintaining discipline in our capital deployment.
Speaker 3: We've been experiencing the benefits of rising interest rates and have had successful investment repayments and sales while maintaining discipline in our capital deployment.
Our balance sheet has been strengthened through our recent notes offering providing us with ample liquidity to invest.
Speaker 3: And as Chris noted, our joint ventures have excelled, consistently delivering mid-team returns and equity in the most recent quarter.
And as Chris noted our joint ventures have excelled consistently delivering mid teen returns on equity in the most recent quarter.
Speaker 3: Looking ahead, we are committed to maintaining our strong performance as we remain disciplined in all aspects of our operation.
Looking ahead, we are committed to maintaining our strong performance as we remain disciplined in all aspects of operations.
Speaker 3: Our portfolio continues to be very well positioned, and our robust relationships and deep underwriting expertise equip us to capitalize on any future volatility that might arise in the market.
Our portfolio continues to be very well positioned and our robust relationships and deep underwriting expertise equip us to capitalize on any future volatility that might arise in the market.
Speaker 3: We are proud of our growth and our earnings for the past several years and are confident that we remain very well positioned to continue delivering attractive returns going forward.
We are proud of our growth and our earnings over the past several years and are confident that we remain very well positioned to continue delivering attractive returns going forward.
Speaker 3: As always, we appreciate your participation on the call today and for your interest in OCSL. With that, we're happy to take your questions. Operator, please open the line.
As always we appreciate your participation on the call today and for your interest in O C. S. L.
With that we're happy to take your questions operator, please open the lines.
Speaker 1: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Speaker 1: If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question,
If youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two.
Speaker 1: At this time, we will take our first question, which will come from Bryce Rowe with B. Riley. Please go ahead. Thanks.
At this time, we will take our first question, which will come from Bryce Rowe with B Riley. Please go ahead.
Hi, Thanks, good morning.
Speaker 6: Wanted to start with some of the the repayment activity that you noted a bit elevated Relative to maybe what we've seen over the last even last couple years Could you talk about kind of the nature of the exits? What what was?
Wanted to start with some of the the repayment activity that you noted are a bit elevated.
Relative to maybe what we've seen over the last even last couple of years.
Could you talk about kind of the nature of of the exits are what what was prepayment or repayment versus sale and then wanted to also ask about the comment you made about kind of seasonality versus selectivity and in terms of the origination activity.
Speaker 6: prepayment or repayment versus sale. And then wanted to also ask about the comment you made about kind of seasonality versus selectivity in terms of the origination activity, hoping you might be able to kind of parse that out for us.
Hoping you might be able to kind of parse that out for us.
Speaker 4: Sure. This is Armin. I'll take the second question first. So in terms of seasonality, you know, the summer months were a little bit slow in terms of just activity. I think the rise in base rates that started last year, you know, became
Sure. This is armen I'll take the second question first so in terms of seasonality as you know the summer months were a little bit slow in terms of just activity I think the.
The rise in base rates that started last year.
Same.
Speaker 4: sort of a reality for folks this year and so M&A volumes are down materially this year and that's why
Sort of a reality for folks this year end and so M&A volumes are down materially this year and that's why.
Speaker 4: That's why the, I would say, the slowdown occurred in the summer months. There also has been a fair portion of technology-related
That's why the.
Yeah, I would say the slowdown occurred in the summer months are also has been a fair portion of technology related transactions. This year with some large tech take privates, but outside of tech I wouldn't say that you know a dramatically.
Speaker 4: transactions this year with some large tech take privates.
Speaker 4: But outside of tech, I wouldn't say that, you know, thematically, you know, any one industry has been a big driver of origination. You know, in tech, it's mainly the reason deals are still getting done is that there's at least, you know, perceived growth for.
The industry has been a big driver of origination and package. It's mainly the reason deals are still getting done is that there's there is at least perceived growth.
For.
Speaker 4: for those tech companies. And they're willing to write really large equity checks in those tech deals, 60, 70, 80% types of checks and still be able to underwrite to nice growth for those businesses. So those deals are getting done. With that said, we do expect a pickup in origination activity back to sort of the upper end of our quarterly origination activity in the last four or five quarters.
For those for those type of companies and they're willing to write really large equity checks. Some of those tech deals. You know 60, 70, 80% types of checks and still be able to underwrite to nice growth for those businesses. So those deals are getting done.
That said, we do expect.
Pickup in origination activity.
Back to sort of the upper end of our quarterly origination activity in the last four or five quarters.
Speaker 4: for the quarter ended 1231, I hesitate to provide very.
For the quarter ended 12 31.
As a teacher provide very detailed guidance on that because some some deals could fall into January but we are we do have a fair number of deals in the pipeline.
Speaker 4: detailed guidance on that because some some deals could fall into January , but we are we we do have a fair number of deals in the pipeline.
Speaker 4: that are expected to fund this quarter that will be meaningfully higher than the originations that we saw in the quarter ended September 30th. For guidance purposes, though, I would just say that a lot of those originations are going to be happening sort of later in the first fiscal quarter or fourth calendar.
That are expected to fund this quarter that will be meaningfully higher than the originations that we saw in the quarter ended September 30th for for for guidance.
Purposes, though I would just say that.
A lot of those originations are going to be happening sort of later in the first fiscal quarter or fourth calendar quarter.
Speaker 4: So, I wouldn't model, you know, a full quarter's worth of income associated with those, but you will see a pretty big pickup.
So I wouldn't model a full quarter's worth of income associated with those but you will see a pretty big pick up in.
Speaker 4: In the case of payoffs versus sales, in terms of the exits, most of the $309 million or so of proceeds was from payoffs. About 75% was from payoffs, and the rest were from sales. In the case of... In the case of...
In the case in the case of payoffs versus sales in terms of the exited most of the the $309 million or so of proceeds was from payoffs about a 75% was from payoffs.
And the rest were from broker themselves.
In the case of.
Speaker 4: In the case of some of them, it was, you know, there was a life sciences investment. I think a big one was our investment in Jazz Acquisition or WEMCOR, which is a private equity-owned company that got sold to a strategic.
In the case of some of them. It was there was a life science investment I think a big one was our investment in jobs acquisition or when core which is a private equity owned companies that got sold to a strategic so I wouldn't say systematically there was anything.
Speaker 4: So I wouldn't say thematically there was anything really going on that drove the payoffs, but I think there were just some surprises in terms of repayments. You know, for example, we also got a repayment in our position in Aptio, which was a software name that fully paid off as well. So some chunky payoffs in software, including WP Engine, and then some, you know, more idiosyncratic things like the WinCorp repayment that occurred upon the sale of that business.
Really going on that drove the payoffs, but I think there was just some surprises.
In terms of repayments you know for example, we also got a repayment in our position in <unk>, which was a software name that fully paid off as well so some chunky pay offs.
In software.
Including the WP engine.
And then some more idiosyncratic things like the wind core repayment that occurred upon the sale of that business.
Speaker 6: Armin, I appreciate all that detail. I'll step back in queue. Thanks. No problem.
And I appreciate all that detail I'll step back in queue. Thanks.
Thank you.
Yeah.
Speaker 1: And our next question will come from Ryan Lynch with KBW. Please go ahead.
And our next question will come from Ryan Lynch with K B W. Please go ahead.
Yeah.
Speaker 5: Hey, good morning. Thanks for taking my questions. First one I had was, with your new unsecured notes that you guys issued, you guys swapped out the rate to a flow.
Hey, good morning, Thanks for taking my questions first one I had was with new unsecured notes that you guys issued you guys swapped out the rate to a floating rate.
Speaker 5: You guys have done that in the past. I'm just curious, is that more of a sort of a rate call given where base rates are today and to kind of better match your portfolio in case rates fall, or is that something that's more a policy change where you guys are just going to start swapping out unsecured notes to floating rate and basically have an entire floating rate liability structure? Yeah. Yeah. Yeah.
You guys have done that in the past I'm. Just curious is that more of a sort of a rate call given where base rates are today and kind of better match. Your portfolio in case rates fall or is that something that's more a policy change where you guys are just going to start swapping out on.
Secured notes to just a floating rate and basically have on an entire a floating rate liability structure.
Hi, It's Matt Stuart.
Speaker 2: Given the makeup of our asset mix, which is about 90% floating rate, we did it to better match our assets and liabilities. We do have one fixed-rate note that's still fixed today, which is our 25s, which is $300 million. And that matches roughly our fixed-rate assets on the left side of our balance sheet.
Given the makeup of our asset mix, which is about 90% floating rate. We bet. We we did it to better match, our assets and liabilities. We do have one fixed rate note. That's still fixed today, which is R 20, fives, which is $300 million and that matches roughly our pick.
Right assets on our on the west side of our balance sheet.
Speaker 7: But going forward, we're taking the approach of matching our liability mix, so all of our secured facilities are floating, and then our most recent bond deal and then our 27s are also floating, so we're matching our assets and liabilities from that perspective.
But going forward.
You know, where we're taking the approach of.
Matching our liability mix so all of our secured facilities are floating.
And then our two most recent bond deal and then our 'twenty Sevens are also floating so we're matching our assets and liabilities from that perspective.
Okay.
Speaker 8: And then one thing which was a positive surprise to me, you guys were able to, it sounds like lower the spread on your credit facility in your JV by 75 basis points. Should we expect that to flow through to any higher distributions from those JVs going forward?
And then one thing which was a positive surprise to me you guys were able to Ah it sounds like lower the spur.
Spread on your credit facility and your JV by 75 basis points.
Should we expect that to flow through to any higher distributions from from those JV is going forward.
Hi, It's Matt again, we should expect a pickup of that 75 bps across the liability structure and going forward, we would have to declare I'm a G. A dividend with our JV partner. So it's up to our JV board, but all else being equal that's 75.
Speaker 7: We should expect a pickup of that 75 BPS across the liability structure going forward. We would have to declare a dividend with our JV partner, so it's up to our JV board. But all else being equal, that 75 BPS saving should flow through the bottom line, which will either accrete through earnings, through a potential distribution, or it'll accrete to NAV. So either way, that 75 BPS is accreting through the BDC.
Bps savings should flow through the bottom line, which will either accrete through.
Earnings through a potential distribution or it'll accrete to nap, so either way that 75 bps is creating through the BDC.
Speaker 8: And then one last question, maybe just a higher level question for you, Armin. It sounds like some of the market commentary you gave sounds a little bit cautious given
And then one last question, maybe just higher level question for you Armen you know it sounds like you know some of the the market commentary you gave it sounds a little bit cautious given where people finance some of their liability structures over the last couple of years and that kind of a big movement in rates.
Speaker 8: where people finance some of their liability structures over the last couple of years and kind of the.
Speaker 8: I'm just curious, fundamentals for private credit, when you look at revenues and EBITDA growth has been pretty healthy.
I'm just curious.
Fundamentals for for private credit you know when you look at revenues and EBITDA growth as it has been pretty healthy over throughout 2020 'twenty three.
Speaker 8: throughout 2020-23. I'm just curious, as if we roll into 2024, you've already seen sort of the decline in longer-term rates. Certainly, the forward LIBOR curve and the Fed funds probabilities continue to trend lower, especially with a report like today.
I'm just curious as we roll into 2024, you've already seen sort of the decline in longer term rates certainly.
The forward LIBOR curve and the fed funds probabilities continued to trend lower especially with a report like today.
Speaker 8: Does your more cautious stance start to change if we start to see sort of rate cuts or if inflation comes down more materially, which implies the greater likelihood of rate cuts earlier or kind of in terms of inflation?
Does your more cautious stance start to change if if we start to see sort of rate cuts or orphan inflation comes down more materially which implies that the greater likelihood of a rate cuts earlier or kind of in 2024.
It's a good question.
Speaker 4: So I don't think we'll see material rate cuts in the front end of the curve, which is kind of what matters for floating rate assets and liabilities.
So I don't think we will see material rate cuts in the front end of the curve, which.
Which is kind of what matters for floating rate assets and liabilities.
Speaker 4: without a meaningful recession. I don't think the Fed is just going to cut rates because.
Without a meaningful recession I don't think the fed is just going to cut rates because.
Speaker 4: it can. I just don't think they're positioned to do that unless and until there's a meaningful economic issue.
It can I I don't I don't I, just don't think they're they're positioned to do that.
Unless and until there's a meaningful economic issue.
So I think that the rates are while they might not be this high for a long period of time.
Speaker 4: are, you know, while they might not be this high for a long period of time, you know, into 2025 or 2026, I do think that rates are going to be materially higher for the foreseeable future versus what they were in 2018 or 2019 or 2021.
Into 'twenty 'twenty, five or 'twenty 'twenty six I do think that rates are going to be materially higher for the foreseeable future versus what they were in 2018 or 2019 or 2021.
Speaker 4: So, with or without a recession, I think that there will be stress and a reason to be very cautious. So, without a recession, there will be
So with or without a recession I think that there will be stress and a reason to be very cautious without a recession there will be.
Speaker 4: highly levered businesses that fail because they can't make their principal and interest as it comes due, with a recession, I think you see a broader issue in the economy. And just as a, just a little bit of a.
Highly levered businesses.
That failed because they can't make their principal and interest as it comes due.
The recession, I think you'll see a broader.
A broader issue in the economy.
And just as a just a little bit of.
Speaker 4: a data point for you using the broadly syndicated loan market as a benchmark. About 50% of the broadly syndicated loan market is B3 rated by Moody's. I would say that's pretty similar to a good chunk of private credit in terms of credit quality that was issued in 2018 or 2019. Of that, roughly 50% of the market, 60% is B3 rated by Moody's.
Hum.
A data point for you using the broadly syndicated loan market as a as a benchmark.
About 50% of the broadly syndicated loan market as being three rated by Moody's.
I'd say, that's pretty similar to a good chunk of private credit in terms of credit quality that was issued in 2018 or 2019.
Of that roughly 50% of the market.
60% will have a one to one fixed charge coverage ratio or lower.
Speaker 4: will have a one-to-one fixed charge coverage ratio or lower at the end of this year. And so I think that, you know, that's 30 percent of a one-and-a-half trillion dollar broadly syndicated loan market. That's a fair bit of sort of issues that need to be handled. And I think that as those defaults pick up and they roll through,
At the end of this year and so I think that you know that's 30% of a one and a half trillion dollar broadly syndicated loan market that that's a fair bit of sort of issues that need to be handled.
And I think that as those defaults pick up and they roll through.
Speaker 4: the banks are gonna have a tough time stepping up to kind of support the market. So I think there's gonna be a long winded answer to a fairly short question, which is, I just think that there's gonna be stress and fits and starts. And I think that looking backward at performance of businesses over the last 12 months being surprisingly good relative to what we thought it would be, doesn't necessarily mean that it will remain surprisingly good in the next 12 months.
The banks are going to have a tough time stepping up.
To kind of support the market, so I think theres going to be a long.
Long winded answer to fairly short question, which is I, just think that theres going to be stressed in fits and starts and I think that the.
Looking backward at performance of businesses over the last 12 months being surprisingly good relative to what we thought it would be doesn't necessarily mean that it will remain surprisingly good.
In the next 12 months.
Speaker 4: because we have had a pretty stimulative environment. We've had a few trillion dollars of stimulus through the CHIPS Act, the Inflation Reduction Act, the Infrastructure Act, and those are all, you know, those all helped to sort of bandaid our way through a pretty challenging economic picture, and I think it has buoyed the economy more than anybody thought.
Because we have had a pretty stimulative environment. We've had a few trillion dollars of stimulus through the other chips acne inflation reduction Act.
The infrastructure Act and those are all those all help to sort of band aid our way through.
A pretty challenging.
I don't think economic picture and I think it is buoyed.
What I mean more than anybody thought.
Speaker 4: But I think that that's going to start rolling off, and then we're going to get into an election year where what the Fed does with rates may be called into question.
But I think that that's going to start rolling off.
And then we're going to get into an.
An election year, where you know what the fed does with rates may be called into question.
Speaker 4: because of that election overhang. So I think there's a lot of uncertainty out there and reason to be cautious. I don't think that rates will decline just because inflation is heading in the right direction. I don't think rates will decline until you actually see a meaningful economic issue.
Because of that because of that election overhang. So a lot I think there's a lot of uncertainty out there and reason to be cautious.
I don't think that rates will decline just because inflation is heading in the right direction I don't think rates will decline until you actually see a meaningful economic issue.
Hi.
Speaker 8: Fair enough. That's that's good color on kind of your outlook and your thoughts and all that. That's all for me today.
Fair enough that's good color on kind of your outlook and your thoughts on all that that's all for me today.
Speaker 1: Again, if you have a question, please press star then 1 to join the call.
Again, if you have a question. Please press star then one to join the queue.
Speaker 1: Our next question here will come from Melissa Wedel with J.P. Morgan. Please go ahead.
Our next question here will come from Melissa Wedel with JP Morgan. Please go ahead.
Good morning, Thanks for taking my question first wanted to touch on the yield on new investments I think it was slide 10 in the deck. It looks like there's been I know, there's been some noise in that line item quarter over quarter, but noticed that the yield on new commitments in the September quarter was fault.
Speaker 9: First, I wanted to touch on the yield on new investments. I think it was slide 10 in the deck. It looks like there's been – I know there's been some noise in that line item quarter over quarter, but notice that the yield on new commitments in the September quarter was 12 percent. That was down about 60 bps quarter over quarter.
Oh, it's down about 60 bps quarter over quarter, but just hoping you could elaborate on sort of what's driving that.
Speaker 9: But just hoping you could elaborate on sort of what's driving that and if you expect sort of a.
Sort of that.
Speaker 9: lower yield on new commitment.
Lower.
Yields on new commitments.
Speaker 10: versus the rest of the portfolio to kind of persist over the next few quarters.
First is the rest of the portfolio to kind of persist over the next few quarters.
I don't know, Matt if you want to take that or if I should take that.
Hi, It's Matt Stuart I think.
Speaker 7: Just, it was a result of the deal flow that we saw during the quarter, as Armin mentioned. We did have a little bit more sponsor-heavy originations this quarter, which came with a little bit lower spread in the $600 to $650 range.
It was a it was a result of the deal flow that we saw during the quarter as Arvind mentioned, we did have a little bit more sponsor heavy.
Originations this quarter, which came with a little bit lower spread in the 600 to 650 range. So I wouldn't.
Speaker 7: view that as an indication of where we will be in the future with our non-sponsor origination capabilities as well. But I think it was just more around the makeup of the originations this quarter being more sponsor-heavy than not.
View that as an indication of where we would be in the future with or non sponsor origination capabilities as well, but I think it was just more around the makeup of the originations this quarter being more sponsor heavy than not.
Speaker 9: Okay, appreciate that. And then I get the follow up to that point and given our comments earlier about caution still being warranted in this environment. So, there being some optimism about the opportunities that.
Okay I appreciate that and then I guess a follow up.
To that point and given army earlier about caution still didn't warranted in this environment. So there remain some optimism about the opportunity set.
Speaker 9: Does the team have a view right now as to whether, you know, non-sponsor would be more attractive because of better spread, lower leverage, or is this an environment where you really do want to skew towards strong sponsor?
Got it.
Does the team have a.
Our view right now as to whether you.
Non sponsor would be more attractive because a better spread lower leverage or is this an environment, where you really do you want it in Torrance strong sponsor support.
Speaker 4: I wouldn't say that there is a big-picture preference one way or the other. I think arguments can be made for both being a good way to create downside protection.
Oh, Yeah. This environment I wouldn't say that there is a big picture preference one way or the other I think you know arguments can be made for.
For both being a good way to to go.
Create downside protection in.
Speaker 4: In the case of the non-sponsored side, you know, you got to think about those borrowers. They are taking on leverage to achieve a strategic initiative, usually around growth.
In the case of the non sponsored side you know you've got to think about those borrowers. They are taking on leverage to achieve a strategic initiatives usually around growth and with the cost of leverage as high as it is for a non sponsored deal would be sort of 12 to 14 or 15%.
Speaker 4: And with the cost of leverage as high as it is, you know, for a non-sponsored deal, it would be sort of 12 to 14 or 15 percent just given where spreads are and given where base rates are.
Just given where spreads are and given where base rates are.
Speaker 4: You can imagine that non-sponsored deal activity is a little slow because
You can imagine that non sponsored deal activity.
<unk> is a little slow because you know the return on equity for taking on that debt for this new initiative may or may not be what it used to be and so those strategic investments that businesses would make at a lower rate environment are slowing down in the current rate environment.
Speaker 4: you know, the return on equity for taking on that, you know, debt for this new initiative may may not be what it used to be. And so those strategic investments
Speaker 4: that businesses would make in a lower rate environment are slowing down in the current rate environment.
Speaker 4: So that's part of the reason for the, I would say, the slowdown in origination that could be on the non-sponsored side. On the sponsored side...
So that's part of our part of the reason for the I would say the slowdown in origination that it could be on the non sponsored side than on the sponsored side.
Speaker 4: I don't think you could paint every sponsor or every company with the same brush stroke.
I don't think you can paint every every sponsor or every company with the same brush stroke. There are there are certainly are very attractive businesses that are being underwritten conservatively by private equity sponsors and the equity checks are routinely are more than 50% in the current vintage of private.
Speaker 4: There certainly are very attractive businesses that are being underwritten conservatively by private equity sponsors, and the equity checks are routinely more than 50% in the current vintage of private equity deals.
Our private equity deals and.
Speaker 4: So, the quality of deal flow is actually quite attractive. The spreads are a little bit tighter than non-sponsored, but I would say the risk-adjusted returns in sponsored deal flow is probably the most attractive it's been in a very long time, getting 11.5% to 12%.
So the quality of deal flow is actually quite attractive spreads are a little bit or a little bit tighter than non sponsored but I would say the risk adjusted returns and sponsored deal flow is probably the most attractive it's been in a very long time, getting 11.5% to 12% coupons, where a sponsor who is writing a 60%.
Speaker 4: coupons where a sponsor is writing a 60% equity check.
Speaker 4: feels pretty good relative to sort of historical standards. And if you are able to underwrite the business, assuming.
Equity check feels pretty good relative to sort of historical standards and if you are able to underwrite the business assuming sort of a downside case a recession in 2024 of 2025.
Speaker 4: a sort of a downside case recession in 2024, 2025.
Speaker 4: It's a good vintage in sponsored lead deal flow that we're looking at right now.
It's a good I would say, it's a good vintage and sponsored led deal flow that way.
That right now.
Thanks for that context.
Yeah.
Yeah.
Speaker 1: And our next question will come from Eric Zwick with Hovde Group. Please go ahead.
And our next question will come from Erik Zwick with Hefty group. Please go ahead.
Speaker 11: Good morning. Just one question for me today. Looking at the diversification of your portfolio by industry, I noticed a specialty retail at about 5.4 percent, and given there's some concern over the consumer and spending and saving levels today, just curious if you could provide a little detail in terms of your portfolio companies, you know, what segment of the consumer market they're serving, and whether you're noticing any changes, either positive or negative, in terms of the recent performance of those portfolio companies. Thank you.
Hi, Good morning, just one question for me today looking at the diversification of your portfolio by industry I noticed a specialty retail at about five 4% in <unk>.
Given there is some concern over the.
Consumer spending and saving levels today, just curious if you could provide a little detail in terms of your portfolio companies what segment of the consumer market, they're serving and whether you're noticing any any changes either positive or negative in terms of the recent performance of those portfolio companies.
Speaker 4: For specialty retail, it's really a couple of chunky investments that are more sort of branded retail. We're not really big into retail as would be more typical of a retail industry.
Yeah, Bruce for specialty retail, it's it's really a couple of chunky investments that.
Our or more sort.
Sort of branded retail, we're not we're not really big into them.
Retail is would be.
More typical of a retail industry and.
Speaker 4: you know, one of our retail, a large position in our retail book.
You know one of our retail a large position where retail book.
Speaker 4: Melissa and Doug is a repayment that will be coming, so I think you will see that number kind of come down pretty materially. We are seeing...
Melissa Doug is a repayment that will be coming so I think you will see.
That number kind of come down pretty materially I. You know, we are seeing I wouldn't say a tremendous weakness in retail, but big picture as we look at some industry wide statistics, we are seeing some weakness in the consumer it it's not to the level of of this.
Speaker 4: I wouldn't say a tremendous weakness in retail, but a big picture, as we look at some industry-wide statistics, we are seeing some weakness in the consumer. It's not to the level of distress, but it is...
Dress, but.
Speaker 4: You know, I would say troubling. I mean, if you look at, for example, if you look at new home sales or home builders and you look at their cancellation rates, they have picked up in the quarter.
It is you know I would say troubling I mean, if you look at for example, if you look at our new home sales or homebuilders and you look at there are cancellation rates they have picked up in the quarter.
Speaker 4: ended September 30th, the read-through to building products is not a good one. So we're looking at more macro indicators and seeing that the consumer is probably stronger than we thought it would be, but weakening. If you look at credit card receivables.
Ended September 30th that the read through the building products is not a good one so we're looking at more macro indicators and seeing that the consumer is probably stronger than we thought it would be but still but the weakening if you look at.
Our credit card receivables.
Speaker 4: uh... your charge officer delinquency those are all starting to pick up a little bit in in the recent months
You know charge offs are delinquencies those are all starting to pick up a little bit in the recent months.
Speaker 12: So, we are, I would say, cautious around the retail segment and not really looking to add. And you would, I think, find that in the next, you know, couple quarters our retail exposure will come down. I appreciate that. The call out today. Thank you so much. No problem.
So we are I would say cautious around the around the retail segment and I'm not really looking to add and you would I think find that in the next couple of quarters, our retail exposure will come down.
I appreciate the color today. Thank you so much.
Okay.
And again, if you have a question you May press Star then one to join the queue.
Yeah.
At this time, we have no further questions Mr. Most of that Joe.
Speaker 2: Great. Thanks, Joe, 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 OCSL's website in the investor section.
Great. Thanks, Joe 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 see yourselves website in the investors section or by dialing 870 734475 to nine for U S callers or 141 to three.
Speaker 2: or by dialing 877-344-7529 for U.S. callers or 1-412-317-0088 for non-U.S. callers with the replay access code 4395-893 beginning approximately one hour after this broadcast.
170088 for non U S callers with the replay access code four 390 5893, beginning approximately one hour. After this broadcast we hope you have a wonderful holiday season, and we look forward to updating you again soon thank you.
Speaker 2: We hope you have a wonderful holiday season and we look forward to updating you again soon.
Yeah.
Speaker 1: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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