Oaktree Specialty Lending Corporation

Welcome, and thank you for joining Oak Tree Specialty Lending Corporation's fourth fiscal quarter and full year 2020 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 Mostichio of Investor Relations, who will host today's conference call. Mr. Mostichio, you may begin.

Thank you, Operator, and welcome to Oak Tree Specialty Lending Corporation's fourth fiscal 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 oaktreespecialtylending.com. Our speakers today are Armin Knossian, Chief Executive Officer and Chief Investment Officer, Matt Pendo, President and Chief Operating Officer, and Mel Carlisle, Chief Financial Officer and Treasurer. 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, the timing or likelihood of the merger closing, the expected synergies and savings associated with the merger, the ability to realize the anticipated benefits of the mergers, and our future operating results and 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 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 a solicitation of an offer to purchase any interest in any Oak Tree Fund. Investors and others should note that Oak Tree Specialty Lending uses the investor section of its corporate website to announce material information. The company encourages investors, the media, and others to review the information that it shares on its website. With that, I would now like to turn the call over to Matt.

Thank you, Mike, and welcome everyone to our fourth quarter and full year 2020 earnings conference call. We appreciate your interest in and support of OCSL, and we hope everyone listening is well. We are pleased to report our fiscal year 2020 ended on a strong note. We reported NAV per share at year end of $6.49, up over 6% in the quarter, and down less than 2% for the year. Our NAV staged an impressive recovery from the decline in the March quarter when the market's concern over the impact of the pandemic was at its peak. The rebound was $1.15 per share, recapturing 91% of the decline in that quarter. We had another strong year of origination. During the year, we originated over $800 million of new investments, representing over half of the value of our portfolio at the start of the year. Notably, a large portion of our originations occurred during the post-COVID period. We have been focused on defensively positioning the portfolio by lending to more diversified businesses with little exposure to cyclical industries, companies that we believe will be resilient through a recession. Many of our new investments have been in the form of directly originated private placement transactions where we have co-invested alongside other Oak Tree funds. By leveraging the extensive firm-wide resources and expertise of Oak Tree for origination, due diligence, and credit selection, we have been able to structure a diverse portfolio with high conviction investments positioned to generate attractive risk-adjusted returns across market cycles. This deliberate shift in our portfolio has led to higher yielding investments. The average yield on our new debt investments increased over the course of the year and was 10.6% for investments made in the fourth quarter. This all occurred against the backdrop of decreasing interest rates, with LIBOR declining by over 180 basis points in the same timeframe. We are proud of our portfolio performance this fiscal year, particularly given the challenging environment created by the pandemic. Our credit quality remains strong, with only two out of our 113 portfolio companies on non-accrual status, representing one-tenth of 1% of the total portfolio at fair value. We continued our portfolio repositioning during the year and successfully monetized $50 million of non-core investments, which resulted in aggregate proceeds of $59 million. At year-end, non-core investments represented only 9% of the portfolio at fair value. Another major accomplishment in fiscal year 2020 was the further improvements we made to our capital structure, reducing funding costs and improving our financial flexibility. In February, we successfully completed a $300 million public note offering that was attractively priced at a coupon of 3.5%. Part of the proceeds were used to redeem our higher coupon bonds, which had a blended interest rate of around 6%. Also, during the fiscal year, Both Moody's and Fitch assigned OCFL investment grade ratings, citing our successful progress to date in exiting non-core investments, the strength and quality of Oak Tree, and our lower leverage relative to peers. And subsequent to year-end, we increased the borrowing capacity under our revolving credit facility by $75 million, following a commitment from a new lender, bringing the total revolver commitment size to $775 million, which we believe is sufficient to fund our future capital needs. Finally, as you know, OCSL and Oak Tree Strategic Income Corporation entered into a merger agreement with OCSL to be the surviving company. We believe this merger represents a great opportunity for shareholders of both OCSL and OCSI. We expect it will create a larger, more scaled BDC with increased trading liquidity, potentially broaden our institutional shareholder base, and may improve access to lower-cost sources of debt. We also anticipate that it will drive NII accretion over both the near and long term. We feel that now is the right time to move forward with this merger. Both portfolios are in great shape, and our transition out of non-core assets that we've been working on since 2017 is nearly complete. We appreciate all the support that we have received to date. In terms of next steps, we anticipate filing the N14 joint proxy statements in the coming weeks, An expected transaction will close in the first calendar quarter of 2021, subject to shareholder approval and satisfaction of other closing conditions as outlined in the merger agreement. Now turning to our fourth quarter results. OCSL delivered excellent results for the quarter, highlighted by solid earnings, strong origination activity, and excellent credit quality. Adjusted net investor income per share was $0.17, up significantly from the $0.12 per share for the prior quarter. The increase was primarily driven by higher investment income, which included higher prepayment fees and OID acceleration. Based on our consistent performance and our expectations for continued strong earnings, our board increased our quarterly dividend by 5% to 11 cents per share, the second consecutive quarter with a dividend increase. Following the market disruption last March, valuations continued to improve in the September quarter. resulting in a NAV increase of 6% from the June quarter to $915 million, reflecting price recovery in our liquid debt investments and tighter credit spreads. In addition, our investments in the Kemper Joint Venture were written up by $7 million, or 7%, reflecting continued appreciation in this mostly first-lane loan portfolio. Our liquidity position remained strong. We had more than $320 million of dry powder, including $285 million availability on our credit facility and $39 million of cash at quarter end. This solid foundation enabled us to once again actively pursue new investments during the quarter, leveraging Oaktree's platform to find several compelling opportunities. We made $148 million of new investment commitments during the quarter, including $90 million in private transactions, $57 million in the primary markets, and $2 million in secondary market purchases. New investments in the quarter were attractively priced with a weighted average yield of 10.6%, notably above the 6.8% weighted average yield on the investments that we exited during the quarter. We received $184 million from paydowns and exits in the quarter, including $36 million from our exit of New Star and $15 million from Sorrento Equity Sales. We exercised warrants and sold shares at Sorrento stock price appreciated following the recent positive COVID-related news from the company. Credit quality remains solid as we have no new non-accruals in the fourth quarter. Leverage declined to 0.74 times net of cash from 0.83 times at June 30, primarily driven by the NAV increase and net paydowns in sales. Despite the net portfolio decline, which reflects our conservative posture and underwriting, we expect to continue to identify compelling investment opportunities in fiscal 2021. Overall, we are very pleased with our fourth quarter results and our performance for the full year, and we are confident the scale that OCSL will have post-merger will help drive further benefits for our shareholders. With that, I will now turn the call over to Armen.