Oaktree Specialty Lending Corp Q1 FY2025 earnings call

• Oaktree purchased $100 million of newly issued common stock at $17.63 per share (10% premium to NAV) to grow the asset base and diversify the portfolio.
• Permanently amended the fee structure with a cap and look-back provision, waiving $6.2 million in Part I incentive fees.
• Amended the dividend policy to a base dividend of $0.40 per share plus a supplemental dividend of $0.07 per share, with supplemental distributions expected to be ~50% of adjusted NII excess over the base.
• Originated $198 million in new investments and had $352 million in paydowns/exits in the quarter.
• Notable investments included participation in Encore's $2.9 billion refinancing, an investment in Team Technologies, and a large refinancing for Optimizely.

Adjusted NII for the first fiscal quarter was $45 million, or $0.54 per share, down slightly from the prior quarter. Net asset value per share declined to $17.63 from $18.09 last quarter. The portfolio had $2.8 billion of fair value invested across 136 companies as of December 31, 2024, with a weighted average yield on debt investments of 10.7%. 82% of the portfolio was in first lien positions, up from 78% a year ago.

• The equity raise is expected to help capitalize on attractive opportunities in the growing pipeline.
• The amended fee structure provides clarity to the market and shareholders.
• The dividend policy aims for a sustainable base dividend with potential growth from supplemental dividends based on excess adjusted NII.

• Elevated interest rates remain a challenge for many borrowers, especially those with levered balance sheets.
• Some portfolio companies face liquidity challenges, with investments placed on non-accrual status, including Dominion Diagnostics and Dialyze.

Q: Details on the $100 million equity investment and future plans?

A: It's a standard lockup provision; Oaktree aims to deploy the equity into the pipeline to capitalize on attractive opportunities.

Q: Why the strategic shift to more senior direct lending?

A: First lien sponsored lending offers good value relative to other options, with lower risk and attractive returns compared to junior positions.

Q: Options for the upcoming debt maturity?

A: Have plenty of liquidity through facilities, will evaluate market conditions to decide the best course of action.

Q: Supplemental dividend level and cash drag?

A: Roughly 50% of excess earnings above the base will be paid as supplemental; there's a pipeline to deploy the new equity fairly quickly.

Q: Reason for buying shares at NAV instead of market discount?

A: To grow the asset base and deploy capital into the market, rather than buying existing shares from other shareholders.

Q: Incentive fee look-back including foreign currency?

A: Includes all capital gains and losses, including foreign currency movements, with foreign currency impact on results being de minimis