OCSL

Business Context and Reporting Period

Oaktree Specialty Lending Corp (OCSL) is a closed-end, externally managed Business Development Company (BDC) and Regulated Investment Company (RIC). The company provides customized credit solutions, including first and second lien loans, mezzanine loans, and equity co-investments, primarily to middle-market companies. This summary covers the quarterly period ended June 30, 2024.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Income: For the three months ended June 30, 2024, total investment income decreased by $6.9 million (6.8%) compared to the same period in 2023, primarily due to a lower average investment portfolio and an increase in non-accrual investments. However, for the nine-month period, income increased by $9.6 million (3.5%) driven by higher base rates on floating-rate debt and a larger portfolio.
• Expenses: Net expenses for the three months decreased by $3.1 million (5.8%) year-over-year, largely due to fee waivers ($3.2 million in Part I incentive fees and $1.5 million in base management fees). For the nine months, net expenses increased by $12.7 million (8.8%) due to higher interest expense from rising rates and increased borrowings.
• Realized Losses: The company recorded significant net realized losses of $69.5 million for the quarter and $84.5 million for the nine months ended June 30, 2024. The quarterly loss was driven primarily by a $68.5 million loss on the Thrasio, LLC investment.
• Unrealized Gains/Losses: The quarter saw a net unrealized appreciation of $26.2 million, contrasting with a depreciation of $1.0 million in the prior year quarter. This was driven by $83.6 million in appreciation on exited investments, partially offset by depreciation on debt and equity holdings.
• Portfolio Composition: As of June 30, 2024, 86.0% of the portfolio consisted of senior secured debt, and 9.0% was subordinated debt. The portfolio size grew to $3.12 billion (208.7% of net assets) from $2.89 billion (190.8% of net assets) at September 30, 2023.

Guidance, Outlook, and Risks

• Management Commentary: Management notes that global financial markets face volatility due to inflation, elevated interest rates, and geopolitical conflicts. Despite this, they believe attractive risk-adjusted returns exist in middle-market lending. The company continues to deploy capital, originating $1.1 billion in commitments during the nine months ended June 30, 2024.
• Fee Waivers: Oaktree waived $1.5 million of base management fees and $3.2 million of Part I incentive fees for the quarter ended June 30, 2024. Effective July 1, 2024, the base management fee is calculated at 1.00% of total gross assets (net of previous waivers).
• Liquidity and Capital: The company maintains $827.5 million of undrawn capacity on credit facilities. It raised $92.5 million in net proceeds from an "at the market" equity offering during the nine-month period. The company declared a quarterly distribution of $0.55 per share on July 26, 2024.
• Risks: Key risks include interest rate fluctuations (85.3% of the debt portfolio is floating rate), credit risk from portfolio companies (8 investments on non-accrual status representing 3.7% of debt at fair value), and valuation uncertainty for Level 3 assets which comprise the majority of the portfolio.

Investor Verification Checklist

• Thrasio, LLC Exposure: Verify the specific details and remaining exposure related to the $68.5 million realized loss recorded on Thrasio, LLC.
• Non-Accrual Status: Review the list of the eight investments currently on non-accrual status and their impact on future cash flows.
• Debt Maturities: Confirm the repayment schedule for the $300 million 2025 Notes maturing in February 2025 and the refinancing strategy.
• Fee Waiver Sustainability: Assess the long-term impact of the management fee waivers on the company's expense ratio and net investment income.
• Level 3 Valuations: Examine the significant unobservable inputs (market yield, EBITDA multiples) used to value the $2.75 billion in Level 3 assets.