Oaktree Specialty Lending: A Buying Opportunity With A 13% Yield

Core Viewpoint - Oaktree Specialty Lending is facing increased selling pressure due to loan performance issues, leading to a significant rise in the non-accrual percentage, but the company is focusing on a first lien strategy to strengthen its portfolio while maintaining its dividend with net investment income [1][3][12]. Loan Performance Issues - The non-accrual percentage for Oaktree Specialty Lending reached 3.7% in the June quarter, reflecting a 1.3 percentage point increase quarter-over-quarter, with eight debt investments classified as non-performing [6][8]. - The company made $302 million in new first lien investments and $3 million in second lien commitments during the third fiscal quarter, with a total of 85% of investments focused on first and second lien debt [4][6]. Dividend Sustainability - Oaktree Specialty Lending generated $0.55 per share in adjusted net investment income, which was sufficient to cover its $0.55 per share dividend, resulting in a distribution coverage ratio of 100% for Q3'24, down from 102% in the previous quarter [8][10]. - Management has adjusted the base management fee structure, reducing it from 1.50% to 1.00%, which is expected to add $0.03-$0.04 per share each quarter to net investment income, providing a cushion for the dividend [11][15]. Valuation and Market Position - The company is currently trading at a price-to-NAV ratio of 0.92X, below its long-term average of 1.02X, indicating a potential opportunity for income investors [12][15]. - If Oaktree Specialty Lending can avoid further deterioration in its balance sheet and loan quality, it could revalue to net asset value within the next twelve months, suggesting an 8% upside potential [12][15].