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

PART I — FINANCIAL INFORMATION This section presents Oaktree Specialty Lending Corporation's unaudited financial statements, management's analysis, market risk, and internal controls assessment Item 1. Consolidated Financial Statements This section presents Oaktree Specialty Lending Corporation's unaudited consolidated financial statements, including statements of assets and liabilities, operations, changes in net assets, cash flows, and detailed schedules of investments for the periods ended March 31, 2025, and September 30, 2024. It also includes comprehensive notes explaining the company's organization, significant accounting policies, portfolio composition, fee income, share data, borrowings, tax information, realized and unrealized gains/losses, credit risk concentrations, related party transactions, financial highlights, derivative instruments, commitments, and subsequent events Consolidated Statements of Assets and Liabilities As of March 31, 2025, Oaktree Specialty Lending Corporation reported total assets of $3,079,167 thousand, a decrease from $3,198,341 thousand as of September 30, 2024. Total investments at fair value decreased to $2,892,771 thousand from $3,021,279 thousand. Total liabilities also decreased to $1,604,054 thousand from $1,710,530 thousand, primarily due to reduced credit facilities payable. Net assets slightly decreased to $1,475,113 thousand, resulting in a net asset value per common share of $16.75, down from $18.09 | Metric (in thousands) | March 31, 2025 | September 30, 2024 | | :-------------------- | :------------- | :----------------- | | Total assets | $3,079,167 | $3,198,341 | | Total investments at fair value | $2,892,771 | $3,021,279 | | Cash and cash equivalents | $97,838 | $63,966 | | Total liabilities | $1,604,054 | $1,710,530 | | Credit facilities payable | $520,000 | $710,000 | | Unsecured notes payable | $928,486 | $928,693 | | Total net assets | $1,475,113 | $1,487,811 | | Net asset value per common share | $16.75 | $18.09 | Consolidated Statements of Operations For the three months ended March 31, 2025, the company reported a net decrease in net assets from operations of $(36,249) thousand, a significant decline from a net increase of $9,337 thousand in the prior year period. Total investment income decreased by 17.5% to $77,568 thousand, while net expenses decreased by 27.4% to $38,235 thousand, largely due to waived incentive fees. The period saw substantial net unrealized depreciation of $(82,023) thousand, contributing to an earnings loss per common share of $(0.42) | Metric (in thousands) | Three months ended March 31, 2025 | Three months ended March 31, 2024 | Six months ended March 31, 2025 | Six months ended March 31, 2024 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Total investment income | $77,568 | $94,029 | $164,215 | $192,014 | | Total expenses | $45,151 | $54,162 | $94,360 | $109,458 | | Management fees waived | $(183) | $(1,500) | $(933) | $(3,000) | | Part I incentive fees waived | $(6,733) | — | $(13,110) | — | | Net expenses | $38,235 | $52,662 | $80,317 | $106,458 | | Net investment income | $39,055 | $41,367 | $83,357 | $85,556 | | Net unrealized appreciation (depreciation) | $(82,023) | $(25,252) | $(101,637) | $(50,277) | | Net realized gains (losses) | $6,705 | $(6,603) | $(10,605) | $(15,056) | | Net increase (decrease) in net assets from operations | $(36,249) | $9,337 | $(29,010) | $19,872 | | Net investment income per common share | $0.45 | $0.52 | $0.99 | $1.09 | | Earnings (loss) per common share | $(0.42) | $0.12 | $(0.35) | $0.25 | Consolidated Statements of Changes in Net Assets For the six months ended March 31, 2025, total net assets decreased by $12,698 thousand to $1,475,113 thousand, primarily driven by a net decrease from operations of $(29,010) thousand and distributions to stockholders of $(86,635) thousand. This was partially offset by a net increase from capital share transactions of $102,947 thousand, including $100,000 thousand from a private placement of common stock | Metric (in thousands) | Six months ended March 31, 2025 | Six months ended March 31, 2024 | | :-------------------- | :------------------------------ | :------------------------------ | | Net investment income | $83,357 | $85,556 | | Net unrealized appreciation (depreciation) | $(101,637) | $(50,277) | | Net realized gains (losses) | $(10,605) | $(15,056) | | Net increase (decrease) in net assets from operations | $(29,010) | $19,872 | | Distributions to stockholders | $(86,635) | $(93,612) | | Issuance of common stock in private placement | $100,000 | — | | Issuance of common stock in connection with "at the market" offering | $2,947 | $78,286 | | Net increase (decrease) in net assets from capital share transactions | $102,947 | $82,075 | | Total increase (decrease) in net assets | $(12,698) | $8,335 | | Net assets at end of period | $1,475,113 | $1,524,099 | | Net asset value per common share | $16.75 | $18.72 | Consolidated Statements of Cash Flows For the six months ended March 31, 2025, the company generated $205,959 thousand in net cash from operating activities, a significant improvement from a net cash outflow of $(16,495) thousand in the prior year. This was primarily driven by proceeds from sales and repayments of investments totaling $640,297 thousand. Net cash used in financing activities was $(177,273) thousand, largely due to repayments of unsecured notes and credit facilities, partially offset by proceeds from a private placement of common stock | Metric (in thousands) | Six months ended March 31, 2025 | Six months ended March 31, 2024 | | :-------------------- | :------------------------------ | :------------------------------ | | Net increase (decrease) in net assets from operations | $(29,010) | $19,872 | | Purchases of investments | $(600,873) | $(733,474) | | Proceeds from sales and repayments of investments | $640,297 | $540,176 | | Net cash provided by (used in) operating activities | $205,959 | $(16,495) | | Distributions paid in cash | $(80,891) | $(89,823) | | Borrowings under credit facilities | $325,000 | $70,000 | | Repayments of borrowings under credit facilities | $(515,000) | $(50,000) | | Repayments of unsecured notes | $(300,000) | — | | Issuance of unsecured notes | $299,976 | — | | Shares issued in private placement | $100,000 | — | | Net cash provided by (used in) financing activities | $(177,273) | $8,462 | | Net increase (decrease) in cash and cash equivalents and restricted cash | $29,665 | $(8,047) | | Cash and cash equivalents and restricted cash, end of period | $108,208 | $137,492 | Consolidated Schedule of Investments (March 31, 2025) As of March 31, 2025, the company's total portfolio investments at fair value were $2,892,771 thousand, with a cost of $3,114,256 thousand. Control investments accounted for 15.7% of net assets, affiliate investments for 2.2%, and non-control/non-affiliate investments for 178.3%. The portfolio was primarily composed of first lien term loans across various industries, with a significant portion of investments categorized as Level 3 in the fair value hierarchy, indicating reliance on unobservable inputs for valuation | Investment Type | Cost (in thousands) | Fair Value (in thousands) | % of Net Assets | | :---------------- | :------------------ | :------------------------ | :-------------- | | Control Investments | $375,317 | $230,904 | 15.7% | | Affiliate Investments | $35,295 | $32,475 | 2.2% | | Non-Control/Non-Affiliate Investments | $2,703,644 | $2,629,392 | 178.3% | | Total Portfolio Investments | $3,114,256 | $2,892,771 | 196.1% | | Cash and Cash Equivalents and Restricted Cash | $108,208 | $108,208 | 7.3% | - As of March 31, 2025, 75.0% of the Company's total assets were qualifying assets, and 25.0% were non-qualifying assets under the Investment Company Act[38] - A significant portion of investments (Level 3) were valued using unobservable inputs, including market yield, revenue/EBITDA multiples, and transaction precedents, reflecting the illiquid nature of many debt investments[43][126][129] Consolidated Schedule of Investments (September 30, 2024) As of September 30, 2024, the company's total portfolio investments at fair value were $3,021,279 thousand, with a cost of $3,144,919 thousand. Control investments represented 19.5% of net assets, affiliate investments 2.4%, and non-control/non-affiliate investments 181.2%. Similar to the current period, a substantial portion of these investments were categorized as Level 3, indicating reliance on unobservable inputs for fair value determination | Investment Type | Cost (in thousands) | Fair Value (in thousands) | % of Net Assets | | :---------------- | :------------------ | :------------------------ | :-------------- | | Control Investments | $372,901 | $289,404 | 19.5% | | Affiliate Investments | $38,175 | $35,677 | 2.4% | | Non-Control/Non-Affiliate Investments | $2,733,843 | $2,696,198 | 181.2% | | Total Portfolio Investments | $3,144,919 | $3,021,279 | 203.1% | | Cash and Cash Equivalents and Restricted Cash | $78,543 | $78,543 | 5.3% | - As of September 30, 2024, 74.4% of the Company's total assets were qualifying assets, and 25.6% were non-qualifying assets under the Investment Company Act[61] - The fair value of Level 3 investments was determined using unobservable inputs such as market yield, revenue/EBITDA multiples, and transaction precedents, reflecting the illiquid nature of many debt investments[61][130][131] Notes to Consolidated Financial Statements The Notes to Consolidated Financial Statements provide detailed disclosures on the company's operations, accounting policies, and financial instruments. Key areas covered include the company's structure as a BDC and RIC, valuation methodologies for its diverse investment portfolio (including Level 3 assets), revenue recognition practices for interest and fee income, and the accounting for various debt instruments and derivative contracts. The notes also detail related party transactions with Oaktree, share data, and recent developments affecting the company's financial position and performance Note 1. Organization Oaktree Specialty Lending Corporation is a specialty finance company operating as a closed-end, externally managed Business Development Company (BDC) and a Regulated Investment Company (RIC). Its objective is to generate current income and capital appreciation through flexible financing solutions, including various types of loans, bonds, preferred equity, and co-investments. The company is managed by Oaktree Fund Advisors, LLC, an affiliate of Oaktree Capital Management, L.P., and has expanded through mergers with Oaktree Strategic Income Corporation (OCSI) in 2021 and Oaktree Strategic Income II, Inc. (OSI2) in 2023 - Oaktree Specialty Lending Corporation is a specialty finance company, BDC, and RIC, aiming for current income and capital appreciation through diverse financing solutions[64][65] - The company is externally managed by Oaktree Fund Advisors, LLC, an affiliate of Oaktree Capital Management, L.P., which is part of Brookfield Corporation[66] - Significant growth occurred through mergers with Oaktree Strategic Income Corporation (OCSI) in March 2021 and Oaktree Strategic Income II, Inc. (OSI2) in January 2023[67][68] Note 2. Significant Accounting Policies The company's financial statements are prepared under GAAP, following ASC Topic 946 for investment companies. Key policies include fair value measurements, with investments categorized into Level 1, 2, or 3 based on observability of inputs, and a multi-step valuation process overseen by Oaktree as the valuation designee. Revenue recognition policies detail accrual for interest income (including PIK interest), fee income, and dividend income. Other policies cover foreign currency translation, derivative instruments (forward contracts, interest rate swaps), cash and cash equivalents, deferred financing/offering costs, and income taxes, including RIC status and deferred tax assets/liabilities - Financial statements are prepared in accordance with GAAP and ASC Topic 946, requiring management estimates for investment valuation and revenue recognition[69][70] - Fair value measurements categorize assets and liabilities into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs), with a multi-step valuation process involving Oaktree and independent valuation firms[73][74][90] - Revenue recognition includes accrual-based interest income (including PIK interest), fee income recognized upon investment closing or service rendering, and dividend income on ex-dividend/record dates. Non-accrual status is applied when collectibility is doubtful[92][94][95][96] - The company uses foreign currency forward contracts and interest rate swaps to mitigate market risks, recognizing them at fair value. It maintains RIC status for tax purposes, distributing at least 90% of taxable income[89][91][104] Note 3. Portfolio Investments As of March 31, 2025, the company's portfolio comprised $2.9 billion in 152 companies, with 84.3% in senior secured debt and 10.6% in subordinated debt. This represents a decrease from $3.0 billion in 144 companies as of September 30, 2024. The portfolio includes significant investments in joint ventures (SLF JV I and Glick JV) and a substantial portion of Level 3 investments, requiring unobservable inputs for valuation. The geographic and industry compositions are diverse, with Application Software and Multi-Sector Holdings being the largest sectors. The company recorded net realized gains of $6.7 million and net unrealized depreciation of $82.0 million for the three months ended March 31, 2025 Portfolio Composition (Fair Value) | Investment Type | March 31, 2025 (% of Total Investments) | September 30, 2024 (% of Total Investments) | | :---------------- | :-------------------------------------- | :-------------------------------------- | | Senior secured debt | 84.29% | 85.21% | | Debt investments in the JVs | 5.53% | 5.35% | | Subordinated debt | 5.04% | 3.64% | | Preferred equity | 2.42% | 2.20% | | Common equity and warrants | 2.17% | 2.85% | | LLC equity interests of the JVs | 0.55% | 0.75% | | Total | 100.00% | 100.00% | Key Financial Performance (in thousands) | Metric | Three months ended March 31, 2025 | Three months ended March 31, 2024 | | :----- | :-------------------------------- | :-------------------------------- | | Net realized gains (losses) | $6,705 | $(6,603) | | Net unrealized appreciation (depreciation) | $(82,023) | $(25,252) | - As of March 31, 2025, ten investments were on non-accrual status, representing 7.6% of total debt investments at cost and 4.6% at fair value[92] - The company co-invests in senior secured loans through two joint ventures: Senior Loan Fund JV I, LLC (SLF JV I) and OCSI Glick JV LLC (Glick JV)[142][171] Note 4. Fee Income For the three months ended March 31, 2025, total fee income was $1.7 million, with less than $0.1 million being recurring. This represents a decrease from $2.5 million in the prior year period, where $0.1 million was recurring. The decline in fee income was primarily due to lower amendment fees | Metric (in thousands) | Three months ended March 31, 2025 | Three months ended March 31, 2024 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Total fee income | $1,700 | $2,500 | | Recurring fee income | < $100 | $100 | - The decrease in fee income was primarily driven by lower amendment fees[100] Note 5. Share Data and Net Assets For the three months ended March 31, 2025, the company reported an earnings loss per common share of $(0.42), down from $0.12 in the prior year. Net assets at period-end were $1,475,113 thousand, with 88,086 thousand common shares outstanding. During the six months ended March 31, 2025, the company issued 5,672,149 shares in a private placement for $100.0 million and 168,055 shares through an "at the market" offering for $3.0 million net proceeds. Distributions to stockholders for the six months ended March 31, 2025, totaled $1.02 per share, with $80.9 million paid in cash and $5.7 million reinvested through the DRIP | Metric (in thousands, except per share) | Three months ended March 31, 2025 | Three months ended March 31, 2024 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Earnings (loss) per common share | $(0.42) | $0.12 | | Weighted average common shares outstanding | 85,916 | 79,763 | | Net assets at end of period | $1,475,113 | $1,524,099 | | Common shares outstanding at end of period | 88,086 | 81,396 | Common Stock Issuances (Six months ended March 31, 2025) | Offering Type | Number of Shares Issued | Gross Proceeds (in thousands) | Net Proceeds (in thousands) | | :-------------- | :---------------------- | :---------------------------- | :-------------------------- | | Private Placement | 5,672,149 | $100,000 | $100,000 | | "At the market" offering | 168,055 | $2,987 | $2,960 | Distributions to Stockholders (Six months ended March 31, 2025) | Distribution Type | Amount per Share | Cash Distribution (in thousands) | DRIP Shares Value (in thousands) | | :------------------ | :--------------- | :------------------------------- | :------------------------------- | | Quarterly | $0.55 | $43,800 | $1,500 | | Quarterly | $0.40 | $31,500 | $3,700 | | Supplemental | $0.07 | $5,600 | $600 | | Total | $1.02 | $80,900 | $5,700 | Note 6. Borrowings The company's borrowings include the Syndicated Facility, OSI2 Citibank Facility, and unsecured notes (2027, 2029, and 2030 Notes). As of March 31, 2025, $430.0 million was outstanding under the Syndicated Facility and $90.0 million under the OSI2 Citibank Facility, both secured. The 2025 Notes matured in February 2025. New 2030 Notes totaling $300.0 million were issued in February 2025. Interest rate swaps are used to hedge fixed-rate debt, aligning with the predominantly floating-rate investment portfolio. The company was in compliance with all financial covenants under the Syndicated Facility as of March 31, 2025 Debt Outstanding (in millions) | Debt Instrument | March 31, 2025 | September 30, 2024 | | :-------------- | :------------- | :----------------- | | Syndicated Facility | $430.0 | $430.0 | | OSI2 Citibank Facility | $90.0 | $280.0 | | 2025 Notes | — | $300.0 | | 2027 Notes | $350.0 | $350.0 | | 2029 Notes | $300.0 | $300.0 | | 2030 Notes | $300.0 | — | Interest Expense (in millions) | Debt Instrument | Three months ended March 31, 2025 | Six months ended March 31, 2025 | | :-------------- | :-------------------------------- | :------------------------------ | | Syndicated Facility | $8.4 | $17.8 | | OSI2 Citibank Facility | $4.2 | $9.9 | | 2025 Notes | $1.8 | $4.7 | | 2027 Notes | $6.0 | $12.1 | | 2029 Notes | $5.9 | $12.3 | | 2030 Notes | $1.9 | $1.9 | - The company uses interest rate swaps to hedge fixed-rate debt (2027, 2029, and 2030 Notes) to align with its predominantly floating-rate investment portfolio[236][241][246] - As of March 31, 2025, the company was in compliance with all financial covenants under the Syndicated Facility[223] Note 7. Taxable/Distributable Income and Dividend Distributions For the six months ended March 31, 2025, the company's estimated taxable/distributable income was $80,978 thousand, compared to $76,060 thousand in the prior year. This differs from net assets from operations due to unrealized gains/losses and other book/tax differences. The company maintains RIC status, requiring distribution of at least 90% of taxable income. As of September 30, 2024, it had $696.0 million in net capital loss carryforwards. Income tax expense for the six months ended March 31, 2025, was $0.5 million for net investment income and $0.1 million for realized/unrealized gains/losses Taxable/Distributable Income (in thousands) | Metric | Six months ended March 31, 2025 | Six months ended March 31, 2024 | | :----- | :------------------------------ | :------------------------------ | | Net increase (decrease) in net assets from operations | $(29,010) | $19,872 | | Net unrealized (appreciation) depreciation | $101,637 | $50,277 | | Taxable/Distributable Income (estimate) | $80,978 | $76,060 | - As of September 30, 2024, the company had $696.0 million in net capital loss carryforwards, with $73.0 million for short-term and $623.0 million for long-term capital gains, which do not expire[250] Income Tax Expense (in thousands) | Metric | Six months ended March 31, 2025 | Six months ended March 31, 2024 | | :----- | :------------------------------ | :------------------------------ | | Income tax related to net investment income | $541 | — | | Income tax related to realized and unrealized gains (losses) | $125 | $351 | Note 8. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation For the three months ended March 31, 2025, the company recorded a net realized gain of $6.7 million, primarily from foreign currency forward contracts, partially offset by losses from FinThrive Software Intermediate Holdings Inc. In contrast, the prior year period saw a net realized loss of $6.6 million. Net unrealized depreciation for the three months ended March 31, 2025, was $82.0 million, mainly from debt and equity investments and foreign currency forward contracts, significantly higher than the $25.3 million depreciation in the prior year Net Realized Gains (Losses) (in millions) | Portfolio Company | Three months ended March 31, 2025 | Three months ended March 31, 2024 | | :---------------- | :-------------------------------- | :-------------------------------- | | Foreign currency forward contracts | $7.9 | $(1.170) | | FinThrive Software Intermediate Holdings Inc | $(2.8) | — | | All Web Leads Inc | — | $(13.4) | | Ardonagh Midco 3 PLC | — | $4.6 | | Total, net | $6.7 | $(6.6) | Net Unrealized Appreciation (Depreciation) (in millions) | Category | Three months ended March 31, 2025 | Three months ended March 31, 2024 | | :------- | :-------------------------------- | :-------------------------------- | | Debt investments | $(63.0) | $(13.5) | | Equity investments | $(10.0) | $(24.8) | | Foreign currency forward contracts | $(14.7) | $2.2 | | Total, net | $(82.0) | $(25.3) | Note 9. Concentration of Credit Risks The company manages credit risk by depositing cash with high-credit-quality financial institutions and continuously monitoring their financial stability. While cash balances may exceed FDIC insurance limits, this practice aims to mitigate exposure to credit loss - The company mitigates credit risk by depositing cash with high-credit-quality financial institutions and monitoring their stability[267] - Cash balances may at times exceed FDIC insurance limits, but this is managed through careful selection and monitoring of financial institutions[97][267] Note 10. Related Party Transactions The company has significant related party transactions with Oaktree Fund Advisors, LLC (Oaktree) and Oaktree Fund Administration, LLC (Oaktree Administrator). Oaktree receives a base management fee (1.00% of gross assets, with waivers) and an incentive fee (Part I on income, Part II on capital gains). For the three months ended March 31, 2025, base management fees incurred were $7.3 million (net of waiver) and Part I incentive fees were $0.0 million (net of $6.7 million waiver). Oaktree Administrator provides administrative services, reimbursed at cost, with $0.5 million accrued for the three months ended March 31, 2025 Management and Incentive Fees (in thousands) | Fee Type | Three months ended March 31, 2025 | Three months ended March 31, 2024 | | :------- | :-------------------------------- | :-------------------------------- | | Base management fee (net of waiver) | $7,300 | $10,100 | | Part I incentive fee (net of waiver) | $0 | $8,500 | | Part I incentive fees waived | $6,733 | — | - Effective July 1, 2024, the base management fee is 1.00% of total gross assets (excluding cash), with specific waivers applied until January 23, 2025[273] - The Part I incentive fee is subject to a 1.50% hurdle rate and a 'catch-up' provision, with a waiver implemented effective October 1, 2024, based on a cumulative pre-incentive fee net return over trailing twelve quarters[276][278] - Oaktree Administrator provides administrative services, reimbursed at cost, with $0.5 million accrued for the three months ended March 31, 2025[291] Note 11. Financial Highlights For the three months ended March 31, 2025, the net asset value per share decreased to $16.75 from $17.63 at the beginning of the period, primarily due to net unrealized depreciation of $(0.94) per share and distributions of $(0.47) per share. The total return for the period was 3.56%. The ratio of net investment income to average net assets was 10.63%, while the ratio of net expenses to average net assets was 10.41%. The asset coverage ratio at period-end was 198.34% | Metric | Three months ended March 31, 2025 | Three months ended March 31, 2024 | | :----- | :-------------------------------- | :-------------------------------- | | Net asset value per share at beginning of period | $17.63 | $19.14 | | Net asset value per share at end of period | $16.75 | $18.72 | | Net investment income (per share) | $0.45 | $0.52 | | Net unrealized appreciation (depreciation) (per share) | $(0.94) | $(0.31) | | Distributions of net investment income to stockholders (per share) | $(0.47) | $(0.55) | | Total return | 3.56% | (0.96)% | | Ratio of net investment income to average net assets | 10.63% | 10.92% | | Ratio of net expenses to average net assets | 10.41% | 13.90% | | Asset coverage ratio at end of period | 198.34% | 188.04% | Note 12. Derivative Instruments The company utilizes foreign currency forward contracts to mitigate foreign exchange rate fluctuations and interest rate swaps to align fixed-rate debt with its floating-rate investment portfolio. As of March 31, 2025, the company had various foreign currency forward contracts with a net derivative liability of $(8,068) thousand. Additionally, interest rate swaps were in place for the 2027, 2029, and 2030 Notes, with a net derivative liability of $(11,151) thousand, reflecting the fair value of these hedging instruments - The company uses foreign currency forward contracts to mitigate foreign exchange rate fluctuations and interest rate swaps to align fixed-rate debt with its floating-rate investment portfolio[297][300] Foreign Currency Forward Contracts (March 31, 2025, in thousands) | Description | Notional Amount to be Purchased | Notional Amount to be Sold | Cumulative Unrealized Appreciation /(Depreciation) | | :---------- | :------------------------------ | :------------------------- | :----------------------------------------------- | | Foreign currency forward contract | $116,789 | €112,945 | $(5,452) | | Foreign currency forward contract | $5,142 | C$7,433 | $(32) | | Foreign currency forward contract | $5,142 | ¥789,671 | $(160) | | Foreign currency forward contract | $20,354 | £17,649 | $(2,424) | | Total | | | $(8,068) | Interest Rate Swaps (March 31, 2025, in thousands) | Description | Notional Amount | Fair Value | | :---------- | :-------------- | :--------- | | Interest rate swap (Fixed 2.7% / Floating 3-month SOFR +1.658%) | $350,000 | $(18,077) | | Interest rate swap (Fixed 7.1% / Floating 3-month SOFR +3.1255%) | $300,000 | $2,110 | | Interest rate swap (Fixed 6.34% / Floating 3-month SOFR +2.1920%) | $300,000 | $4,816 | | Total | | $(11,151) | Note 13. Commitments and Contingencies As of March 31, 2025, the company had $299.8 million in off-balance sheet unfunded commitments, a decrease from $311.4 million as of September 30, 2024. These commitments include $272.6 million for debt and equity financing to portfolio companies and $27.1 million for joint ventures. Approximately $252.0 million of the portfolio company commitments can be drawn immediately, with the remainder subject to specific milestones or restrictions. The company is not currently a party to any pending material legal proceedings Unfunded Commitments (in thousands) | Category | March 31, 2025 | September 30, 2024 | | :------- | :------------- | :----------------- | | To portfolio companies | $272,600 | $284,300 | | To joint ventures | $27,100 | $27,100 | | Total unfunded commitments | $299,763 | $311,361 | - Approximately $252.0 million of the commitments to portfolio companies can be drawn immediately, with the remaining amount subject to certain milestones or restrictions[304] - The company is not currently a party to any pending material legal proceedings[443] Note 14. Subsequent Events On April 28, 2025, the Board of Directors declared quarterly and supplemental distributions totaling $0.42 per share, payable on June 30, 2025. Additionally, on April 8, 2025, the Syndicated Facility was amended to reduce interest rate margins, decrease the facility size to $1.160 billion (while increasing the accordion feature to $1.50 billion), remove the Consolidated Interest Coverage Ratio covenant, and extend the reinvestment period and final maturity date to April 8, 2029, and April 8, 2030, respectively Distribution Declaration (April 28, 2025) | Distribution Type | Amount per Share | | :---------------- | :--------------- | | Quarterly | $0.40 | | Supplemental | $0.02 | | Total | $0.42 | - On April 8, 2025, the Syndicated Facility was amended to reduce interest rate margins, decrease the facility size from $1.218 billion to $1.160 billion, increase the "accordion" feature to $1.50 billion, and extend the reinvestment period and final maturity date to April 8, 2029, and April 8, 2030, respectively[309][431] - The amendment to the Syndicated Facility also removed the Consolidated Interest Coverage Ratio covenant[309][431] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Oaktree Specialty Lending Corporation's business, its operating environment, and a detailed analysis of its financial performance and condition. The company focuses on providing customized credit solutions to middle-market companies, with a strategy emphasizing situational lending, select sponsor lending, stressed sector/rescue lending, and public credit. Key financial results for the six months ended March 31, 2025, show a decrease in total investment income and net investment income, but also a significant reduction in net expenses due to fee waivers. The company's liquidity and capital resources are deemed sufficient, supported by cash, credit facilities, and recent equity issuances, including a $100.0 million private placement - The company's investment objective is to generate current income and capital appreciation by providing flexible financing solutions to companies with limited access to public or syndicated capital markets[325] - Current investment strategy focuses on situational lending, select sponsor lending, stressed sector and rescue lending, and opportunistic public credit investments[326] Key Financial Performance (Six months ended March 31) | Metric (in millions) | 2025 | 2024 | | :------------------- | :----- | :----- | | Total investment income | $164.2 | $192.0 | | Net expenses | $80.3 | $106.5 | | Net investment income | $83.4 | $85.6 | | Net realized losses | $(10.6) | $(15.1) | | Net unrealized depreciation | $(101.6) | $(50.3) | - Net expenses decreased by $26.1 million (24.6%) for the six months ended March 31, 2025, primarily due to a $15.9 million reduction in Part I incentive fees (net of waivers) and lower interest and management fees[371] - The company's liquidity and capital resources are sufficient, with $108.2 million in cash and cash equivalents, $1,097.5 million of undrawn capacity on credit facilities, and recent equity issuances including a $100.0 million private placement[383][386][396] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks, primarily valuation risk for illiquid investments and interest rate risk. Valuation risk arises from the use of management judgment and unobservable inputs for fair value determination, which may differ from actual realized values. Interest rate risk stems from a predominantly floating-rate debt investment portfolio (89.8% at fair value as of March 31, 2025) and floating-rate borrowings. A hypothetical 100 basis point increase in interest rates would result in an approximate $9.6 million annualized net increase in net assets from operations, while a 100 basis point decrease would lead to a $9.5 million net decrease - The company is subject to valuation risk due to the inherent uncertainty in determining the fair value of illiquid investments, which relies on management judgment and unobservable inputs[434] Debt Investment Portfolio by Interest Rate Type | Metric | March 31, 2025 | September 30, 2024 | | :----- | :------------- | :----------------- | | Floating rate debt investments (at fair value) | 89.8% | 88.4% | | Floating rate debt investments (at cost) | 89.5% | 88.7% | Hypothetical Annualized Net Increase (Decrease) in Net Assets from Operations due to Interest Rate Changes (in thousands) | Basis Point Change | Net Increase (Decrease) | | :----------------- | :---------------------- | | +250 | $23,945 | | +100 | $9,556 | | -100 | $(9,523) | | -250 | $(22,890) | Item 4. Controls and Procedures As of March 31, 2025, management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level. There were no material changes in internal control over financial reporting during the three months ended March 31, 2025 - As of March 31, 2025, disclosure controls and procedures were evaluated as effective at the reasonable assurance level[440] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2025[441] PART II — OTHER INFORMATION This section details legal proceedings, risk factors, equity sales, senior securities defaults, mine safety, other information, exhibits, and signatures Item 1. Legal Proceedings The company is not currently a party to any pending material legal proceedings - The company is not currently a party to any pending material legal proceedings[443] Item 1A. Risk Factors In addition to previously disclosed risks, the company highlights that existing or new tariffs could adversely affect its operations or those of its portfolio companies by increasing production costs or reducing product demand - Existing or new tariffs imposed on foreign goods or U.S. goods could adversely affect the company or its portfolio companies by increasing production costs or reducing demand for products[444] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[445] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None[446] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Not applicable[447] Item 5. Other Information During the three months ended March 31, 2025, none of the company's officers or directors adopted or terminated any Rule 10b5-1 trading arrangements - During the three months ended March 31, 2025, none of the company's officers or directors adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities intended to satisfy Rule 10b5-1(c) conditions[448] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various amendments to the Restated Certificate of Incorporation and Bylaws, the Eighth Supplemental Indenture for the 6.340% Notes due 2030, a Letter Agreement with Oaktree Fund Advisors, LLC, and certifications from the Chief Executive Officer and Chief Financial Officer - Key exhibits include amendments to the Restated Certificate of Incorporation and Bylaws, the Eighth Supplemental Indenture for the 6.340% Notes due 2030, and a Letter Agreement with Oaktree Fund Advisors, LLC[449] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002 are also filed[449] Signatures The report is duly signed on behalf of Oaktree Specialty Lending Corporation by Armen Panossian, Chief Executive Officer, and Christopher McKown, Chief Financial Officer and Treasurer, on April 30, 2025 - The report is signed by Armen Panossian, Chief Executive Officer, and Christopher McKown, Chief Financial Officer and Treasurer, on April 30, 2025[452]