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 to middle-market companies with limited access to public capital markets. This summary covers the quarterly period ended December 31, 2020.

On October 28, 2020, the company entered into a merger agreement with Oaktree Strategic Income Corporation (OCSI), with consummation anticipated in the first half of 2021.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total investment income increased by 23.4% ($7.2 million) compared to Q4 2019, driven primarily by a $5.2 million increase in interest income due to a larger portfolio and a $2.3 million increase in fee income.
• Expense Increase: Net expenses rose by 21.9% ($5.1 million) year-over-year. This was largely due to a $3.3 million increase in Part II incentive fees (capital gains) and a $1.2 million increase in Part I incentive fees, partially offset by lower interest expense due to decreased LIBOR rates.
• Valuation Appreciation: Net unrealized appreciation surged to $47.6 million from $2.9 million in the prior year, driven by $27.2 million in debt investment appreciation and $9.9 million in equity investment appreciation.
• Realized Gains: Net realized gains increased to $8.2 million, primarily from exits of PLATO Learning Inc. ($7.8 million) and L Squared Capital ($1.4 million).
• Liquidity: Cash and cash equivalents decreased by $14.9 million during the quarter, primarily due to investment funding ($243.7 million) and distributions ($15.0 million), partially offset by proceeds from sales and repayments ($169.8 million).

Guidance, Outlook, Risks, and Unusual Items

• Merger Activity: The company is proceeding with the merger with OCSI. Stockholder votes are scheduled for March 15, 2021. The transaction is expected to be accounted for as an asset acquisition.
• Legal Proceedings: Merger-related litigation was filed on December 18, 2020, by a putative stockholder alleging breach of fiduciary duty. The company intends to vigorously defend the claims but voluntarily included supplemental disclosures in its proxy statement to mitigate risks.
• Interest Rate Risk: Approximately 88.8% of the debt portfolio bears floating interest rates. A prolonged reduction in LIBOR could decrease investment income, though the company benefits from lower borrowing costs.
• Unfunded Commitments: As of December 31, 2020, the company had $197.6 million in unfunded commitments to portfolio companies.
• Distributions: The Board declared a quarterly distribution of $0.12 per share on January 29, 2021, payable March 31, 2021.

Investor Verification Checklist

• Merger Approval: Verify the outcome of the stockholder votes for the OCSI merger scheduled for March 15, 2021.
• Valuation Methodology: Review the Board's determination of fair value for Level 3 assets, which comprised a significant portion of the portfolio ($1.26 billion).
• Debt Covenants: Confirm continued compliance with the Credit Facility covenants, specifically the asset coverage ratio (236.7%) and minimum net worth requirements.
• PIK Interest: Assess the collectability of Payment-in-Kind (PIK) interest, which totaled $3.1 million for the quarter and increases the cost basis of investments.
• Legal Costs: Monitor potential legal costs and outcomes related to the pending merger litigation.