Oaktree Specialty Lending Q1 Earnings Call Highlights

Core Insights - Oaktree Specialty Lending (OCSL) reported a solid start to fiscal 2026, with adjusted net investment income (NII) rising to $36.1 million or $0.41 per share, compared to $35.4 million or $0.40 per share in the prior quarter, indicating stable earnings despite lower base rates [2][4] - The company declared a quarterly cash dividend of $0.40 per share, fully covered by earnings, reflecting a commitment to returning value to shareholders [1][4] Financial Performance - Adjusted total investment income decreased to $74.5 million from $76.9 million in the previous quarter, primarily due to lower interest income from reduced reference rates [1] - Net expenses decreased modestly, aided by a $4 million reduction in Part I incentive fees [1] - Net asset value (NAV) per share fell to $16.30 from $16.64, largely due to markdowns, with Pluralsight being the largest detractor [4][11] Portfolio Deployment and Metrics - New funded investments totaled $314 million, increasing the portfolio size to approximately $2.95 billion, with a weighted average yield on debt of about 9.3% [4][5][6] - Non-accruals represented 3.1% of the debt portfolio, with management focused on reducing these and reinvesting proceeds [3][8] - The average position in the portfolio represents less than 1% of fair value, with no single position exceeding 2% [6] Market Conditions and Strategy - Private credit conditions reflect a bifurcation in the economy, with strong companies retaining access to capital while weaker ones face challenges [12] - Management believes private credit spreads have bottomed at SOFR plus 450 to 475 basis points, with potential for stability in 2026 [13] - The company has emphasized a disciplined approach to payment-in-kind (PIK) interest, which represented 6.3% of adjusted total investment income in the quarter [14] Software and AI Focus - Software investments accounted for approximately 23% of the portfolio, with a focus on high-switching-cost providers and a coherent AI roadmap [15] - The firm has become more selective in its software underwriting, adding criteria to assess risk related to AI [15][16] Liquidity and Leverage - OCSL ended the quarter with approximately $576 million in liquidity, including $81 million in cash and $495 million in undrawn revolving credit capacity [17] - Net leverage increased to 1.07x from 0.97x, reflecting higher deployment, while the long-term target leverage range remains between 0.9x and 1.25x [17]