Oaktree Specialty Lending Corporation

bespoke, assets are difficult to value, and sector-specific expertise is rewarded. In this less crowded segment of the market, we believe that our skill and capacity to make complex loans is a competitive advantage and can lead to superior investment results. We also remain focused on identifying deal flow in the life sciences and technology industries. We expect to see a steady stream of lending opportunities in these sectors as applied sciences and digital commerce continue to gain prominence throughout the global economies. In summary, we are actively but judiciously investing, working diligently to make sure that we control risk while delivering strong returns for our shareholders. Now turning to the overall portfolio. At the close of the second quarter, our portfolio was well diversified with more than $2.6 billion in fair value across 146 companies. 86% of the portfolio was invested in senior secured loans, with first lien loans representing 69% of the portfolio. This reflects our emphasis on being at the top of the capital structure. Nearly 90% of our loans are floating rate, positioning us well for rising rates. As you know, we have been lending to larger, more diversified businesses to lower risk and bolster credit quality. Median portfolio company EBITDA in March 31 was approximately $118 million. The underlying leverage at our portfolio companies was approximately five times lower than middle market leverage multiples, which are near historical highs, at around 5.6 times. The portfolio's weighted average interest coverage is strong at approximately three times, meaning our borrowers are well positioned for a rising interest rate environment. Moving on to investment activity. Our $228 million of new investment commitments were spread across 16 new and nine existing portfolio companies in the second quarter. Of the 24 portfolio companies we invested in during the quarter, nine were private deals, three were primaries, and the remaining 12 were secondary purchases, which were generally smaller in size and purchased at a discount to par. Our ongoing progress in the life sciences sector was particularly pronounced in the March quarter. We invested a total of $62 million to three companies that are well-positioned for growth in this sector. These included Inicol, a provider of healthcare supply chain and emergency preparedness infrastructure services to government and commercial customers, Impel, a commercial-stage biopharma company focused on developing transformative therapies for people suffering from central nervous system diseases, and SIO2 Material Science, an advanced material sciences company that has invented a new technology for the packaging and containment of biological drugs and molecular diagnostics. These are each compelling investments, priced attractively with favorable terms that provide meaningful downside protections. Our origination activity remains healthy in this sector and across a wide range of industries, fueling steady momentum as we progress further into 2022. Now, I will turn the call over to Chris to discuss our financial results in more detail.

Thank you, Armin. OCSL delivered another quarter of solid financial performance, continuing the strong momentum from the first fiscal quarter of 2022 and fiscal year 2021. For the second quarter, we reported adjusted net investment income of $32.3 million, or 18 cents per share, up from 31.2 million, or 17 cents per share in the first quarter. The increase was primarily the result of higher income from prepayments and lower professional fees. Partially offsetting this was higher interest expense related to the impact of rising LIBOR on our floating rate liabilities. Net expenses for the second quarter totaled 24.2 million, down $5.1 million sequentially. The decrease was mainly due to lower incentive fees driven by a $5.5 million decrease in accrued capital gains incentive fees resulting from the unrealized losses during the quarter and half a million dollars of lower professional fees. This was partially offset by a $.5 million increase of higher interest expense due to an increase in borrowings in our larger investment portfolio. Turning to our credit quality, which continues to be excellent. As Matt mentioned, we had no investments on non-accrual at quarter end as all of our portfolio companies made their scheduled interest payments. Now, moving to the balance sheet. OCSL's net leverage ratio at quarter end increased moderately from the December quarter to 1.02 times. Net leverage continues to be at the high end of our target range of 0.85 to 1 times. and will tend to fluctuate every quarter depending on the timing of investment fundings and portfolio prepayments. As of March 31st, total debt outstanding was $1.4 billion and had a weighted average interest rate of 2.5%, up from 2.3% at December 31st due to a rising LIBOR. Unsecured debt represented 47% of total debt at quarter end, down slightly from 50% in the prior quarter. At quarter end, we had total liquidity of approximately $494 million, including $39 million of cash and $455 million of undrawn capacity on our upsized credit facilities. Unfunded commitments, excluding unfunded commitments to joint ventures, were $195 million, with approximately $152 million of this amount eligible to be drawn immediately, as the remaining amount is subject to certain milestones that must be met by portfolio companies. Now, turning to our two joint ventures. At quarter end, the Kemper JV had $390 million of assets invested in senior secured loans to 60 companies, down slightly from last quarter, driven by portfolio payoffs during the second quarter, as well as spread widening across the portfolio. The JV generated $1.9 million of cash interest income for OCSL in the quarter, and we also received a $700,000 dividend, up from $450,000 in the prior quarter. as a result of the portfolio's continued strong performance. Leverage at the JV was 1.4 times at quarter end, in line with prior quarter. The GLIF JV had $150 million of assets in March 31st. These consisted of senior secured loans to 44 companies. Leverage at the JV was 1.2 times at quarter end. During the quarter, we received $1.1 million of principal and interest payments on OCSL's subordinated note in the GLIF JV. In summary, We continue to be very pleased with our financial results and believe our diverse portfolio and flexible balance sheet positions us well for the future. Now I will turn the call back to Matt.

Thank you, Chris. Our strong financial results for the quarter enabled us to generate an annualized return on equity of 9.7%, slightly higher than the 9.5% we generated last quarter. While we are very pleased with our results this quarter, we believe there are still ways for OCSL's ROE to increase going forward. First, we remain focused on positioning the portfolio for an improved yield by rotating out of lower-yielding investments and into higher-yielding loans. At quarter-end, we had $41 million of loans priced at or below LIBOR plus 4.5%, which we will look to opportunistically exit over time. Our new investments continue to come on the books at attractive yields, which means there is more upside in yield on that portion of the portfolio that we expect to realize over time. As we discussed before, another ongoing opportunity for us to support our ROE target is to further optimize our joint ventures. We can accomplish this by selectively rotating out of lower-yielding investments into higher-yielding ones, as well as increasing leverage with the JVs. We made good progress on this to date, as both vehicles are generating ROEs to OCSL of just over 10%. That said, the joint ventures continue to have capacity and we will selectively rotate and grow these portfolios over time, which we believe will be accretive to ROE. Finally, we believe OCSL is well positioned for a rising rate environment. With 89% of our investment portfolio in volume rate assets, an increase in base rates over our weighted average interest rate floor of approximately 80 basis points may positively impact our net interest margin. In conclusion, We are very pleased with our strong second quarter financial results. We are excited about our prospects for the remainder of the year and are optimistic that we will continue to be able to identify new, attractive, risk-adjusted investment opportunities, allowing us to provide strong returns to our shareholders. Thank you for joining us on today's call and for your continued interest in OCSL. With that, we're happy to take your questions.