Oaktree Specialty Lending: Plenty Of Reasons To Remain Bullish

Core Viewpoint - The recent quarterly earnings report for Oaktree Specialty Lending Corporation (OCSL) indicates that while the stock price has remained flat, the underlying business fundamentals remain strong despite some unfavorable one-off events [3][10]. Financial Performance - The adjusted net investment income (NII) for Q2 2024 was $0.56 per share, which is $0.01 lower than the previous quarter [3]. - The adjusted total investment income decreased by $700,000, primarily due to unfavorable timing of capital deployment and spread compression from a shift away from higher-yielding second liens [3]. - OCSL's non-accrual level improved from 4.2% in the prior quarter to 2.4% in Q2 2024, with no new non-accruals recognized during the quarter [3][4]. Investment Strategy - OCSL has successfully reduced its exposure to second lien structures from 16% in September 2022 to 5% as of Q2 2024, focusing more on first lien investments [3]. - New investment commitments totaled $396 million at a weighted average yield of 11.1%, slightly lower than the current portfolio yield due to a focus on defensive investments [4]. Leverage and Capital Structure - OCSL's leverage remains below the sector average, with an indebtedness of 107% compared to the sector average of 115% [4]. - The company funded new investments through retained cash generation and an additional share issuance of $46 million at an average 104% premium to NAV, which is beneficial for existing shareholders [4]. Dividend Coverage - The current dividend coverage stands at 102%, impacted by previous non-accruals and timing of repayments and fundings [4]. - A reduction in management fees to 1% as of July 1st is expected to positively influence adjusted NII and enhance dividend coverage [4]. Market Position - Despite challenges in adjusted NII, OCSL's fundamentals, including below-average leverage and a de-risked portfolio, present a favorable investment opportunity [11]. - The company has delivered positive total returns since the last analysis but has underperformed compared to the broader BDC market [10].