Oaktree Specialty Lending Corporation Q3 FY2025 earnings call

Performance Overview: NAV was up slightly, adjusted net investment income declined to $0.37 per share mainly due to nonrecurring and noncash items from refinancing activities. Board approved a base dividend of $0.40 per share. ### Balance Sheet: Successfully amended and extended senior secured revolving facility, reducing interest rate, terminated higher cost ABL facility, reducing overall interest expense though with one-time costs. Strong balance sheet, ample liquidity, and lowest leverage in 3 years with meaningful dry powder. ### Market Environment: Uncertainty over tariffs deterred M&A activity, lending pivoted to refinancing; CLO issuance created competition; credit spreads tightened; OCSL has expertise in middle market lending and opportunities in asset-backed financing, life sciences, Europe, and Asia Pacific; monitored PIK income risk. ### Investment Activity: Investment activity tempered due to slow market, but focused on opportunities meeting portfolio objectives; new debt investments weighted average yield 9.1%; all originations were first lien loans; current pipeline has attractive opportunities; selectively investing in mature businesses; maintaining diversified portfolio; leveraging Oaktree's global platform. ### Portfolio: Added BayMark to nonaccrual list, removed Telestream Holdings; Mosaic had cash paydowns; investment exits decreased to $249 million; median EBITDA of portfolio companies increased, leverage decreased slightly, interest coverage increased slightly. ### Financial Results: Adjusted total investment income declined, net expenses increased due to higher interest expense from nonrecurring costs, weighted average interest rate decreased; net leverage ratio 0.93x, total debt $1.46 billion; JVs generated 10.5% ROE aggregate, received $525,000 dividend from Kemper JV.

In the third fiscal quarter of 2025, adjusted net investment income was $32.5 million or $0.37 per share, down from $38.7 million or $0.45 per share in the prior quarter. On the balance sheet, the company successfully amended and extended the maturity of its senior secured revolving facility, reducing the interest rate, which will reduce overall interest expense. The two joint ventures generated an aggregate ROE of 10.5% in the third fiscal quarter, with leverage at 1.3x.

Target leverage ratio remains unchanged at 0.9x to 1.25x, currently at low end due to successful investment exits and prudent capital deployment; JVs' leverage at 1.3x, target 1.5x; ample dry powder to fund investment commitments with liquidity of approximately $730 million.

Uncertainty surrounding implementation of increased tariffs impacting M&A, economy, and monetary policy; potential risk of PIK income, with OCSL maintaining conservative stance and PIK at 6.7% of total income near low end of peer set.

Q: First question on spreads this quarter. I think you were mid- to upper 5s, which is tracking better than most peers. Obviously, a very good thing, but the other side of the coin is we ask sort of how you were able to generate that? Maybe if it was nonsponsor, higher leverage? Or any color you could give us there.

A: Raghav Khanna responded that it includes lower spread deals in the market, some life science deals, non-U.S. deals like Draken deal, and premium for refinancing deals versus de novo buyouts.

Q: I wanted to start with some of the onetime items. You've touched on them both in the press release but also on this call. When we back those out from the quarter, it kind of gets to earnings power, a bit above the base dividend, but not by a ton. I just wanted to revisit the level at which you reset the base dividend at $0.40 a share. I just wanted to gauge your confidence in that level, especially with the forward curve sort of implying 100 bps of rate cuts in the next year or so.

A: Mathew M. Pendo stated that dividend is up to the Board, base dividend of $0.40 for this quarter was based on adjusting for one-time items, considering investment deployments, pipeline, prepayment activity, and turning noninterest-earning assets into interest-bearing assets, and will tackle quarter-by-quarter external factors.

Q: You mentioned seeing some attractive opportunities particularly in asset-backed and also maybe infrastructure and even outside the U.S. I was hoping you could give a little bit more color on what particular flavor of asset-backed opportunities you're looking at and infrastructure. Is there a certain kind of collateral that you're looking more carefully at and then others that you wouldn't consider. Anything you can share would be helpful.

A: Raghav Khanna said asset-backed deals pipeline is diversified from rental car leases to small loans for homeowners' HVAC systems financing, and Armen Panossian added that they are not doing consumer unsecured debt, but looking at asset-backed deals with corporate underlying borrower assets in familiar industries, and infrastructure has opportunities but details not elaborated.