Oaktree Specialty Lending Corp Q4 FY2024 earnings call

• Adjusted NII for Q4 was $45M or $0.55 per share, consistent with Q3. Full year 2024 adjusted NII was $179M or $2.23 per share.
• Rotated into primarily first lien loans; first lien investments increased to 82% from 76% in 2023.
• Originated $259 million in new investment commitments in Q4 at 9.9% weighted average yield; paydowns and exits generated $338 million.
• Board approved a quarterly dividend of $0.55 per share.
• Appointed Raghav Khanna as Co-Chief Investment Officer.
• Key investments in Legends Hospitality, Integrity Marketing, and Everbridge.
• Experienced increase in nonaccrual loans but restructured two investments; added Telestream Holdings, Astra Acquisition Corp, and nThrive to nonaccrual.
• Market environment: Elevated interest rates, Fed cuts, tighter credit spreads, and anticipated M&A/IPO activity under Trump administration.

For the fourth fiscal quarter ended September 30, 2024, adjusted NII was $45 million or $0.55 per share, consistent with the third quarter. Full year 2024 adjusted NII was $179 million or $2.23 per share compared to $178 million or $2.47 per share in 2023. First lien investments increased to 82% from 76% at fiscal year-end 2023, while second lien investments decreased from 10% to 4%. Investments on nonaccrual status at quarter end were 4% at fair value and 4.9% at cost.

• Ongoing monitoring of market conditions and working with portfolio companies to address potential issues.
• Anticipation of increased M&A and IPO activity in 2025 due to expected pro-business measures under Trump administration.

• Elevated interest rate environment posing challenges for highly levered companies.
• Fed not expected to return to ultra-low rates, which could be challenging for companies with elevated debt levels.
• Inflation remaining a challenge for companies and consumers.
• Credit quality issues with nonaccrual loans and ongoing monitoring of such situations.

Q: Just on the incentive fee waiver this quarter. Just trying to understand if this is going to be something that the adviser is committed to on a go-forward basis to the extent that NII trends below the $0.55 dividend?

A: Matt Pendo states the incentive fee waiver is discretionary, not permanent; the management fee reduction to 1% effective July 1 is permanent.

Q: As I'm reading between the lines a little bit, regarding your comments on the investment environment right now. It sounds like you're not necessarily expecting a normally large December quarter like we typically see on a seasonal basis, and you're sort of expecting that activity to pick up in early '25. Am I interpreting that right?

A: Armen Panossian says it's hard to predict specific quarters, but there's increased conversation and velocity of deals with lower rates and compressed spreads, expecting activity to pick up in early 2025.

Q: I'm wondering, we've seen that slip a little bit in terms of portfolio allocation year-over-year. I'm wondering if you see an opportunity, particularly in a more compressed spread environment to sort of further optimize those JVs and maybe generate some incremental income, and how that might be sized?

A: Armen Panossian states they are always looking to optimize JVs, with ways to get more return, but expansion is a partnership and they are constantly monitoring portfolio allocation, leverage, etc.