UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-33901 Oaktree Specialty Lending Corporation (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (State or jurisdiction of incorporation or organization) ...

First Quarter Fiscal Year 2021 Earnings Presentation February 4, 2021 Nasdaq: OCSL Forward Looking Statements Some of the statements in this presentation constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this presentation may include statements as to: our future operating results and distribution projections; the ability of Oaktree Fund Advisors, LLC ("Oaktree") to reposition our portfolio ...

[PART I — FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20%E2%80%94%20FINANCIAL%20INFORMATION) This section provides the unaudited consolidated financial statements and management's discussion and analysis for Oaktree Specialty Lending Corporation [Item 1. Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents the unaudited consolidated financial statements, including statements of assets, operations, cash flows, and detailed investment schedules [Consolidated Statements of Assets and Liabilities](index=3&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) Total assets and net assets significantly increased as of December 31, 2020, primarily due to higher total investments at fair value | Metric | December 31, 2020 (in thousands) | September 30, 2020 (in thousands) | | :----------------------------------- | :--------------------------------- | :--------------------------------- | | Total investments at fair value | $1,712,324 | $1,573,851 | | Cash and cash equivalents | $24,234 | $39,096 | | Total assets | $1,793,903 | $1,640,712 | | Total liabilities | $828,986 | $725,833 | | Total net assets | $964,917 | $914,879 | | Net asset value per common share | $6.85 | $6.49 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) Net investment income and net assets from operations increased substantially for Q4 2020, driven by higher investment income and significant net unrealized appreciation | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total investment income | $38,204 | $30,960 | | Total expenses | $28,186 | $17,924 | | Net investment income | $10,018 | $7,836 | | Net unrealized appreciation (depreciation) | $47,556 | $2,879 | | Net realized gains (losses) | $8,215 | $3,288 | | Net increase (decrease) in net assets from operations | $65,544 | $13,843 | | Earnings per common share | $0.46 | $0.10 | [Consolidated Statements of Changes in Net Assets](index=5&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) Net assets increased significantly in Q4 2020, primarily due to strong operational performance, including net investment income and substantial net unrealized appreciation, despite distributions to stockholders | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net assets at beginning of period | $914,879 | $930,630 | | Net increase (decrease) in net assets from operations | $65,544 | $13,843 | | Distributions to stockholders | $(15,506) | $(13,391) | | Total increase (decrease) in net assets | $50,038 | $452 | | Net assets at end of period | $964,917 | $931,082 | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Cash and cash equivalents decreased in Q4 2020 due to significant cash used in financing activities, partially offset by cash provided by operating activities | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by (used in) operating activities | $16,072 | $(43,469) | | Net cash provided by (used in) financing activities | $(30,594) | $49,589 | | Net increase (decrease) in cash and cash equivalents | $(14,862) | $6,121 | | Cash and cash equivalents, end of period | $24,234 | $21,527 | [Consolidated Schedule of Investments (December 31, 2020)](index=8&type=section&id=Consolidated%20Schedule%20of%20Investments%20(December%2031%2C%202020)) The investment portfolio totaled **$1.71 billion** across 115 companies, with **85.7%** in senior secured debt, showing an increase from the prior quarter | Investment Type | Cost (in thousands) | Fair Value (in thousands) | % of Net Assets | | :--------------------------------- | :------------------ | :------------------------ | :-------------- | | Control Investments | $243,990 | $207,760 | 21.5% | | Affiliate Investments | $10,303 | $8,971 | 0.9% | | Non-Control/Non-Affiliate Investments | $1,503,368 | $1,495,593 | 155.0% | | Total Portfolio Investments | $1,757,661 | $1,712,324 | 177.5% | | Cash and Cash Equivalents | $24,234 | $24,234 | 2.5% | - As of December 31, 2020, **85.7%** of the Company's portfolio at fair value consisted of senior secured debt investments and **8.7%** consisted of subordinated debt investments[106](index=106&type=chunk) - The portfolio included **115 portfolio companies**, with **$125.5 million** invested in Senior Loan Fund JV I, LLC (SLF JV I)[106](index=106&type=chunk) [Consolidated Schedule of Investments (September 30, 2020)](index=21&type=section&id=Consolidated%20Schedule%20of%20Investments%20(September%2030%2C%202020)) The investment portfolio totaled **$1.57 billion** across 113 companies, with **84.1%** in senior secured debt, providing a comparative baseline | Investment Type | Cost (in thousands) | Fair Value (in thousands) | % of Net Assets | | :--------------------------------- | :------------------ | :------------------------ | :-------------- | | Control Investments | $245,950 | $201,385 | 22.0% | | Affiliate Investments | $7,551 | $6,509 | 0.7% | | Non-Control/Non-Affiliate Investments | $1,415,669 | $1,365,957 | 149.3% | | Total Portfolio Investments | $1,669,170 | $1,573,851 | 172.0% | | Cash and Cash Equivalents | $39,096 | $39,096 | 4.3% | - As of September 30, 2020, **84.1%** of the Company's portfolio at fair value consisted of senior secured debt investments and **10.3%** consisted of subordinated debt investments[106](index=106&type=chunk) - The portfolio included **113 portfolio investments**, with **$117.4 million** invested in Senior Loan Fund JV I, LLC (SLF JV I)[106](index=106&type=chunk) [Notes to Consolidated Financial Statements](index=32&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Detailed explanations of financial reporting, including organization, accounting policies, investment valuation, and significant events like the pending merger [Note 1. Organization](index=32&type=section&id=Note%201.%20Organization) Oaktree Specialty Lending Corporation is a BDC and RIC focused on flexible financing solutions, externally managed by Oaktree, with a pending merger - Oaktree Specialty Lending Corporation is a closed-end, externally managed, non-diversified management investment company regulated as a **Business Development Company (BDC)** and has elected to be treated as a **Regulated Investment Company (RIC)** for tax purposes[65](index=65&type=chunk) - The company's investment objective is to generate current income and capital appreciation by providing flexible financing solutions, including first and second lien loans, unsecured and mezzanine loans, bonds, preferred equity, and certain equity co-investments[66](index=66&type=chunk) - The company is externally managed by **Oaktree Fund Advisors, LLC**, a subsidiary of Oaktree Capital Group, LLC, and an administration agreement is in place with Oaktree Fund Administration, LLC[67](index=67&type=chunk) - An Agreement and Plan of Merger with Oaktree Strategic Income Corporation (OCSI) was entered into on **October 28, 2020**, with OCSI merging into the Company, subject to conditions[68](index=68&type=chunk) [Note 2. Significant Accounting Policies](index=32&type=section&id=Note%202.%20Significant%20Accounting%20Policies) Financial statements adhere to GAAP and ASC 946, with key policies covering fair value measurements, foreign currency, derivatives, and revenue recognition - Financial statements are prepared in accordance with **GAAP** and **ASC Topic 946, Financial Services - Investment Companies**[69](index=69&type=chunk) - Investments are valued at fair value in accordance with **ASC 820**, using a three-level hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs other than Level 1; Level 3: unobservable inputs)[74](index=74&type=chunk)[79](index=79&type=chunk) - Revenue recognition policies cover interest income (accrued with OID accretion), PIK interest (accrued if collectible), fee income (recognized upon closing or as earned), and dividend income (recognized on ex-dividend or record date)[90](index=90&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk)[95](index=95&type=chunk) - The company has elected to be taxed as a **RIC**, requiring distribution of at least **90%** of taxable income. Taxable subsidiaries are consolidated for financial reporting but not for U.S. federal income tax, leading to deferred tax assets and liabilities[102](index=102&type=chunk)[103](index=103&type=chunk) [Note 3. Portfolio Investments](index=41&type=section&id=Note%203.%20Portfolio%20Investments) The portfolio comprises **$1.7 billion** in 115 companies, with **85.7%** in senior secured debt, detailed by fair value hierarchy and SLF JV I summary - As of December 31, 2020, **177.5% of net assets ($1.7 billion)** was invested in **115 portfolio companies**, including **$125.5 million** in SLF JV I. Senior secured debt constituted **85.7%** of the portfolio at fair value[106](index=106&type=chunk) Investment Composition by Type (Fair Value) | Investment Type | Dec 31, 2020 (in thousands) | Sep 30, 2020 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Investments in debt securities | $1,520,243 | $1,388,605 | | Investments in equity securities | $66,567 | $67,806 | | Debt investment in SLF JV I | $96,250 | $96,250 | | Equity investment in SLF JV I | $29,264 | $21,190 | | Total | $1,712,324 | $1,573,851 | Fair Value Hierarchy of Investments (December 31, 2020) | Asset Type | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Net Asset Value (in thousands) | Total (in thousands) | | :-------------------------------------------------------------------------------- | :--------------------- | :--------------------- | :--------------------- | :----------------------------- | :------------------- | | Investments in debt securities (senior secured) | $— | $389,161 | $1,078,416 | $— | $1,467,577 | | Investments in debt securities (subordinated, including the debt investment in SLF JV I) | $— | $34,744 | $114,172 | $— | $148,916 | | Investments in equity securities (preferred) | $— | $— | $29,731 | $— | $29,731 | | Investments in equity securities (common and warrants, including LLC equity interests of SLF JV I) | $— | $— | $35,472 | $30,628 | $66,100 | | Total investments at fair value | $— | $423,905 | $1,257,791 | $30,628 | $1,712,324 | - SLF JV I, a joint venture with Kemper, had total assets of **$341.2 million** as of December 31, 2020, primarily consisting of senior secured loans to **56 portfolio companies**. The company's investment in SLF JV I was **$125.5 million** at fair value[137](index=137&type=chunk) [Note 4. Fee Income](index=59&type=section&id=Note%204.%20Fee%20Income) Total fee income for Q4 2020 was **$3.4 million**, with **$0.1 million** being recurring, a significant increase from **$1.1 million** in the same period of 2019 Total Fee Income | Period | Total Fee Income (in thousands) | Recurring Fee Income (in thousands) | | :--------------------------------- | :------------------------------ | :---------------------------------- | | Three months ended Dec 31, 2020 | $3,400 | $100 | | Three months ended Dec 31, 2019 | $1,100 | $200 | [Note 5. Share Data and Net Assets](index=60&type=section&id=Note%205.%20Share%20Data%20and%20Net%20Assets) Earnings per share increased significantly to **$0.46** for Q4 2020, reflecting strong operational performance and net asset growth to **$964.9 million** Earnings Per Common Share | Metric | Three months ended Dec 31, 2020 | Three months ended Dec 31, 2019 | | :--------------------------------------- | :------------------------------ | :------------------------------ | | Earnings (loss) per common share | $0.46 | $0.10 | | Weighted average common shares outstanding | 140,961 | 140,961 | Changes in Net Assets (December 31, 2020) | Item | Shares (in thousands) | Par Value (in thousands) | Additional paid-in-capital (in thousands) | Accumulated Overdistributed Earnings (in thousands) | Total Net Assets (in thousands) | | :--------------------------------------- | :-------------------- | :----------------------- | :---------------------------------------- | :---------------------------------- | :------------------------------ | | Balance as of September 30, 2020 | 140,961 | $1,409 | $1,487,774 | $(574,304) | $914,879 | | Net increase in net assets from operations | — | — | — | $65,544 | $65,544 | | Distributions to stockholders | — | — | — | $(15,506) | $(15,506) | | Balance as of December 31, 2020 | 140,961 | $1,409 | $1,487,774 | $(524,266) | $964,917 | - The company has a dividend reinvestment plan (DRIP) where distributions are automatically reinvested in additional shares unless a stockholder elects to receive cash. Shares are issued at the greater of NAV or **95%** of market price if trading at a premium, or purchased in the open market if trading at a discount[165](index=165&type=chunk) [Note 6. Borrowings](index=61&type=section&id=Note%206.%20Borrowings) Borrowings include a senior secured revolving Credit Facility, which was increased to **$800 million** as of December 31, 2020, and **$300 million** in 3.500% unsecured notes due 2025, with previous notes fully redeemed - The Credit Facility was increased to **$800 million** as of December 31, 2020, with a drawing period expiring on **February 25, 2023**, and a maturity date of **February 25, 2024**. The interest rate margin for LIBOR loans is **2.00%**[170](index=170&type=chunk)[173](index=173&type=chunk) Credit Facility Borrowings and Interest Expense | Metric | Dec 31, 2020 (in thousands) | Sep 30, 2020 (in thousands) | 3 months ended Dec 31, 2020 (in thousands) | 3 months ended Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | :------------------------------------------- | :------------------------------------------- | | Borrowings outstanding | $400,025 | $414,825 | N/A | N/A | | Weighted average interest rate | N/A | N/A | 2.323% | 3.983% | | Interest expense (inclusive of fees) | N/A | N/A | $3,200 | $4,000 | - The company issued **$300.0 million** in 3.500% unsecured notes due 2025 (2025 Notes) on **February 25, 2020**. As of December 31, 2020, **$300.0 million** of these notes were outstanding, with a carrying value of **$294.8 million** and a fair value of **$311.3 million**[177](index=177&type=chunk)[183](index=183&type=chunk) - The **5.875% notes due 2024** (2024 Notes) and **6.125% notes due 2028** (2028 Notes) were fully redeemed on **March 2, 2020**, and **March 13, 2020**, respectively[185](index=185&type=chunk)[188](index=188&type=chunk) [Note 7. Interest and Dividend Income](index=66&type=section&id=Note%207.%20Interest%20and%20Dividend%20Income) Only **one investment** was on non-accrual status for cash and/or PIK interest or OID income as of December 31, 2020, indicating **99.96%** accruing debt investments at cost, an improvement from prior quarter Debt Investments by Accrual Status | Accrual Status | Dec 31, 2020 Cost (in thousands) | Dec 31, 2020 Fair Value (in thousands) | Sep 30, 2020 Cost (in thousands) | Sep 30, 2020 Fair Value (in thousands) | | :--------------- | :------------------------------- | :------------------------------------- | :------------------------------- | :------------------------------------- | | Accrual | $1,609,920 | $1,616,023 | $1,500,364 | $1,483,284 | | PIK non-accrual | — | — | $12,661 | — | | Cash non-accrual | $588 | $470 | $5,712 | $1,571 | | Total | $1,610,508 | $1,616,493 | $1,518,737 | $1,484,855 | - As of December 31, 2020, there was only **one investment** on which the Company had stopped accruing cash and/or PIK interest or OID income, compared to **two investments** as of September 30, 2020[191](index=191&type=chunk) [Note 8. Taxable/Distributable Income and Dividend Distributions](index=66&type=section&id=Note%208.%20Taxable%2FDistributable%20Income%20and%20Dividend%20Distributions) Taxable income for Q4 2020 was an estimated **$13.8 million**, an increase from **$12.1 million** in the prior year, reflecting RIC status and deferred tax assets Reconciliation of Net Assets to Taxable Income | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net increase (decrease) in net assets from operations | $65,544 | $13,843 | | Net unrealized (appreciation) depreciation | $(47,556) | $(2,879) | | Taxable/Distributable Income (estimate) | $13,767 | $12,109 | - The company had net capital loss carryforwards of **$515.3 million** as of September 30, 2020, available to offset future capital gains[194](index=194&type=chunk) - As of December 31, 2020, the company recognized a deferred tax asset of **$1.1 million**, after determining that **$1.8 million** of the **$2.9 million** net deferred tax assets would not likely be realized[199](index=199&type=chunk) [Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation](index=67&type=section&id=Note%209.%20Realized%20Gains%20or%20Losses%20and%20Net%20Unrealized%20Appreciation%20or%20Depreciation) For Q4 2020, the company recorded a net realized gain of **$8.2 million**, primarily from PLATO Learning Inc. and L Squared Capital, with net unrealized appreciation of **$47.6 million** Net Realized Gain (Loss) by Portfolio Company (3 months ended Dec 31, 2020) | Portfolio Company | Net Realized Gain (Loss) (in millions) | | :------------------------ | :------------------------------------- | | PLATO Learning Inc. | $7.8 | | L Squared Capital | $1.4 | | BX Commercial Mortgage Trust 2020-VIVA | $1.2 | | ExamSoft Worldwide Inc. | $0.9 | | California Pizza Kitchen Inc. | $(2.1) | | 99 Cents Only Stores | $(0.9) | | Other, net | $(0.1) | | Total, net | $8.2 | - Net unrealized appreciation for the three months ended December 31, 2020, was **$47.6 million**, consisting of **$27.2 million** on debt investments, **$12.8 million** related to exited investments, and **$9.9 million** on equity investments, partially offset by **$2.4 million** depreciation on foreign currency forward contracts[206](index=206&type=chunk) - For the three months ended December 31, 2019, net realized gains were **$3.3 million**, primarily from YETI Holdings, Inc., and net unrealized appreciation was **$2.9 million**[204](index=204&type=chunk)[206](index=206&type=chunk) [Note 10. Concentration of Credit Risks](index=68&type=section&id=Note%2010.%20Concentration%20of%20Credit%20Risks) Credit risk is concentrated in cash deposits exceeding FDIC limits, managed by depositing with high-credit-quality financial institutions - The company deposits its cash with financial institutions, and these balances may at times exceed the **FDIC insurance limit**[207](index=207&type=chunk) - Credit risk is managed by depositing cash with high credit quality financial institutions and monitoring their financial stability[207](index=207&type=chunk) [Note 11. Related Party Transactions](index=68&type=section&id=Note%2011.%20Related%20Party%20Transactions) Significant related party transactions include base management fees (**$6.5 million** for Q4 2020) and incentive fees (**Part I: $4.1 million; Part II: $9.5 million** for Q4 2020) with Oaktree, plus a **$6.0 million** base management fee waiver post-merger - As of December 31, 2020, the company had a liability of **$20.2 million** for unpaid base management and incentive fees payable to Oaktree[208](index=208&type=chunk) - The base management fee is **1.50%** annually of total gross assets (excluding cash and cash equivalents), with a reduced rate of **1.00%** for gross assets exceeding **200%** of net asset value. Oaktree agreed to waive **$750,000** of base management fees for eight quarters post-merger, totaling **$6.0 million**[214](index=214&type=chunk) Base Management Fee Incurred | Period | Base Management Fee (in thousands) | | :--------------------------------- | :------------------------------- | | Three months ended Dec 31, 2020 | $6,500 | | Three months ended Dec 31, 2019 | $5,600 | - The incentive fee has two parts: Part I (incentive fee on income) is calculated quarterly based on pre-incentive fee net investment income, subject to a **1.50% hurdle rate** and a 'catch-up' provision. Part II (capital gains incentive fee) is **17.5%** of cumulative realized capital gains, net of losses and unrealized depreciation, from September 30, 2019[216](index=216&type=chunk)[221](index=221&type=chunk) Incentive Fees Incurred | Fee Type | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Part I incentive fee | $4,100 | $3,000 | | Part II incentive fee | $9,500 | $1,100 | - Oaktree Administrator provides administrative services, for which the company reimburses allocable overhead and expenses at cost. As of December 31, 2020, **$2.4 million** was due to the affiliate for these expenses[232](index=232&type=chunk)[234](index=234&type=chunk) [Note 12. Financial Highlights](index=75&type=section&id=Note%2012.%20Financial%20Highlights) Key financial highlights for Q4 2020 show a net asset value per share of **$6.85**, a total return of **17.34%**, an asset coverage ratio of **236.67%**, and a debt to equity ratio of **0.73x** Key Financial Highlights | Metric | Three months ended Dec 31, 2020 | Three months ended Dec 31, 2019 | | :------------------------------------------- | :------------------------------ | :------------------------------ | | Net asset value per share at end of period | $6.85 | $6.61 | | Total return | 17.34% | 7.23% | | Ratio of net investment income to average net assets | 4.21% | 3.33% | | Ratio of total expenses to average net assets | 11.83% | 7.61% | | Asset coverage ratio at end of period | 236.67% | 271.92% | - The company's debt to equity ratio was **0.73x** as of December 31, 2020, with a target range of **0.85x to 1.0x**[354](index=354&type=chunk) [Note 13. Derivative Instruments](index=76&type=section&id=Note%2013.%20Derivative%20Instruments) The company uses foreign currency forward contracts to mitigate exchange rate risk, with derivative liabilities of **$2.203 million** from these contracts as of December 31, 2020 - The company uses foreign currency forward contracts to mitigate the impact of adverse changes in foreign exchange rates on its foreign-denominated investments[240](index=240&type=chunk) - Derivative instruments are valued at fair value, with unrealized gains or losses recorded in 'net unrealized appreciation (depreciation)' and realized gains or losses in 'net realized gains (losses)' in the Consolidated Statements of Operations[242](index=242&type=chunk) Foreign Currency Forward Contracts (December 31, 2020) | Description | Notional Amount to be Purchased | Notional Amount to be Sold | Balance Sheet Location of Net Amounts | | :------------------------------ | :------------------------------ | :------------------------- | :------------------------------------ | | Foreign currency forward contract | $36,999 £ | $27,894 | Derivative liability | | Foreign currency forward contract | $30,308 € | $25,614 | Derivative liability | | Total Gross Amount of Recognized Liabilities | N/A | N/A | $2,203 | [Note 14. Commitments and Contingencies](index=76&type=section&id=Note%2014.%20Commitments%20and%20Contingencies) The company faces merger litigation and has **$197.6 million** in unfunded commitments as of December 31, 2020, primarily for debt financing to portfolio companies (**$192.8 million**) - A putative stockholder lawsuit (Merger Litigation) was filed on **December 18, 2020**, alleging direct and derivative breaches of fiduciary duty by the Board of Directors in connection with the OCSI merger. The company believes these claims are without merit and intends to defend against them[246](index=246&type=chunk)[248](index=248&type=chunk) - As of December 31, 2020, off-balance sheet arrangements consisted of **$197.6 million** in unfunded commitments, including **$192.8 million** for debt financing to portfolio companies, **$1.3 million** for equity financing to SLF JV I, and **$3.5 million** for limited partnership interests[250](index=250&type=chunk) Unfunded Commitments by Investment | Investment | December 31, 2020 (in thousands) | September 30, 2020 (in thousands) | | :--------------------------------- | :------------------------------- | :------------------------------- | | Assembled Brands Capital LLC | $33,326 | $36,079 | | WPEngine, Inc. | $26,348 | $26,348 | | NuStar Logistics, L.P. | $17,911 | $17,911 | | Athenex, Inc. | $17,085 | $22,780 | | FFI Holdings I Corp | $16,529 | — | | Thrasio, LLC | $11,355 | — | | Jazz Acquisition, Inc. | $10,147 | — | | Gulf Operating, LLC | $10,064 | — | | Latam Airlines Group S.A. | $8,177 | — | | MRI Software LLC | $6,473 | $7,239 | | NeuAG, LLC | $4,382 | $4,382 | | Corrona, LLC | $3,968 | $5,189 | | Olaplex, Inc. | $3,834 | $1,917 | | Pingora MSR Opportunity Fund I-A, LP | $3,500 | $3,500 | | Dominion Diagnostics, LLC | $3,449 | $5,887 | | Mindbody, Inc. | $3,048 | $3,048 | | Ardonagh Midco 3 PLC | $2,506 | $3,007 | | Accupac, Inc. | $2,346 | $2,346 | | Acquia Inc. | $2,240 | $2,240 | | New IPT, Inc. | $2,229 | $2,229 | | ADB Companies, LLC | $1,667 | — | | Apptio, Inc. | $1,538 | $1,538 | | Telestream Holdings Corporation | $1,417 | — | | Senior Loan Fund JV I, LLC | $1,328 | $1,328 | | Ministry Brands, LLC | $1,000 | $425 | | Coyote Buyer, LLC | $942 | $942 | | Immucor, Inc. | $541 | $541 | | GKD Index Partners, LLC | $231 | $231 | | A.T. Holdings II SÀRL | — | $7,541 | | iCIMs, Inc. | — | $882 | | Total | $197,581 | $157,530 | [Note 15. Pending Merger with OCSI](index=79&type=section&id=Note%2015.%20Pending%20Merger%20with%20OCSI) A merger agreement with OCSI was signed on **October 28, 2020**, where OCSI will merge into the company, with closing anticipated in the **first half of 2021** - On **October 28, 2020**, the company entered into a Merger Agreement with OCSI, where OCSI will merge into the company, with the company continuing as the surviving entity[253](index=253&type=chunk) - Each share of OCSI common stock will be converted into a number of the company's common shares based on an Exchange Ratio, calculated from the net asset values of both companies prior to the merger[254](index=254&type=chunk)[255](index=255&type=chunk) - The merger is anticipated to close during the **first half of calendar year 2021**, contingent on stockholder approvals and other closing conditions[258](index=258&type=chunk) - The Mergers are expected to be accounted for as an asset acquisition of OCSI by the company, with the fair value of total consideration allocated to acquired assets and assumed liabilities based on their relative fair values[260](index=260&type=chunk) [Note 16. Subsequent Events](index=80&type=section&id=Note%2016.%20Subsequent%20Events) On **January 29, 2021**, the Board of Directors declared a quarterly distribution of **$0.12 per share**, payable in cash on **March 31, 2021** - On **January 29, 2021**, the Board of Directors declared a quarterly distribution of **$0.12 per share**, payable in cash on **March 31, 2021**, to stockholders of record on **March 15, 2021**[263](index=263&type=chunk) [Schedule 12-14: Schedule of Investments in and Advances to Affiliates](index=81&type=section&id=Schedule%2012-14) This schedule details investments in and advances to affiliates, categorizing Control and Affiliate types by fair value, additions, and reductions Control Investments (December 31, 2020) | Portfolio Company | Fair Value as of Oct 1, 2020 (in thousands) | Gross Additions (in thousands) | Gross Reductions (in thousands) | Fair Value as of Dec 31, 2020 (in thousands) | % of Total Net Assets | | :--------------------------------- | :------------------------------------------ | :----------------------------- | :------------------------------ | :------------------------------------------- | :---------------------- | | C5 Technology Holdings, LLC | $27,638 | $— | $— | $27,638 | 2.9% | | Dominion Diagnostics, LLC | $40,587 | $2,439 | $(70) | $45,289 | 4.7% | | First Star Speir Aviation Limited | $13,132 | $2,204 | $(6,155) | $9,181 | 1.0% | | New IPT, Inc. | $2,588 | $33 | $(150) | $2,471 | 0.3% | | Senior Loan Fund JV I, LLC | $117,440 | $8,074 | $— | $125,514 | 13.0% | | Total Control Investments | $201,385 | $12,750 | $(6,375) | $207,760 | 21.5% | Affiliate Investments (December 31, 2020) | Portfolio Company | Fair Value as of Oct 1, 2020 (in thousands) | Gross Additions (in thousands) | Gross Reductions (in thousands) | Fair Value as of Dec 31, 2020 (in thousands) | % of Total Net Assets | | :--------------------------------- | :------------------------------------------ | :----------------------------- | :------------------------------ | :------------------------------------------- | :---------------------- | | Assembled Brands Capital LLC | $5,768 | $2,765 | $(65) | $8,468 | 0.9% | | Caregiver Services, Inc. | $741 | $— | $(238) | $503 | 0.1% | | Total Affiliate Investments | $6,509 | $2,765 | $(303) | $8,971 | 0.9% | - Gross additions include increases in cost basis from new investments, follow-on investments, accrued PIK interest, and exchanges of securities[267](index=267&type=chunk)[271](index=271&type=chunk) - Gross reductions include decreases from principal payments, sales, and exchanges[267](index=267&type=chunk)[271](index=271&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=85&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, business strategy, COVID-19 impact, accounting policies, liquidity, capital resources, and significant transactions [Business Overview](index=85&type=section&id=Business%20Overview) Oaktree Specialty Lending Corporation is a BDC and RIC providing credit solutions to middle-market companies (enterprise values **$100 million-$750 million**), actively managing its portfolio, with a pending merger - The company is a specialty finance company, BDC, and RIC, externally managed by Oaktree, aiming to generate current income and capital appreciation through flexible financing solutions for middle-market companies (enterprise values **$100 million-$750 million**)[277](index=277&type=chunk)[278](index=278&type=chunk)[279](index=279&type=chunk)[280](index=280&type=chunk) - Oaktree is actively rotating the portfolio into 'core investments' and has reduced 'non-core' investments by over **$700 million** at fair value since **October 2017**, with approximately **$125 million** remaining as of December 31, 2020[281](index=281&type=chunk) - A merger with Oaktree Strategic Income Corporation (OCSI) is anticipated to occur during the **first half of calendar year 2021**, subject to closing conditions and stockholder approvals[282](index=282&type=chunk) [Business Environment and Developments](index=86&type=section&id=Business%20Environment%20and%20Developments) COVID-19 creates economic uncertainty, but the company sees attractive returns, proactively monitors portfolio companies, and prepares for the **LIBOR phase-out by end of 2021** (or **June 30, 2023**, for most US Dollar LIBOR) - The COVID-19 pandemic continues to cause economic uncertainty, but the company believes attractive risk-adjusted returns can be achieved in the middle market due to Oaktree's investment platform[283](index=283&type=chunk)[284](index=284&type=chunk) - The company has proactively evaluated and supported its portfolio companies, maintaining close contact to understand liquidity and solvency positions[285](index=285&type=chunk) - As of December 31, 2020, **88.8%** of the debt investment portfolio (at fair value) bore interest at floating rates indexed to LIBOR. A prolonged reduction in interest rates could decrease total investment income, and the company is preparing for the phase-out of LIBOR by the **end of 2021** (or **June 30, 2023**, for most US Dollar LIBOR)[286](index=286&type=chunk) [Critical Accounting Policies](index=87&type=section&id=Critical%20Accounting%20Policies) Financial statements adhere to GAAP and ASC 946, with critical investment valuation using ASC 820's fair value hierarchy and detailed revenue recognition policies - Financial statements are prepared in accordance with **GAAP** and **ASC Topic 946, Financial Services-Investment Companies**[287](index=287&type=chunk) - Investment valuation follows **ASC 820**, defining fair value as an orderly transaction price between market participants, prioritizing observable market prices (Level 1, 2) over unobservable inputs (Level 3)[288](index=288&type=chunk)[289](index=289&type=chunk) - The Board of Directors undertakes a multi-step valuation process quarterly, involving Oaktree's valuation team, management, independent valuation firms, and the Audit Committee, to determine fair value[296](index=296&type=chunk) - Revenue recognition policies include interest income (accrued if collectible, with OID accretion), PIK interest (accrued if sufficient value), fee income (recognized upon closing or as earned), and dividend income (recognized on ex-dividend or record date, based on portfolio company earnings)[300](index=300&type=chunk)[302](index=302&type=chunk)[304](index=304&type=chunk)[306](index=306&type=chunk) [Portfolio Composition](index=91&type=section&id=Portfolio%20Composition) The company's portfolio primarily consists of senior secured debt, with **$286.3 million** in new commitments originated and **$160.7 million** in proceeds received from exits and repayments - During the three months ended December 31, 2020, the company originated **$286.3 million** of investment commitments in **14 new and seven existing portfolio companies** and funded **$241.5 million** of investments[308](index=308&type=chunk) - During the same period, **$160.7 million** of proceeds were received from prepayments, exits, other paydowns, and sales, with **12 portfolio companies** exited[308](index=308&type=chunk) Portfolio Composition by Investment Type (Fair Value) | Investment Type | December 31, 2020 | September 30, 2020 | | :--------------------------------- | :------------------ | :------------------- | | Senior secured debt | 85.70 % | 84.06 % | | Debt investment in SLF JV I | 5.62 % | 6.12 % | | Subordinated debt | 3.08 % | 4.17 % | | Common equity and warrants | 2.15 % | 2.40 % | | Preferred equity | 1.74 % | 1.90 % | | LLC equity interests of SLF JV I | 1.71 % | 1.35 % | | Total | 100.00 % | 100.00 % | Portfolio Composition by Industry (Fair Value) | Industry | December 31, 2020 | September 30, 2020 | | :--------------------------------- | :------------------ | :------------------- | | Application Software | 12.88 % | 10.21 % | | Multi-Sector Holdings | 7.54 % | 7.74 % | | Data Processing & Outsourced Services | 7.14 % | 6.33 % | | Pharmaceuticals | 6.91 % | 6.55 % | | Biotechnology | 6.54 % | 6.14 % | | Specialized Finance | 4.04 % | 3.08 % | | Health Care Services | 3.64 % | 3.81 % | | Personal Products | 3.27 % | 3.24 % | | Movies & Entertainment | 3.00 % | 2.77 % | | Property & Casualty Insurance | 2.81 % | 2.97 % | [Loans and Debt Securities on Non-Accrual Status](index=95&type=section&id=Loans%20and%20Debt%20Securities%20on%20Non-Accrual%20Status) Only **one investment** was on cash non-accrual status as of December 31, 2020, representing **0.04%** of debt investments at cost and **0.03%** at fair value, an improvement from prior quarter Debt Investments by Accrual Status | Accrual Status | Dec 31, 2020 Cost (in thousands) | Dec 31, 2020 Fair Value (in thousands) | Sep 30, 2020 Cost (in thousands) | Sep 30, 2020 Fair Value (in thousands) | | :--------------- | :------------------------------- | :------------------------------------- | :------------------------------- | :------------------------------------- | | Accrual | $1,609,920 | $1,616,023 | $1,500,364 | $1,483,284 | | PIK non-accrual | — | — | $12,661 | — | | Cash non-accrual | $588 | $470 | $5,712 | $1,571 | | Total | $1,610,508 | $1,616,493 | $1,518,737 | $1,484,855 | - As of December 31, 2020, there was **one investment** on which the company had stopped accruing cash and/or PIK interest or OID income, compared to **two investments** as of September 30, 2020[313](index=313&type=chunk) [Senior Loan Fund JV I, LLC](index=95&type=section&id=Senior%20Loan%20Fund%20JV%20I%2C%20LLC) SLF JV I, a joint venture with Kemper, had total assets of **$341.2 million** as of December 31, 2020, with the company's investment at **$125.5 million**, and saw net income increase to **$9.2 million** from **$2.5 million** - SLF JV I, a joint venture with Kemper, had total assets of **$341.2 million** as of December 31, 2020, primarily consisting of senior secured loans to **56 portfolio companies**[319](index=319&type=chunk) - The company's investment in SLF JV I was **$125.5 million** at fair value as of December 31, 2020, comprising LLC equity interests and SLF JV I Notes[319](index=319&type=chunk) SLF JV I Selected Statements of Operations Information | Metric | Three months ended Dec 31, 2020 (in thousands) | Three months ended Dec 31, 2019 (in thousands) | | :------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Interest income | $4,475 | $5,393 | | Total investment income | $4,529 | $5,399 | | Total expenses | $3,643 | $4,708 | | Net unrealized appreciation (depreciation) | $8,486 | $2,941 | | Net realized gains (losses) | $(144) | $(1,152) | | Net income (loss) | $9,228 | $2,480 | - SLF JV I's interest expense for the three months ended December 31, 2020, included **$1.6 million** related to the Deutsche Bank I Facility and **$2.0 million** related to the SLF JV I Notes[341](index=341&type=chunk) [Discussion and Analysis of Results and Operations](index=103&type=section&id=Discussion%20and%20Analysis%20of%20Results%20and%20Operations) Total investment income increased by **23.4% to $38.2 million**, driving a **27.8%** rise in net investment income to **$10.0 million** and substantial net unrealized appreciation of **$47.6 million** Comparison of Key Financial Metrics (3 months ended Dec 31, 2020 vs 2019) | Metric | Dec 31, 2020 (in thousands) | Dec 31, 2019 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Investment Income | $38,204 | $30,960 | $7,244 | 23.4% | | Net Expenses | $28,186 | $23,124 | $5,062 | 21.9% | | Net Investment Income | $10,018 | $7,836 | $2,182 | 27.8% | | Net Realized Gains (Losses) | $8,215 | $3,288 | $4,927 | 150.0% | | Net Unrealized Appreciation (Depreciation) | $47,556 | $2,879 | $44,677 | 1551.8% | - The increase in total investment income was primarily due to a **$5.2 million** increase in interest income from a larger investment portfolio and a **$2.3 million** increase in fee income from higher prepayment fees[345](index=345&type=chunk) - The increase in net expenses was mainly due to a **$3.3 million** increase in Part II incentive fees, a **$1.2 million** increase in Part I incentive fees, and a **$0.9 million** increase in management fees, partially offset by a **$0.4 million** decrease in interest expense due to lower LIBOR[346](index=346&type=chunk) [Financial Condition, Liquidity and Capital Resources](index=104&type=section&id=Financial%20Condition%2C%20Liquidity%20and%20Capital%20Resources) The company targets a debt to equity ratio of **0.85x to 1.0x**, with current ratios at **0.73x** and **236.7%** asset coverage, maintaining sufficient liquidity with **$400.0 million** undrawn on the Credit Facility - The company expects to fund portfolio growth through additional debt and equity capital, with a target debt to equity ratio of **0.85x to 1.0x**[352](index=352&type=chunk)[354](index=354&type=chunk) - As of December 31, 2020, the company had **$702.2 million** in senior securities, an asset coverage ratio of **236.7%**, and a debt to equity ratio of **0.73x**[354](index=354&type=chunk) - For the three months ended December 31, 2020, there was a net decrease in cash and cash equivalents of **$14.9 million**, with **$16.1 million** net cash from operating activities and **$30.6 million** net cash used in financing activities[355](index=355&type=chunk) - As of December 31, 2020, the company had **$24.2 million** in cash and cash equivalents, **$400.0 million** of undrawn capacity on the Credit Facility, and **$197.6 million** of unfunded commitments, indicating sufficient liquidity[357](index=357&type=chunk) [Significant Capital Transactions](index=106&type=section&id=Significant%20Capital%20Transactions) A quarterly distribution of **$0.11 per share** was paid on **December 31, 2020**, totaling **$15.0 million** in cash and **$0.5 million** in DRIP shares Distributions Per Share | Date Declared | Record Date | Payment Date | Amount per Share | Cash Distribution (in millions) | DRIP Shares Issued | DRIP Shares Value (in millions) | | :---------------- | :------------ | :------------- | :--------------- | :------------------------------ | :----------------- | :------------------------------ | | November 13, 2020 | December 15, 2020 | December 31, 2020 | $0.11 | $15.0 | 93,964 | $0.5 | | November 12, 2019 | December 13, 2019 | December 31, 2019 | $0.095 | $12.9 | 87,747 | $0.5 | [Indebtedness](index=106&type=section&id=Indebtedness) As of December 31, 2020, the company had **$400.0 million** outstanding under its **$800 million** Credit Facility and **$300.0 million** in 3.500% unsecured notes due 2025 - As of December 31, 2020, the Credit Facility had **$400.0 million** of borrowings outstanding, with an interest rate margin of **2.00%** over LIBOR[365](index=365&type=chunk)[362](index=362&type=chunk) Credit Facility Financial Covenants (December 31, 2020) | Financial Covenant | Target Value | September 30, 2020 Reported Value | | :------------------------- | :----------- | :-------------------------------- | | Minimum shareholders' equity | $550 million | $915 million | | Asset coverage ratio | 1.50:1 | 2.27:1 | | Interest coverage ratio | 2.25:1 | 3.69:1 | | Minimum net worth | $500 million | $911 million | - The company had **$300.0 million** of 3.500% unsecured notes due 2025 outstanding as of December 31, 2020, with a carrying value of **$294.8 million** and a fair value of **$311.3 million**[367](index=367&type=chunk)[368](index=368&type=chunk) - The **5.875% notes due 2024** and **6.125% notes due 2028** were fully redeemed in **March 2020**[369](index=369&type=chunk)[370](index=370&type=chunk) [Off-Balance Sheet Arrangements](index=107&type=section&id=Off-Balance%20Sheet%20Arrangements) As of December 31, 2020, the company's off-balance sheet arrangements totaled **$197.6 million** in unfunded commitments, primarily for debt financing to portfolio companies (**$192.8 million**), subject to covenants - As of December 31, 2020, off-balance sheet arrangements consisted of **$197.6 million** of unfunded commitments[371](index=371&type=chunk) - These commitments included **$192.8 million** to provide debt financing to portfolio companies, **$1.3 million** for equity financing to SLF JV I, and **$3.5 million** for limited partnership interests[371](index=371&type=chunk) - Such commitments are subject to portfolio companies' satisfaction of certain financial and nonfinancial covenants and may involve credit risk[371](index=371&type=chunk) [Contractual Obligations](index=108&type=section&id=Contractual%20Obligations) As of December 31, 2020, the company's total contractual obligations for principal and interest on its Credit Facility and 2025 Notes amounted to **$771.2 million**, with the majority (**$713.5 million**) due in 3-5 years Contractual Obligations by Period (December 31, 2020) | Contractual Obligations | Total (in thousands) | Less than 1 year (in thousands) | 1-3 years (in thousands) | 3-5 years (in thousands) | More than 5 years (in thousands) | | :------------------------ | :------------------- | :------------------------------ | :----------------------- | :----------------------- | :------------------------------- | | Credit Facility | $400,025 | $— | $— | $400,025 | $— | | Interest due on Credit Facility | $27,570 | $8,751 | $17,501 | $1,318 | $— | | 2025 Notes | $300,000 | $— | $— | $300,000 | $— | | Interest due on 2025 Notes | $43,640 | $10,500 | $21,000 | $12,140 | $— | | Total | $771,235 | $19,251 | $38,501 | $713,483 | $— | [Regulated Investment Company Status and Distributions](index=109&type=section&id=Regulated%20Investment%20Company%20Status%20and%20Distributions) The company maintains its RIC status by distributing at least **90%** of its annual taxable income, avoiding federal income tax on distributed amounts, and offers a dividend reinvestment plan - The company has qualified and elected to be treated as a **RIC**, requiring it to distribute at least **90%** of its investment company taxable income to avoid federal income tax on distributed amounts[377](index=377&type=chunk)[379](index=379&type=chunk) - The company did not incur a U.S. federal excise tax for calendar years **2019 and 2020**[379](index=379&type=chunk) - The DRIP allows stockholders to reinvest cash distributions in additional common stock. If shares trade at a premium to NAV, new shares are issued at the greater of NAV or **95%** of market price; if at a discount, shares are purchased in the open market[384](index=384&type=chunk) Qualified Net Interest Income and Short-Term Capital Gains (Year Ended Sep 30, 2020) | Year Ended | Qualified Net Interest Income | Qualified Short-Term Capital Gains | | :----------- | :---------------------------- | :--------------------------------- | | Sep 30, 2020 | 83.4 % | — | [Related Party Transactions](index=110&type=section&id=Related%20Party%20Transactions) The company engages in related party transactions with Oaktree Fund Advisors, LLC (investment adviser) and Oaktree Fund Administration, LLC (administrator), as detailed in Note 11 - The company has entered into an Investment Advisory Agreement with Oaktree and an Administration Agreement with Oaktree Administrator, both affiliates of Oaktree[385](index=385&type=chunk) - Mr. John B. Frank, an interested member of the Board of Directors, has an indirect pecuniary interest in Oaktree[385](index=385&type=chunk) [Recent Developments](index=110&type=section&id=Recent%20Developments) An amended registration statement for the OCSI merger was filed on **January 19, 2021**, and declared effective on **January 21, 2021**, with stockholder meetings scheduled for **March 15, 2021** - An amended registration statement on Form N-14, including a joint proxy statement/prospectus for the OCSI merger, was filed on **January 19, 2021**, and declared effective on **January 21, 2021**[386](index=386&type=chunk) - Stockholder meetings for both the company and OCSI are scheduled for **March 15, 2021**, to vote on merger-related proposals[386](index=386&type=chunk) - On **January 29, 2021**, the Board of Directors declared a quarterly distribution of **$0.12 per share**, payable on **March 31, 2021**[387](index=387&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=111&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to valuation risk for illiquid investments and interest rate risk, as **88.8%** of its debt investment portfolio bears floating interest rates, with a **250 basis point increase** resulting in an estimated **$19.1 million** net increase in net assets - The company is subject to valuation risk for investments without readily available market prices, which are valued at fair value by the Board of Directors with management judgment[390](index=390&type=chunk) - Interest rate risk is significant, as **88.8%** of the debt investment portfolio (at fair value) bore floating interest rates as of December 31, 2020[391](index=391&type=chunk)[392](index=392&type=chunk) Hypothetical Impact of Interest Rate Changes on Net Assets (December 31, 2020) | Basis point increase | Increase in Interest Income (in thousands) | (Increase) in Interest Expense (in thousands) | Net increase (decrease) in net assets from operations (in thousands) | | :------------------- | :----------------------------------------- | :-------------------------------------------- | :----------------------------------------------------------------- | | 250 | $29,066 | $(10,001) | $19,065 | | 200 | $21,838 | $(8,001) | $13,837 | | 150 | $14,610 | $(6,000) | $8,610 | | 100 | $7,471 | $(4,000) | $3,471 | | 50 | $2,703 | $(2,000) | $703 | - The net effect of any decrease in interest rates is limited due to interest rate floors on investments and outstanding borrowings[393](index=393&type=chunk) [Item 4. Controls and Procedures](index=113&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were effective as of December 31, 2020, with no material changes to internal control over financial reporting - Management, with the participation of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of **December 31, 2020**, and concluded they were effective at the reasonable assurance level[395](index=395&type=chunk) - There were no changes in internal control over financial reporting during the three months ended **December 31, 2020**, that materially affected or are reasonably likely to materially affect internal control over financial reporting[396](index=396&type=chunk) [PART II — OTHER INFORMATION](index=113&type=section&id=PART%20II%20%E2%80%94%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, exhibits, and signatures [Item 1. Legal Proceedings](index=113&type=section&id=Item%201.%20Legal%20Proceedings) The company is a nominal defendant in the 'Merger Litigation' lawsuit, filed on **December 18, 2020**, alleging fiduciary duty breaches related to the OCSI merger, which it intends to defend - A putative stockholder lawsuit, 'Merger Litigation,' was filed on **December 18, 2020**, alleging direct and derivative breaches of fiduciary duty against the Board of Directors in connection with the

Oaktree Specialty Lending Corporation (NASDAQ:OCSL) Q4 2020 Earnings Conference Call November 19, 2020 11:00 AM ET Company Participants Michael Mosticchio - Investor Relations Armen Panossian - Chief Executive Officer and Chief Investment Officer Matt Pendo - President and Chief Operating Officer Mel Carlisle - Chief Financial Officer and Treasurer Conference Call Participants Devin Ryan - JMP Securities Kyle Joseph - Jefferies Finian O'Shea - Wells Fargo Securities Ryan Lynch - KBW Rick Shane - JPMorgan Br ...

Part I [Business](index=4&type=section&id=Item%201.%20Business) Oaktree Specialty Lending Corporation (OCSL) is a specialty finance company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC), externally managed by Oaktree Fund Advisors, LLC, aiming to generate current income and capital appreciation by providing customized credit solutions to middle-market companies, with its portfolio valued at **$1.6 billion** as of September 30, 2020 - The company's investment objective is to generate **current income and capital appreciation** through flexible financing solutions, including first and second lien loans, unsecured loans, and equity co-investments, primarily for middle-market companies[14](index=14&type=chunk) Portfolio Snapshot as of September 30, 2020 | Metric | Value | | :--- | :--- | | Total Portfolio Fair Value (USD) | $1.6 billion | | Number of Portfolio Companies | 113 | | Debt Investments (%) | 94.3% | | Senior Secured Loans (%) | 84.1% | | Weighted Avg. Annual Yield on Debt (%) | 8.3% | | Debt to Equity Ratio (x) | 0.78x | - The company is **externally managed by Oaktree Fund Advisors, LLC**, an affiliate of Oaktree Capital Management, L.P. (OCM), which is majority-owned by Brookfield Asset Management Inc[13](index=13&type=chunk) - On October 28, 2020, the company entered into a **merger agreement with Oaktree Strategic Income Corporation (OCSI)**, which is expected to result in OCSL as the surviving company[19](index=19&type=chunk) [Business Strategy and Investment Process](index=6&type=section&id=Business%20Strategy%20and%20Investment%20Process) The company's business strategy focuses on originating proprietary deals, investing in quality companies with extensive diligence, disciplined portfolio management, and managing risk through loan structures, while its rigorous five-stage investment process ensures selective and disciplined new investments and ongoing risk management - Key business strategies emphasize **proprietary deal sourcing, extensive due diligence for quality companies, disciplined portfolio management, and risk mitigation through loan structures**, with a focus on rotating out of approximately **$128 million** in non-core investments as of September 30, 2020[31](index=31&type=chunk)[36](index=36&type=chunk) - The investment process consists of **five stages: Source, Screen, Research, Evaluate, and Monitor**, ensuring a selective and disciplined approach to new investments and ongoing risk management[38](index=38&type=chunk)[39](index=39&type=chunk)[44](index=44&type=chunk) [Investment Portfolio and SLF JV I](index=10&type=section&id=Investment%20Portfolio%20and%20SLF%20JV%20I) The investment portfolio primarily consists of various debt instruments, with **84.1%** in secured debt as of September 30, 2020, and includes a key joint venture, Senior Loan Fund JV I (SLF JV I), valued at **$117.4 million** - The portfolio is a mix of senior secured loans, unitranche loans, second lien loans, mezzanine loans, unsecured loans, and bonds, with **84.1% of the portfolio's fair value in debt investments secured by first or second priority liens** as of September 30, 2020[46](index=46&type=chunk)[47](index=47&type=chunk) - The company co-invests with Kemper Corporation through **SLF JV I**, a joint venture focused on middle-market corporate debt, with OCSL's investment valued at **$117.4 million** at fair value as of September 30, 2020[49](index=49&type=chunk) [Investment Advisory and Administration Agreements](index=12&type=section&id=Investment%20Advisory%20and%20Administration%20Agreements) Oaktree manages the company's operations under an Investment Advisory Agreement, receiving a two-part fee (base management and incentive fees), while Oaktree Administrator provides administrative services for reimbursement at cost Management Fee Structure | Fee Type | Rate/Structure | | :--- | :--- | | **Base Management Fee (Annual %)** | 1.50% annually on gross assets (excluding cash). Reduced to 1.00% on gross assets exceeding 200% of net asset value | | **Incentive Fee (Part I - Income) (%)** | 17.5% of pre-incentive fee net investment income, subject to a 1.50% quarterly hurdle rate on net assets with a catch-up provision | | **Incentive Fee (Part II - Capital Gains) (%)** | 17.5% of cumulative net realized capital gains over cumulative net realized capital losses and unrealized depreciation since fiscal year 2019 | - Oaktree Administrator provides necessary administrative services, including office facilities, bookkeeping, and reporting, for which it is **reimbursed by the company at cost**[85](index=85&type=chunk)[87](index=87&type=chunk) [Regulatory Framework](index=22&type=section&id=Regulatory%20Framework) The company operates as a Business Development Company (BDC) and a Regulated Investment Company (RIC), requiring it to invest at least **70%** of assets in 'qualifying assets' and maintain a **150%** asset coverage ratio, while distributing at least **90%** of taxable income annually to avoid corporate-level federal income tax - To qualify as a RIC, the company must meet source-of-income and asset diversification tests and **distribute at least 90% of its investment company taxable income annually**[100](index=100&type=chunk)[103](index=103&type=chunk) - As a BDC, **at least 70% of assets must be 'qualifying assets,'** and the company must maintain an **asset coverage ratio of at least 150%**, allowing it to incur up to $2 of debt for every $1 of equity[112](index=112&type=chunk)[116](index=116&type=chunk) [Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks, including the adverse effects of the COVID-19 pandemic, interest rate fluctuations, uncertainty in the fair value of illiquid portfolio investments, reliance on the Adviser's key personnel, magnification of losses due to leverage, potential conflicts of interest, regulatory constraints, and risks associated with the pending merger with OCSI - The **COVID-19 pandemic** poses a significant risk, potentially causing distress in portfolio companies, lack of income, and uncertainty in the value of investments[134](index=134&type=chunk)[135](index=135&type=chunk) - Changes in **interest rates** and the planned **LIBOR phase-out** by the end of 2021 could adversely affect the company's cost of capital and net investment income[143](index=143&type=chunk)[147](index=147&type=chunk) - A significant portion of the investment portfolio is **valued in good faith by the Board of Directors**, leading to uncertainty as to the value of these **illiquid investments**[150](index=150&type=chunk) - The use of **leverage magnifies the potential for loss**, and **regulations governing BDCs and RICs** affect the ability to raise additional capital, potentially hindering growth[188](index=188&type=chunk)[161](index=161&type=chunk) - Significant potential **conflicts of interest** exist, as the Adviser's fee structure may incentivize riskier investments, and investment opportunities may be allocated among multiple Oaktree-managed funds[180](index=180&type=chunk) - The **pending merger with OCSI** carries risks, including the potential failure to realize anticipated benefits, integration challenges, and a potential decline in stock price post-merger[259](index=259&type=chunk)[262](index=262&type=chunk) [Unresolved Staff Comments](index=55&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - There are **no unresolved staff comments**[281](index=281&type=chunk) [Properties](index=55&type=section&id=Item%202.%20Properties) The company does not own any real estate or other material physical properties, with its principal executive offices located in Los Angeles, CA, considered suitable for its current business operations - The company **does not own any material physical properties** and leases its principal executive offices[282](index=282&type=chunk) [Legal Proceedings](index=55&type=section&id=Item%203.%20Legal%20Proceedings) As of the report date, the company is not a party to any pending material legal proceedings - The company is **not currently a party to any pending material legal proceedings**[283](index=283&type=chunk) [Mine Safety Disclosures](index=55&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - **Not applicable**[284](index=284&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=56&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the Nasdaq Global Select Market under 'OCSL', with prices ranging from **$2.33** to **$5.65** per share in FY2020, and quarterly distributions totaling **$0.39** per share, while estimated annual expenses borne by stockholders total **8.61%** of net assets Quarterly Stock Price and Distribution Data (Fiscal Year 2020) | Quarter | NAV per Share (USD) | High Price (USD) | Low Price (USD) | Distribution per Share (USD) | | :--- | :--- | :--- | :--- | :--- | | Q1 | $6.61 | $5.52 | $5.00 | $0.095 | | Q2 | $5.34 | $5.65 | $2.33 | $0.095 | | Q3 | $6.09 | $4.90 | $3.00 | $0.095 | | Q4 | $6.49 | $5.23 | $4.29 | $0.105 | Estimated Annual Expenses (as a % of net assets) | Expense Category | Percentage (%) | | :--- | :--- | | Base management fees | 2.63% | | Incentive fees | 1.66% | | Interest payments on borrowed funds | 2.58% | | Other expenses | 0.78% | | Acquired fund fees and expenses | 0.96% | | **Total annual expenses** | **8.61%** | - The company **did not repurchase any shares** of its common stock during the fiscal years ended September 30, 2020 and 2019[296](index=296&type=chunk) [Selected Financial Data](index=62&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of the company's key financial data, showing total investment income of **$143.1 million** and net investment income of **$72.0 million** for FY2020, with NAV per share at **$6.49** and total investments at fair value growing to **$1.57 billion** Selected Financial Data (Fiscal Years 2018-2020) | (Amounts in thousands, except per share) | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Total Investment Income (USD) | $143,133 | $147,702 | $138,722 | | Net Investment Income (USD) | $71,992 | $67,909 | $60,046 | | Net Increase (Decrease) in Net Assets (USD) | $39,224 | $126,160 | $46,762 | | NAV per Common Share (USD) | $6.49 | $6.60 | $6.09 | | Total Investments at Fair Value (USD) | $1,573,851 | $1,438,042 | $1,491,201 | | Total Liabilities (USD) | $725,833 | $550,408 | $693,423 | | Total Net Assets (USD) | $914,879 | $930,630 | $858,035 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=63&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's business strategy, the impact of the COVID-19 pandemic, and its financial results, highlighting a **3.1%** decrease in total investment income to **$143.1 million** and a **6.0%** increase in net investment income to **$72.0 million** for fiscal year 2020, alongside portfolio growth to **$1.6 billion** and sufficient liquidity Results of Operations Comparison (FY 2020 vs. FY 2019) | (Amounts in millions USD) | FY 2020 | FY 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Investment Income (USD) | $143.1 | $147.7 | -3.1% | | Net Expenses (USD) | $71.1 | $79.8 | -10.8% | | Net Investment Income (USD) | $72.0 | $67.9 | +6.0% | | Net Realized/Unrealized Losses (USD) | $(34.5) | $59.3 | N/A | - The decrease in total investment income was primarily due to **lower interest income** from the impact of **LIBOR decreases** and lower non-recurring OID accretion, partially offset by higher prepayment fees[383](index=383&type=chunk) - The decrease in net expenses was mainly driven by **lower interest expense** resulting from **LIBOR decreases** and debt refinancing, as well as lower net management and incentive fees[384](index=384&type=chunk) - As of September 30, 2020, the company had **$39.1 million** in cash, **$1.6 billion** in portfolio investments, and **$285.2 million** of undrawn capacity on its credit facility, indicating **sufficient liquidity**[396](index=396&type=chunk) - Subsequent to year-end, the company entered a **merger agreement with OCSI**, increased its **credit facility to $775 million**, and declared a **quarterly dividend of $0.11 per share**[429](index=429&type=chunk)[430](index=430&type=chunk)[431](index=431&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=88&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to financial market risks, primarily **valuation risk** for its illiquid portfolio and **interest rate risk** for its floating-rate assets and liabilities, with **88.3%** of the debt portfolio at fair value bearing floating rates, and a hypothetical **100 basis point** increase in interest rates estimated to increase annual net assets from operations by approximately **$3.3 million** - The company's primary market risks are **valuation risk** for its illiquid portfolio and **interest rate risk** for its floating-rate assets and liabilities[442](index=442&type=chunk) - As of September 30, 2020, **88.3% of the company's debt portfolio** at fair value bore interest at **floating rates**, making its income sensitive to interest rate changes[445](index=445&type=chunk) Annualized Impact of Interest Rate Changes on Net Assets | Basis Point Increase | Net Increase in Net Assets (USD thousands) | | :--- | :--- | | 250 | $17,237 | | 200 | $12,548 | | 150 | $7,860 | | 100 | $3,269 | | 50 | $822 | [Financial Statements and Supplementary Data](index=90&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements for the fiscal year ended September 30, 2020, and the related **unqualified opinion** reports from Ernst & Young LLP, including the Consolidated Statements of Assets and Liabilities, Operations, Changes in Net Assets, and Cash Flows, along with detailed Schedules of Investments and comprehensive Notes - The independent registered public accounting firm, Ernst & Young LLP, issued an **unqualified opinion** on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting as of September 30, 2020[451](index=451&type=chunk)[457](index=457&type=chunk) Key Financial Statement Balances as of September 30, 2020 | Account | Amount (USD thousands) | | :--- | :--- | | Total Investments at Fair Value | $1,573,851 | | Total Assets | $1,640,712 | | Total Liabilities | $725,833 | | Total Net Assets | $914,879 | | Net Increase in Net Assets from Operations (FY 2020) | $39,224 | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=180&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) This item is not applicable to the company - **Not applicable**[738](index=738&type=chunk) [Controls and Procedures](index=180&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were **effective at a reasonable assurance level** as of September 30, 2020, with internal controls over financial reporting also assessed as **effective** and confirmed by Ernst & Young LLP, and no material changes reported during the fourth fiscal quarter - Management concluded that disclosure controls and procedures were **effective at a reasonable assurance level** as of September 30, 2020[739](index=739&type=chunk) - Management assessed internal control over financial reporting as **effective** as of September 30, 2020, an assessment **audited and confirmed by Ernst & Young LLP**[742](index=742&type=chunk)[743](index=743&type=chunk) - There were **no material changes** in internal control over financial reporting during the fourth quarter of fiscal year 2020[744](index=744&type=chunk) [Other Information](index=181&type=section&id=Item%209B.%20Other%20Information) The company reported no other information for this item - **None**[745](index=745&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=181&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The information required for this item is **incorporated by reference** from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is **incorporated by reference** from the 2021 Proxy Statement[747](index=747&type=chunk) [Executive Compensation](index=181&type=section&id=Item%2011.%20Executive%20Compensation) The information required for this item is **incorporated by reference** from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is **incorporated by reference** from the 2021 Proxy Statement[748](index=748&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=181&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) The information required for this item is **incorporated by reference** from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is **incorporated by reference** from the 2021 Proxy Statement[749](index=749&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=181&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The information required for this item is **incorporated by reference** from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is **incorporated by reference** from the 2021 Proxy Statement[750](index=750&type=chunk) [Principal Accountant Fees and Services](index=181&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) The information required for this item is **incorporated by reference** from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is **incorporated by reference** from the 2021 Proxy Statement[751](index=751&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=181&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the documents filed as part of the Annual Report, including the **Consolidated Financial Statements**, the **financial statement schedule for investments in affiliates**, and various exhibits such as the **Merger Agreement**, corporate governance documents, material contracts, and certifications - The report includes the **Consolidated Financial Statements** and a schedule of **Investments in and Advances to Affiliates**[754](index=754&type=chunk)[755](index=755&type=chunk) - Exhibits filed with the report include the **Merger Agreement with OCSI**, the **Investment Advisory Agreement**, the **Administration Agreement**, and **indentures for outstanding notes**[756](index=756&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DELAWARE (State or jurisdiction ofincorporation or organization) 26-1219283 (I.R.S. EmployerIdentification No.) 333 South Grand Avenue, 28th Floor Los Angeles, CA (Address of principal executive of ice) ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-33901 Oaktree Specialty Lending Corporation (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (State or jurisdiction of incorporation or organization) ...

OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-33901 Oaktree Specialty Lending Corporation UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2019 (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (State or jurisdiction of incorporation or organizatio ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K (Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2019 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-33901 Oaktree Specialty Lending Corporation (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (State or jurisdiction of incorporation or organization) 333 ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-33901 Oaktree Specialty Lending Corporation (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (State or jurisdiction of incorporation or organization) 3 ...