Oaktree Specialty Lending (OCSL) - 2025 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents Oaktree Specialty Lending Corporation's unaudited consolidated financial statements, detailing assets, operations, and cash flows, reflecting decreases in total assets and net investment income Consolidated Statements of Assets and Liabilities Consolidated Statements of Assets and Liabilities Highlights (in thousands USD) | Metric | June 30, 2025 (unaudited) | September 30, 2024 | | :--- | :--- | :--- | | Total investments at fair value | $2,809,377 | $3,021,279 | | Total assets | $2,964,212 | $3,198,341 | | Total liabilities | $1,487,743 | $1,710,530 | | Total net assets | $1,476,469 | $1,487,811 | | Net assets per common share | $16.76 | $18.09 | - Total assets decreased from $3.20 billion at September 30, 2024, to $2.96 billion at June 30, 2025, primarily due to a reduction in the fair value of investments and lower credit facilities payable[10] Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands USD, except per share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2025 | Nine Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $75,271 | $94,966 | $239,486 | $286,980 | | Net expenses | $41,734 | $50,391 | $122,051 | $156,849 | | Net investment income | $33,481 | $44,575 | $116,838 | $130,131 | | Net increase (decrease) in net assets from operations | $38,352 | $1,120 | $9,342 | $20,992 | | Earnings (loss) per common share | $0.44 | $0.01 | $0.11 | $0.26 | - Total investment income for the three months ended June 30, 2025, decreased to $75.3 million from $95.0 million in the prior-year period, primarily due to lower interest income[13] - Net investment income also decreased to $33.5 million from $44.6 million[13] Consolidated Statements of Changes in Net Assets - For the nine months ended June 30, 2025, net assets decreased by $11.3 million[15] - This was driven by distributions to stockholders of $123.6 million, which exceeded the $9.3 million net increase from operations and $102.9 million net increase from capital share transactions (primarily a $100 million private placement)[15] Changes in Net Assets (Nine Months Ended June 30, 2025, in thousands USD) | Description | Amount | | :--- | :--- | | Net assets at beginning of period | $1,487,811 | | Net increase from operations | $9,342 | | Distributions to stockholders | ($123,631) | | Net increase from capital share transactions | $102,947 | | Net assets at end of period | $1,476,469 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Nine Months Ended, in thousands USD) | Activity | June 30, 2025 | June 30, 2024 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $227,038 | ($76,433) | | Net cash provided by (used in) financing activities | ($229,115) | $38,462 | | Net increase (decrease) in cash | $1,256 | ($38,225) | - For the nine months ended June 30, 2025, net cash from operating activities was positive $227.0 million, a significant shift from a use of $76.4 million in the prior-year period[17] - This was primarily due to higher proceeds from sales and repayments of investments ($871.8 million) compared to purchases ($739.4 million)[17] - Financing activities used $229.1 million in cash, driven by net repayments of borrowings under credit facilities ($200.0 million) and distributions paid ($114.1 million), partially offset by proceeds from a private placement ($100.0 million)[17] Consolidated Schedule of Investments Portfolio Investment Summary (June 30, 2025, in thousands USD) | Investment Type | Cost (in thousands) | Fair Value (in thousands) | % of Net Assets | | :--- | :--- | :--- | :--- | | Control Investments | $377,134 | $230,697 | 15.6% | | Affiliate Investments | $59,044 | $55,978 | 3.8% | | Non-Control/Non-Affiliate Investments | $2,576,411 | $2,522,702 | 170.9% | | Total Portfolio Investments | $3,012,589 | $2,809,377 | 190.3% | - As of June 30, 2025, the total investment portfolio had a fair value of $2.81 billion, down from $3.02 billion at September 30, 2024[10][37] Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's business overview, economic environment, and detailed financial analysis, highlighting decreased investment income and expenses, while maintaining sufficient liquidity - Management notes that global financial markets have experienced increased volatility due to higher inflation and elevated interest rates, but as inflation has eased, the Federal Reserve has relaxed monetary policies[334] - The company believes attractive risk-adjusted returns can still be achieved in the middle market[334] - Oaktree's investment focus is on situational lending, select sponsor lending, stressed sector/rescue lending, and public credit opportunities, particularly during market dislocations[332] Portfolio Composition - During the nine months ended June 30, 2025, the company originated $752.3 million of investment commitments and received $881.2 million of proceeds from prepayments, exits, and sales[355] Portfolio Composition by Type (Fair Value %) | Investment Type | June 30, 2025 | September 30, 2024 | | :--- | :--- | :--- | | Senior secured debt | 83.40% | 85.21% | | Debt investments in the JVs | 5.69% | 5.35% | | Subordinated debt | 4.92% | 3.64% | | Common equity and warrants | 2.85% | 2.85% | | Preferred equity | 2.61% | 2.20% | | LLC equity interests of the JVs | 0.53% | 0.75% | - The portfolio's largest industry concentration by fair value as of June 30, 2025, is Application Software at 18.03%[357] The Joint Ventures - The company co-invests through two joint ventures: Senior Loan Fund JV I, LLC (SLF JV I) and OCSI Glick JV LLC (Glick JV)[354] Joint Venture Investment Summary (June 30, 2025, in millions USD) | Joint Venture | Company's Investment (Fair Value) | Portfolio Size (Principal) | Number of Borrowers | | :--- | :--- | :--- | :--- | | SLF JV I | $127.5 million | $339.1 million | 52 | | Glick JV | $47.1 million | $111.4 million | 42 | Results of Operations - Total investment income decreased by 20.7% for the third quarter and 16.5% for the nine months ended June 30, 2025, compared to the prior-year periods[373][374] - This was primarily due to lower interest income resulting from decreases in reference rates, the impact of certain investments placed on non-accrual, and a smaller average investment portfolio[373][374] - Net expenses decreased by 17.2% for the third quarter and 22.2% for the nine months ended June 30, 2025, compared to the prior-year periods[375][376] - The decrease was mainly driven by a significant reduction in Part I incentive fees due to the implementation of a total return hurdle, as well as lower management fees and interest expense[375][376] - For the nine months ended June 30, 2025, the company recorded net realized losses of $24.0 million and net unrealized depreciation of $83.1 million[380][383] Financial Condition, Liquidity and Capital Resources - As of June 30, 2025, the company had $79.8 million in cash and cash equivalents and $650.0 million of undrawn capacity on its credit facilities[389] - The company's asset coverage ratio was 199.86% as of June 30, 2025, and its net debt-to-equity ratio was 0.93x[385][386] - Total unfunded commitments were $305.3 million as of June 30, 2025, composed of $278.2 million to portfolio companies and $27.1 million to the JVs[391] - On February 27, 2025, the company issued $300.0 million of 6.340% unsecured notes due 2030[233] - The 3.500% notes due 2025 matured and were repaid in February 2025[245] - On May 14, 2025, the company repaid all outstanding borrowings under the OSI2 Citibank Facility, which was then terminated[229] - This resulted in an acceleration of $3.1 million in deferred financing costs[230] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are valuation and interest rate fluctuations, with a significant portion of its debt portfolio exposed to floating rates - The company's primary market risks are valuation risk for investments without a readily available market price and interest rate risk affecting both funding costs and investment income[439][440][441] Interest Rate Sensitivity Analysis (as of June 30, 2025, in thousands USD) | Basis Point Change | Approximate Annualized Net Change in Net Assets (in thousands) | | :--- | :--- | | +200 | $19,084 | | +100 | $9,542 | | -100 | ($9,356) | | -200 | ($18,090) | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2025[446] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any pending material legal proceedings - As of the report date, the company is not a party to any material legal proceedings[449] Item 1A. Risk Factors This section highlights a new risk factor regarding the potential adverse effects of tariffs on the company or its portfolio companies - A new risk factor has been added, stating that existing or new tariffs could adversely affect the company or its portfolio companies by increasing costs or reducing demand[450] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities[451] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities - There were no defaults upon senior securities[452] Item 5. Other Information No officers or directors adopted or terminated Rule 10b5-1 trading plans during the three months ended June 30, 2025 - No officers or directors adopted or terminated any Rule 10b5-1 trading arrangements during the quarter[454] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data