Q1 2024 Oaktree Specialty Lending Corp Earnings Call
[music].
Okay.
Hello, and welcome and thank you for joining Oaktree specialty lending Corporation's first fiscal quarter conference call.
Today's conference call is being recorded at.
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.
Now I would like to introduce Michael Most states you head of Investor Relations, who will host today's conference call. Mr. Mr. Gill you may begin.
Thank you operator, and welcome to Oaktree specialty lending Corporation's first 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 binding dotcom.
Joining us on the call today are Armen, <unk>, Chief Executive Officer, and Chief Investment Officer, Matt <unk>, President, Chris Mccown, Chief Financial Officer, and Treasurer, and Matt Stuart Our 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 the expected synergies and 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.
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 fund <unk>.
Investors and others should note that Oaktree specialty lending uses the investors section of its corporate website to announce material information the company encourages investors the media and others to review the information that it shares on its website with that I would now like to turn the call over to Matt.
Thanks, Mike and welcome everyone. Thank you for joining us today and for your interest in and support of CSL.
We identified a diverse set of attractive investment opportunities in our first quarter driving strong origination activity and solid earnings.
Adjusted NII was <unk> 57 per share down from 62 cents for the prior quarter. These.
These results reflect higher interest income for from our predominantly floating rate portfolio and benefits of the scale, we built with the OSI to merger. However.
However, our results were impacted by idiosyncratic performance challenges at four portfolio companies Armen.
Harman, who will provide more specifics, but we experienced an uptick in non accruals during the quarter as a result.
We are engaged and working with each company to address their specific situations, we're drawing upon our long history and proven expertise in turning around challenged investments as well as the deep resources of oaktree to maximize outcomes for our shareholders.
Investments on nonaccrual status at quarter end represented four 2% and five 9% of the debt portfolio at fair value and cost respectively.
That was up from one 8% of the debt portfolio at fair value and two 4% at the book of the portfolio at cost last quarter.
We reported NAV per share of $19.14 down from $19 63 per share for the prior quarter.
The decline reflected realized and unrealized losses on certain debt and equity investments, including the markdowns on the aforementioned four portfolio investments as well as the seven cents per share special distribution that was paid in December.
This was partially upset by broader credit spread tightening across the portfolio.
Our investment activity for the first quarter was strong with $370 million of new investment commitments.
Up substantially from 87 million in the prior quarter.
We continue to find attractive opportunities across sponsor non sponsor and discounted publicly traded credit and credit investments generating net portfolio growth for the quarter.
Even as we maintain our highly selective approach to investing amid the uncertain current economic environment Importantly, our new originations were made during an attractive environment for private credit highlighted by higher interest rates and lender friendly deal structure and terms, including lower leverage and loan to values. The weighted average yield on new debt invest.
<unk> was 11, 6%.
On the repayment front, we received $214 million from Paydowns and exits in the first quarter, while market activity has eased overall, given higher interest rates and fewer M&A transactions. We continued to receive steady levels of repayments. We have also been opportunistically selling out of certain liquid securities including <unk>.
Several junior capital positions.
As we noted previously about 30% of our portfolio turned over in fiscal year, 'twenty 23, and that trend continued into the first quarter. We believe this amplifies the strength of the overall portfolio and our underwriting and collection process.
As we see portfolio exits it is largely because of these companies achievements of their respective financial goals, enabling them to pay down debt refinance at lower rates or sell at attractive prices to a larger competitors in short these outcomes effectively validate our initial investment decisions.
Importantly, our portfolio turnover continues to drive a positive shift in our investment composition. Our first lien investments increased from 71% as of September 32022, 78% as of December 31, 2023 at the same time.
Second lien investments decreased from 16% to 8% this ship underscores our emphasis on improving the risk profile of our portfolio.
Turning to the right hand side of our balance sheet as always we maintained ample liquidity to meet funding needs at quarter end, our net leverage ratio was one times consistent with the prior quarter, we had 908 million available on our credit facility and 100 and 112 million of cash.
Our board approved a quarterly dividend of 55 cents per share consistent with the prior quarterly distribution importantly, our dividend continues to be covered by our earnings. Despite the headwinds caused by the increase in non accruals.
With that I would like to turn the call over to Arvind to provide more color on our portfolio activity and the market environment.
Thanks, Matt and Hello, everyone.
I'll begin with comments on our portfolio activity and then conclude with observations regarding the market environment.
Our portfolio was well diversified with $3 billion at fair value across 146 companies at the close of the quarter.
We continue to prioritize investing at the top of the capital structure with 86% of the portfolio invested in senior secured loans and first lien loans, representing 78% of the portfolio at fair value.
Further minimize risk we were focused on larger more diversified businesses median portfolio company EBITDA as of December was approximately $133 million and leveraging our portfolio of companies was approximately approximately five three times well below overall middle market leverage levels.
Our portfolio of companies have been performing well despite the higher interest rate environment. The portfolios weighted average interest coverage based on current base rates was in line with the prior quarter at one nine times in the December quarter, we originated $370 million of new investment commitments across 14, new and 10 existing portfolio companies.
Nearly all of these originations were first lien loans.
The diversity of our originations as evident in key examples from the quarter.
And spec one of the world's largest testing and certification services providers specializing in energy commodities and fuels.
Oaktree was presented with an opportunity to be the lead underwriter to fund the purchase of the company by a sponsor and provided $301 million or a $710 million financing package for the company, which came with a 2.5% original issue discount and a sofa plus 575% coupons.
S. L was allocated $43 million of this transaction.
Pet that an operator of veterinary hospitals as joint lead arranger and one of the largest lenders in the deal Oaktree made a $673 million total commitment with the company with O C. S L allocated $71 million.
Pro Frac and oilfield services business with fracturing fleets and sand mines.
This is a non sponsored name that Oaktree has been invested in for several years and as part of a refinancing package oaktree made a $150 million commitment and the $520 million refinancing.
C S L was allocated $29 million.
We also made $68 million of secondary market purchases, including discounted first lien bonds at an average price of 90.
As we move further into the new year, our origination activity is healthy and we have a strong pipeline of opportunities.
Turning to credit quality as Matt noted, we experienced an increase in non accruals during the quarter driven by the additions of Brasil Impella Pharmaceuticals, OTG management and Stitch acquisition also known as singer.
Another named <unk> logistics, which had been on nonaccrual was there was restructured industrial moved from non accrual status.
Looking closer at the new additions I'll begin with <unk> and Amazon marketplace. Aggregators. This is a company that capitalize on elevated demand during the pandemic, which required growing its operations and increasing leverage recently it has faced operational challenges related to supply chain delays and inventory as well as reduced Amazon traffic the.
Company entered forbearance on our loan during the first quarter and we were engaged with the management team and other lenders to develop a new path and the best possible outcome potentially including a restructuring.
Regarding OTG management. This company operates an airport concession business across several airports throughout the U S. We made this investment alongside our opportunities funds in 2020 one as the company was emerging from the pandemic travel slowdown while the Companys performance has been solid as air travel has rebounded and it states the higher interest expense burden from the increase.
And interest rates pressure and cash flow generation.
Given these headwinds in January the company announced a series of initiatives to position the business for long term growth and stability, including an agreement under which Oaktree and other investors will acquire the company. While this is a fluid situation. We are confident in the long term prospects for this business.
In Perl Pharmaceuticals, as a biotech company that develops central nervous system drugs sales are a key product have been slower than anticipated and the company filed for bankruptcy protection. During the December quarter. The company is currently engaged in the sale process as it exits bankruptcy and we're focused on maximizing long term value of the business and our ultimate recovery, we will have more to.
Sure on this name as a sale process plays out in the coming months.
Lastly, finger the world's largest consumer sewing machine company had initially seen a surge of business during the pandemic, but it has since endured a slowdown the sponsor has previously supported the business with additional capital and we're working with other lenders on a solution as the company returns to growth. While the company has stayed current on its cash interest payments based on <unk>.
Secondary trading prices, we determined that it was prudent to move this investment to non accrual.
It is important to note that the rest of our overall portfolio is in solid shape and with each of these non accruals were leveraging oaktree has extensive experience in workouts to achieve successful outcomes on behalf of our shareholders.
We're closely monitoring the health of our overall portfolio mindful that the high interest rates in the past two years have carried into calendar 2024 increased.
Increased borrowing cost as you've heard me say here before present elevated potential for more borrowers to struggled to service increasingly expensive debt.
With that in mind, I'll turn to our view on the market environment.
In recent months credit markets have rallied as investors expressed optimism about easing inflation in our potential and the rate hike cycle, both private and public credit markets have seen a surge of activity and an increase in competition, resulting in spreads moving tighter in legal terms, becoming more lenient as investors have been eager to put capital to work after experiencing.
<unk> limited supply over the summer months.
Nevertheless, we're mindful about the prevailing risks that you've heard me discuss on previous calls the persistence of elevated interest rates could still challenged borrowers with high debt loads and despite a slowdown inflation remains a concern for businesses.
Really we are closely monitoring companies that will need to refinance that in the coming years as it could face difficulties in the event financial conditions become restricted.
Against this backdrop, we believe caution continues to be warranted, our investment approach prioritizes relative value drawing upon the full breadth of oaktree scale and resources to selectively invest across both the sponsor and non sponsor back markets as we did in the first quarter and carefully pursue attractive opportunities as they arise.
Ample capital and robust liquidity and commitment to navigating short term volatility from the foundation for our success to date and the basis of our strategy moving forward. These attributes also feel my confidence in O C. S L and our ability to deliver improved profitability and strong returns in the year ahead.
Now I will turn the call over to Chris to discuss our financial results in more detail.
Thank you Armen.
As Matt noted, we reported adjusted net investment income of $44 $2 million or 57 cents per share down from $47 $8 million or 62 cents per share in the fourth quarter of last fiscal year the decrease.
This was primarily driven by lower adjusted total investment income, partially offset by a modest decline in net expenses due to lower part one incentive fees in the quarter.
Adjusted total investment income in the quarter was adversely impacted by a $5 $2 million decrease in interest income due primarily to the increase in non accrual investments discussed earlier, and partially offset by $1.7 million increase in fee income, resulting from prepayment and exit fees and they point 4 million increase in dividend income.
From the Companys investment in the Kemper JV.
Net expenses for the first quarter totaled $53 $8 million down <unk> 6 million sequentially. The decline was mainly driven by point $5 million of lower part one incentive fees.
As a reminder, we waived $1.5 million of fees during the quarter as part of the Oc OSI to merger.
Now moving to our balance sheet.
Ooh Csl's net leverage ratio at quarter end was 1.0 to time relatively stable with the level at the end of the September quarter.
Newly funded investment activity of $368 million exceeded proceeds from repayments and sales of $214 million, enabling us to grow the portfolio, but the markdowns taken in the quarter temper that growth.
Our net leverage continues to be within our targeted range of 0.9 to $1 two five times.
As of December 31, total debt outstanding was $1.66 billion and including the effects of our interest rate swap agreements at a weighted average interest rate of 7.0% consistent with the level at the end of the September quarter as interest rates remained steady during the quarter.
Unsecured debt represented 57% of total debt at quarter end also in line with the prior quarter.
We continue to have ample liquidity to meet our funding needs with total dry powder at quarter end of approximately $1 billion, including $112 million of cash and $908 million of undrawn capacity on our credit facilities.
Unfunded commitments, excluding unfunded commitments to the joint ventures were $200 million with approximately 166 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.
Turning now to our two joint ventures are JV is.
<unk> continued to deliver strong performance.
The JV is currently holds $450 million of investments primarily in broadly syndicated loans spread across 54 portfolio companies.
For the quarter. The JV is again generated attractive annualized ROE, which combined were approximately 15%.
This is a testament to the underlying credit quality of the portfolios and the positive impact of higher interest rates on the predominantly floating rate loans.
Additionally, we received a $1 4 million dollar dividend from the Kemper JV, which was up $350000 from the prior quarter as that vehicle has benefited from reduced funding cost following the credit facility refinancing that we completed in the September quarter.
Leverage at each J P declined slightly to one one times at quarter end.
In summary, despite the isolated credit incident that we experienced in the quarter. We were pleased with our financial results. We continue to believe that our strong balance sheet and attractive investment opportunities position us well for the remainder of fiscal year 2024, now I will turn the call back to Matt for some closing remarks.
Operator: Hello and welcome. Thank you for joining Oak Tree Specialty Lending Corporation's first fiscal quarter 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 session following the prepared remarks. Now, I would like to introduce Michael Mosticchio, Head of Investor Relations, who will host today's conference call. Mr. Mosticchio, you may
Thank you, Chris our financial performance for the first quarter demonstrated the resilience of our earnings. Despite the increase in non accruals are return on adjusted net investment income for the quarter was 11, 6%, which continues to be at the higher end of our targeted range and our dividend continues to be covered by earnings.
Looking ahead, we are being proactive with our nonaccrual investments and have plans in place that we believe will enable us to optimize our recovery for each investment.
We have generated solid growth in our earnings over the last several years and believe we are well positioned to further deliver attractive returns to our shareholders.
Michael Mosticchio: Thank you, Operator, and welcome to Oak Tree Specialty Lending Corporation's first fiscal quarter conference call. Our earnings release, which we issued this morning, and the accompanying slide presentation can be accessed in the investor section of our website at oaktreespecialtylending.com. Joining us on the call today are Armen Panossian, Chief Executive Officer and Chief Investment Officer, Matt Pendo, President, Chris McCown, Chief Financial Officer and Treasurer, and Matt Stewart, our 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, the expected synergies and savings associated with the merger with Oak Tree Strategic Income Our actual results could differ materially from those implied or expressed in these 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 statement.
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.
[noise].
Okay.
Yeah.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on you touched on the phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two if needed.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Okay.
We have the first question from Kyle Joseph from Jefferies <unk> Co. Please go ahead.
Good morning, guys. Thanks for taking my questions just.
Wanted to get your thoughts on yield it looks like there was a bit of contraction in the quarter. I was just wondering is that.
Just a function of the mix of repayments versus say the deployments as anything is some of that related to the non accruals and just your thoughts there.
Michael Mosticchio: 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 Fund. Investors and others should note that Oak Tree Specialty Lending uses the Investors section of its corporate website to announce material information. The company encourages investors, the media, and others to review the information that it shares on its website. With that said, I would now like to turn the call over to Matt. Thanks, Mike, and welcome, everyone.
Hi, it's a matter of they were Oh go ahead ma'am.
So we did experience a 50 bps decline in our weighted average yield on the portfolio about 40 basis points of that was driven by the non accruals that we mentioned in our prepared remarks, and the remainder was from spread compression.
During the quarter, we did deploy on an average spread of a little over 600 during the quarter and experienced payoffs of.
Mathew M. Pendo: Thank you for joining us today and for your interest in and support of OCSL. We identified a diverse set of attractive investment opportunities in our first quarter, driving strong origination activity and solidarity. Adjusted NII was $0.57 per share, down from $0.62 for the prior quarter. These results reflect higher interest income from our predominantly floating rate portfolio and benefits of the scale we built with the OSI2 merger. However, our results were impacted by idiosyncratic performance challenges at four portfolio companies. Armen will provide more specifics, but we experienced an uptick in non-accruals during the quarter as a result. We are engaged in working with each company to address their specific situation, drawing upon our long history and proven expertise in turning around challenged investors, as well as the deep resources of Oaktree to maximize outcomes for our shareholders. Investments in nonaccrual status at quarter end represented 4.2% and 5.9% of the debt portfolio at fair value and cost, respectively. That was up from 1.8% of the debt portfolio at fair value and 2.4% of the portfolio at cost last quarter. We reported an average share of $19.14, down from $19.63 per share for the prior quarter.
Of around $6 50, so we had some slight spread compression during the quarter as well on new originations.
Got it and then just one follow up for me you guys talked about how consistent repayments have been.
Based on the forward curve when he makes that expect any sort of acceleration.
And then in the coming quarters.
It's armen.
I don't think we have enough visibility on predicting that.
I think that during the course of the calendar year 2023 spreads tightened in and Theres certainly.
It was a fair bit of demand amongst direct lenders for high quality.
Companies from borrowers.
It's possible to see that continue but I think to predict.
You know what'll happen really.
It's hard to do just given some of the the ebbs and flows of the economy and in the right picture. So I don't think we would make our two stronger predictions on that.
Got it that's it for me thanks for answering my questions.
Yes.
Okay.
And our next question comes from Bryce Rowe.
And.
From B Riley sorry, Bryce Sprague. Please go ahead.
Mathew M. Pendo: The decline reflected realized and unrealized losses on certain debt and equity investments, including markdowns on the aforementioned four portfolio investors, as well as the $0.07 per share special distribution that was paid in December. This was partially offset by broader credit spread tightening across the portfolio. Our investment activity for the first quarter was strong, with $370 million of new investment commitments, up substantially from $87 million in the prior quarter. We continue to find attractive opportunities across sponsor, non-sponsor, and discounted publicly traded credit investments, generating net portfolio growth for the quarter, even as we maintain our highly selective approach to investing amid the uncertain current economic environment. Importantly, our new originations were made during an attractive environment for private credit highlighted by higher interest rates and lender-friendly deal structure and terms, including lower leverage and loan-to-value. The weighted average yield on new debt investments was 11.6%.
Thank you so much.
Quick follow up on the the the lower yield.
Carl just asked about was there was there any reversed interest income due to the non accruals in the quarter.
No nothing was reversed from sort of a prior period.
Yeah.
Non accruals so were on non accrual status.
Prior quarter so.
Worries.
Okay. That's helpful.
And then maybe you can help us think about you've got the NAV bridge in your Investor presentation.
It shows 47 cents of <unk>.
Compression.
Yeah, I guess net depreciation for the quarter can you kind of bifurcate that between.
The positive impact of market spreads in the quarter.
And then just Steve.
I guess, maybe maybe credit performance at some of the some of the Underperformers if you will.
Mathew M. Pendo: On the repayment front, we received $214 million from paydowns and exits in the first quarter. While market activity has eased overall, given higher interest rates and fewer M&A transactions, we continue to receive steady levels of repayment. We have also been opportunistically selling out of certain liquid securities, including several junior capital positions. As we noted previously, About 30% of our portfolio turned over in fiscal year 2023, and that trend continued into the first quarter. We believe this amplifies the strength of the overall portfolio and our underwriting and selection process. As we see portfolio exits, it is largely because of these companies' achievements of their respective financial goals, enabling them to pay down debt, refinance at lower rates, or sell at attractive prices to larger competitors. In short, these outcomes effectively validate our initial investment decision.
Okay.
Yeah. So the majority of our write down during the quarter related to two names one what's the rationale we held both the private equity and the term loan and about a $30 million was a result of that name.
The second name, which is impel them also we placed on nonaccrual during the quarter was just under $10 million for the quarter between those two names there was a little over 2.5% of NAV and that was the primary driver.
Of the AR write down this quarter.
That's helpful Matt.
And then maybe one more for me.
You guys you guys highlighted the.
Dividend from the JV kind of stepping up.
And it sounds like that that step up.
Mathew M. Pendo: Importantly, our portfolio turnover continues to drive a positive shift in our investment composition. Our first lien investments increased from 71% as of September 30, 2022, to 78% as of December 31, 2023. At the same time, second lien investments decreased from 16% to 8%.
Should maintain at these levels just wanted to make sure I'm kind of reading into that correctly.
Okay.
Yeah, we with the restructuring of the credit facility, we were able to lower interest cost on the facility from L. Plus 275 down to as plus 200, and those savings are fell through to the bottom line and on the back of that the board at the JV and decided to raise the dividend on a go forward basis.
Mathew M. Pendo: This shift underscores our emphasis on improving the risk profile of our portfolio. Turning to the right-hand side of our balance sheet, as always, we maintained ample liquidity to meet funding needs. At quarter end, our net leverage ratio was one times, consistent with the prior quarter. We had $908 million available on our credit facilities and $112 million of cash. Our board approved a quarterly dividend of $0.55 per share, consistent with the prior quarterly distribution.
And we do have excess earnings that we've been.
Been earning even for the past several quarters above the dividend. So we feel good about the coverage there.
Awesome things like it wasn't just that it wasn't just a one quarter. So it wasn't just a one quarter thing right yeah yeah.
The changes should allow you guys to maintain that $1 4 million going forward it sounds like.
Mathew M. Pendo: Importantly, our dividend continues to be covered by our earnings despite the headwinds caused by the increase in nonaccrual. With that, I would like to turn the call over to Armen to provide more color on our portfolio activity and the market environment. Thanks, Matt, and hello, everyone.
Yes.
Okay. Thanks, Matt.
We now have a question from Finian O'shea from Wells Fargo opinion. Please go ahead.
Okay.
Armen Panossian: I'll begin with comments on our portfolio activity and then conclude with observations regarding the market environment. Our portfolio was well diversified, with $3 billion of fair value across 146 companies at the close of the quarter. We continue to prioritize investing at the top of the capital, with 86% of the portfolio invested in senior secured loans and first lien loans representing 78% of the portfolio at fair value. To further minimize risk, we are focused on larger, more diversified businesses. Media and Portfolio Company EBITDA as of December was approximately $133 million, and leverage in our portfolio companies was approximately 5.3 times, well below the overall middle market leverage level. Our portfolio companies have been performing well despite the higher interest rate environment. The portfolio's weighted average interest coverage, based on current base rates, was in line with the prior quarter at 1.9%. In the December quarter, we originated $370 million of new investment commitments across 14 new and 10 existing portfolio companies. Nearly all of these originations were first-lien loans. The diversity of our originations is evident in key examples from the quarter.
Hey, everyone. Good morning, Hi, I wanted to revisit the concept of.
Not having a credit look back in and the incentive fee structure.
So the original recovery from the fifth Street portfolio was obviously pretty admirable and meaningful.
But more recently shareholders are.
Paying you a full performance fee, while you've been losing money.
So as you.
Think about this and think about competing for new shareholders, who would be more focused on today and tomorrow.
Where have you been in this debate thank you.
Hi, Hey fan, it's it's it's Matt Thanks for the question.
This is this is something that we continually review with our board and we stay abreast of developments in the industry and what our peers are doing.
Yes.
Investment management agreement was last approved in in November by the board.
So it is something we continue to watch the mentioned from when we took over management.
You know in 2017, there's been something we continually look at I think right now we believe our fee structure is competitive and appropriate as part of the OSI to merger. We did agree to waive 9 million of management fees. So we're working through that.
Armen Panossian: AmSpec, one of the world's largest testing and certification services providers specializing in energy commodities, and Oak Tree was presented with an opportunity to be the lead underwriter to fund the purchase of the company by a sponsor, and it provided $301 million of a $710 million financing package for the company, which came with a 2.5% original issue discount and a SOFR plus 5.75% coupon. OCSL was allocated $43 million of this transaction. PetFet, an operator of veterinary hospitals, As joint lead arranger and one of the largest lenders in the deal, OAK3 made a $673 million total commitment with the company, with OCSL allocated $71 million. Profrac, an oil field services business with fracturing fleets and sand mines. This is a non-sponsored name that Oaktree has been invested in for several years, and as part of a repenancing package, Oaktree made a $150 million commitment in the $520 million repenancing. OCSL was allocated $29 million.
And then as we.
About obviously, we were disappointed in and.
Non accruals in the quarter, but there are even for the quarter, even with that was an 11.6%. So it was down from last quarters 12.6 was basically flat to a year ago quarter, which was.
Just 11, 9%. So we continue to look at the at the fee structure and.
That will keep you don't keep thinking about it and watching it.
What our peers do industry, but you know we're comfortable with where we are right now.
Great. Thanks, so much.
And our next question comes from Erik Zwick from the Heartbeat do it.
Please go ahead.
Armen Panossian: We also made $68 million of secondary market purchases, including discounted first lien bonds at an average price of $90. As we move further into the new year, our origination activity is healthy, and we have a strong pipeline of opportunities. Turning to credit quality, as Matt noted, we experienced an increase in non-accrual, driven by the additions of Thrasio, Impel Pharmaceuticals, OTG Management, and Stitch Acquisition, also known as Synco. Another, named CIG Logistics, which had been on non-accrual, was restructured and thus removed from non-accrual status. Looking closer at the new additions, I'll begin with Thrasio, an Amazon Marketplace aggregate. This is a company that capitalized on elevated demand during the pandemic, which required growing its operations and increasing leverage. Recently, Amazon has faced operational challenges related to supply chain delays and inventory, as well as reduced Amazon traffic.
Good morning, everyone.
Just looking at the investment activity in the quarter that the 370 million commitments was the highest volume in almost two years, a little over two years or so so I wonder if you could just kind of.
Frame, what you're seeing in the market.
It's just an increased opportunity set that's meeting your investment criteria and you know how does the pipeline look today heading into.
And so the 24 calendar year.
Hum.
You know I think the the year generally.
Ebbed and flowed yeah, we were there there were some months.
In calendar 2020 three.
We thought it was a little slow it looked like a private equity firms were less interested in doing deals given the high cost of funding with base rates So high.
I just think in the quarter. It was frankly, just a little bit idiosyncratic.
Private equity firms sort of came back to the table.
Wanted to do some deals where they.
They refinanced a couple of deals like for example, the pets that deal is a refinancing.
Armen Panossian: The company entered forbearance on our loan during the first quarter, and we are engaged with the management team and other lenders to develop a new path and the best possible outcomes, potentially including a restructuring. Regarding OTG management, this company operates an airport concession business across several airports throughout the U.S. We made this investment alongside our Opportunities Funds in 2021, as the company was emerging from the pandemic travel slowdown. While the company's performance has been solid as air travel has rebounded, it has faced a higher interest expense burden from the increase in interest rates, pressuring cash flow generation. Given these headwinds, in January, the company announced a series of initiatives to position the business for long-term growth and stability, including an agreement under which Oaktree and other investors will acquire the company. While this is a fluid situation, we are confident in the long-term prospects for this business. Impel Pharmaceuticals is a biotech company that develops central nervous system drugs.
Skinny down first lien loan.
So I Wouldnt say theres the medically.
Or directionally.
You know something that we could derive from from the originations in this quarter I would just say maybe there was some.
Some pent up deal flow that probably would've come into smoother fashion in 2020 three.
But just happened to kind of come in in the quarter.
In terms of the pipeline, it's pretty robust.
Heading into the March quarter.
We already have.
$180 million in the funding pipeline for the quarter ended March.
So.
It's it's looking pretty healthy so far year to date.
And you know that's that's pretty much it I would say that there's a.
A little bit of pressure on spreads.
Certainly you know the spreads are or have come in in the last three to six months versus early 2023.
Thanks, and maybe just a quick follow up.
A lot of the action was certainly in the private placement did have a $6 million to $8 million in the secondary market. Just curious what you saw attractive Oh, if there isn't there kind of any commonalities or opportunities you saw it in the.
Armen Panossian: Sales of a key product have been slower than anticipated, and the company filed for bankruptcy protection during the December quarter. The company is currently engaged in a sale process as it exits bankruptcy, and we are focused on maximizing the long-term value of the business and our ultimate recovery. We will have more to share on this name as the sale process plays out in the coming days. Lastly, Singer, the world's largest consumer sewing machine company, had initially seen a surge of business during the pandemic, but it has since endured a slowdown.
Fiscal first quarter purchases there.
Yeah.
Yeah, I wouldn't say that there's any particular commonalities, we did buy some fixed rate bonds at dollar prices that were around 90.
I think we we saw in the quarter that there was a pretty nice convexity in fixed rate bonds. So.
If there was if there was any sort of theme on the secondary purchases that that would be the theme.
There's there's just some you know high quality debt out there and that's publicly traded and what do we do think it has an appropriate yield and an appropriate total return opportunity where we're happy to.
You know flex that muscle through.
Armen Panossian: The sponsor has previously supported the business with additional capital, and we are working with other lenders on a solution as the company returns to growth. While the company has stayed current on its cash interest payments based on secondary trading prices, we determined that it was prudent to move this investment to non-accrual. It is important to note that the rest of our overall portfolio is in solid shape, and with each of these non-accruals, we are leveraging Oak Tree's extensive experience and workouts to achieve successful outcomes on behalf of our shareholders. We are closely monitoring the health of our overall portfolio, mindful that the high interest rates of the past two years have carried into calendar 2022, and increased lending, as you've heard me say here before, present the elevated potential for With that in mind, I'll turn to our view on the market environment. In recent months, credit markets have rallied as investors express optimism about easing inflation and a potential end to the rate hike cycle.
Through the public public markets and deploy there.
That's it for me thanks for taking my questions.
Thank you.
Thank you and let me remind that'd be one if you would like to pose a question to enter the queue you Press star one.
And our next question comes from Paul Johnston from K B W. Paul You May proceed.
Yeah. Good morning, Thanks for taking my questions. Most of mine have been asked at this point, but I just kind of a few higher level ones.
Yes, just kind of looking at next quarter pairing.
The lighter interest income this quarter, obviously kind of driven by the new non accruals, but pairing that with the strong investment fundings you guys had I mean should we be looking at a pretty pretty nice rebound in interest income next quarter.
Hi, It's Matt Stuart I don't want to give forward guidance, but what I will say is I mean, if you look at the originations during the quarter ended December they were heavily weighted towards the back end of the $300 million of privates redeploy.
Armen Panossian: Both private and public credit markets have seen a surge of activity and an increase in competition resulting in spreads moving tighter and legal terms becoming more lenient, as investors have been eager to put capital to work after experiencing limited supply over the summer months. Nevertheless, we are mindful about the prevailing risks that you've heard me discuss in previous videos. The persistence of elevated interest rates could still challenge borrowers with high debt loads.
The majority of them are actually in the month of December.
I'm just as I'm deals, we're looking to close before yearend. So they were heavily weighted towards the back end of the quarter as Chris noted earlier, when we were talking about non accruals, our non accruals affected earnings just under four cents for the quarter.
So if you look at the bridge between the 62 cents from last quarter to 57.
Some of it was impacted.
Armen Panossian: And despite a slowdown, inflation remains a concern for businesses. Additionally, we are closely monitoring companies that will need to refinance their debt in the coming years as they could face difficulties in the event financial conditions become restrictive. Against this backdrop, we believe caution continues to be warranted. Our investment approach prioritizes relative value, drawing upon the full breadth of Oaktree's scale and resources to selectively invest across both the sponsor and non-sponsor backed markets, as we did in the first quarter, and carefully pursue attractive opportunities as they arise. Our ample capital, robust liquidity, and commitment to navigating short-term volatility form the foundation for our success to date and the basis of our strategy moving forward. These attributes also fuel my confidence in OCSL and our ability to deliver improved profitability and strong returns in the year ahead.
By the timing of deployment versus the non accruals, so with that back weighted.
Appointment off being equal that probably impacted earnings during the quarter of around two sets.
Got it thanks, that's very helpful.
And then.
I guess, just you know it sounds like you're you mentioned a little bit like terms have come in spreads had been pressured a little bit I mean should we read that as a sign that it sounds like sponsorships or at least kind of come into the new two new year here Capitulating, a little bit on on valuation multiples.
Is that kind of what you're observing in the market.
Okay.
Yeah. The assortment I spoke capitulation is a strong word but I think sponsors have some motivations to do deals. This.
This year.
Starting with you late last year, what are those motivations. Its you know they are.
Funds that they've raised and have periods, our investment periods that are clicking away and and there is as a result of motivation to deploy that capital I think older vintage funds. The limited partners. The investors that are in those funds.
Armen Panossian: Now, I will turn the call over to Chris to discuss our financial results in more detail. Thank you, Armen. As Matt noted, we reported adjusted net investment income of $44.2 million for $0.57 per share, down from $47.8 million for $0.62 per share in the fourth quarter of last fiscal year. The decrease was primarily driven by lower adjusted total investment income, partially offset by a modest decline in net expenses due to lower Part 1 incentives in the quarter. Adjusted total investment income in the quarter was adversely impacted by a $5.2 million decrease in interest income due primarily to the increase in non-accrual investments discussed earlier, and partially offset by a $0.7 million increase in fee income resulting from prepayment and exit fees and a $0.4 million increase in dividend income from the company's investment in the Kemper JV. Net expenses for the first quarter totaled $53.8 million, down $0.6 The decline was mainly driven by $0.5 million of lower Part 1 incentive fees.
Our pressuring sponsors to return capital so as a result.
I would think sponsors are a little bit more willing to transact at prices that might not maximize irr's or returns, but are a pretty good outcome for their fund and and have the benefit of.
Returning capital to their Lps.
So the combination of those two factors you know new vintage funds having dry.
Dry powder older vintage funds, having L. P is about working capital back half.
I have resulted in and sponsors kind of considering transactions again, rather than sitting on the sidelines. I think also you know with the general market.
Hum.
Our view that we're going to see some rate declines this year with base rates coming down I think private equity sponsors or say or or some of them at least are thinking well we've seen peak rates are.
It's sort of a flat to down from here in terms of base rates. So, let's try and Docklands bi was by that business that we've been tracking for the last three to five years at a reasonable multiple and I think rates will be going down are in our favor over the course of the next two years, so they're kind of coming off the sidelines and doing some deals there but.
Chris McCown: As a reminder, we waived $1.5 million of fees during the quarter as part of the OSI 2 merger. Now, moving to our balance sheet, OCSL's net leverage ratio at quarter end was 1.02 times, relatively stable with the level at the end of the September quarter.
I wouldn't say that the trend is super strong right now, but I would but I would say, it's a noticeably different in terms of spa.
Sponsor interest in deals today versus this time last year.
Chris McCown: Newly funded investment activity of $368 million exceeded proceeds from repayments, exits, and sales of $214 million, enabling us to grow the portfolio, but the markdowns taken in a quarter tempered that growth. However, our net leverage continues to be within our targeted range of 0.9 to 1.25 times. As of December 31st, total debt outstanding was $1.66 billion, and including the effect of our interest rate swap agreements, had a weighted average interest rate of 7.0%, consistent with the level at the end of the September quarter, as interest rates remained steady during the quarter. Unsecured debt represented 57% of total debt at quarter end, also in line with the prior quarter.
Got it appreciate it thanks for the detail and that's all for me.
Okay.
And our next question comes from Melissa Wedel from J P. Morgan Melissa go ahead.
Good morning, Thanks for taking my question.
Wanted to follow up on the new non accruals.
I certainly understand that each situation.
Has different potential outcomes and different timeline I think you know our affirm in particular is also well known for capabilities on workout.
Hoping you can maybe provide whatever context, you can for us around what time line could look like for some of those are we talking months or can this be multiple multiple quarters and I understand each one is unique.
Chris McCown: We continue to have ample liquidity to meet our funding needs with total dry powder at quarter end of approximately $1 billion, including $112 million of cash and $908 million of undrawn capacity on our credit facility. Unfunded commitments, excluding unfunded commitments to joint ventures, were $200 million, with approximately $166 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. Turning now to our two joint ventures, our JVs continue to deliver strong performance. Together, the JVs currently hold $450 million in investments, primarily in broadly syndicated loans, spread across 54 portfolio companies. For the quarter, the JVs again generated attractive annualized ROEs, which were combined to be approximately 15%.
Thankfully and Garmin.
Would say that while the processes around potential restructuring could be short.
You know as a matter of sort of weeks or months.
I think the process to actually maximize our recoveries will take longer and I wouldn't hazard, a guess as to what that is but I wouldn't measure.
The final resolution or maximize recovery could be a matter of months I would say it's closer to it.
It being a year or more.
Generally speaking.
When you have a restructuring and there's there's a little bit of wood to chop from an operational standpoint.
Your best outcome is usually not achieved in two weeks or months. Unfortunately.
Chris McCown: This is a testament to the underlying credit quality of the portfolios and the positive impact of higher interest rates on the predominantly floating rate loans. Additionally, we received a $1.4 million dividend from the Kemper JV, which was up $350,000 from the prior quarter, as that vehicle benefited from reduced funding costs following the credit facility refinancing that we completed in the September quarter. Leverage at each JV declined slightly to 1.1 times at quarter end.
Okay.
I appreciate that context.
Related to that we've been seeing since then.
While our recovery rate than maybe historical level would suggest it's.
It's not.
What's your view on recovery rates, and just sort of generally and then anything.
Portfolio.
Yeah, so generally the.
The lower recovery rates.
Our I would expect that in the broadly syndicated loan market that recovery rates will be lower as.
Mathew M. Pendo: In summary, despite the isolated credit incidents that we experienced in the quarter, we were pleased with our financial results. We continue to believe that our strong balance sheet and attractive investment opportunities position us well for the remainder of fiscal year 2024. Now, I will turn the call back to Matt for some closing remarks. Thank you, Chris.
We see defaults unfold over the next couple of years versus historical norms, and it's mainly because the legal protections in those documents are quite weak.
And therefore.
When there is a challenging situation there is a risk that athletes are stripped away from the from the creditors or there's some sort of upped hearing transaction that occurs to the benefit of some creditors at the expense of others.
Mathew M. Pendo: Our financial performance for the first quarter demonstrated the resilience of our earnings, despite the increase in non-accrual. Our return on adjusted net investment income for the quarter was 11.6%, which continues to be at the higher end of our targeted..., and our dividend continues to be covered by earnings. Looking ahead, we are being proactive with our non-accrual investments and have plans in place that we believe will enable us to optimize our recovery for each investor. We have generated solid growth in our earnings over the last several years and believe we are well-positioned to further deliver attractive returns to our shareholders. As always, we appreciate your participation on the call today and for your interest in OCSL. With that said, we are happy to take your questions. Operator, please open the line.
I would expect that there's going to be you know generically in the broadly syndicated loan market lower recoveries in terms of the portfolio or a particular non accruals.
I for us at this these situations or idiosyncratic there sort of performance and execution driven by by the management teams.
And so it's not.
I, Wouldnt say theres sort of like a thematic.
The outcome or thematic.
You know core to how we're going to resolve these it's literally just blocking and tackling and every one of them is gonna be different than the next.
Thank you.
Okay.
And again, if he would like to ask a question Press Star then one.
Operator: Boom! Thank you. And we will now begin the question and answer session. To ask a question, you may press R then 1 when you're touched on the phone.
Yeah.
Okay.
Right.
Operator: If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then two, if needed. At this time, we will pause momentarily to assemble our roster. We have the first question from Kyle Joseph from Jeffreys. Kyle, please go ahead.
We have no further questions at this moment, so I would like to turn the conference over to management.
Yeah.
Thanks, Charlie and thank you all for joining us on today's conference call. A replay of this call will be available for 30 days I noticed yourselves website in the investors section or by dialing 87734 475 to nine for U S callers.
Mathew M. Pendo: Good morning, guys. Thanks for taking my questions. Just wanted to get your thoughts on yield. Looks like there was a bit of contraction in the quarter. Just wondering, you know, is that just a function of the mix of repayments versus the deployments? Is anything, is some of that related to non-accruals? Just your thoughts. Hi, it's Matt Leibert.
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Mathew M. Pendo: Go ahead, Matt. So we did experience a 50-bit decline in our weighted average yield on the portfolio. About 40 basis points of that was driven by the non-accruals that we mentioned in our prepared remarks, and the remainder was from spread compression during the quarter. We did deploy at an average spread of a little over 600 during the quarter and experienced payoffs of around 650.
Good day.
Armen Panossian: So we had some slight spread compression during the quarter as well. Yeah, and then just one follow-up for me. You guys talked about how, you know, consistent repayments have been. Based on the forward curve, would you expect any sort of acceleration in the coming quarter? It's Armen.
Armen Panossian: You know, I don't think we have enough kind of visibility to predict that. But I think that during the course of the calendar year 2023, spreads tightened, and there certainly was a fair bit of demand amongst direct lenders for high quality companies and borrowers. It's possible to see that continue, but I think to predict, you know, what will happen really is hard to do just given some of the ebbs and flows of the economy and the rate picture. So, I don't think we would make too strong a prediction on that. Got it. That's it for me.
Mathew M. Pendo: Thanks for answering my questions. And our next question comes from Bryce Rowe. And from the O'Reilly. Sorry. Bryce, please go ahead.
Mathew M. Pendo: Thank you so much. Quick follow-up on the lower yield that Kyle just asked about. Was there any reversed interest income due to the non-accruals in the quarter? No, nothing was reversed from sort of a prior period. The non-accruals, though, were on sort of a non-accrual status if you go through the entire quarter, so nothing came back through the quarter. Okay, that's helpful.
Mathew M. Pendo: And then, you know, maybe you can help us think about you've got the nav bridge in your investor presentation, that shows $0.47 of compression from, I guess, net depreciation for the quarter. Can you kind of bifurcate that between, you know, the positive impact of market spreads in the quarter and then, you know, just the, I guess, maybe credit performance at, you know, some of the underperformers, if you Yeah, so the majority of our write-downs during the quarter related to two names. One was Zorachio.
Mathew M. Pendo: We held both the PREP equity and the term loan, and about $30 million was a result of that name. The second name, which is Impel, also we placed on non-accrual during the quarter was just under $10 million for the quarter. Between those two names, it was a little over 2.5% of NAV, and that was the primary driver of the write-down this quarter. That's helpful, Matt. And then maybe one more for me, you guys highlighted the...
Mathew M. Pendo: I just wanted to make sure I'm kind of reading into that correctly. Yeah, with the restructuring of the credit facility, we were able to lower interest costs on the facility from S plus 275 down to S plus 200. And those savings fell through to the bottom line.
Mathew M. Pendo: And on the back of that, the board at the JV decided to raise the dividend on a going forward basis. And we do have excess earnings that we've been earning even for the past several quarters above the dividend, so we feel good about the coverage. Awesome. Thanks a lot.
Mathew M. Pendo: It wasn't just a one-quarter thing. Right. Yeah. The changes should allow you guys to maintain that $1.4 million going forward. Yes. Yeah. Okay. Thanks, Matt. We now have a question from Finian O'Shea from Wells Fargo. Finian, please go ahead. Hey, everyone. Good morning.
Mathew M. Pendo: I wanted to revisit the concept of not having a credit look back in the incentive fee structure. So the original recovery from the Fifth Street portfolio was obviously pretty admirable and meaningful. But more recently, shareholders are paying you a full performance fee while you've been losing money. So as you think about this and think about competing for new shareholders who would be more focused on the today and the tomorrow, where have you been in this debate? Thank you. Hey Finn, it's Matt.
Mathew M. Pendo: Thanks for the question. You know, this is something that we continually review with our board, and we stay abreast of developments in the industry and what our peers are doing. The investment management agreement was last approved in November by the board. So it is something we continue to watch, and as you mentioned, since when we took over management in 2017, it has been something we could continually look at. I think right now, we believe our fee structure is competitive and appropriate. As part of the OSI 2 merger, we did agree to waive $9 million in management fees, so we're working through that. And then, as we think about, obviously, we were disappointed in the amount of accruals in the quarter, but the RRE for the quarter, even with that, was 11.6%. So it was down from last quarter's 12.6 percent.
Mathew M. Pendo: It was basically flat to a year ago quarter, which was just 11.9%. So we continue to look at the fee structure, and that's something that we'll keep thinking about and watching what our peers do in the industry, but we're comfortable with where we are right now. Great, thanks so much. And our next question comes from Eric Zueck from the Hovde Group. Eric, please go ahead.
Armen Panossian: Good morning, everyone. Just looking at the investment activity in the quarter, the 370 million commitments were the highest volume in almost two years, a little over two years or so. So I wonder if you could just kind of frame what you're seeing in the market, if it's just an increased opportunity set that's meeting your investment criteria, and how does the pipeline look today heading into the 24 calendar year? This is Armen.
Armen Panossian: I think the year generally ebbed and flowed. There were some months in calendar 2023 that we thought it was a little slow. It looked like private equity firms were less interested in doing deals given the high cost of funding with base rates so high. I just think in the quarter it was, frankly, just a little bit idiosyncratic. I think private equity firms sort of came back to the table and wanted to do some deals. They refinanced a couple of deals. For example, the PetVet deal is a refinancing with a skinny down first lien loan.
Armen Panossian: I wouldn't say there's anything thematically or directionally that we could derive from the originations in this quarter. I would just say maybe there was some pent-up deal flow that probably would have come in a smoother fashion in 2023 but just happened to kind of come in during this quarter. In terms of the pipeline, it's pretty robust heading into the March quarter. We already have about $180 million in the funding pipeline for the quarter ended March. I think it's looking pretty healthy so far this year to date.
Armen Panossian: That's pretty much it. I would say that there's a little bit of pressure on spreads. Certainly, spreads have come in in the last three to six months versus early 2023. Thanks, Armen. And maybe just a quick follow up.
Armen Panossian: A lot of the action was certainly in the private placement did have 68 million in the secondary market. Just curious what you saw attractive, if there's any kind of commonalities or opportunities you saw in the fiscal first quarter purchases there. I wouldn't say that there were any particular commonalities. We did buy some fixed-rate bonds at dollar prices that were around 90.
Armen Panossian: I think we saw in the quarter that there was a pretty nice convexity in fixed-rate bonds. So I think if there's any sort of theme in the secondary purchases, that would be the theme. There's just some high-quality debt out there, and that's publicly traded. And when we do think it has an appropriate yield and an appropriate total return opportunity, we're happy to flex that muscle into the public markets and deploy it there. That's it for me today.
Armen Panossian: Thanks for taking my questions. Thank you. Thank you. And let me remind everyone, if you would like to pose a question, to enter the queue, you press star one, and our next question comes from Paul Johnston from KBW. Paul, you may proceed. Yeah, good morning. Thanks for taking my questions. Most of mine have been asked at this point.
Matt Stewart: But just kind of a few higher-level ones. I mean, I guess I'm just kind of looking at next quarter pairing, you know, the lighter interest income this quarter, obviously kind of driven by the new non-accruals, but pairing that with the strong investment funding you guys had. Should we be looking at a pretty nice rebound in interest income next quarter? Hi, it's Matt Stewart.
Matt Stewart: I don't want to give forward guidance, but what I will say is, if you look at the originations during the quarter ended December, they were heavily weighted towards the back end of the 300 million privates we deployed. The majority of them were actually in the month of December, just as deals were looking to close before year end. So they were heavily weighted towards the back end of the quarter. As Chris noted earlier, when we were talking about non-accruals, our non-accruals affected our earnings by just under four cents for the quarter.
Matt Stewart: So if you look at the bridge between the 62 cents from last quarter and 57 cents this quarter, some of it was impacted by the timing of deployment versus the non-accruals. So with that back-weighted deployment, all else being equal, that probably impacted earnings during the quarter by around two cents. Got it, thanks, that's very helpful. And then, um...
Armen Panossian: I guess just, you know, it sounds like, you mentioned a little bit like terms have come in, spreads have been pressured a little bit. Should we read that as a sign that it sounds like sponsors have at least kind of come into the new year here, capitulating a little bit on, you know, valuation multiples? Is that kind of what you're observing in the market? Yeah, this is Armen.
Armen Panossian: I don't know, capitulation is a strong word, but I think sponsors have some motivations to do deals this year and starting late last year. What are those motivations? It's, you know, they have funds that they've raised and have, you know, periods or investment periods that are, you know, clicking away, and there is, as a result, a motivation to deploy that capital. I think older vintage funds, the limited partners, the investors that are in those funds are pressuring sponsors to return capital. So, as a result, I would say sponsors are a little bit more willing to transact at prices that might not maximize IRRs or returns but are a pretty good outcome for their funds and have the benefit of returning capital to their LPs.
Armen Panossian: So, the combination of those two factors, you know, new vintage funds having dry powder, and older vintage funds having LPs that want capital back, has resulted in sponsors kind of considering transactions again, rather than, you know, sitting on the sidelines. I think also, you know, with the general market view that we're going to see some rate declines this year with base rates coming down, I think private equity sponsors are saying, or some of them, at least, are thinking, well, we've seen peak rates; it's sort of flat to down from here in terms of base rates, so let's, you know, transact, let's buy that business that we've been tracking for the And I think rates will be, you know, going down or in our favor over the course of the next two years. So, they're kind of coming off the sidelines and doing some deals here.
Armen Panossian: But I wouldn't say the trend is super strong right now, but it's noticeably different in terms of sponsor interest in deals today versus, you know, this time last year. Got it. Appreciate it. Thanks for the detail, and it's all from me. And our next question comes from Melissa Waddell from J.P. Morgan. Melissa, go ahead.
Armen Panossian: Good morning. Thanks for taking my questions. I wanted to follow up on the new non-accruals. I certainly understand that each situation has different potential outcomes and different timelines. I think your firm, in particular, is also well known for its capabilities in workouts.
Armen Panossian: I was hoping you could maybe provide whatever context you can for us around what a timeline could look like for some of those. Are we talking months, or could this be multiple quarters? I understand each one is unique.
Armen Panossian: Thanks, this is Armen. I would say that while the process... around potential restructurings could be short, in a matter of weeks or months. I think the process to actually maximize our recoveries will take longer, and I wouldn't hazard a guess as to what that is, but I wouldn't measure the final resolution or maximized recovery to be a matter of months. I would say it's closer to a year or more, generally speaking, when you have a restructuring and there's a little bit of wood to chop from an operational standpoint. Your best outcome is usually not achieved in weeks or months, unfortunately.
Armen Panossian: Okay, appreciate that contact. Related to that, we've been seeing instances of lower recovery rates than maybe historical levels would suggest. What's your view on recovery rates, and just sort of generally, and then anything specific to the portfolio? Thanks. Generally, lower recovery rates. I would expect that in the broadly syndicated loan market, recovery rates will be lower as we see defaults unfold over the next couple of years versus historical norms. And it's mainly because the legal protections in those documents are quite weak.
Armen Panossian: And therefore, when there is a challenging situation, there is a risk that assets are stripped away from the creditors, or there's some sort of up-tiering transaction that occurs to the benefit of some creditors at the expense of others. So I would expect that there are going to be, generically, lower recoveries in the broadly syndicated loan market. In terms of the portfolio or particular non-accruals, for us, these situations are idiosyncratic. They're sort of performance and execution driven by the management teams. And so it's not, I wouldn't say there's sort of like a thematic outcome or thematic core to how we're going to resolve these. It's literally just blocking and tackling, and every one of them is going to be different than the next.
Armen Panossian: Thank you. And again, if you would like to ask a question, press star, then one. We have no further questions at this moment, so I would like to turn the conference over to management. Thanks, Marlies, and thank you all for joining us on today's conference call. A replay of this call will be available for 30 days on OCSL's website in the Investors section 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 2845273 beginning approximately one hour after this broadcast.
Operator: Thank you. And this concludes the conference. Thank you for attending today's presentation. You may now disconnect. Have a good day.