Financial Data and Key Metrics Changes - Fundings totaled $46 million, with exits and repayments at $81 million, resulting in net originations of negative $35 million [5] - Interest income remained unchanged at $21.3 million, while the weighted average portfolio yield declined to 12.6% due to a 36 basis point drop in average SOFR rates [6][10] - Net investment income was $11.2 million, unchanged from the previous quarter, with net realized gains of $7.7 million [6][11] - Total assets decreased to $777 million, with net assets declining by $2.3 million to $478 million, and NAV per share fell from $21.51 to $21.41 [11][12] Business Line Data and Key Metrics Changes - The yielding debt investments decreased by $20 million compared to the prior quarter end [5] - Non-earning asset investments remained unchanged at four companies totaling $53.7 million at cost [7] - The portfolio turnover did not materially impact the investment mix, with senior debt representing 71% of the fair value of the portfolio [6] Market Data and Key Metrics Changes - The company experienced a surge in portfolio liquidity events totaling $289 million, representing approximately 36% of the portfolio exited [8] - The current pipeline of expected fundings is healthy, expected to outpace anticipated repayments [8] Company Strategy and Development Direction - The company continues to focus on investing in growth-oriented lower middle market businesses with strong management [17] - The strategy includes supporting midsized private equity funds in buyouts and growth opportunities [17] - The company aims to increase leverage towards $1 billion in total assets under management while maintaining yield and leverage discipline [56] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the portfolio's resilience despite market volatility and widening credit spreads [21] - The company is optimistic about the performance of domestically focused businesses amid tariff impacts, noting advantages for responsive domestic service providers [24][30] - Management highlighted a healthy backlog of deals and a focus on domestic manufacturing to mitigate tariff risks [52] Other Important Information - Monthly distributions for May and June will be $0.165 per common share, with an annual run rate yield of about 7.8% [12][13] - The company completed the restructuring of its investment in EG's, restoring most exposure to earning asset status [7] Q&A Session Summary Question: How do you see the portfolio and NAV performing with both broadly syndicated loan and private credit spreads widening in April? - Management noted that they do not have syndicated loans and that their portfolio spreads remain favorable compared to the market [20][21] Question: How do you see SeaLink and RPM freight performing as tariffs impact shipping volumes? - Management indicated that domestically focused companies are adapting well to changes, with some businesses experiencing growth [23][24] Question: Is the EG's restructuring going to generate a realized loss for you? - Management anticipates a very small loss from the restructuring, with significant equity investment going forward [31] Question: Can you provide an update on the pipeline and its size relative to three months ago? - Management reported a healthy backlog with 8 to 10 deals in advanced stages, totaling approximately $100 million to $150 million [37] Question: Where do you see leverage going for the rest of the year? - Management aims to increase leverage towards 90% to 100% over the next few quarters, targeting $1 billion in total assets under management [56][60]

Core Insights - Hedge funds in the U.S. have aggressively shorted private lending institutions, earning $1.7 billion in paper profits this year [1] - The largest direct lending institutions are facing significant pressure from short-sellers amid economic slowdown and deteriorating borrower conditions [1][2] Group 1: Borrower Financial Health - The credit quality of borrowers in the private credit sector is deteriorating, raising concerns about the valuation of loans held by these institutions [2] - The International Monetary Fund (IMF) has warned that the decline in borrower credit quality has not yet been reflected in the loan valuations of these institutions [2] - Increased competition among private credit funds is compressing loan returns, with many funds lending to weaker companies that are more vulnerable during economic downturns [2] Group 2: Valuation Concerns - There are significant concerns regarding the overvaluation of direct loans, with only 40% of private credit funds using third-party assessments [3] - Evidence suggests that direct lending institutions may be concealing problem loans and delaying defaults, leading to inflated loan valuations and fund returns [3] - The rise of Payment-in-Kind (PIK) loans, where borrowers pay interest with equity or debt instruments instead of cash, is contributing to inflated valuations [3]

Core Viewpoint - Concerns about further economic deterioration have led U.S. private credit investors to sell assets at significant discounts, with some transactions occurring at half the asset's face value [1] Group 1: Discount Trading and Investor Behavior - Private credit market investors are selling fund shares at notable discounts, starting from 10% and dropping to as low as 50% [2] - The current sell-off is characterized as a proactive risk-hedging behavior by investors rather than a result of forced liquidations or severe liquidity crises [2] - There has been no significant deterioration in credit quality observed so far, but concerns about expanding discounts may arise as economic conditions worsen [2] Group 2: Credit Quality Concerns - The U.S. private credit market has rapidly expanded to a size of $1.6 trillion, raising concerns about asset quality during economic downturns due to a relatively lax regulatory environment [2] - Issues with "loose underwriting" in private credit loans could lead to high single-digit default rates for high-yield debt and potentially double-digit default rates for private credit [2] Group 3: Market Conditions and Strategic Positioning - The current situation is viewed as more severe than during the COVID-19 pandemic, primarily due to higher inflation pressures that could amplify economic shocks [4] - The potential economic downturn is compared to the bursting of the internet bubble, with expectations of a similarly severe impact [4] - Oak Tree Capital is cautiously positioning itself in the credit market, maintaining liquidity to capitalize on larger investment opportunities as they arise [4]