Brookfield Oaktree Holdings, LLC quarterly report, Q3 FY2022

Business context and reporting period

The supplied filing is Oaktree Capital Group, LLC’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2022—not a filing under the requested name Brookfield Oaktree Holdings, LLC. Oaktree is an alternative investment manager focused on credit, real assets, private equity and listed equities. Its statements consolidate certain managed funds and CLOs, so reported totals include substantial assets, liabilities and results attributable to outside investors.

Financial performance and position

At September 30, 2022, cash and cash equivalents attributable to Oaktree were $120.5 million; with $6.0 million of U.S. Treasury and other securities, reported liquidity was $126.6 million. Oaktree reported $198.2 million of debt obligations, primarily euro-denominated senior notes issued in 2022. It also was jointly and severally liable as guarantor or co-obligor for approximately $1.05 billion of other operating-group debt, which generally is not recorded as its debt unless specified triggering events occur. Consolidated-fund borrowings and CLO debt were $975.7 million and $8.0 billion, respectively, and are nonrecourse to the Company.

For the first nine months, consolidated operating activities used $1.59 billion of cash, investing activities used $183.7 million, and financing activities provided $1.72 billion. These consolidated cash flows include fund investment activity and are not equivalent to cash flows available to Oaktree. Management stated that Oaktree and its consolidated funds had sufficient near-term operating liquidity.

Material changes versus the prior comparable period

• Third-quarter revenue fell to $59.8 million from $226.2 million in 2021, principally because incentive income declined from $167.5 million to zero. Class A-attributable net income fell to $18.7 million from $90.2 million.
• Nine-month revenue declined to $239.4 million from $984.3 million, and Class A-attributable net income declined to $8.2 million from $471.0 million. The prior year included much higher incentive income; 2022’s $56.1 million was primarily associated with a SPAC deconsolidation in the second quarter.
• Management fees rose 2.2% in the quarter and 6.1% year to date, primarily reflecting growth in sub-advisory fees.
• Interest expense increased 124.2% in the quarter and 51.2% year to date, attributed to higher interest rates, additional CLO issuances and new senior notes. Interest and dividend income also increased, largely from consolidated funds.
• Investment results weakened: year-to-date consolidated-fund realized losses were $68.9 million, unrealized depreciation was $14.0 million, and investment income was a $20.0 million loss, versus gains in the 2021 period.
• Incentive-creating AUM increased 7.1% from year-end 2021 to $43.8 billion, reflecting net contributions partly offset by market depreciation and currency effects.

Outlook, risks and unusual items

The filing provides no quantitative earnings or revenue guidance. Management expected available liquidity sources to fund working-capital needs for at least the next 12 months. It described incentive income as volatile and difficult to predict; $1.59 billion of fund-level accrued incentives remained unrecognized at September 30, and is contingent on fund performance, realizations and distribution waterfalls.

Key exposures include market valuation and credit risk, rising interest rates, foreign exchange, financing availability and counterparty risk. Management estimated that a 10% decline in consolidated-fund investment values would reduce unrealized appreciation by $1.2 billion, with an estimated $203.1 million impact on net income attributable to Class A unitholders. A 100-basis-point rate increase was estimated to increase annualized interest expense on consolidated-fund variable-rate debt by $73.8 million. The filing cited ongoing uncertainty from COVID-19 and the Russia-Ukraine conflict, while stating it was not aware of a material effect on the financial statements at filing.

Other notable items: Oaktree Capital I issued €200 million of senior notes in June 2022; the Company had funded $375 million of its $750 million Opps XI commitment by quarter-end; and an indirect subsidiary completed the acquisition of a majority interest in 17Capital in July 2022. A $0.30-per-Class A-unit distribution was paid November 10, 2022. The filing reported no pending legal or regulatory proceedings expected to have a material financial impact and no material changes to previously disclosed risk factors.

Important facts for investors to verify

• Confirm the issuer identity: the source filing names Oaktree Capital Group, LLC, whereas the request names Brookfield Oaktree Holdings, LLC.
• Distinguish Oaktree’s own liquidity and debt from consolidated-fund balances, which are generally not available to the Company or recourse to it.
• Review the terms and scope of the approximately $1.05 billion of joint and several debt guarantees, alongside the $198.2 million recorded debt balance.
• Assess the sustainability of fee growth and the sensitivity of earnings and distributions to incentive income and market valuations.
• Track funding of remaining commitments, including Opps XI, and the performance and financing implications of the 17Capital acquisition.