Q3 2019 Earnings Call
Welcome and thank you for joining the Oaktree specialty lending Corporation's third fiscal quarter 2019 conference call.
Today's conference call is being recorded.
At this time all participants are in a listen only mode, but will be prompted for a question and answer session. Following the prepared remarks.
Now I would like to introduce Michael must achieve of Investor Relations, who will host today's conference call Mr. Mr., Chile, you may begin.
Thank you operator, and welcome to Oaktree specialty lending corporations fiscal third quarter conference call.
Our earnings release, which we issued this morning and the accompanying slide presentation can be accessed on the investors section of our website at Oaktree specialty lending dot com.
Our speaker today, our Chief Executive Officer, Chief Investment Officer, Edgar Lee, Chief Financial Officer, and Treasurer, Mel Carlyle and Chief operating Officer, Matt penned out we will be happy to take your questions. Following their prepared remarks.
Before we begin I want to remind you that comments on today's call include forward looking statements, reflecting our current views with respect to among other things our future operating results or financial performance. Our actual results could differ materially from those implied or expressed in the forward looking statements. Please refer to our SEC filings for a discussion of these factors in further detail.
We undertake no duty to update or revise any forward looking statements.
I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any Oaktree fund.
Investors and others should note that Oaktree specialty lending uses the investor section of its corporate website to announce material information Accordingly, the company encourages investors the media and others to visit our corporate website to obtain investor related materials with that I would now like to turn the call over to anchor.
Thank you, Mike and welcome everyone to our third quarter earnings Conference call. We appreciate your interest to know CSL. We are pleased to report another quarter of strong results highlighted again by NAV growth solid earnings continued progress monetizing noncore investments and ongoing conservative financial position.
NAV per share increased five cents from the previous quarter. This marks the sixth straight quarter of NAV growth demonstrating the solid credit quality of our portfolio and the success of our portfolio repositioning efforts since we started managing CSL in 2017.
Our portfolio produced net investment income per share of 12 cents in the third quarter relatively consistent with the first two quarters of the year contributing to investment income this quarter were call protection and prepayment fees received on two loans that were paid off during the quarter.
In one instance, our 30 million dollar investment us and us wealth services, a provider of fracking services and oil and gas basins was repaid.
As you May recall this investment was part of a $75 million one year loan that Oaktree made to the company, which owns CSL participated in alongside with other Oaktree funds.
During the quarter, our loan was refinanced generating an IR of over 60% and a money multiple of 1.17 times and just over five months.
The third quarter was also highlighted by continued progress in repositioning the portfolio.
As we realized approximately $27 million from the monetization of noncore investments I will discuss one of these exits in more detail later.
Additionally, we maintained a conservative financial position during the quarter, we are exercising caution and discipline given the current market environment and the late stage of the economic cycle and as a result leverage was down slightly to 0.58 times below our long term target range of 0.70 to 0.85 times.
That noted we remain active in the market and are well positioned to take advantage of market dislocations as we have about $330 million of dry powder for new investments at quarter end.
Now I would like to share our view on the overall market environment, the competitive lending environment, we experienced earlier in the year continued through the most recent quarter. There was a tremendous amount of capital targeting direct lending opportunities extending a borrower friendly environment in which some direct lending funds are approaching loan deals more aggressively and taking on excessive risk. This translates into credit spreads spreads that continue to be tight and generally covenant structures and terms that we find less attractive.
While we are not seeing widespread signs of credit deterioration and increasing number of direct lending funds are experiencing deterioration in several of their loans. These pressures may eventually help encourage a rebalancing of the direct lending market and create more attractive opportunities.
In keeping with our strategy, we continue to focus on the near term investment objectives, we outlined on our last call.
Maintaining diversity across issuers and industries, focusing on senior secured opportunities lending to larger more diversified businesses and seeking borrowers with lower leverage levels.
Oh I see ourselves portfolio characteristics were generally stable from last quarter as of June Thirtyth, we had $1.5 billion of investments diversified across 105 companies and 36 industries.
80% of the portfolio was invested in senior secured loans of which 54% first lien.
In addition, we continue to wait wait the portfolio towards larger middle market companies with lower amounts of leverage the median annual EBITDA of companies in our investment portfolio increased to $130 million in the quarter up from $99 million in the same quarter one year ago.
And 50%, 57% of our company has generated EBITDA in excess of $100 million.
Leverage at our portfolio companies was 5.0 times at quarter end, well below the overall market leverage levels of over 5.5 times.
Moving onto our noncore portfolio.
As mentioned earlier, we monetize $27 million in noncore investments during the quarter $21 million of which came from the sale of an airplane in our aviation subsidiary, we were able to complete the sale at a premium to our planes prior quarter, Mark which drove gains of approximately $3 million.
Following the sale our aviation subsidiaries fair value is down to approximately $15 million in just one aircraft.
Notably the remaining plane is an Airbus Athree hundred 20 that is leased to a high quality counterparty and as a result, we are confident that we will carry out a successful sale process to exit the remaining balance of this investment.
With these monetizations noncore investments have declined from $893 million since we began managing CSL to $273 million as of June thirtyth.
Of the remaining noncore investments five our non on non accrual totaling $87 million or 6% of the portfolio at fair value. We continue to work diligently on maximizing the value of our remaining investments, which we expect will continue to occur over time.
Given our conservative posture and patient approach, we identified fewer origination opportunities that met our standards in the third quarter.
While we evaluated more than 200 potential transactions during the quarter.
We originated $67 million across seven investments down from $100 million in the previous quarter.
First lien loans accounted for 94% of the third quarter investments.
Three of these transactions were add on investments to support the growth of existing portfolio companies. While four were new portfolio company investments made across the primary and secondary markets.
The most prominent investment for the quarter was a $40 million loan to light box, a commercial real estate data and software provider with market leading positions in certain niches.
In aggregate Oaktree funds lent $90 million to the company and led it's $190 million first lien financings.
The loan carries an attractive rate at LIBOR, plus 500, and a favorable covenant package. The loan is supported by $379 million of equity capital cushion.
The average yield for all of our originations was 8% down modestly from the previous quarter, Although our conservative approach has muted the overall yield on new investments. We are confident that this is a prudent way to generate income in the near term, especially given the current volatile geopolitical and macro environment.
In summary, we are very pleased with our strong third quarter results. We hold a defensive portfolio that we believe will continue to deliver attractive risk adjusted returns to our shareholders and we believe we are well positioned to navigate the changing market conditions.
With that I'd like to turn the call over to Mel to discuss our financial results in more detail.
Thank you, Ed or Oh, CFO reporting another quarter of strong financial results.
Total investment income was $36.7 million down slightly from $38.2 million in the second quarter.
The $1.6 million decline was due to lower interest income.
Including pick interest income.
That was partially offset by higher fee income.
Interest income was down by $1.4 million quarter over quarter.
Primarily the primarily the result of recognizing $4.6 million of nonrecurring IP accretion.
Related to Dominion diagnostics in the second quarter.
This was offset by the acceleration and make whole interest from pay offs.
Interest income was down from the second quarter as we exited our investment in Maverick healthcare last quarter.
Now we all the Pik income we receive is from our investment in Alphatec, a senior secured bonds that we originated in the December quarter.
Fee income was up during the quarter, primarily driven by prepayment fees that we received from the us well services repayment.
Operating expenses, excluding management fees and interest were up $141000, mainly driven by slightly higher professional fees.
As a result of these items.
Net investment income was $16.6 million.
Down 1.1 million from the prior quarter.
Turning to net asset value.
Any increase to $6.60 per share.
From $6.55 per share on March 30 Onest.
Contributing to the sequential increase income in excess of the dividend and net gains on exited investments.
However, offsetting these were mark to market valuation adjustments on some of our holdings.
The credit quality of the portfolio remained stable between quarters as no new investments were added to non accrual in the quarter.
As of June Thirtyth, 6.4% of our debt investments at fair value run non accrual status.
As compared to 6.1% at March 30 Onest.
This represents five physicians down from six as we exited our investment in advance pain management, which had previously been written down to zero.
With respect to leverage our leverage ratio decreased 2.58 times from 0.64 times on March 30 Onest.
As the portfolio shrinks slightly during the quarter.
We experienced $138 million in pay offs and exits.
Which was greater than the $74 million of investment fundings.
As of June Thirtyth.
Total debt outstanding was $543 million.
And had a weighted average interest rate of 5.1%.
Unchanged from the prior quarter.
Cash and cash equivalents were $6 million at quarter end.
And we had $330 million of Undrawn capacity on the revolving credit facility.
Shifting now to the Kemper joint venture.
As of June Thirtyth, the JV had $349 million of assets invested in senior secured loans to 51 companies.
This compared to $347 million of total assets invested in 49 companies last quarter.
Leverage at the JV was 1.3 times at June Thirtyth.
Flat with last quarter.
During the quarter, we amended and increased the size of the Jvs credit facility from $200 million to $250 million.
And at quarter end, the credit facility had $63 million of Undrawn capacity.
Now ill turn the call over to Matt.
Thank you Mel we continue to execute on our plan to increase our are we on several fronts, which has resulted in solid returns for our CSL. We have steadily exited non interest generating investments and further strengthened our foundation of core earning assets during the quarter. We received proceeds of $6 million from three positions and have rotated out of over $100 million of non interest generating investments this fiscal year.
The remaining non interest generating investments comprised $152 million or approximately 10% of the portfolio, which represents a significant opportunity to increase overall portfolio yield. Additionally, our efforts to optimize the Kemper JV are contributing nicely to our results.
The JV added $17 million in investments across five companies during the quarter. All of these were first lien loans.
As Mel mentioned, the JV increase its credit facility capacity by $50 million to $250 million and now has $63 million of available capacity, we expect that over time, the JV will increase leverage as it incrementally adds investments leverage at quarter end was 1.3 times well below the longer term target of 2.0 times.
Furthermore, both CSL has the opportunity to increase returns by deploying more leverage at the portfolio level. We are currently operating at less than 0.6 times. So we do have the ability to enhance returns as we find attractive investments and deploy a higher leverage finally, we continue to rotate into broadly syndicated loans with yields below LIBOR, plus 400 basis points positioning the portfolio for improved yield.
During the third quarter, we owned $20 million of these lower yielding broadly syndicated loans down from $32 million in the second quarter over time, we plan to replace these investments with higher yielding proprietary investments.
Now turning to the dividend.
Our board approved a nine and a half cent dividend today, maintaining the level of the five prior quarters. As you know we are determined to pay sustainable and consistent dividends supported by portfolio performance.
And lastly, I want to provide an update on the proxy initiatives that we put before shareholders with respect to the pending Brookfield transaction with Oaktree as well as modifying the asset coverage requirements applicable to host CSL.
As you may recall in light of Brookfield asset management management's merger agreement with the parents of our investment advisor Oaktree Capital Group, we saw shareholder approval of a new investment advisory agreement between Oaktree and owes CSL.
The new investment advisory agreement will become effective when the merger closes notably.
Other than changing the date of this effectiveness the terms of the new investment Advisory agreement, we remain unchanged from those in the existing agreement.
At the same time, we ask shareholders to approve an increase in our leverage limits by modifying our asset coverage requirements. Importantly, we saw this change in order to provide us with additional operating flexibility to deploy capital as the market becomes more favorable as a reminder, with these new leverage limits our base management fee will be reduced to 1% on all assets financed using leverage above one times debt to equity.
We are pleased to report that both of these proposals received overwhelming approval from shareholders and we think all those that voted their shares and participated in the meeting.
In conclusion, as we look to the remainder of this fiscal year and into 2020 . We're confident we have positioned the portfolio for continued strong results.
We will strategically leverage oaktrees expertise and resources to identify attractive risk adjusted investment opportunities that deliver value to our shareholders.
Thank you for joining us on todays call and for your continued interest in OTI CSL with that we're happy to take your questions. Operator, Please open the lines.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then too.
Our first question will come from Chris York of JMP Securities. Please go ahead.
Good morning, or good afternoon, guys and thanks for taking my questions.
So maybe Edgar Matt I just have one question. This morning, so I calculate the payout ratio of your earnings.
Go year to date were below 80%.
And that's below the 9% threshold generally associated with maintaining.
Ric status.
So the question is to pool, our their historical pattern.
Loss carry forwards that are currently shielding the distribution requirement and the payment of excise taxes, and then when can investors expect that dividend increase to a level closer to your earnings.
So on the.
Yes, Matt on the sorry, Chris on the.
On the last part of your question.
You know the things that we're focused on is that before is really the earnings of the portfolio translating into the dividend and in in the first and second quarters, we had some nonrecurring noncash items.
Related to R&D accretion accruals.
Particularly related to Dominion and the current quarter, we had higher interest and fee income.
Related to you as well so it's about $3.5 million in data was a million dollars too so.
Those those are items that we've had in the most recent quarters. So we're kind of waiting to work through those obviously is the volatile environment out there right now.
Around interest rates and market. So we're kind of weighing all those things is as we as we as import through it in terms of the specifics on the tax.
I wanted to circle back with you. There's there's we obviously watch that and there's spillover and ways to manage it.
So don't have a specific number for you right now.
Okay, just so to be clear on the earnings. So what would you think is the core.
Net investment income I guess this quarter that would be comparable to your dividends. So I calculate a payout ratio adjusting for some of those onetime items what would we do.
We use and that denominator, yes, it will depend I mean the.
The payout ratio.
It is.
That we've kind of targeted is kind of in the low ninetys.
Of.
Net investment income.
There's every quarter, there's been as mentioned for kind of OID accretion or fees et cetera.
So it really.
And those are really hard to predict kind of quarter to quarter. So view, if you kind of run your models and.
Look at kind of the steady state investment income the other thing that we're focused on is taking some of the non accruals and during an accruing assets.
So all those are does very well.
Various inputs, we have I don't want to give you the specific projection, but you can use that to kind of run through your models.
Got it.
I hope so thats it for me thanks.
Chris if I can just add to what Matt mentioned.
If you look at our dividend stream over time.
Over the past year, it's been a combination.
Return of capital as well as an income dividend.
For investors, it's actually been quite advantageous because in a return of capital.
Hey, there's certain tax efficient efficiency associated with it because we do have a significant amount of net operating losses, which.
I can provide some tax efficiency to those distributions in those circumstances.
And then just a follow up is that the reason why you're not accruing any excise tax because you have those and Noel.
Exactly there is a certain amount of.
Because the return of capital versus income distributions.
Okay that makes sense, thanks for clarifying that I guess that's it.
Our next question comes from Rick Shane of JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning, I'm just wanted to talk a little bit about ongoing portfolio rotation. You cited specifically a 130 million of assets that are generating income and you know we can all do serve the math on what that would represent.
From a p. and L. perspective, I am curious, though and again I understand that leverage is in very fungible concept and that you guys have leveraged capacity a with the new rules, but are those investments that in within your discipline, our under Levered and so as that capital is recycled would we actually expect to see not only.
In in freak out migration to earning assets, but actually more than a $130 million of assets a replacing that.
So right, it's an interesting way to look at those assets I don't think weve quite think of it as a as methodically as you do in that sense. It's really a reflection of what are the investment opportunities in front of us and do we think bay reflects good risk reward. So why you are correct in your statement that theoretically the $130 million of assets are under Levered, even if we translate those $130 million into cash and then we redeploy the $130 million into new loans, while we could lever those loans up and therefore net deploy a well in excess of $130 million. We may not do so if we can't find enough good assets that Stan.
Beyond the 130 million for example.
Yeah, I don't I don't look I.
Go ahead.
I would just just pick up on its Matt when Egger said the the the the leverage that portfolio leverage we run you know isn't isn't influenced by the the Nonaccruals, it's influenced by the investment opportunities.
Got it look I and I agree with you and then I think it's part of the strong philosophy of the company, which is the you don't solve for how big the portfolio should be.
The portfolio size as defined by the opportunity.
That you guys perceive but I am at the same time.
Assuming that that opportunity does present itself curious about.
How big.
The how that pool of capital could be translated into facing that opportunity Youre absolutely right. Rick on that point. If you think about the total earnings potential of the company. If we were.
Able to translate that 130 into accruing assets.
And lever those assets the earnings.
Opportunity here.
Could be meaningfully larger than than what they are today.
On that point about leverage we do have a significant amount of what we consider sort of dry powder here.
Available to invest in the marketplace as we commented in our prepared remarks and as you've seen in our materials leverage has declined.
The company this past quarter part of that is a reflection of strong refinancing environment and part of that is a reflection of us not being satisfied with the types of opportunities that are.
We're seeing before us today that is not a reflection of not necessarily finding enough operator.
Originating enough opportunities. It's just a reflection of we don't necessarily like the opportunities before us I think that's served us well as we begin Q3 weve begun.
August here.
We've seen a significant amount of volatility.
And you've heard folks at Oaktree in the past publicly comment about markets priced for perfection. Our general view was as we were approaching.
The end of Q2 that the market was really priced for perfection, a lot of aggressive behaviors in the marketplace and ones that we just did not feel comfortable with and I think as we've seen in August as the markets have sold off especially equity markets on Monday.
We can see that people didnt leave a large margin for error and we saw some pretty significant downward pressure on the marketplace and a significant amount of anxiety in the markets. These days and we're hopeful that those anxieties will continue to escalate to a certain extent because it will position us well to take advantage of those because we are.
We aren't in our optimal leverage target right now and we do have the ability to deploy a significant amount of capital still.
Great. Thank you so much guys.
Our next question comes from Ryan Lynch of KBW. Please go ahead.
Hey, good morning, if I look at your guys the leverage over the last several quarters. There just continues to kind of tick lower I wondered if you could.
Kind of me what do you think is the main driver or is it more of a lack of an opportunity set of new investments given the competitive environment is it more that you guys are.
Kind of pushing investments out trying to exit them as you rotate the portfolio or is this just an intentional positioning.
For lower leverage given that we are just made are in the credit cycle I think it's a little bit of a ladder of the last two points you made a couple of.
Thoughts around.
Your comments.
One as you saw in Q4 of last year, our point of capital picked up quite a bit and that was because in Q4, we saw some pretty significant market disruptions as all of you are aware of.
When those disruptions happen what we see consistently over time is that a direct lenders are private credit funds tend to step back from the marketplace. You would think that that is the time. When these funds would step into the marketplace, but what we find consistently is that they step back from the marketplace, which creates really interesting opportunities for us.
So as markets get weaker our deployment tends to tends to pick up its not always the case, but it tends to pick up in a pretty meaningful way one too when we look at the marketplace overall.
They really we look at it in terms of a risk reward basis a lot of.
Managers might look at.
Investments are loans that they make in terms of a yield perspective that they can make a 6% yield or an 8% yield we really look at it as.
What's the reward how many dollars can I make and what's the potential for us to lose dollars here and how many and so therefore, how many dollars can we lose.
And what we were seeing in this past quarter and we've seen it over the beginning part of this year as the market has been very strong.
Was that a bat risk reward ratio, which is increasingly becoming unfavorable.
And it didn't make sense for us as fiduciaries to be investing on a investors dollars into that to what we considered sub optimal situations as you can see and you've seen from other bdcs. Other direct lenders you hear it anecdotally in the marketplace. There have been plenty of managers, who have made some pretty poor quality loans.
Two one have capital deployed but two did it because they thought they could any earn an incremental 1% per year, but three unfortunately have been suffering losses of 20 to 30.
Points and when we look at those risk reward ratios, we struggle to see how those are prudent situations to get involved in where to make one point a year incremental.
You have to take on the risk of losing 20 to 30 points to the downside and that's what we were seeing in the marketplace and we've seen more lonestar too.
Really struggle in the marketplace.
And we saw fewer good quality opportunities and therefore.
Really decided to.
Curtail some of our lending activity.
In the short term.
Having said that I would caution investors to not measure us from quarter to quarter.
But but rather I think of that take a longer term view.
And you know as we mentioned in our prepared marks remarks on U.S. well services. For example that loan was a loan that we made in Q4 at the time the market was dislocating.
We were refinanced out of that alone we generated an IR are well over 60% the money multiple on that loan at five months was 1.17 times money. If you think about a traditional loan that you would make today's environment. If we had done it in Q2.
That alone probably would have generated about maybe at 9%.
I or on an unlevered basis with the money multiple maybe of 1.11 0.2 times over a two to three year period.
So.
If I can find opportunities in a market place, where we can generate high are ours, good morning, multiples and manage our downside risk.
But that comes with the.
Lumpiness.
For one point at the risk of losing 20 on the downside.
And that kind of brings me to my next question on Slide 15, you guys outlined for.
Opportunities to increase your return on equity.
And certainly I would say points two through four.
Our all.
Opportunities that rely on finding attractive.
Copper attractive investments in the market to deploy capital into.
Growing leverage.
Utilization of the JV with Kemper and rotate into higher yielding proprietary investments.
If the market conditions for direct lending remained unchanged as they are today, which as youve explained are pretty tight and pretty competitive.
How confident are you that you can successfully.
Achieve the those opportunities that you've outlined particularly opportunities two through four which rely on attractive.
Opportunities in the market.
So.
Its Matt I think I think if you look if you look back.
Yes, as Weve take over as the manager here.
I think I think we've we've done.
We've done we've taken action points one through four.
And I think every every quarter there'll be different levels of activity.
As Andrew mentioned, given that the investment environment, we saw last quarter our originations.
Were lower but.
As Andrew mentioned, you as well as we did that loan a year ago.
We've done things like Alan media.
Just to go to the manager. So I think I think you can you can see opportunities since we've taken over really the last year last two quarters, where we've been able to put on some some higher yielding proprietary investments or if you look over the last couple of quarters, we have.
Put additional investments in Kemper, So we've done that.
The the leverage targets number to that that we haven't done.
In terms of.
Just looking at the numbers here, we've we've taken last year leverage down from <unk> 0.75 0.58.
So you know that when it was just we're just waiting with dry powder for for the.
The opportunity to play but.
All these things in the last year.
Quarter to quarter, we've done so we still we still feel pretty confident we can do that but you know it's it's we're going to be.
Helpful and opportunistic and.
Every day things change as we've seen this week, so that creates opportunities for us.
But don't those opportunities going forward really depend on your guys' view and the attractiveness of deploying capital into the market, which can be out of your control.
Yes, although I mean right like the last the the.
Private credit direct lending environment for the last year has been pretty robust.
And we still managed to get stuff done so.
Well, we're going to be choosy and picky.
Ryan I think couple of things worth noting one.
As we've said in the past.
We encourage investors to think about.
Investments in our portfolio on a total return basis, not just on an interest income bearing basis. So.
While.
While our total assets in the portfolio, where our leverage may have been declining.
What doesn't accurately necessarily get reflected in financials, LTM financials and others in the BDC space as the capital appreciation upside, we're a little bit different than other bdcs because of the nature of this portfolio and that there is a pretty significant amount of.
Equities and other opportunities here that are.
And our trading or or have a fair market value below par.
That create potential for capital appreciation and the future, obviously theres no guarantee that it will be created.
But I think if you look at our past performance over the last couple of years since managing.
Portfolio that there has been a pretty decent amount of capital appreciation that has been created so we can create value for shareholders.
Even if we don't necessarily increase leverage in the short term.
And I'd I'd encourage people not to discount that necessarily too in terms of some of the points that have been outlined on page 15 couple of things to think about when you think about the optimal leverage on a portfolio or.
Your ability to lever up portfolio, if we think about it in the context of a commercial bank perspective, where you're looking at net interest margin.
Over the last several quarters as we've been driving down the cost of our capital.
By renegotiating our credit facility.
Cost of capital with our borrowers by refinancing at high cost fixed rate debt and so on and so forth, we're actually creating the opportunity for us to basically use that leverage in a way it take advantage of a market where yields overall are coming down, but we're creating oh.
Or we're increasing our ability to generate NIM by driving down our cost of liabilities, which allows us theoretically to push up our leverage levels over time again, if we find interesting investment opportunities.
The when we think about the investing environment, where we say that we're more cautious that is absolutely true, but that doesn't mean that we don't find.
Opportunities coming up.
What ends up happening, though is when the market is very strong and you have a strong lending environment.
The opportunity is coming the door in a more episodic way as opposed to a consistent way and so in Q3.
Oh or in any future quarter, it's quite possible that even if the market is strong that we all of a sudden see pretty significant pickup in our net deployment just because there were some unique situation that we were able to identify or create that just happened to match up with the particular quarter. So I wouldn't look at our Historicals and say that that isn't necessarily a good predictor of our future deployment because of the nature of the lending that we do it can be episodic and at points in times.
But it doesn't necessarily always correlate to.
The overall lending environment.
On this point about the Kemper JV.
It is an area in a tool that we are utilizing today.
You know unfortunately, because when markets are very strong we do experience a fair amount of refinancings and so sometimes when markets are very strong that treadmill.
Picks up speed quite a bit.
But we do look at the Kemper JV as a tool, especially in periods, where we may not find as many attractive overall opportunities, we do use that as a tool to enhance.
Our always.
And we think Thats, a great tool for us to use in a more robust environments.
Uh huh.
For sure.
Okay. That's very helpful commentary those are all my questions I appreciate the time today.
Thank you.
Our next question comes from Kyle Joseph of Jefferies. Please go ahead.
Hey, good morning, guys and thanks for answering my questions. Most have been asked and answered but just wanted to follow up you guys have referenced some volatility picking up recently in the market.
You guys, obviously have a portfolio of over 101 hundred companies.
At the company specific level have you seen any any changes in terms of topline our EBITDA growth trends in your portfolio. That's a great question and thank you for the question.
I would say that.
Generally things have been stable I would say that we are seeing a slowing growth as a general comment.
And that's because of the breadth of our portfolio we get it.
And for that matter, a breadth of the Oaktree platform, we get a pretty good view into the us economy, because we touched so many industries here at Oaktree.
And I would just generally say that it's been more sluggish I wouldn't say that we're seeing negative trends necessarily it's just not as robust as maybe where we were a year ago.
Okay, and then one follow up on that and so given a little bit more sluggishness.
Shifting rate environment have you seen any sort of shift in terms of competitors' strategies any higher demand for fixed rate debt or anything like that over the last few months.
Not that I can think of off the top of my head.
Not really a dramatic shift.
Okay got it thanks for answering my questions.
Our next question comes from Simeon O'shea of Wells Fargo. Please go ahead.
Hi, Good morning, just a couple on co investment can you remind us on on the the private credit platform is there a specific.
Direct lending cohort, whether it be the BDC and more similar funds.
That that are able to eat first on on the allocation on the origination you generate.
And then have you know a broader overflow claim for your broader private credit group or is the whole group entitled to.
Deal flow based on Allocable capital.
So thank you for the question fan so under our Exemptive relief order every strategy that could participate.
In a private direct loan that meets board established criteria.
Has the opportunity to participate or has it requirement I should say to show us all of their opportunities.
DTC.
The reverse does not hold true, but every opportunity that any other strategy at oaktree that yeah that is generated by any other strategy at oaktree.
That meets the board established criteria, they must show those opportunities to the BDC.
The BTC will then and the team managing the BDC, we'll evaluate those opportunities if we would like to participate in those opportunities. We will put an order in for that opportunity and all the other strategies that are that strategy that originated the opportunity can put an order as well.
They will be allocated their pro rata amount of that opportunity based on their order size.
And the order size will be based on part by portfolio.
<unk> criteria and demands strategy as well as just available lending are investing capacity.
That's very helpful and you were saying, though that in the sense of the reverse the.
From your group.
As it relates to the BDC the.
Okay, Sri specialty lending.
It's what it wants and then its overflow is that what you are seeing as well.
Any opportunity that is originated by the investment team that manages the bdcs here.
Those opportunities do not have to be shown to any other strategy at oaktree.
Under the Exemptive relief order they are not required to do so.
So to the extent for example, if we had a 500 million dollar private loan opportunity.
And the Bdcs collectively that are managed by the strategic credit group only wanted to participate in a $100 million of that loan there would technically be $400 million of available loan.
Available.
The Bdcs could then go to the balance of Oak tree and asked as any other strategy want to participate in that loan.
But those are ones.
What effectively serve as the overflow theoretically under the Exemptive relief order and Im specific I'm talking specifically to the Exemptive relief order.
Alright, well I appreciate the color and one more on origination does the.
Advisor or any any affiliate of the advisor receive.
Economics from the upfront work before allocating to the BDC.
Very well thanks for taking my questions.
Our next question is a follow up from Chris York of JMP Securities. Please go ahead.
Yes. Thanks, just one follow up strategic question, so presumably a component of the investment thesis of Oaktree to acquire the contract sales both Bdcs from fifth Street was to potentially take advantage of future disruption among direct lenders.
And then utilize the manager is true.
Distressed expertise, what you've done a good job of demonstrating with resolution up you're not quite that's it.
So now we've started to see some bdcs acquire some subscale bdcs and we expect BDC M&A to continue so the question to you is do you consider yourself as a strategic buyer of either other bdcs or portfolios today.
Well.
Basically the answer is yes.
We as you know, it's a great question, Chris and obviously theres been a number of bdcs in portfolios that have been trapped transacting.
Over the last couple of quarters.
Yeah, Oh, sorry doesn't generally comment on our M&A strategy other than.
I would say that we'll explore and look at all of these opportunities and if they make sense, we will pursue them and whether it's a it's an existing BDC or a portfolio. We look at all those.
I think to your point I think we we have the scale and expertise to do those types of things.
And and we would expect I personally spent to see more of those opportunities.
Present themselves you know over the next over the next year I mean, you're you're starting to see if you kind of you know subscale BDC continue to have we're starting to have more more credit issues.
Great.
Thanks, Matt Thanks.
We have no further questions Mr. must achieve.
Thank you again for joining us for our fiscal third quarter 2019 earnings Conference call. A replay of this conference call will be available for 30 days I know CSL is website in the investors section or by dialing 87734475 to nine for us callers or 1412317 0088 for non us collars with the replay access code 10133, 101, beginning approximately one hour after this broadcast.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.