Q3 2025 Oaktree Specialty Lending Corp Earnings Call

Welcome and thank you for joining Oaktree specialty lending Corporation's third fiscal quarter 2025 Conference call Today's conference call is being recorded.

<unk>, we begin I want to remind you that comments on today's call include forward looking statements, reflecting current views with respect to among other things future operating results and financial performance.

Actual results could differ materially from those implied or expressed in the forward looking statements. Please refer to the relevant S. E SEC filings for a discussion of these factors in further detail.

Oaktree undertakes 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 an Oaktree fund.

Investors and others should note that Oc S. L uses the investor 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.

Now I'll turn the call over to Clarke, Corey Oh, Csl's head of Investor Relations. Please go ahead.

Thank you operator, our third quarter earnings release, which we issued this morning, along with the accompanying slide presentation can be accessed on the investors section of our website Oaktree specialty lending dot com joining me on the call today are <unk> CEO and co CIO.

Raga, Ghana co CIO, Matt Penndot, President and Chris Mccown, CFO and Treasurer now I'll turn it over the call to Matt to provide an overview of our performance for the quarter Matt.

Thanks, Mark and thank you all for joining our call today.

This quarter now it was up slightly and we made progress restructuring or exiting certain challenged names within the portfolio and reducing non accruals, which declined as a percentage of your both fair value and cost.

Adjusted net investment income declined to 37 cents per share primarily due to the impact of certain nonrecurring and noncash items related to refinancing activities.

Also experienced a lower than usual amount of nonrecurring income Chris will share more details on nonrecurring income a bit later in the presentation rigor.

Regarding our dividend our board approved a base dividend of <unk> 40 per share for the quarter.

Turning to our balance sheet, there were several positive outcomes during the quarter.

As mentioned on last quarter's call.

Excessively amended and extended the maturity of our senior secured revolving facility, reducing the interest rate on the sulfur plus 2% to a range of so for plus 175% to $1 87, 5%.

This enabled us to terminate a higher cost ABL facility with pricing, so far plus 2.35%.

Taken together these will reduce our overall interest expense expense, which would be accretive to earnings going forward.

There were some one time costs as a result of these developments as we wrote off unamortized deferred financing costs that impacted our NII.

With a strong balance sheet ample liquidity and leverage at its lowest level in three years, we have meaningful dry powder to further diversify the portfolio and position <unk> for sustained growth.

Now I will turn the call it the army to provide an overview of the market environment.

Thanks, Matt.

Certainty surrounding the implementation of increased tariffs and their potential impact on inflation, the economy and monetary policy deterred M&A activity, which remains muted.

Consequently, most lending in the marketplace pivoted to refinancing existing debt rather than de Novo buyouts.

Robust CLO issuance in recent months has created some competition for deal flow pulling some deals out of the private market and into the broadly syndicated loan market.

These dynamics coupled with the continued strength of fundraising for private credit pushed credit spreads tighter.

Liquid credit markets also tightened, but it's important to note the private credit still offers an attractive premium.

However spreads on newly originated loans have reverted to the levels. We saw at the start of the calendar year pricing for large cap sponsor loans isn't the sofa, plus or 25 to $4 75 basis points range and spreads are 25 to 50 basis points higher than the core to upper middle market.

Oh, CSL has deep expertise in originating and structuring loans to middle market companies and we are finding more value in this part of the market.

Our it environment.

Beyond core middle market lending in the U S, you're seeing pockets of opportunity in asset backed financing and life science areas.

Areas, where oaktree has extensive capabilities.

We are observing increased opportunities in Europe supported by a strengthening economic outlook and favorable valuation metrics concurrently we are seeking to expand our capabilities across the Asia Pacific region and within infrastructure.

Against this backdrop credit quality has remained stable and most problems are tied to company specific issues, where management teams are not executed in line with expectations, creating financial pressure on their balance sheets and capital structure.

We are also keeping a close eye on areas of potential risk within the portfolio, including the use of fee income.

In this regard we maintain a conservative stance and continue to rank near the low end of our peer set as a percentage of total income at six 7%.

Even as spreads have tightened our focus remains on high quality companies with strong credit profiles.

We believe the long term outlook for direct lending will remain favorable.

Those are compelling on a gross unlevered basis, including at the top of the capital.

The absence of Mark to market volatility in the historically tight band of returns across different market environments makes this asset class appealing to investors seeking income.

And capital preservation.

Now I'll pass the call to Rogoff Carter to give an update on our portfolio.

Thanks, Harlan I'll start with investment activity for the quarter.

While our overall investment activity was tempered due to the slower market environment, we leaned into opportunities that squarely met our portfolio objectives and discipline underwriting standards.

The weighted average yield on our new debt investments was nine 1%.

Bumper bold and nine 5% in the prior quarter.

Selecting continued tight spreads in the marketplace.

All our originations in the quarter were first lien loans consistent with our strategy of investing at the top of the capital structure to provide greater downside protection.

We are excited about our current pipeline and continue to see compelling investment opportunities even amid persistent inflation.

Weighted interest rates and tariff related uncertainty.

In this environment, we are selectively deploying capital into mature market, leading businesses with solid fundamentals and consistent cash flows.

We are also maintaining a granular diversified approach to portfolio construction, avoiding an industry concentration risk and steering clear of more cyclical businesses.

The strength of will create a global platform is a competitive advantage for Ocs L.

As one of a handful of lenders that has the scale to lead or participate in larger financings. Our platform gives us access to high quality transactions that are often unavailable to smaller lenders.

In addition, <unk> broad sourcing capabilities span, both sponsored and non sponsored deals stress and rescue lending high yield public credit and asset backed transactions.

This breadth allows us to evaluate a wide range of attractive opportunities in any market environment.

And allows us to lean into opportunities with the best risk adjusted returns.

As of June 30, the median EBITDA of our portfolio companies was approximately $161 million.

$3 million increase from the prior quarter.

The weighted average leverage in our portfolio.

Decreased slightly from five two to five one times.

And the weighted average interest coverage.

Slightly increased from two one to 2.2.

Now I will share the details on two recent investments during the quarter that demonstrate our focus on portfolio diversification and first lien lending.

Both were sourced through the broader OTT platform.

Underscore how we are leveraging the firm's extensive sponsor relationships and garden market access to co invest in compelling opportunities.

I'll begin with drop in international.

A provider of operational training solutions to air forces around the world.

The business has close relationships with both the U S and U K Air forces.

This investment expands our exposure in the countercyclical aerospace and defense industry.

Where demand for cost effective pilot trading continues to rise amid persistent global pilot shortages.

With long term government contracts in place Dropkin generates recurring revenues by serving a critical market with predictable demand.

This investment also aligns with our strategy to partner with institutional sponsors Blackstone in this instance to originate senior secured loans for resilient businesses operating in sectors with long term demand visibility.

Okay was the sole lender in this new transaction with the drop in used to refinance existing debt.

Oh pre committed to 217 million of which 177 million was funded upfront.

The deal was priced at Sony up plus 550 with two points of upfront fees.

Both DSO was allocated 31 spot 9 million.

Which 26 million was funded upfront.

Turning to the lines Magnus.

Did an 18 51 lines Magnus is a leading food and beverage manufacturer of plant based beverages and flavor ingredients, serving the foodservice health care and dairy industries.

Lines Magnus maintains a top three market share position across its core product categories and has longstanding relationships with leading <unk> foodservice distributors and health care providers.

Including the likes of Starbucks, Mcdonald's and Cisco.

Customers that generate stable recurring revenue for the business.

This is a great example of our focus on investing in established businesses with long standing customer relationships diversified product offerings and strong margin profiles.

Lines Magnus you use the proceeds of the transaction to refinance its existing capital structure.

This investment was sourced directly by Oaktree through a long standing relationship with the sponsor in Schwartz partners.

Hopefully acted as joint lead arranger on the deal providing 150 million dollar commitment or 34% of the total transaction.

And 133 million was funded upfront.

Oh C. S. L was allocated $12 $7 million of which $11 2 million was funded upfront.

Now turning to our existing portfolio, where we are seeing encouraging signs of progress in addressing non accruals.

During the quarter, one company B Mark was added to the nonaccrual list and one company Telus stream holdings was removed.

The Mark is one of the largest substance abuse and recovery treatment providers in North America.

It is experiencing operational issues with its revenue cycle management systems and underperformance in certain business segments, resulting.

Resulting in cash flow and liquidity pressures.

The company is working with turnaround professionals.

And we are actively engaged with management to help them achieve the best possible outcome for the company.

And our loan.

These situations take time to resolve but our team has the experience and the discipline to navigate them effectively and drive favorable resolutions.

We're pleased to report that Telus stream holdings, a video software platform that provides on demand digital video tools to broadcasters and media companies and content creators was removed from non accrual status.

After completing a comprehensive restructuring that helped reduce the company's debt burden and eased liquidity constraints.

Additionally, we are beginning to realize meaningful exits of recoveries from previously challenged positions, which were contributing factors to the decline in non accruals as a percentage of the overall portfolio.

One. Notable example is mosaic, where we received cash pay downs totaling $25 $7 million or just over 50% of our total position during the quarter.

We remain focused on working through challenged positions and maximizing recoveries.

Moving now to exit and repayment activity during the quarter.

Investment exits decreased to $249 million down from $279 million in the prior quarter.

One exited worth mentioning is also.

A digital pharmacy company, which was merged into let's get checked to create a comprehensive platform, combining pharmacy diagnostics and virtual care.

The loan for also had been marked at 85 and 95 as of December 31 2024.

On March 31st 2025, respectively.

And what's taken out at par in connection with the merger.

Looking to the second half of the year, we are very encouraged by the depth and diversity of the opportunities we are seeing across sectors structures and sponsors.

We are leaning hard into our strengths, our deep industry relationships broad market access.

And due diligence and underwriting expertise.

To continue building, a well diversified portfolio that can deliver sustained long term performance.

With that I will now turn the call over to Chris.

Thank you Rob.

Let's review, our financial results and our third fiscal quarter ending June 30th 2025, we delivered adjusted net investment income of $32 $5 million or <unk> 37 per share as compared to $38 $7 million or 45 cents per share in the prior quarter.

Decreased for the quarter was primarily driven by nonrecurring and noncash expenses related to refinancing activities as well as a decline in nonrecurring income, which we generally define as things like prepayment fees and OID acceleration.

Drill into that a bit our trailing eight quarter median amount of nonrecurring income has been about $3.8 million or $4 <unk> per share based on current shares outstanding.

Our June quarter nonrecurring income came in around $2 $1 million less or a little over two since less than this median level.

Adjusted total investment income in the quarter declined $2 $9 million compared to the prior quarter, primarily due to the reasons I just mentioned as well as a modestly smaller average portfolio the impact of tightening spreads and lower dividend income from the Kemper JV.

Net expenses increased $3 $5 million from the prior quarter, driven by a $2 $9 million increase in interest expense due to $3 $9 million of nonrecurring and noncash expense related to the acceleration of certain deferred financing costs in connection with the termination.

Of the Citibank SPV facility and the amendment of our revolving credit facility.

This was partially offset by lower average borrowings outstanding during the quarter and reduced interest rates or the amended credit facility.

Our weighted average interest rate at June 30 was six 6% compared to six 7% at the end of the prior quarter.

Our net leverage ratio at quarter end was 0.93 times flat from last quarter and total debt outstanding was $1.46 billion.

Unsecured debt represented 65% of total debt at quarter end consistent with last quarter.

We have ample dry powder to fund investment commitments with liquidity of approximately $730 million, including $80 million of cash and $650 million of undrawn capacity on our credit facilities.

Unfunded commitments, excluding those related to the joint ventures were $278 million, approximately 264 million of which can be drawn immediately as the remaining amount is subject to portfolio companies meeting certain milestones before the bonds can be drawn.

Our target leverage ratio remains unchanged at 0.9 times to 1.25 times and we are currently at the low end of that range due to a combination of successful investment exits in recent quarters and our prudent approach to deploying capital.

Turning to our two joint ventures.

Together the JV is currently hold $442 million of investment primarily in broadly syndicated loans spread across 54 portfolio companies.

During the third fiscal quarter, the jb's generated or are we a pinpoint and 5% in aggregate.

Leveraging.

That's one point.

Changed from 1.3 times last quarter and.

In addition, we received a 525000 dollar dividend from the Kemper JV.

With that I'll turn the call back to the operator to open the call for questions.

Thank you.

We will now begin the question and answer.

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

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

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Once again that is star one to ask a question.

Okay.

And your first question today will come from Finian O'shea with Wells Fargo. Please go ahead.

Okay.

Hi, everyone. Good morning.

First question on on spreads this quarter.

Secure mid to upper fives, which is tracking better.

Than most peers, obviously very good thing, but yeah.

The other side of the coin is we ask you know sort of how you were able to generate that maybe if it was you know non sponsor higher leverage or any color you could give us there. Thanks.

Hey.

It's Rob Thanks for the question so you're right.

You know over the quarter I believe we have been able to achieve.

One of course being spreads which are.

Call it mid five hundred's, including away there's.

There's a few factors that are playing in two ways. One is that does include the lower spread deals that you are seeing in the market or do so we do have some deals that you've done this year, which are in that $4 50 to 475.

Range and in a way he will take you to just 500, but we also have some higher yielding deals.

It's been a couple of life science deals whichever is higher yielding.

That's helped some of the non U S yogurt on such as the drop in fuel.

Which was Sony amplified 50 with two points are already that's helping as well as European spreads are slightly wider than what we're seeing in the U S. And then the third thing I would say it is there is a premium for refinancing deals versus revenue.

It's not huge but it could be 50 to 75 basis points and on the margin that's something as well.

Yeah.

Okay. That's helpful. Thanks, and then.

Sort of.

You know back of the napkin here with the moving parts that you.

Hopefully oh.

Outlined on earnings.

The one time the facility fee and so forth.

Those seem to.

Roughly offset if that the impact of the look back and you're still.

Below the dividend so I guess is the.

Should we assume the main obvious lever.

To drive earnings that would be levering up.

And then can you give color on how the discussions with rating agencies are.

And in that regard given given recent loss rates you know would they would they be comfortable with your going up to a 125 or so if that is the plan. Thanks.

Thanks, Dan its Matt so.

The planet the plan isn't to go to 125.

Kind of hit that that number but the plan is to kind of be at the mid point of our range. Yeah arranges 0.91 0.25 right now we're at a point 93, So we're which I think is the lowest we've been here for quite a while.

And I think if you and.

We continue we have active dialogue with the rating agencies, you know, they're aware of our plans.

But one of our plan to your point to take leverage up is to take leverage up to.

To create more earnings to support.

Support the dividend.

So that's why we feel comfortable with where we are with the agencies and doing that again take it up to the mid point of our range not at the top of our range.

I think is as Ragav mentioned, our pipeline is pretty diverse and pretty robust. So we feel good about the ability to deploy.

Yeah. We also just kind of given we are where we are in the quarter, we have some visibility into repayment activity by the September quarter.

We also in another lever is the JV. The JV is now really focused on broadly syndicated loans. So taking some leverage up slightly there more target. There is 1.5 times, we're at like one point do right now.

So that's another lever.

And then it is to take cash from the equity and the non accruals.

And put those into interest earning assets. So we talked about this worry about I'll tell on mosaic once you two examples.

Sample in July we got the cash for the E E OS fitness.

And there was a nice gain there. So we can redeploy that so those are those that's the kind of the strategy, we're comfortable with the reading eases ease.

In executing that yeah, it it won't necessarily happen in one quarter.

But you know that's the that's the plan and again given and in the pipeline visibility on repayments.

Yeah, you know some of them some of the legacy non.

Non earning assets put that altogether, that's kind of how we think about things.

Thanks, so much.

Yeah.

Again, if you have a question. Please press star and then one and your next question today will come from Melissa Wedel with JP Morgan. Please go ahead.

Good morning, appreciate you taking my questions today.

I wanted to start with some of the onetime items I touched on them.

Also on this call when we back those out from the quarter.

It kind of gets your earnings power and thinking about the base, but not icon I just wanted to read that that you know that.

My whole life, which you reset the base dividend at 40, 45, a share and just wanted to stay here.

Well, you know, especially with the forward curve sort of implying.

That's the rate cuts in the next year or so.

Unless it's Matt.

Thanks for the question. So you know I think I don't want to like project out the dividend the dividend subject to the board.

So I don't want to do that I think kind of like the color a little bit to kind of last question.

The one time items.

Oh sure.

Uh huh.

Matt I'm, sorry, you cut out of that it's hard to hear you.

Yeah.

Being more normalized.

Yeah.

Yeah.

Pardon me, ladies and gentlemen, it appears we have lost connection to our speaker line. Please standby, while we reconnect. Thank you for your patience.

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Melissa.

I can hear you.

Okay. Okay, sorry, we had some technical difficulties.

Hmm.

Did I answer you guys a much clearer when we put out what did I answer any part of your question the second half.

It cut out pretty early actually.

Recap it.

Sure sure. So let me I didn't I don't want to get in Canada.

Projecting the dividend the dividend you know.

Up to the board of names.

Prove it every quarter.

I wanted to just focus kind of on where he worked for this quarter and in the 40 cents, which is a base dividend.

If you look at the add backs that Chris covered earlier.

So you kind of adjust for that if you walk through kind of that well I just didn't understand regarding deployments and you know our pipeline there are our visibility into the.

Prepayment activity for the quarter.

So the progress you've made in turning non interest earning assets into interest earning assets.

So you add all that together that kind of got us comfortable with the base dividend of 40 cents as you as you look forward and Theres, obviously things outside of our control such as base rate and spreads were obviously well well.

Tackle those kind of quarter by quarter as they present themselves, but that's a little bit how we were kind of thinking about you know the 40 cents for this quarter.

Okay I appreciate that.

When you you mentioned seeing some attractive opportunities.

Really an asset act and also may be infrastructure and even outside the U S. A.

I was hoping you could give a little bit more color on what particular.

Flavor of asset backed opportunities, you're looking at and infrastructure there are certain kinds of collateral that year.

Looking more carefully at and then others that you wouldn't consider anything you can share would be helpful. Thanks.

Yeah.

Yeah sure Melissa its market, it's actually a very diversified.

<unk> pipeline asset back deals that we're looking at.

It ranges really from everything from.

Our rental car.

Leases too.

Small loans that are used to buy by homeownership pronounce HVAC systems.

So theres really no one particular threat you know the only the only kind of overarching Fred.

Fred here really is that it will be.

Unlike in the corporate loans that we make the assets in these asset backed deals are.

Our a a pool of oh contractual assets, such as loans or leases. The other area that we have spent time on hum, but this is a market that has tightened as the SRT market.

That is an area we had been spending.

Spending some time on but.

Most of the S. Archie trades are or are either at levels, which are inside 350 spread so not particularly interesting or are higher up on the risk spectrum and not interesting from a risk perspective, but away from ISR cheese, we're still finding a pretty decent portfolio of a pipeline of assets in an asset that deals.

And most of those arm and the only other thing I would add is what we're not doing much or any other Vanessa factors really.

Tumor unsecured debt that's in.

Not something that we feel like we have an edge on but.

But where there is a corporate underlying borrower assets that are used in a corporate context for example equipment receivables.

Or.

Even even in an industry that we know very well like like telecom and fiber optics. There are asset backed deals out there that we are seeing across oaktree platform and evaluating them for the BDC, obviously, not all of them will fits but.

Generally it's it's in categories and industries that we know well and it's just the asset backed with a different wrapper different structure for deployment into that same industry.

Thank you.

Yeah.

Conclude our question and answer session I would like to turn the conference back over to Clark Cory for any closing remarks.

Thank you for everybody for joining our call today, please feel free to reach out directly to us to the extent you have any questions.

We appreciate all of your support.

Great day.

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

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