Oaktree Specialty Lending (US:OCSL)2022-11-14 23:51Merger and Investment Strategy - The company entered into a Merger Agreement with Oaktree Strategic Income II, Inc. on September 14, 2022, which involves a two-step merger process[21]. - Oaktree, as the external adviser, manages the company's day-to-day operations and provides investment advisory services under the Investment Advisory Agreement[22]. - The company has invested over $31 billion in more than 500 directly originated loans since 2005, indicating a strong focus on proprietary deals[34]. - The investment strategy emphasizes identifying private lending opportunities, particularly in underserved markets, with a disciplined portfolio management approach[37]. - The company aims to invest at least 70% of its total assets in U.S. companies, focusing on those with resilient business models and strong fundamentals[42]. - The investment professionals employ a fundamental, value-driven opportunistic approach to credit investing, leveraging proprietary information and relationships[31]. - The company targets investments with strong credit protections, including covenants that minimize the risk of capital loss[42]. - The investment process includes sourcing opportunities through a network of advisers, sponsors, and banks, enhancing access to proprietary deal flow[44]. - The company plans to exit investments within three to eight years through various strategies, including repayment or sale of the company[42]. Financial Performance and Portfolio Composition - As of September 30, 2022, 95.0% of the portfolio consisted of debt investments, with 86.9% being senior secured loans[49]. - The company has funded approximately $165.5 million to SLF JV I, with $144.8 million from the company as of September 30, 2022[50]. - The Glick JV received approximately $84.0 million in aggregate commitments, with $73.5 million funded by the company as of September 30, 2022[52]. - The investment in SLF JV I was approximately $117.0 million at fair value as of September 30, 2022[51]. - The company prioritizes managing risk by monitoring each portfolio company and making hold or exit decisions based on credit events[48]. Fee Structure and Incentives - The base management fee is calculated at an annual rate of 1.50% of total gross assets, with a reduced rate of 1.00% for assets exceeding 200% of net asset value[57]. - The incentive fee on income is calculated quarterly, with a preferred return rate of 1.50% on net assets[58]. - The incentive fee is calculated as 17.5% of realized capital gains, net of capital losses and depreciation, starting from the fiscal year ended September 30, 2019[62]. - For a pre-incentive fee net investment income of 1.80%, the incentive fee calculated is 0.30%[64]. - For a pre-incentive fee net investment income of 2.925%, the total incentive fee amounts to 0.5119%[65]. - Cumulative realized capital gains over seven years total $28 million, with various capital gains fees calculated based on this amount[69]. - The capital gains fee for Year 2 is $1.4 million, based on $10 million realized capital gains[69]. - The capital gains fee for Year 5 is $1.75 million, based on $22 million cumulative realized capital gains[69]. Regulatory Compliance and RIC Status - The company has elected to be treated as a Regulated Investment Company (RIC) and must distribute at least 90% of its investment company taxable income to avoid corporate-level taxes[91]. - To maintain RIC status, the company must meet specific income and asset diversification requirements, including deriving at least 90% of gross income from qualifying sources[95]. - The company is subject to a 4% federal excise tax on certain undistributed income unless timely distributions are made[93]. - The Investment Company Act requires a majority of the company's directors to be independent and imposes restrictions on transactions with affiliates[100][101]. - The company may face challenges in making distributions necessary to satisfy the Annual Distribution Requirement due to debt financing and asset coverage ratio requirements[97]. - If the company fails to qualify as a RIC, all taxable income will be subject to corporate tax rates, impacting stockholder distributions[99]. Interest Rate Risk Management - As of September 30, 2022, 86.5% of the debt investment portfolio (at fair value) bore interest at floating rates, down from 91.5% in the previous year[427]. - A hypothetical 250 basis point increase in interest rates would result in a net increase in net assets of $27,234 thousand[428]. - A hypothetical 250 basis point decrease in interest rates would lead to a net decrease in net assets of $23,693 thousand[429]. - The company regularly measures exposure to interest rate risk and assesses the need for hedging transactions[429]. - The company’s interest rate sensitive assets and liabilities are compared to manage interest rate exposure effectively[429].