Oaktree Specialty Lending (OCSL) - 2025 Q2 - Quarterly Results

Financial Performance Financial Highlights (Q2 2025) Oaktree Specialty Lending reported a decline in Q2 2025 financial metrics, including GAAP and Adjusted Net Investment Income, driven by a smaller portfolio and increased non-accrual investments, resulting in a lower NAV per share Key Financial Metrics | Financial Metric | Q2 2025 (ended Mar 31, 2025) | Q1 2025 (ended Dec 31, 2024) | Change | | :--- | :--- | :--- | :--- | | Total Investment Income (USD) | $77.6M ($0.90/share) | $86.6M ($1.05/share) | ▼ | | Adjusted Total Investment Income (USD) | $77.2M ($0.90/share) | $87.1M ($1.06/share) | ▼ | | GAAP Net Investment Income (USD) | $39.1M ($0.45/share) | $44.3M ($0.54/share) | ▼ | | Adjusted Net Investment Income (USD) | $38.7M ($0.45/share) | $44.7M ($0.54/share) | ▼ | | NAV per Share (USD) | $16.75 | $17.63 | ▼ | - The decline in investment income was primarily driven by a smaller average investment portfolio, the impact of certain investments being placed on non-accrual status, and decreases in reference rates[2] - The CEO acknowledged that "certain challenged portfolio company investments weighed on our results in the second quarter," indicating a focus on resolving these issues[3] Results of Operations Total investment income decreased in Q2 2025, partially offset by lower net expenses, but significant net realized and unrealized losses resulted in a net decrease in net assets Consolidated Statements of Operations | (USD thousands) | Q2 2025 (ended Mar 31) | Q1 2025 (ended Dec 31) | Q2 2024 (ended Mar 31) | | :--- | :--- | :--- | :--- | | Total Investment Income | $77,568 | $86,647 | $94,029 | | Net Expenses | $38,235 | $42,082 | $52,662 | | Net Investment Income | $39,055 | $44,302 | $41,367 | | Net Realized/Unrealized Losses | $(75,304) | $(37,063) | $(32,030) | | Net (Decrease) in Net Assets | $(36,249) | $7,239 | $9,337 | - The $9.9 million quarterly decline in adjusted total investment income was primarily due to a smaller portfolio, non-accrual placements, and lower reference rates[7] - Net expenses decreased by $3.8 million quarter-over-quarter, driven by $2.4 million in lower interest expense and $1.5 million in lower Part I incentive fees[8] Financial Position As of March 31, 2025, NAV per share decreased to $16.75, while total debt was reduced, improving the total and net debt-to-equity ratios to 1.00x and 0.93x respectively Balance Sheet Highlights | Balance Sheet Metric | As of Mar 31, 2025 | As of Dec 31, 2024 | | :--- | :--- | :--- | | Investment Portfolio at Fair Value (USD billions) | $2.89B | $2.84B | | Net Assets (USD billions) | $1.48B | $1.45B | | Net Asset Value per Share (USD) | $16.75 | $17.63 | | Total Debt to Equity Ratio (x) | 1.00x | 1.11x | | Net Debt to Equity Ratio (x) | 0.93x | 1.03x | - The decline in NAV per share from December 31, 2024, was primarily due to losses on certain debt and equity investments[2] Portfolio Analysis Portfolio Overview and Investment Activity The investment portfolio's fair value was $2.9 billion with 80.9% in first-lien debt, but credit quality showed stress with non-accrual investments increasing to 4.6% of debt at fair value Investment Activity (Q2 2025) | Investment Activity | Amount (USD thousands) | | :--- | :--- | | New Investment Commitments | $407,000 | | Proceeds from Exits/Sales | $279,400 | | Net New Investments | $126,400 | - The portfolio remains heavily weighted towards floating-rate debt, which constituted 89.8% of investments as of March 31, 2025, an increase from 87.6% in the prior quarter[10] Non-Accrual Investments | Non-Accrual Investments | As of Mar 31, 2025 | As of Dec 31, 2024 | | :--- | :--- | :--- | | Number of Investments | 10 | 9 | | As a % of Debt at Fair Value (%) | 4.6% | 3.9% | | As a % of Debt at Cost (%) | 7.6% | 5.1% | - The weighted average yield on new debt investments made during the quarter was 9.5%[2] Joint Venture Performance Both SLF JV I and Glick JV experienced declines in fair value due to leverage and unrealized depreciation in their underlying investment portfolios - SLF JV I's investments decreased in fair value to $128.6 million; it held $374.7 million in assets across 52 portfolio companies with a debt-to-equity ratio of 1.3x[17][18] - Glick JV's investments decreased in fair value to $47.3 million; it held $125.1 million in assets across 41 portfolio companies with a debt-to-equity ratio of 1.3x[19][20] Capital, Liquidity, and Shareholder Returns Liquidity and Capital Resources The company maintained strong liquidity with $97.8 million cash and over $1.0 billion undrawn credit, refinancing debt with $300 million unsecured notes and shifting funding mix to 65% unsecured borrowings - As of March 31, 2025, liquidity consisted of $97.8 million in unrestricted cash and over $1.0 billion of undrawn capacity under credit facilities[2][22] - The company issued $300 million of 6.340% unsecured notes due 2030 and repaid $300 million of notes that matured in February 2025, increasing the weighted average interest rate on debt to 6.7%[2][23] - The funding mix as of March 31, 2025, was 35% secured and 65% unsecured borrowings[21] Distribution Declaration The Board declared a total cash distribution of $0.42 per share for the quarter, comprising a regular and a supplemental distribution, payable on June 30, 2025 - A quarterly cash distribution of $0.40 per share was declared[2][4] - A supplemental cash distribution of $0.02 per share was also declared[2][4] Other Information Recent Developments Post-quarter, on April 8, 2025, the company amended its Syndicated Facility, reducing interest rate margins, removing a key covenant, and extending maturity to April 2030 - On April 8, 2025, the company amended its senior secured credit facility with several favorable changes, including reduced interest rate margins on SOFR loans to 1.875%, removal of the Consolidated Interest Coverage Ratio covenant, and extension of the final maturity date to April 8, 2030[25] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted Net Investment Income to provide a clearer view of performance by excluding non-cash merger adjustments and capital gains incentive fees - Adjusted financial measures exclude non-cash income/gain/loss from the OCSI and OSI2 Mergers, which established a new cost basis for acquired assets under ASC 805[26][27] - Adjusted Net Investment Income also excludes capital gains incentive fees (Part II incentive fees) to better align with management's view of core earnings[29] Reconciliation of GAAP to Adjusted Net Investment Income | (USD thousands) | Q2 2025 (ended Mar 31) | | :--- | :--- | | GAAP Net Investment Income | $39,055 | | Interest Income Adjustments (Merger) | $(373) | | Part II Incentive Fee | — | | Adjusted Net Investment Income | $38,682 |