Oaktree Specialty Lending Corporation

Welcome and thank you for joining Oaktree Specialty Lending Corporation's second fiscal quarter conference call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode, but we will be prompted for a question and answer session following the prepared remarks. Now, I would like to introduce Michael Mostichio, Head of Investor Relations, who will host today's call. Mr. Messiccio, you may begin.

Thank you, Operator, and welcome to Oak Tree Specialty Lending Corporation's second fiscal quarter conference call. Our earnings release, which we issued this morning, and the accompanying slide presentation can be accessed on the investor section of our website at oaktreespecialtylending.com. Joining us on the call today are Armin Pinozian, Chief Executive Officer and Chief Investment Officer, Matt Pendo, President, Chris McCown, Chief Financial Officer and Treasurer, and Matt Stewart, Chief Operating Officer. 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, 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 solicitation of an offer to purchase any interest in any Oak Tree Fund. Investors and others should note that OCSL 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.

Thanks, Mike, and welcome, everyone. Thank you for joining us today and for your interest in and support of OCSL. Our second quarter was highlighted by robust origination activity that drove a positive shift in the composition of our portfolio, steady earnings, and progress on several non-accruals that led to an improvement in credit quality. Adjusted NII was 56 cents per share, roughly in line with the 57 cents per share for the prior quarter. These results reflect the ongoing strength in the earnings power of OCSL, including solid interest income from our predominantly floating rate portfolio. However, our results were impacted by the timing of repayments, which primarily occurred at the start of the quarter, and capital deployments, which were concentrated towards the end of the quarter. In addition, our continued rotation into primarily first lien loans reduced our weighted average portfolio spread by approximately 10 basis points in the quarter. Our first lien investments have increased from 71% at September 30, 2022, to approximately 81% today. At the same time, second lien investments decreased from 16% to 5% over the same period. We declared a dividend of 55 cents per share, consistent with the past five quarters. We also worked closely with the management teams of our underperforming portfolio companies and made important progress with repositioning several investments during the quarter. Drawing upon our long history and proven expertise in turning around challenge investments and leveraging the deep resources of Oaktree, we are confident that we can continue to successfully maximize outcomes and deliver value for our shareholders. The successful restructuring of some of our non-accrual positions, as well as no new non-accruals, enabled us to drive improved credit quality during the quarter. Investments on non-accrual status at quarter end represented 2.4% of the portfolio at fair value and 4.3% at cost. That was down from 4.2% of the portfolio at fair value and 5.9% at cost the prior quarter. NAV per share declined to $18.72 from $19.14 per share for the prior quarter. The decline reflected further markdowns on certain of our non-performing investments due both to restructurings on some as well as lower valuations on others. Our robust investment activity consisted of 396 million of new commitments in the quarter building on the momentum from the prior quarter when we originated 370 million of new investments. We continue to find attractive opportunities across sponsor, non-sponsor, and publicly traded credit investments, bolstering healthy deal flow, even as we maintain our highly selective approach to investing amid the uncertainty in this current higher for longer interest rate environment. Importantly, our new originations were made in attractive yields with lender-friendly deal structures. This included lower leverage and loan devalues. To that end, the weighted average yield on our new debt investments was 11.1%. On the repayment front, we received 323 million from pay down and exits in the second quarter. Our portfolio continues to receive steady levels of repayments, even in a less active M&A environment. We have also been capitalizing on the strength in the liquid credit markets by opportunistically selling out of certain public debt investments. Over the past two years, over 50% of our portfolio has turned over, which we believe reflects the strength of our investment underwriting and selection process. Exits occur largely when these companies prove successful and have the ability to pay down debt, refinance at lower rates, or sell at attractive valuations to larger competitors. We pursue opportunities and make investment decisions with these outcomes in mind. Before I turn the call over to Armin, I wanted to highlight a significant action that our manager has taken in support of OCSL. As part of our strong commitment to aligning our interests with shareholders, we announced yesterday that Oaktree has agreed to a significant and permanent reduction in our base management fee to 1% on gross assets from 1.5%. As a reminder, Oaktree has been waiving 1.5 million of management fees each quarter as part of the OSI 2 merger that closed in January of last year. For the original agreement, those fee waivers were decreased to $750,000 per quarter for the second year following the close of the transaction, which occurred this January. However, Oaktree agreed to keep the fee waivers at $1.5 million per quarter for both the March and June 2024 quarters. We expect this reduction will increase OCSL's adjusted net investment income per share by approximately 15 cents annually. This equates to an estimated improvement in our return on adjusted net investment income of 0.8% annually. Bottom line, this lowers our cost of operations and allows a larger share of investment income to flow directly to our shareholders. With that, I would like to turn the call over to Armen to provide more color on our portfolio activity and the market environment.