Operator: Welcome, and thank you for joining Oaktree Specialty Lending Corporation's first fiscal quarter 2026 conference call. Today's conference call is being recorded. I'll now turn the call over to Allison Miarmi, OCSL's Head of Investor Relations.
Operator: Welcome, and thank you for joining Oaktree Specialty Lending Corporation's first fiscal quarter 2026 conference call. Today's conference call is being recorded. I'll now turn the call over to Allison Miarmi, OCSL's Head of Investor Relations.
Speaker #1: Welcome and thank you for joining Oak Tree Corporations first fiscal Quarter 2026 conference call . Today's conference call is being recorded . I'll now turn the call over to Alison Murphy O .
Speaker #1: Head of Investor Relations .
Allison Miarmi: Our Q1 2026 earnings release, which we issued this morning, along with the accompanying slide presentation, can be accessed on the investor section of our website, oaktreespecialtylending.com. Before we begin, I want to remind you that the 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 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 OCSL uses the investor section of its corporate website to announce material information.
Alison Mermey: Our Q1 2026 earnings release, which we issued this morning, along with the accompanying slide presentation, can be accessed on the investor section of our website, oaktreespecialtylending.com. Before we begin, I want to remind you that the 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 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 OCSL uses the investor section of its corporate website to announce material information.
Speaker #2: Our first quarter 2026 earnings release , which we issued this morning along with the accompanying slide presentation , can be accessed on the investor section of our website .
Speaker #2: Oaktree Specialty Lending . Com . Before we begin , I remind you want to that the comments on today's call include forward looking statements reflecting current views with respect to , among other things , future operating results and financial .
Speaker #2: Performance: Actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to the relevant SEC filings for a discussion of these factors in further detail.
Speaker #2: 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 a solicitation of an offer to purchase any interest in an Oaktree fund.
Speaker #2: Investors and others should note that OCL uses the investor section of its corporate website to announce material information. The company encourages investors, the media, and others to review information that it shares on its website.
Allison Miarmi: The company encourages investors, the media, and others to review information that it shares on its website. Now, I'll turn the call over to Matt Pendo, President of OCSL. Matt?
Alison Mermey: The company encourages investors, the media, and others to review information that it shares on its website. Now, I'll turn the call over to Matt Pendo, President of OCSL. Matt?
Speaker #2: Now , I'll turn the call over to Mathew Pendo , president of Oxl , Matt .
Matt Pendo: Thanks, Allison, and good morning, everyone. I'll begin the call with an overview of our first quarter results. Armen Panossian, our CEO and co-CIO, will then share some commentary on the current market environment, and Raghav Khanna, our co-CIO, will provide details on our portfolio and investment activity. Our CFO and Treasurer, Chris McKown, will then review our financial performance before we open the call for questions. This year is off to a good start, and we delivered solid results for the first fiscal quarter of 2026. Adjusted net investment income for the quarter was $36.1 million, or $0.41 per share, up modestly from the prior quarter. Once again, we fully covered our quarterly dividend with earnings.
Matt Pendo: Thanks, Allison, and good morning, everyone. I'll begin the call with an overview of our first quarter results. Armen Panossian, our CEO and co-CIO, will then share some commentary on the current market environment, and Raghav Khanna, our co-CIO, will provide details on our portfolio and investment activity. Our CFO and Treasurer, Chris McKown, will then review our financial performance before we open the call for questions. This year is off to a good start, and we delivered solid results for the first fiscal quarter of 2026. Adjusted net investment income for the quarter was $36.1 million, or $0.41 per share, up modestly from the prior quarter. Once again, we fully covered our quarterly dividend with earnings.
Speaker #3: Thanks , Alison , and good morning , everyone . I'll begin the call with an overview of our first quarter results . Armen Panossian .
Speaker #3: Our CEO and Co-CIO, Armen Panossian, will provide commentary on the current share market environment. Then, Raghav Khanna, our Co-CIO, will provide details on our portfolio and investment activity.
Speaker #3: Our CFO and Treasurer, Chris McKown, will then review our financial performance before we open the call for questions. This year is off to a good start and we delivered solid results for the first fiscal quarter of 2026.
Speaker #3: Adjusted net investment income for quarter the was $36.1 million , or $0.41 per share , up modestly from the prior quarter . Once again , we fully covered our quarterly dividend with earnings .
Matt Pendo: These results reflect our team's disciplined capital deployment into income-generating assets, as well as the actions we took last year to optimize the liability side of our balance sheet. Importantly, this was the first full quarter reflecting the impact of the September rate cut, and despite lower base rates, earnings remained stable. Consistent with our dividend policy and first quarter earnings, our board declared a quarterly cash dividend of $0.40 per share, payable on 31 March 2026, to stockholders of record as of 16 March 2026. As discussed on our fiscal 2025 year-end call, we have several levers to help offset lower base rates and support net investment income. One of the key levers is our ability to prudently deploy capital into attractive investment opportunities.
Matt Pendo: These results reflect our team's disciplined capital deployment into income-generating assets, as well as the actions we took last year to optimize the liability side of our balance sheet. Importantly, this was the first full quarter reflecting the impact of the September rate cut, and despite lower base rates, earnings remained stable. Consistent with our dividend policy and first quarter earnings, our board declared a quarterly cash dividend of $0.40 per share, payable on 31 March 2026, to stockholders of record as of 16 March 2026. As discussed on our fiscal 2025 year-end call, we have several levers to help offset lower base rates and support net investment income. One of the key levers is our ability to prudently deploy capital into attractive investment opportunities.
Speaker #3: These results reflect our team's disciplined capital deployment into income-generating assets, as well as the actions we took last year to optimize the liability side of our balance sheet.
Speaker #3: Importantly , this was the reflecting first full quarter the impact of the September rate cut . And despite lower base rates , earnings remained stable , consistent with our dividend policy and first quarter earnings .
Speaker #3: Our board declared a quarterly cash dividend of $0.40 per share . Payable on March 31st , 2026 , to stockholders of record as of March 16th , 2026 .
Speaker #3: As discussed on our fiscal 2025 year end call , we have several levers to help offset lower base rates and support net investment income .
Speaker #3: One of the key ability to levers is our prudently deploy capital into attractive investment opportunities . To that point , new funded investments , including drawdowns from existing commitments , totaled $314 million , up from $220 million in the prior quarter .
Matt Pendo: To that point, new funded investments, including drawdowns from existing commitments, totaled $314 million, up from $220 million in the prior quarter. The average all-in spread and yield of new private investments was 525 basis points and 9%, respectively. We have ample financial flexibility to continue deploying capital as we ended the quarter with over $576 million available liquidity. We are intensely focused on reducing non-accruals and equity positions as another key lever for improving earnings power. In the first quarter, non-accruals were relatively stable sequentially and down nearly 85 basis points year-over-year. At quarter end, non-accruals represented 3.1% of the total debt portfolio, measured at fair value. For several of our non-accrual positions, we are optimistic about the potential outcomes and are actively working to maximize recovery value.
Matt Pendo: To that point, new funded investments, including drawdowns from existing commitments, totaled $314 million, up from $220 million in the prior quarter. The average all-in spread and yield of new private investments was 525 basis points and 9%, respectively. We have ample financial flexibility to continue deploying capital as we ended the quarter with over $576 million available liquidity. We are intensely focused on reducing non-accruals and equity positions as another key lever for improving earnings power. In the first quarter, non-accruals were relatively stable sequentially and down nearly 85 basis points year-over-year. At quarter end, non-accruals represented 3.1% of the total debt portfolio, measured at fair value. For several of our non-accrual positions, we are optimistic about the potential outcomes and are actively working to maximize recovery value.
Speaker #3: The average all in spread and yield of new private investments was 525 basis points and 9% , respectively . We have ample financial flexibility to continue deploying capital as we ended the quarter with over 576 million available liquidity , we are intensely focused on reducing non-accruals and equity positions another key as lever for improving earnings power .
Speaker #3: In the first quarter , Non-accruals relatively stable sequentially and down nearly 85 basis points year over year at quarter end . Non-accruals represented 3.1% of the total debt portfolio measured at fair value for several of our nonaccrual positions .
Speaker #3: We are optimistic about the potential outcomes and are actively working to maximize recovery value this quarter , we restructured our investment in Avery and put a portion of the loan back on accrual status , which is consistent with our broader objective of converting Non-earning assets into income producing assets .
Matt Pendo: This quarter, we restructured our investment in Avery and put a portion of the loan back on accrual status, which is consistent with the broader objective of converting non-earning assets into income-producing assets. Avery continues to sell units, and it appears to be happening at an increased pace. Any proceeds from monetization of non-accruals or equity positions will be reinvested into income-generating investments. We will continue to evaluate these levers and their potential contribution to our earnings and dividends. As always, we remain committed to strong alignment with our shareholders as we navigate an evolving credit landscape. Now I'll turn the call over to Armen for an update on the market environment.
Matt Pendo: This quarter, we restructured our investment in Avery and put a portion of the loan back on accrual status, which is consistent with the broader objective of converting non-earning assets into income-producing assets. Avery continues to sell units, and it appears to be happening at an increased pace. Any proceeds from monetization of non-accruals or equity positions will be reinvested into income-generating investments. We will continue to evaluate these levers and their potential contribution to our earnings and dividends. As always, we remain committed to strong alignment with our shareholders as we navigate an evolving credit landscape. Now I'll turn the call over to Armen for an update on the market environment.
Speaker #3: Avery continues to sell units , and appears to be happening at an increased pace . Any proceeds from monetization of Non-accruals or equity positions will be reinvested into income generating investments .
Speaker #3: We will continue to evaluate these levers and their potential contribution to our earnings and dividends . As always , we remain committed to strong alignment with our we shareholders as navigate and evolving credit landscape .
Speaker #3: turn the Now , I'll call over to Ahmed for an update on the market environment .
Armen Panossian: Thanks, Matt. Current trends in private credit mirror the bifurcation we're seeing in the broader economy. Macro factors, including persistent inflation, tariffs, and ongoing technology disruption, are amplifying structural strengths and weaknesses, creating a clear divide between the winners and losers. Companies with scale, profitability, and financial stability have ample access to capital, and those that are struggling have limited or no access at all. Over the past two years, sponsors have favored recapitalizations over exits in a muted M&A environment, creating a backlog of transactions waiting to come to market. With rate pressures easing, sponsors are increasingly turning to the M&A market to deliver much-needed liquidity for their LPs. While large cap activity accelerated in the December quarter, middle market volumes were still below historical averages. That said, we are starting to feel more confident that middle market M&A activity will improve over the course of the year.
Armen Panossian: Thanks, Matt. Current trends in private credit mirror the bifurcation we're seeing in the broader economy. Macro factors, including persistent inflation, tariffs, and ongoing technology disruption, are amplifying structural strengths and weaknesses, creating a clear divide between the winners and losers. Companies with scale, profitability, and financial stability have ample access to capital, and those that are struggling have limited or no access at all. Over the past two years, sponsors have favored recapitalizations over exits in a muted M&A environment, creating a backlog of transactions waiting to come to market. With rate pressures easing, sponsors are increasingly turning to the M&A market to deliver much-needed liquidity for their LPs. While large cap activity accelerated in the December quarter, middle market volumes were still below historical averages. That said, we are starting to feel more confident that middle market M&A activity will improve over the course of the year.
Speaker #4: Thanks , Matt . Current trends in private credit mirror the bifurcation we are seeing in the broader economy . Macro factors , including persistent inflation , tariffs and ongoing technology disruption are amplifying structural strengths and weaknesses , creating a clear divide between the winners and losers .
Speaker #4: Companies with scale, profitability, and financial stability have ample access to capital, and those that are struggling have limited or no access at all.
Speaker #4: past Over the few years , sponsors have favored Recapitalizations over exits in a muted M&A environment , creating a backlog of transactions waiting to come to market with rate pressures easing , sponsors are increasingly turning to the M&A market to deliver much needed liquidity for their LPs .
Speaker #4: While large cap activity accelerated in the December quarter , middle market volumes were still below historical averages . That are confident that middle market M&A activity will improve over the course of the year .
Armen Panossian: Since the Fed rate cut in September, we have seen greater price discipline in the market and believe that spreads in private credit have now bottomed out at SOFR plus 450 to 475 basis points. We think this may be supported by elevated redemptions in the perpetual BDC space, easing the demand for new paper. We are cautiously optimistic that spreads will remain stable in 2026, with the potential to widen. Importantly, direct lending transactions continue to offer an approximate 150 basis point spread premium relative to broadly syndicated loans of similar credit quality. PIK interest remains prevalent in direct lending transactions, underscoring sponsors' preference for flexible capital structures. We continue to stay extremely disciplined in our use of PIK.
Armen Panossian: Since the Fed rate cut in September, we have seen greater price discipline in the market and believe that spreads in private credit have now bottomed out at SOFR plus 450 to 475 basis points. We think this may be supported by elevated redemptions in the perpetual BDC space, easing the demand for new paper. We are cautiously optimistic that spreads will remain stable in 2026, with the potential to widen. Importantly, direct lending transactions continue to offer an approximate 150 basis point spread premium relative to broadly syndicated loans of similar credit quality. PIK interest remains prevalent in direct lending transactions, underscoring sponsors' preference for flexible capital structures. We continue to stay extremely disciplined in our use of PIK.
Speaker #4: Since the Fed rate cut in September, we have seen greater price discipline in the market and believe that spreads in private credit have now bottomed out at SOFR plus 450 to 475 basis points.
Speaker #4: We think this may be supported by elevated redemptions in the perpetual BDC space , easing the demand for new paper . We are cautiously optimistic that spreads will remain stable in 2026 , with the potential to widen .
Speaker #4: Importantly , direct lending transactions continue to offer an approximate 150 basis point spread premium relative to broadly syndicated loans . Similar credit quality pick interest remains prevalent in direct lending transactions , underscoring sponsor's preference for flexible capital structures .
Speaker #4: We continue to stay extremely disciplined in our use of pick in the first quarter , pick as a percentage of adjusted total investment income was 6.3% , which is below the public BDC industry average .
Armen Panossian: In Q1, PIK, as a percentage of adjusted total investment income, was 6.3%, which is below the public BDC industry average. Even with tighter than normal spreads and looser terms, we are still seeing compelling investment opportunities as reflected in our strong level of originations this quarter. In the current market environment, we are prioritizing loans to businesses with resilient models, defensible market positions, and durable long-term outlooks that align with our bottoms-up, value-driven approach to underwriting. One area we are monitoring closely is the impact of AI on private credit and the broader economy. Software and applications have consistently been the primary secular beneficiaries of major technology shifts, and we believe AI will increase the total addressable market for software. That said, we expect outcomes to be uneven, with increasing dispersion between players, as success depends heavily on execution and speed of adoption.
Armen Panossian: In Q1, PIK, as a percentage of adjusted total investment income, was 6.3%, which is below the public BDC industry average. Even with tighter than normal spreads and looser terms, we are still seeing compelling investment opportunities as reflected in our strong level of originations this quarter. In the current market environment, we are prioritizing loans to businesses with resilient models, defensible market positions, and durable long-term outlooks that align with our bottoms-up, value-driven approach to underwriting. One area we are monitoring closely is the impact of AI on private credit and the broader economy. Software and applications have consistently been the primary secular beneficiaries of major technology shifts, and we believe AI will increase the total addressable market for software. That said, we expect outcomes to be uneven, with increasing dispersion between players, as success depends heavily on execution and speed of adoption.
Speaker #4: Even with tighter than normal spreads and looser terms , we are still seeing compelling investment opportunities as reflected in our strong level of originations this quarter .
Speaker #4: In the current market environment , we are prioritizing loans to businesses with resilient models , defensible market positions , and durable long term outlooks that align with our bottoms up , value driven approach to underwriting One area we .
Speaker #4: are monitoring closely is the impact of AI on private credit and the broader economy . Software and applications have consistently been the primary secular of major technology shifts , and we believe AI increase the will total addressable market for software .
Speaker #4: That said, we expect outcomes to be uneven, with increasing dispersion between players as success depends heavily on execution and speed of adoption.
Armen Panossian: For 2026, we see an active backdrop supported by robust hyperscale investment and a more active software M&A environment as incumbents look to consolidate amid public valuation multiples that are at multiyear lows. At the same time, we are mindful that current levels of AI-related spending are a meaningful driver of broader economic growth, and that disappointment in realized returns or adoption timelines could result in a pullback in AI investment. Against this backdrop of increasing dispersion and uncertainty, we believe our scaled global investment platform positions us well. While US middle market direct lending remains the foundation of Oaktree's global private credit platform, our expertise across multiple strategies and our ability to underwrite complex transactions expand our opportunity set and allows us to be highly selective.
Armen Panossian: For 2026, we see an active backdrop supported by robust hyperscale investment and a more active software M&A environment as incumbents look to consolidate amid public valuation multiples that are at multiyear lows. At the same time, we are mindful that current levels of AI-related spending are a meaningful driver of broader economic growth, and that disappointment in realized returns or adoption timelines could result in a pullback in AI investment. Against this backdrop of increasing dispersion and uncertainty, we believe our scaled global investment platform positions us well. While US middle market direct lending remains the foundation of Oaktree's global private credit platform, our expertise across multiple strategies and our ability to underwrite complex transactions expand our opportunity set and allows us to be highly selective.
Speaker #4: For 2026 , we see an active backdrop supported by robust hyperscale investment and a more M&A software active environment . As look to incumbents consolidate amid public valuation multiples that are at multi-year lows .
Speaker #4: At the same time, we are mindful that current levels of AI-related spending are a meaningful driver of broader economic growth, and that disappointment in realized returns or adoption timeline could result in a pullback in AI investment.
Speaker #4: Against this backdrop of increasing dispersion and uncertainty , we believe our scaled global investment platform positions us well . While US middle market direct lending remains the foundation of oak global private credit platform , our expertise across multiple strategies and our ability to underwrite complex transactions , expand our opportunity , set , and allows us to be highly selective .
Armen Panossian: Specifically, the depth and breadth of our sponsor, corporate, and advisor relationships provide access to proprietary deal flow across asset-backed finance, European direct lending, infrastructure lending, and capital solutions. We remain constructive on the long-term outlook for private credit. ... In this environment, disciplined underwriting, selectivity, and active portfolio management will remain critical drivers of long-term performance. Raghav will now talk more about our portfolio and new investments. Raghav?
Armen Panossian: Specifically, the depth and breadth of our sponsor, corporate, and advisor relationships provide access to proprietary deal flow across asset-backed finance, European direct lending, infrastructure lending, and capital solutions. We remain constructive on the long-term outlook for private credit. ... In this environment, disciplined underwriting, selectivity, and active portfolio management will remain critical drivers of long-term performance. Raghav will now talk more about our portfolio and new investments. Raghav?
Speaker #4: Specifically , the depth and breadth of our sponsor , corporate and advisory relationships provide access to proprietary deal flow across asset backed finance , European direct lending , infrastructure lending and capital solutions .
Speaker #4: remain We constructive on the long term outlook for private credit in this environment . Disciplined underwriting selectivity and active portfolio management will remain critical drivers of long term performance .
Speaker #4: Raghav will now talk more about our portfolio and new investments. Raghav.
Raghav Khanna: Thanks, Armen. Before turning to our standard discussion of portfolio activity, I want to build on Armen's comments on software and spend a few minutes outlining our approach to investing in the software sector. Our foundational approach to software investing has not changed in light of AI, but we have become more selective in the sector. At its core, our framework focuses on software providers that are deeply embedded in customers' daily workflows and business processes, require meaningful buy-in from multiple stakeholders, and have high switching costs. AI has raised the quality bar for software investments, and as a result, we have added incremental criteria to our underwriting for both new investments and existing portfolio companies. We prioritize software businesses with multiple control points, data gravity, business context, high mission criticality, and a coherent and credible AI roadmap.
Raghav Khanna: Thanks, Armen. Before turning to our standard discussion of portfolio activity, I want to build on Armen's comments on software and spend a few minutes outlining our approach to investing in the software sector. Our foundational approach to software investing has not changed in light of AI, but we have become more selective in the sector. At its core, our framework focuses on software providers that are deeply embedded in customers' daily workflows and business processes, require meaningful buy-in from multiple stakeholders, and have high switching costs. AI has raised the quality bar for software investments, and as a result, we have added incremental criteria to our underwriting for both new investments and existing portfolio companies. We prioritize software businesses with multiple control points, data gravity, business context, high mission criticality, and a coherent and credible AI roadmap.
Speaker #5: Thanks Ahmed . Before turning to our standard discussion of portfolio activity , I want to build on Arman's comments on software and spend a few minutes our outlining approach to investing in the software sector .
Speaker #5: Our foundational approach to software investing has not changed in light of AI , but we have become more selective in the sector . At its core , our framework focuses on software providers that are deeply embedded in customers daily workflows and business processes require meaningful buying from multiple stakeholders and have high switching costs .
Speaker #5: AI has raised the quality bar for software investments and as a result , we have added incremental criteria to our underwriting for both new investments and existing companies .
Speaker #5: Software prioritize. We focus on businesses with multiple control points, data gravity in the business context, high mission criticality, and a coherent and credible AI roadmap.
Raghav Khanna: This has contributed to a higher pass rate on new opportunities relative to prior years. In addition, over the past 12 months, approximately 18% of our total software positions have been repaid, underscoring the quality of our underwriting decisions. Further details of the software portfolio are shown on page 8 of the earnings presentation. As of 31 December, software represented approximately 23% of investments at fair value across 28 issuers, and 94% of our software positions are first lien term loans, and we have only 2 ARR-based loans, representing approximately 2% of fair value. Turning to the broader portfolio, as of 31 December, 85% of the total portfolio was comprised of first lien senior secured debt, and the weighted average yield on debt investments was 9.3%. We remain committed to a diversified portfolio.
Raghav Khanna: This has contributed to a higher pass rate on new opportunities relative to prior years. In addition, over the past 12 months, approximately 18% of our total software positions have been repaid, underscoring the quality of our underwriting decisions. Further details of the software portfolio are shown on page 8 of the earnings presentation. As of 31 December, software represented approximately 23% of investments at fair value across 28 issuers, and 94% of our software positions are first lien term loans, and we have only 2 ARR-based loans, representing approximately 2% of fair value. Turning to the broader portfolio, as of 31 December, 85% of the total portfolio was comprised of first lien senior secured debt, and the weighted average yield on debt investments was 9.3%. We remain committed to a diversified portfolio.
Speaker #5: This has contributed to a higher pass rate on new opportunities relative to prior years . In addition , over the past 12 months , approximately 18% of our total software positions have been repaid , underscoring the quality of our underwriting decisions .
Speaker #5: Further details of the software portfolio are shown on page eight of the earnings presentation . As of December 31st , software represented approximately 23% of investments at fair value across 28 issuers and 94% of our software positions are first term loans , and we have only two RR based loans representing approximately 2% of fair value Turning to the .
Speaker #5: Broader portfolio, as of December 31st, 85% of the total portfolio was comprised of first-lien senior secured debt, and the weighted average yield on debt investments was 9.3%.
Speaker #5: We remain committed to a diversified portfolio . The average position makes up less than 1% and no position makes up more than 2% of our portfolio at fair value .
Raghav Khanna: The average position makes up less than 1%, and no position makes up more than 2% of our portfolio at fair value. Portfolio company weighted average leverage and interest coverage remain unchanged at 5.2 times and 2.2 times, respectively. Our team delivered a meaningful increase in investment activity, which grew our portfolio size by approximately $100 million to $2.95 billion. Newly funded investment activity totaled $314 million, up 42% sequentially. Paydowns and exits were stable at $179 million, resulting in $135 million of net new investments for the quarter.
Raghav Khanna: The average position makes up less than 1%, and no position makes up more than 2% of our portfolio at fair value. Portfolio company weighted average leverage and interest coverage remain unchanged at 5.2 times and 2.2 times, respectively. Our team delivered a meaningful increase in investment activity, which grew our portfolio size by approximately $100 million to $2.95 billion. Newly funded investment activity totaled $314 million, up 42% sequentially. Paydowns and exits were stable at $179 million, resulting in $135 million of net new investments for the quarter.
Speaker #5: company weighted Portfolio average leverage and interest coverage remained unchanged at 5.2 times and 2.2 times , respectively . Our team delivered a meaningful increase in investment activity , which grew our portfolio size by $100 million approximately investment to funded $2.95 billion .
Speaker #5: Newly activity totaled $314 million , up . Paydowns 42% sequentially and exits were stable at 179 million . Resulting in $135 million of net new investments for the quarter .
Raghav Khanna: This increase in deal flow reflects the breadth of Oaktree's private credit platform, combined with recent targeted investments in global sourcing and origination and specialized investment talent, which have meaningfully expanded the top of our funnel, despite the lower volume in US middle market direct lending. We continue to prioritize first lien senior secured investments in resilient, market-leading businesses, supported by disciplined underwriting. First lien loans represented 92% of our new originations, and the all-in weighted average spread on new originations during the quarter was approximately 500 basis points. One transaction I want to highlight this quarter is our investment in Premier, Inc., a healthcare services company that operates a large national group purchasing organization for a network of hospitals and healthcare providers. The company also provides a range of complementary offerings, such as healthcare software, supply chain management, data and analytics, and consulting services.
Raghav Khanna: This increase in deal flow reflects the breadth of Oaktree's private credit platform, combined with recent targeted investments in global sourcing and origination and specialized investment talent, which have meaningfully expanded the top of our funnel, despite the lower volume in US middle market direct lending. We continue to prioritize first lien senior secured investments in resilient, market-leading businesses, supported by disciplined underwriting. First lien loans represented 92% of our new originations, and the all-in weighted average spread on new originations during the quarter was approximately 500 basis points. One transaction I want to highlight this quarter is our investment in Premier, Inc., a healthcare services company that operates a large national group purchasing organization for a network of hospitals and healthcare providers. The company also provides a range of complementary offerings, such as healthcare software, supply chain management, data and analytics, and consulting services.
Speaker #5: increase in deal flow reflects the breadth of oak trees , private credit platform , combined with recent targeted investments in global sourcing and origination , and specialized investment talent which have meaningfully expanded the top of our funnel despite still lower volume in US middle market direct lending , we continue to prioritize first lien senior secured investments in resilient , market leading businesses supported by disciplined underwriting , first line loans represented 92% of our new originations and the all in weighted average spread on new resignations during the quarter was approximately 500 basis points .
Speaker #5: One transaction I want to highlight this quarter is our investment in Premier Inc., a healthcare services company that operates a large national group purchasing organization for a network of hospitals and healthcare providers.
Speaker #5: The company also range of provides a complementary offerings , such as healthcare software , supply chain management , data and analytics , and consulting services .
Raghav Khanna: In November, Patient Square Capital completed the take-private transaction of Premier at a total enterprise value of $2.6 billion. Oaktree has been growing its relationship with the sponsor and was deeply involved through the complex underwriting and negotiation process. Oaktree Funds acted as joint lead arranger, providing nearly 40% of the first lien term loan and 30% of the revolving credit facility. The term loan carries an all-cash coupon of SOFR + 6.50% and has 2 points of original issue discount. We were attracted to this transaction based on Premier's strong competitive positioning, secular tailwinds for healthcare spending, and high customer switching costs. During the quarter, there was one new addition to our non-accrual list. We placed a second-out term loan to All Web Leads on non-accrual.
Raghav Khanna: In November, Patient Square Capital completed the take-private transaction of Premier at a total enterprise value of $2.6 billion. Oaktree has been growing its relationship with the sponsor and was deeply involved through the complex underwriting and negotiation process. Oaktree Funds acted as joint lead arranger, providing nearly 40% of the first lien term loan and 30% of the revolving credit facility. The term loan carries an all-cash coupon of SOFR + 6.50% and has 2 points of original issue discount. We were attracted to this transaction based on Premier's strong competitive positioning, secular tailwinds for healthcare spending, and high customer switching costs. During the quarter, there was one new addition to our non-accrual list. We placed a second-out term loan to All Web Leads on non-accrual.
Speaker #5: In November , Patient Square Capital completed the Take private transaction of Premier at a total enterprise value of $2.6 billion . Oak tree has been growing its relationship with the sponsor and deeply was involved through the complex underwriting and negotiation process .
Speaker #5: Oaktree Funds acted as joint lead arranger, providing nearly 40% of the first long-term loan and 30% of the revolving credit facility.
Speaker #5: The term loan carries an all cash coupon of Sofr plus six , 50 and has two points of original issue discount . We were attracted to this transaction based Premier's on strong competitive positioning , secular tailwinds for healthcare spending , and high customer switching costs during the quarter , there was one new addition to our Non-accrual list .
Speaker #5: Out placed a second . terminal of Pluralsight on We Non-accrual , our prior position was restructured in August of 2024 , and this quarter we placed the restructured loan on Non-accrual due to the ongoing challenging industry dynamics and the company's softer than expected outlook at quarter end , there were 11 investments on Non-accrual , and as Matt noted , they represented 3.1% of the total debt portfolio measured at fair value .
Raghav Khanna: Our prior position was restructured in August 2024, and this quarter, we placed the restructured loan on non-accrual due to the ongoing challenging industry dynamics and the company's softer-than-expected outlook. At quarter end, there were 11 investments on non-accrual, and as Matt noted, they represented 3.1% of the total debt portfolio measured at fair value. We continue to actively manage these positions with the goal of converting non-earning assets into income-producing investments over time. I'll now turn the call over to Chris to review our financial results.
Raghav Khanna: Our prior position was restructured in August 2024, and this quarter, we placed the restructured loan on non-accrual due to the ongoing challenging industry dynamics and the company's softer-than-expected outlook. At quarter end, there were 11 investments on non-accrual, and as Matt noted, they represented 3.1% of the total debt portfolio measured at fair value. We continue to actively manage these positions with the goal of converting non-earning assets into income-producing investments over time. I'll now turn the call over to Chris to review our financial results.
Speaker #5: We continue to actively manage these positions with a goal of converting Non-earning assets into income producing investments over time . now I'll turn the call over to Chris to review our financial results .
Chris McKown: Thank you, Raghav. In our Q1, ending 31 December 2025, we delivered adjusted net investment income of $36.1 million, or $0.41 per share, as compared to $35.4 million, or $0.40 per share in the prior quarter. This increase reflects lower levels of Part I incentive fee expense, which offset lower total investment income quarter-over-quarter. NAV per share was $16.30, down from $16.64 in the Q4 due to unrealized depreciation on certain debt and equity investments. The largest detractor in our portfolio was Pluralsight, which Raghav discussed in his remarks. We marked the equity position down to zero and marked down the second-lien term loan to reflect this challenged position. Adjusted total investment income decreased to $74.5 million.
Chris McKown: Thank you, Raghav. In our Q1, ending 31 December 2025, we delivered adjusted net investment income of $36.1 million, or $0.41 per share, as compared to $35.4 million, or $0.40 per share in the prior quarter. This increase reflects lower levels of Part I incentive fee expense, which offset lower total investment income quarter-over-quarter. NAV per share was $16.30, down from $16.64 in the Q4 due to unrealized depreciation on certain debt and equity investments. The largest detractor in our portfolio was Pluralsight, which Raghav discussed in his remarks. We marked the equity position down to zero and marked down the second-lien term loan to reflect this challenged position. Adjusted total investment income decreased to $74.5 million.
Speaker #6: Thank you . Raghav . And our first fiscal quarter ending December 31st , 2025 . We delivered adjusted net investment income $36.1 million , of or $0.41 per share , as compared to $35.4 million , or $0.40 per share , in the prior quarter .
Speaker #6: This increase reflects lower levels of Part One incentive fee expense, which offset lower total investment income quarter over quarter. NAV per share was $16.30, down from $16.64 in the fourth quarter due to unrealized depreciation on certain debt and equity investments.
Speaker #6: The largest detractor in our portfolio was Pluralsight , which Raghav discussed in his remarks . We marked the equity position down to zero and marked down the second out .
Speaker #6: Term loan reflect . This challenged position . Adjusted total investment income decreased to $74.5 million . This compares to $76.9 million in the fourth quarter , and was primarily driven by lower interest income due to lower reference rates and lower original issue discount acceleration , which was partially offset by higher fee income .
Chris McKown: This compares to $76.9 million in Q4 and was primarily driven by lower interest income due to lower reference rates and lower Original Issue Discount acceleration, which was partially offset by higher fee income, largely from higher prepayment and exit fees. Net expenses declined modestly compared to Q4, primarily reflecting a $4 million reduction in Part I incentive fees, primarily as a result of our total return hurdle. OCSL continues to be cautious around the usage of Payment-in-Kind, with PIK representing 6.3% of adjusted total investment income in the quarter. Approximately 2/3 of our PIK income is related to investments that had the ability to PIK at origination.
Chris McKown: This compares to $76.9 million in Q4 and was primarily driven by lower interest income due to lower reference rates and lower Original Issue Discount acceleration, which was partially offset by higher fee income, largely from higher prepayment and exit fees. Net expenses declined modestly compared to Q4, primarily reflecting a $4 million reduction in Part I incentive fees, primarily as a result of our total return hurdle. OCSL continues to be cautious around the usage of Payment-in-Kind, with PIK representing 6.3% of adjusted total investment income in the quarter. Approximately 2/3 of our PIK income is related to investments that had the ability to PIK at origination.
Speaker #6: Largely from higher prepayment and exit fees. Net expenses declined modestly compared to the fourth quarter, primarily reflecting a $4 million reduction in.
Speaker #6: Part fees , one incentive primarily as a result of our total return hurdle . CSL continues to be cautious around the usage of payment in kind , with Pic representing 6.3% of adjusted total investment income in the quarter .
Speaker #6: Approximately two thirds of our Pic income is related to investments that had the ability to pick at origination . Our net leverage ratio at quarter end was 1.07 times , up from 0.97 times last quarter , and total debt outstanding was $1.6 billion .
Chris McKown: Our net leverage ratio at quarter end was 1.07 times, up from 0.97 times last quarter, and total debt outstanding was $1.6 billion. The increased leverage mirrored our strong deployments during the quarter. Our long-term target leverage ratio of 0.9 times to 1.25 times remains unchanged. As of December 31, the weighted average interest rate on debt outstanding was 6.1%, down from 6.5% from the prior quarter, primarily driven by lower reference rates. Unsecured debt represented 59% of total debt at quarter end, down slightly from the prior quarter. We have ample dry powder to fund investment commitments with liquidity of approximately $576 million, including $81 million of cash and $495 million of undrawn capacity on our credit facility.
Chris McKown: Our net leverage ratio at quarter end was 1.07 times, up from 0.97 times last quarter, and total debt outstanding was $1.6 billion. The increased leverage mirrored our strong deployments during the quarter. Our long-term target leverage ratio of 0.9 times to 1.25 times remains unchanged. As of December 31, the weighted average interest rate on debt outstanding was 6.1%, down from 6.5% from the prior quarter, primarily driven by lower reference rates. Unsecured debt represented 59% of total debt at quarter end, down slightly from the prior quarter. We have ample dry powder to fund investment commitments with liquidity of approximately $576 million, including $81 million of cash and $495 million of undrawn capacity on our credit facility.
Speaker #6: The increased leverage mirrored our strong during deployments the quarter . Our long term target leverage ratio of 0.9 times to 1.25 times remains unchanged as of December 31st .
Speaker #6: The weighted average interest rate on debt outstanding was 6.1%, down from 6.5% from the prior quarter, primarily driven by lower reference rates.
Speaker #6: Unsecured debt represented 59% of total debt end , at quarter down slightly from the prior quarter . We have ample dry powder to fund investment commitments with liquidity of approximately $576 million , including $81 million of cash and $495 million of undrawn capacity .
Chris McKown: Unfunded commitments, excluding those related to the joint ventures, were $247 million. Turning to our two joint ventures. Together, the JVs currently hold $511 million of investments, primarily in broadly syndicated loans spread across 135 portfolio companies. During the first fiscal quarter, the JVs generated ROEs of 12% in aggregate. Leverage at the JVs was 1.7 times, unchanged from last quarter. In addition, we received a $525,000 dividend from the Kemper JV. With that, I'll turn the call back to the operator for Q&A.
Chris McKown: Unfunded commitments, excluding those related to the joint ventures, were $247 million. Turning to our two joint ventures. Together, the JVs currently hold $511 million of investments, primarily in broadly syndicated loans spread across 135 portfolio companies. During the first fiscal quarter, the JVs generated ROEs of 12% in aggregate. Leverage at the JVs was 1.7 times, unchanged from last quarter. In addition, we received a $525,000 dividend from the Kemper JV. With that, I'll turn the call back to the operator for Q&A.
Speaker #6: On our credit facility . Unfunded commitments , excluding those related to the joint ventures , were $247 million . Turning to our two joint ventures together , the JVs currently hold $511 million of investments , primarily in broadly syndicated loans spread across 135 portfolio companies .
Speaker #6: During the first fiscal quarter , the JVs generated Rois of 12% in aggregate , leveraged the JVs was 1.7 times , unchanged from last quarter .
Speaker #6: In addition , we received a $525,000 dividend from the Kemper JV . With that , I'll turn the call back to the operator for Q&A .
Operator: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Finnian O'Shea with Wells Fargo.
Operator: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Finnian O'Shea with Wells Fargo.
Speaker #1: At this time, if you would like to ask a press question, please press star followed by the number one on your telephone keypad.
Speaker #1: We'll pause for just a moment to compile the Q&A roster. Your first question comes from Finian O'Shea with Wells Fargo.
Finian O'Shea: Hey, everyone. Good morning. On the portfolio, I'm not sure if you guys give one of those performance, you know, one through five kind of category breakdowns. But in any case, can you give us the picture of the portion of the portfolio at this point that is, that is sort of underperforming its current security or underwrite, and where, you know, sort of where we are in migrating out of the legacy type issues?
Finian O'Shea: Hey, everyone. Good morning. On the portfolio, I'm not sure if you guys give one of those performance, you know, one through five kind of category breakdowns. But in any case, can you give us the picture of the portion of the portfolio at this point that is, that is sort of underperforming its current security or underwrite, and where, you know, sort of where we are in migrating out of the legacy type issues?
Speaker #7: everyone . Hey , Good morning . I'm on the portfolio . I'm not sure if you guys give one of those performance , you know , one through five .
Speaker #7: Kind of . Category breakdowns . But in any case , can you give us the picture of the portion of the portfolio at this point that is that is sort of underperforming ?
Speaker #7: Its current security or underwrite ? And where sort of where we are and migrating out of the , the , legacy type issues .
Raghav Khanna: Hey, Finn, it's Raghav. So I'd point you to page 13. No. Sorry, it's not on there. So the way we think about our underperforming assets are, you obviously have the non-accruals, which you can see, the restructured equities. And then the third thing we monitor are positions that are trading or have been marked well below par, and that's obviously an indicator of stress. And in that portion, most of the loans and positions we have that are under considerably below par are actually public positions, some of which we actually bought around in the high 80s to 90s and have traded down a few points below that. Most of them we expect to rebound.
Raghav Khanna: Hey, Finn, it's Raghav. So I'd point you to page 13. No. Sorry, it's not on there. So the way we think about our underperforming assets are, you obviously have the non-accruals, which you can see, the restructured equities. And then the third thing we monitor are positions that are trading or have been marked well below par, and that's obviously an indicator of stress. And in that portion, most of the loans and positions we have that are under considerably below par are actually public positions, some of which we actually bought around in the high 80s to 90s and have traded down a few points below that. Most of them we expect to rebound.
Speaker #5: So, hey, I—I'd like to point you to page 13.
Speaker #8: Yeah. I don't know.
Speaker #5: Sorry . It's not on there . So the way we think about our , our , our underperforming assets are you obviously have the non-accruals , which you can see the restructured equities .
Speaker #5: And then the third thing we monitor are positions that are trading or have been marked well below par. And that's obviously an indicator of stress.
Speaker #5: And in that portion , most of the loans and positions we have that are under considerably below par are actually public positions , some of which we actually bought around in the high 80s to 90 .
Speaker #5: And have traded down a few points below that . Most of them we expect to rebound . There are a couple of names which are in the technology space that are , as I'm sure you can see in the market , that are facing a little bit of pressure just on that point , by the way , you know , to our when we speak trading desk , a lot of those technology names are trading down on like two and $3 million trades , mostly from CLO sellers who are trying to manage their worth tests and rating tests .
Raghav Khanna: There are a couple of names which are in the technology space that are, you know, as I'm sure you can see in the market, that are facing a little bit of pressure. Just on that point, by the way, you know, when we speak to our trading desk, a lot of those technology names are trading down on, like, $2- and $3 million-dollar trades, mostly from CLO sellers who are trying to manage their WARF tests and rating tests. We're not seeing huge selling in those positions, so we're watching those names, in particular, the technology names that are broadly syndicated loans and have traded down. But there's not a lot of trading actually happening. There's not a lot of selling. It's mostly small selling from CLO sellers.
Raghav Khanna: There are a couple of names which are in the technology space that are, you know, as I'm sure you can see in the market, that are facing a little bit of pressure. Just on that point, by the way, you know, when we speak to our trading desk, a lot of those technology names are trading down on, like, $2- and $3 million-dollar trades, mostly from CLO sellers who are trying to manage their WARF tests and rating tests. We're not seeing huge selling in those positions, so we're watching those names, in particular, the technology names that are broadly syndicated loans and have traded down. But there's not a lot of trading actually happening. There's not a lot of selling. It's mostly small selling from CLO sellers.
Speaker #5: We're not seeing huge selling in those positions . So we're watching those names in in particular , the technology names that are broadly syndicated loans and have traded down .
Speaker #5: But there's not a lot of trading actually happening. There's not a lot of selling. It's mostly small selling from CLO sellers.
Finian O'Shea: Okay. I guess that helpful. And, I guess follow up, sticking with that topic, you gave some helpful views or color on AI, risk to software. Are you... You know, let's, let's say to the extent there is volume, are there interesting names on the screen? It looked like you had a good amount of liquid this quarter. Should we expect that to continue?
Finian O'Shea: Okay. I guess that helpful. And, I guess follow up, sticking with that topic, you gave some helpful views or color on AI, risk to software. Are you... You know, let's, let's say to the extent there is volume, are there interesting names on the screen? It looked like you had a good amount of liquid this quarter. Should we expect that to continue?
Speaker #7: Okay , I guess that's helpful in a I guess , follow up . Sticking with that topic , you gave some helpful views or color on AI risk to software .
Speaker #7: Are you you know , let's say to the extent there is volume , are there interesting names on the screen that looked like you had a good quarter ?
Speaker #7: Liquid amount—should we expect that to continue?
Raghav Khanna: Yeah. So one of the benefits we have is, you know, we obviously have a large public markets business in our high-yield business and in our senior notes business. So we're actually triaging all of the software names and technology, in addition to, obviously, very closely monitoring our private positions, by developing AI scorecards and other types of scorecards to, again, triage. Because I think your sentiment is right, that there is a bit of a baby out with a bathwater situation, and that's something we are looking at.
Raghav Khanna: Yeah. So one of the benefits we have is, you know, we obviously have a large public markets business in our high-yield business and in our senior notes business. So we're actually triaging all of the software names and technology, in addition to, obviously, very closely monitoring our private positions, by developing AI scorecards and other types of scorecards to, again, triage. Because I think your sentiment is right, that there is a bit of a baby out with a bathwater situation, and that's something we are looking at.
Speaker #5: So Yeah . one of the benefits we have is , you know , we obviously have a large public public markets business in our high yield business and in our senior loans business .
Speaker #5: So we're actually triaging all of the software names and technology in addition to obviously very closely monitoring our private positions by developing AI scorecards and other types of scorecards to again , triage because I think your sentiment is right that there is a bit of a baby out with the bathwater situation , and that's something we are looking at again , you know , when we look at what is the right point to step in , it doesn't feel like that right now .
Raghav Khanna: Again, you know, when we look at what is the right point to step in, it doesn't feel like that right now, just because, again, you know, the trading volume we've seen is either small ticket sales from CLOs or dealers trying to make a market. And these, like, $2 or $3 million trades are basically being used to mark positions down, you know, 2 or 3 points. So it looks very attractive when you look on a screen, at least for some of these names, where the AI risk is low, but there isn't enough volume to actually want to step in and try to be a buyer.
Raghav Khanna: Again, you know, when we look at what is the right point to step in, it doesn't feel like that right now, just because, again, you know, the trading volume we've seen is either small ticket sales from CLOs or dealers trying to make a market. And these, like, $2 or $3 million trades are basically being used to mark positions down, you know, 2 or 3 points. So it looks very attractive when you look on a screen, at least for some of these names, where the AI risk is low, but there isn't enough volume to actually want to step in and try to be a buyer.
Speaker #5: Just because , again , you know , the trading volume we've seen is either small ticket sales from close or dealers trying to make a market .
Speaker #5: these like two , And $3 million trades are , are basically being used to mark positions down , you know , 2 or 3 points .
Speaker #5: So it looks attractive when you look at your screen, at least for some on a lot of these names, where the AI risk is low.
Speaker #5: But there isn't enough volume to actually want to step in and try to be a buyer .
Operator: Your next question comes from Ethan Kaye, with Lucid Capital Markets.
Operator: Your next question comes from Ethan Kaye, with Lucid Capital Markets.
Speaker #1: Your next question comes from Ethan Kaye with Lucid Capital Markets .
Ethan Kaye: Hey, guys. Thanks for taking the question here. So you disclosed median portfolio EBITDA increasing from $150 million to $190 million sequentially. I'm, you know, feels like a pretty, pretty big change for one quarter. You did talk about there being maybe some more activity in the upper middle market, you know, as compared to the core middle market. But wondering really kind of what drove that. Was it, you know, a strategic result or more so, you know, a by-product of the deal environment and company growth?
Ethan Kaye: Hey, guys. Thanks for taking the question here. So you disclosed median portfolio EBITDA increasing from $150 million to $190 million sequentially. I'm, you know, feels like a pretty, pretty big change for one quarter. You did talk about there being maybe some more activity in the upper middle market, you know, as compared to the core middle market. But wondering really kind of what drove that. Was it, you know, a strategic result or more so, you know, a by-product of the deal environment and company growth?
Speaker #9: Hey guys , thanks for taking the question here . So you disclosed median portfolio EBITDA increasing from 150 million to 190 million sequentially .
Speaker #9: I'm , you know , feels like a pretty , pretty big change for one quarter . You did talk about there being maybe some more activity in the upper middle market , you know , as compared to the core middle market , but wondering really kind of what drove that .
Speaker #9: Was it , you know , a strategic result or more so a byproduct of of the deal environment and a company growth .
Raghav Khanna: Yeah, so it's, you're right. So it was really driven by our new originations that we funded in the fourth quarter, which were pretty large companies. They were all large cap, mostly on the sponsor side, mostly in the US. There were a couple of non-sponsor situations, and a couple of non-US, really just European situations that we funded in the fourth quarter. But they were typically much larger EBITDA. So, most of the growth in the median EBITDA, I would say, was a mix shift from those originations in the fourth quarter. But the overall portfolio EBITDA has also been growing. That, I would say, was a smaller portion of the increase you're seeing in the median EBITDA.
Raghav Khanna: Yeah, so it's, you're right. So it was really driven by our new originations that we funded in the fourth quarter, which were pretty large companies. They were all large cap, mostly on the sponsor side, mostly in the US. There were a couple of non-sponsor situations, and a couple of non-US, really just European situations that we funded in the fourth quarter. But they were typically much larger EBITDA. So, most of the growth in the median EBITDA, I would say, was a mix shift from those originations in the fourth quarter. But the overall portfolio EBITDA has also been growing. That, I would say, was a smaller portion of the increase you're seeing in the median EBITDA.
Speaker #5: it's Yeah . So it It was you're right . really driven by our new originations that we funded in the fourth quarter , which were pretty large companies .
Speaker #5: They were all large cap , mostly on the sponsor side , mostly in the US . There were a couple of Non-sponsored situations , a couple of non US religious European situations that we funded in the fourth quarter .
Speaker #5: But they were typically much larger. EBITDA. So most of the growth in the median EBITDA, I would say, was a mix shift from those originations in the fourth quarter.
Speaker #5: But the overall portfolio EBITDA has also been growing. That, I would say, was a smaller portion of the increase you're seeing in the median EBITDA.
Ethan Kaye: Got it. Great. And then one other. So I'm hoping you can kind of walk through the $32 million or so of unrealized appreciation. You know, we talked about Pluralsight, which appears to be about 1/3 of that net number. But can you kind of talk through whether there was, you know, maybe any other themes or drivers of kind of the markdowns in the quarter?
Ethan Kaye: Got it. Great. And then one other. So I'm hoping you can kind of walk through the $32 million or so of unrealized appreciation. You know, we talked about Pluralsight, which appears to be about 1/3 of that net number. But can you kind of talk through whether there was, you know, maybe any other themes or drivers of kind of the markdowns in the quarter?
Speaker #9: Got it. Great. And then one other—hoping you can—so I'm kind of wanting to walk through the $32 million or so of unrealized appreciation.
Speaker #9: You know , we talked about which Pluralsight , appears to be about a third of that . Net number . But can you kind of talk through whether there was maybe any other themes or drivers of kind of the markdowns in the quarter ?
[Analyst] (Wells Fargo): Yeah. Hey, it's Chris. I'll make a few comments and I don't know if I add any color. So you're right, you know, Pluralsight was the single largest driver, you know, accounting for about 38% of, you know, the total mark. You know, beyond that, you know, we did take some smaller marks in a few other private positions. And then we did see some of the quoted names trade down, you know, which impacted some of the names that hold on balance sheet, yeah, as well as in the JVs.
Chris McKown: Yeah. Hey, it's Chris. I'll make a few comments and I don't know if I add any color. So you're right, you know, Pluralsight was the single largest driver, you know, accounting for about 38% of, you know, the total mark. You know, beyond that, you know, we did take some smaller marks in a few other private positions. And then we did see some of the quoted names trade down, you know, which impacted some of the names that hold on balance sheet, yeah, as well as in the JVs.
Speaker #6: Yeah . Hey , it's it's Chris . I'll make a few comments and my colleagues add any color . So you're right , Pluralsight was the single largest driver , accounting for about 38% of the total .
Speaker #6: The total marks beyond that , we did take some some smaller marks and a few other private positions . And then we did see some some of the quoted names trade down , which impacted some of the names that hold on balance sheet as well as as well as the JVs .
Ethan Kaye: Okay, great. Thank you, guys.
Ethan Kaye: Okay, great. Thank you, guys.
Speaker #9: Okay, great. Thank you, guys.
Operator: Your next question comes from Paul Johnson with KBW.
Operator: Your next question comes from Paul Johnson with KBW.
Speaker #1: Your next question comes from Paul Johnson with KBW .
Paul Johnson: Hey, guys, thanks for taking my questions. I mean, just a little bit more in terms of the software, you know, your sort of perspective on software. You know, I guess, how would you kind of characterize at this point, you know, top line growth and EBITDA trends sort of broadly? You know, have you, you know, noticed any sort of change in the growth rates there, you know, pick up in any sort of new activity for deals? I mean, how has that impacted the market, I guess, beyond kind of the weakness in some of the secondary loan prices?
Paul Johnson: Hey, guys, thanks for taking my questions. I mean, just a little bit more in terms of the software, you know, your sort of perspective on software. You know, I guess, how would you kind of characterize at this point, you know, top line growth and EBITDA trends sort of broadly? You know, have you, you know, noticed any sort of change in the growth rates there, you know, pick up in any sort of new activity for deals? I mean, how has that impacted the market, I guess, beyond kind of the weakness in some of the secondary loan prices?
Speaker #10: Hey guys . Thanks for taking my questions . I mean , just a little bit more . In terms of the , you know , your sort of perspective on software .
Speaker #10: You know, I guess, how would you kind of characterize, at this point, you know, top line growth and EBITDA trends, sort of broadly?
Speaker #10: Have you noticed any sort of change in the growth rates there, backup, and any sort of new activity for deals? I mean, how has that impacted the market?
Speaker #10: I guess beyond kind of the weakness in some of the secondary loan prices ?
Raghav Khanna: Thanks for the question. This is Armen. Look, I think big picture, I would say that it's too early to actually see performance degradation in any software name, and it's probably gonna take a fair bit of time to actually see any sort of dispersion in performance due to AI or disruption in performance due to AI. There have been a lot of splashy headlines, but it has not translated big picture into a widespread issue across the names. The reason for the concern isn't necessarily near-term weakness in performance. It's more that the concern around the long run calls into question the refinanceability of these loans when they mature.
Armen Panossian: Thanks for the question. This is Armen. Look, I think big picture, I would say that it's too early to actually see performance degradation in any software name, and it's probably gonna take a fair bit of time to actually see any sort of dispersion in performance due to AI or disruption in performance due to AI. There have been a lot of splashy headlines, but it has not translated big picture into a widespread issue across the names. The reason for the concern isn't necessarily near-term weakness in performance. It's more that the concern around the long run calls into question the refinanceability of these loans when they mature.
Speaker #8: Thanks for the question. This is Armen. Look, I think big picture, I'd say that it's too early to actually see performance degradation in any software name.
Speaker #8: And it's probably going to take a fair bit of time to actually see any sort of dispersion in performance due to AI, or disruption in performance due to AI.
Speaker #8: There have been a lot of splashy headlines, but it has not translated, big picture, into a widespread issue across the names. The reason for the concern isn't necessarily near-term weakness in performance.
Speaker #8: It's more that the concern around the long run calls into question the refinance ability of these loans when they mature . And that's why everybody should be looking at their software exposure , because to the extent that a subset of software names , whether they're in your private equity book or in your private credit book , to the extent some of them are more susceptible to long term dislocation due to AI , the more likely it is that the private equity sponsor fails to support them .
Raghav Khanna: And that's why everybody should be looking at their software exposure, because to the extent that a subset of software names, whether they're in your private equity book or in your private credit book, to the extent some of them are more susceptible to long-term dislocation due to AI, the more likely it is that the private equity sponsor fails to support them when a maturity occurs, even in advance of a real issue in performance. The other thing I would say is, if some number of these software businesses are eventually disrupted by AI, it may turn out to be that they are binary in their outcomes. What I mean by that is-
Armen Panossian: And that's why everybody should be looking at their software exposure, because to the extent that a subset of software names, whether they're in your private equity book or in your private credit book, to the extent some of them are more susceptible to long-term dislocation due to AI, the more likely it is that the private equity sponsor fails to support them when a maturity occurs, even in advance of a real issue in performance. The other thing I would say is, if some number of these software businesses are eventually disrupted by AI, it may turn out to be that they are binary in their outcomes. What I mean by that is-
Speaker #8: When a maturity occurs , even in advance of a real issue . In performance . The other thing I would say is if some number of these software businesses are eventually disrupted by AI , it may turn out to be that they are binary in their outcomes .
Armen Panossian: ... If a business appears to be at risk of an AI, a meaningful AI competitor, you could see, depending on the nature of the contracts and the nature of the business, you could see a pretty rapid degradation of performance in those businesses over time. And therefore, from an equity perspective and from a credit perspective, the recoveries could be quite problematic. So it is a significant reason to be concerned about in the medium to long term, but it's not gonna really emerge in the short run. And on this point, I think it's worth mentioning real quick, the concept of covenants in software deals.
Armen Panossian: ... If a business appears to be at risk of an AI, a meaningful AI competitor, you could see, depending on the nature of the contracts and the nature of the business, you could see a pretty rapid degradation of performance in those businesses over time. And therefore, from an equity perspective and from a credit perspective, the recoveries could be quite problematic. So it is a significant reason to be concerned about in the medium to long term, but it's not gonna really emerge in the short run. And on this point, I think it's worth mentioning real quick, the concept of covenants in software deals.
Speaker #8: What I mean by that is , if a business appears to be at risk of an AI , a meaningful AI competitor , you could see , depending on the nature of the contracts and the nature of the business , you could see a pretty rapid degradation of performance in those businesses over time , and therefore , from an equity perspective and from a credit perspective , the recoveries could be quite problematic .
Speaker #8: So it is it is a significant reason to be concerned about in the medium to long term , but it's not going to really emerge in the short run .
Speaker #8: And on this point , I think it's worth mentioning real quick the concept of covenants in software deals . You know , covenants and software deals mirror same sort of the common mirror , the same sort of condition as just large cap versus core or small cap , private credit .
Armen Panossian: You know, covenants in software deals mirror the same sort of condition as just large cap versus core or small cap private credit. What I mean by that is this: there are software deals that have covenants, EBITDA covenants, and they tend to be smaller or mid-sized companies. But as businesses become large cap and as they are possibly financiable in the broadly syndicated loan market, those software loans do not have any covenants. So it's like cov light, as you would imagine in another industry outside of software. In a large cap deal, you don't see covenants. In a small or mid-sized deal, you do see covenants typically. And the covenants in software deals are usually one of two types.
Armen Panossian: You know, covenants in software deals mirror the same sort of condition as just large cap versus core or small cap private credit. What I mean by that is this: there are software deals that have covenants, EBITDA covenants, and they tend to be smaller or mid-sized companies. But as businesses become large cap and as they are possibly financiable in the broadly syndicated loan market, those software loans do not have any covenants. So it's like cov light, as you would imagine in another industry outside of software. In a large cap deal, you don't see covenants. In a small or mid-sized deal, you do see covenants typically. And the covenants in software deals are usually one of two types.
Speaker #8: And what I mean by that is this: there are software deals that have covenants, EBITDA covenants, and they tend to be smaller or midsize companies.
Speaker #8: But as businesses become large cap and as they are possibly financeable in the broadly syndicated loan market , those software loans do not have any covenants .
Speaker #8: So it's like Cove Light , as you would imagine in another industry outside of software , in a large cap deal , you don't see covenants and the smaller mid-sized deal you do see covenants typically , and the covenants and software deals are usually one of two types .
Armen Panossian: One is an EBITDA-based covenant, as you would see in a normal business that is financed off of a leverage multiple, and the other would be ARR or annual recurring revenue. And those transactions that are recurring revenue-based, again, if they're middle market or lower middle market, they will have typically an ARR covenant, whereby they have a total debt to ARR cap. And that covenant usually falls away in about three years, and it converts into a more traditional leverage-based covenant. So the covenants can become a problem for ARR deals as they approach that three-year anniversary, typically, in those deals that have such a covenant. Again, large cap is less likely to have it than small cap.
Armen Panossian: One is an EBITDA-based covenant, as you would see in a normal business that is financed off of a leverage multiple, and the other would be ARR or annual recurring revenue. And those transactions that are recurring revenue-based, again, if they're middle market or lower middle market, they will have typically an ARR covenant, whereby they have a total debt to ARR cap. And that covenant usually falls away in about three years, and it converts into a more traditional leverage-based covenant. So the covenants can become a problem for ARR deals as they approach that three-year anniversary, typically, in those deals that have such a covenant. Again, large cap is less likely to have it than small cap.
Speaker #8: One is an EBITDA based covenant , as you would see in a normal business , that is , that is financed off of a leverage multiple .
Speaker #8: And the other would RR be or annual recurring revenue . And those those transactions that are recurring revenue based . Again , if they're middle market lower middle or market , they will have typically an IRR covenant whereby they have a total debt to RR cap and that covenant usually falls away in about three years .
Speaker #8: And it converts into a more traditional leverage based covenant . So the covenants are can become a problem for IRR deals as they approach that three year anniversary .
Speaker #8: Typically . And those deals that have such a covenant again , large cap is less likely to have it than small cap . But it it is sort of an additional factor that may ring the alarm bell a little bit sooner or earlier than the maturity .
Armen Panossian: But it is yet sort of an additional factor that may ring the alarm bell a little bit sooner or earlier than the maturity. So, in our case, by the way, in terms of OCSL, we really only have two ARR deals in our portfolio, period, and one of them is already free cash flow positive and expected to repay imminently. The other is a very large transaction, a very large company, with a very large private equity sponsor.
Armen Panossian: But it is yet sort of an additional factor that may ring the alarm bell a little bit sooner or earlier than the maturity. So, in our case, by the way, in terms of OCSL, we really only have two ARR deals in our portfolio, period, and one of them is already free cash flow positive and expected to repay imminently. The other is a very large transaction, a very large company, with a very large private equity sponsor.
Speaker #8: So and in our case , by the way , in terms of OCL , we really only have two RR deals in our portfolio , period .
Speaker #8: And one of them is already free cash flow positive and expected to repay imminently . The other is a very large transaction company very large , a with a very large private equity sponsor .
Armen Panossian: We think it's pretty well insulated from AI competition, but we think we've done, we think we've been pretty forward-looking on the ARR side, at least, to avoid those situations that do not cash flow, and therefore need some sort of access to the public markets or some sort of availability in the, in the financing markets. We've wanted to avoid those situations now for several years, and so that's not really an issue in our portfolios.
Armen Panossian: We think it's pretty well insulated from AI competition, but we think we've done, we think we've been pretty forward-looking on the ARR side, at least, to avoid those situations that do not cash flow, and therefore need some sort of access to the public markets or some sort of availability in the, in the financing markets. We've wanted to avoid those situations now for several years, and so that's not really an issue in our portfolios.
Speaker #8: We think it's well pretty insulated from AI competition , but we think we've done a we think we've been pretty forward looking on the RR side , at least to avoid those situations that do not cash flow and therefore need some sort of access to the public markets or some sort of availability in financing the in the We've markets .
Speaker #8: wanted to avoid those situations . Now for years . several And and so that's that's not really an issue in our portfolios .
Matt Pendo: And I think, Paul, Matt, we put a new page in the deck, page 8, that breaks out our software exposure in OCSL. Which I think is... And give us any comments if you have on it. But what we lay out there, kind of your question on kind of performing in the business. So, if you look at the EBITDA growth since we funded the deals, it's up about 20%. So it gives you a sense of we've had growth there, that EBITDA margin is around 40%. So these are EBITDA-positive companies. And about 18%, almost 20% of our software loans have repaid over the last 12 months, so a reflection of you know, thoughtful and hopefully successful underwriting.
Matt Pendo: And I think, Paul, Matt, we put a new page in the deck, page 8, that breaks out our software exposure in OCSL. Which I think is... And give us any comments if you have on it. But what we lay out there, kind of your question on kind of performing in the business. So, if you look at the EBITDA growth since we funded the deals, it's up about 20%. So it gives you a sense of we've had growth there, that EBITDA margin is around 40%. So these are EBITDA-positive companies. And about 18%, almost 20% of our software loans have repaid over the last 12 months, so a reflection of you know, thoughtful and hopefully successful underwriting.
Speaker #3: I think Paul it's Matt . We put a new page in the deck . Page eight that breaks out our software exposure and Oxl , which I think is .
Speaker #3: Give us any comments if you have on it . But when we lay out there , kind of a question on performing the business .
Speaker #3: So if you look at the growth , since EBITDA we funded deals , funded the that's up about 20% . So it gives you a sense of of we've had growth there .
Speaker #3: The EBITDA margins , around 40% . So these are EBITDA companies positive . And about 18% , almost 20% of our software loans have repaid over the last 12 months .
Speaker #3: So a reflection of of , you know , thoughtful and hopefully successful underwriting . But this out on on page eight , which is which in what we posted .
Matt Pendo: But so we lay all this out on page eight, which is in what we posted. Hopefully, that's helpful as well.
Matt Pendo: But so we lay all this out on page eight, which is in what we posted. Hopefully, that's helpful as well.
Speaker #3: Hopefully that's helpful as well .
Paul Johnson: It is. Yeah, thank you for that. It's, you know, very good color there. And Armen, appreciate, you know, the helpful answer there, as well. One more bigger question - bigger picture question, if I may, kind of on this topic. Sort of two-part, but on that slide, you mentioned there's a 47% weighted average LTV ratio. I'm just curious, is that an LTV ratio at underwrite, or is that a more, you know, a current LTV ratio, obviously, based on valuations and leverage today? That's the first part of the question. And then, the other part of the question is bigger picture.
Paul Johnson: It is. Yeah, thank you for that. It's, you know, very good color there. And Armen, appreciate, you know, the helpful answer there, as well. One more bigger question - bigger picture question, if I may, kind of on this topic. Sort of two-part, but on that slide, you mentioned there's a 47% weighted average LTV ratio. I'm just curious, is that an LTV ratio at underwrite, or is that a more, you know, a current LTV ratio, obviously, based on valuations and leverage today? That's the first part of the question. And then, the other part of the question is bigger picture.
Speaker #10: It is . Yeah . Thank you for that . It's very good color there . And Arvin appreciate the helpful answer there as well .
Speaker #10: One more bigger question . Bigger picture question . If I may kind of on this topic sort of two part , but on that slide you mentioned there's a 47% weighted average LTV ratio .
Speaker #10: I'm just curious , is that an LTV ratio and underwriter , or is that a more , you know , a current ratio ?
Speaker #10: LTV Obviously based on valuations and leverage today , that's the first part of the question . And then the the other part of the question is bigger picture how much of of valuations sort of reset do you think that , you know , broadly to software space can absorb in the equity multiples before we do start to see , you know , widespread sort of restructurings and losses and bigger trouble within the the software industry .
Paul Johnson: You know, how much of a valuation sort of reset do you think that, you know, broadly, the software space can absorb in the equity multiples before we do start to see, you know, widespread sort of restructurings, losses, and bigger trouble within the software industry? Just given that, obviously, these are companies that are typically financed with lower LTV ratios at underwrite. And I'll hand it off there. Thanks.
Paul Johnson: You know, how much of a valuation sort of reset do you think that, you know, broadly, the software space can absorb in the equity multiples before we do start to see, you know, widespread sort of restructurings, losses, and bigger trouble within the software industry? Just given that, obviously, these are companies that are typically financed with lower LTV ratios at underwrite. And I'll hand it off there. Thanks.
Speaker #10: Just given that, obviously, these are companies that are typically financed with lower LTV ratios at underwrite. And I'll hand it off there.
Armen Panossian: Yeah. This is Armen. I'll answer that, Paul. I mean, so first of all, on that slide, that is the LTV at underwrite, not a current estimate LTV.
Armen Panossian: Yeah. This is Armen. I'll answer that, Paul. I mean, so first of all, on that slide, that is the LTV at underwrite, not a current estimate LTV.
Speaker #10: Thanks . Yeah
Speaker #8: is Armin . I'll answer that , Paul . I mean , so first of all , on that slide , that is the LTV at underwrite , not a current estimate .
Matt Pendo: No, it's a December 31. It's the current one.
Matt Pendo: No, it's a December 31. It's the current one.
Armen Panossian: It's the current one at 12:31?
Armen Panossian: It's the current one at 12:31?
Speaker #8: LTV .
Speaker #3: It's a 1231 . current one . It's the
Matt Pendo: Yeah.
Matt Pendo: Yeah.
Armen Panossian: Okay. So, December 31, it would. So that is our estimate of the LTV as of December 31. And then in terms of the amount of degradation in the equity multiple that it could sustain. I would say, generally speaking, if you do see LTVs rise to 60%, that's getting to the point where they-- it calls into question the refinancability of the loan. Generally speaking, today, outside of software, when there is an LBO, you're seeing something like 50 to 55% LTV at the max. You're not seeing 70% or 65% LTV deals generally. So what would happen, theoretically, assuming these businesses aren't burning a terrible amount of cash, and they get m...
Armen Panossian: Okay. So, December 31, it would. So that is our estimate of the LTV as of December 31. And then in terms of the amount of degradation in the equity multiple that it could sustain. I would say, generally speaking, if you do see LTVs rise to 60%, that's getting to the point where they-- it calls into question the refinancability of the loan. Generally speaking, today, outside of software, when there is an LBO, you're seeing something like 50 to 55% LTV at the max. You're not seeing 70% or 65% LTV deals generally. So what would happen, theoretically, assuming these businesses aren't burning a terrible amount of cash, and they get m...
Speaker #8: 1231 It's the okay . So so 1231 it would so that is our estimate of the LTV as of 1231 . And then terms in of the amount of degradation in the equity , multiple that that it could sustain , I would say , generally speaking , if you do see LTV rise to 60% , that's getting to the point where they it calls into question the refinance ability of the loan .
Speaker #8: Generally speaking , today , outside of software , when there is an LBO , you're seeing something like 50 to 55% LTV at the max .
Speaker #8: You're not seeing 70% or 65% LTV deals generally . So what would happen theoretically , assuming these businesses aren't burning a terrible amount of cash and they get to to within a reasonable time frame of maturity ?
Armen Panossian: To within a reasonable timeframe of maturity, if once the sponsor, you know, calls up the market and says, Hey, I wanna refinance, and the response is going to be: Well, you're gonna need to put in more equity to kind of make this closer to a 50/50 LTV again. And the sponsors will then have to judge whether it makes sense to do that or not, based on the future, sort of risk factors and earnings potential of the business, but also the stage of deployment of the fund that those investments are in. If a fund cannot call capital, well, it can't... then that sponsor can't support the business.
Armen Panossian: To within a reasonable timeframe of maturity, if once the sponsor, you know, calls up the market and says, Hey, I wanna refinance, and the response is going to be: Well, you're gonna need to put in more equity to kind of make this closer to a 50/50 LTV again. And the sponsors will then have to judge whether it makes sense to do that or not, based on the future, sort of risk factors and earnings potential of the business, but also the stage of deployment of the fund that those investments are in. If a fund cannot call capital, well, it can't... then that sponsor can't support the business.
Speaker #8: If once the sponsor calls says , hey , up the market and I . Want to refinance and the response is going to be , well , you're going to need to put in more equity to kind of make this closer to a 5050 LTV .
Speaker #8: Again . And the the sponsors will then have to judge whether it makes sense to to do that or not based future sort of risk factors and earnings potential to business , but also the stage of deployment of the fund that those investments are in .
Speaker #8: If a fund cannot call capital , well , it can't then that sponsor can't support the business . If the fund is already a winner and has already returned a lot of capital , then it's more likely to let go , you know , those straggler businesses that need additional capital to kind of punch through a refinancing or a maturity so the sponsor is less likely to support the business in that event .
Armen Panossian: If the fund is already a winner and has already returned a lot of capital, then it's more likely to let go of, you know, those straggler businesses that need additional capital to kind of punch through a refinancing or a maturity. And so the sponsor is less likely to support the business in that event. So there's a lot of economic and noneconomic factors that come into play to judge a sponsor's willingness to support a business if and when the LTV of the loan exceeds, again, probably that 55 or 60% LTV threshold level.
Armen Panossian: If the fund is already a winner and has already returned a lot of capital, then it's more likely to let go of, you know, those straggler businesses that need additional capital to kind of punch through a refinancing or a maturity. And so the sponsor is less likely to support the business in that event. So there's a lot of economic and noneconomic factors that come into play to judge a sponsor's willingness to support a business if and when the LTV of the loan exceeds, again, probably that 55 or 60% LTV threshold level.
Speaker #8: there's a lot of economic and non-economic factors that So come into play to judge the sponsor . Sponsor's willingness to support a business if and when the LTV of the loan exceeds .
Speaker #8: Again , probably that 60 , 55 or 60% LTV threshold level .
Paul Johnson: Appreciate it. That's all for me. Thank you very much, guys.
Paul Johnson: Appreciate it. That's all for me. Thank you very much, guys.
Speaker #10: Appreciate it. For me, thank you very much. That's all, guys.
Operator: Again, if you would like to ask a question, press star one on your telephone keypad. There are no further questions at this time. I'll now turn the call back over to Allison Miarmi for any closing remarks.
Operator: Again, if you would like to ask a question, press star one on your telephone keypad. There are no further questions at this time. I'll now turn the call back over to Allison Miarmi for any closing remarks.
Speaker #1: would like to ask a Again , if you question , press star one on your telephone keypad . There further are no questions at this time .
Speaker #1: I'll now turn the call back over to Allison Mermaid for any closing remarks .
Allison Miarmi: Thank you all for joining us on today's call. Please feel free to reach out to me and the team with any questions you may have. Have a great day.
Alison Mermey: Thank you all for joining us on today's call. Please feel free to reach out to me and the team with any questions you may have. Have a great day.
Speaker #2: Thank you all for joining us on today's call . Please feel free to reach out to me and the team with any questions you may have .
Speaker #2: Have a great day .
Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
