Oaktree Specialty Lending (US:OCSL)2023-02-07 17:16Financial Data and Key Metrics Changes - The company reported adjusted net investment income (NII) of $0.61 per share, a 10% increase from $0.55 in the prior quarter, driven by higher total investment income that offset increased interest expense [24][70] - The net asset value (NAV) per share decreased to $19.63 from $20.38, primarily due to a special distribution and unrealized depreciation on public debt investments [27] - The company's leverage ratio increased to 1.24 times, but is expected to decrease to approximately 1.16 times post-merger with Oaktree Strategic Income II [74] Business Line Data and Key Metrics Changes - The company originated $250 million in new investment commitments in the first quarter, more than double the previous quarter, with 85% being first lien loans [28] - The weighted average yield on new debt investments was 13.1%, up from 9.9% in the previous quarter, indicating improved investment opportunities [28][102] - The company received $104 million from paydowns, sales, and exits, continuing to selectively reinvest proceeds into better risk-adjusted opportunities [29] Market Data and Key Metrics Changes - The overall corporate performance is challenged, with rising prices leading to demand destruction in some industries, resulting in a slowdown in growth rates [5][44] - The cost of borrowing has increased significantly, with a 300 basis point rise in SOFR impacting unhedged borrowers [7] - The company noted that while revenues are up, gross profit and EBITDA margins have remained flat to down, indicating pressure on profitability [44] Company Strategy and Development Direction - The company expects substantial benefits from the merger with Oaktree Strategic Income II, including increased scale and financial flexibility, with a pro forma asset base of over $3.3 billion [30] - The focus remains on maintaining a defensively positioned portfolio with strong credit quality, despite the potential for a recession due to slowing consumer spending and business investment [25][56] - The company aims to leverage its platform to source attractive deals with strong downside protections, emphasizing relative value in the market [54][56] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about elevated risks in the portfolio, particularly regarding defaults in broadly syndicated loans, while noting that defaults in direct lending may be muted due to the bilateral nature of lending [47] - The economic environment is mixed, with strong job growth but signs of slowing consumer spending, indicating potential recession risks [52] - Management remains cautious but confident in the ability to identify new investment opportunities while maintaining solid credit quality [55][56] Other Important Information - The company has a strong liquidity position with total dry powder of approximately $357 million, including cash and undrawn capacity on credit facilities [79] - The joint ventures generated cash interest income of $2.6 million, up from $2.2 million in the previous quarter, reflecting strong performance and rising interest rates [82] Q&A Session Summary Question: What is the outlook for credit quality in the current environment? - Management indicated that unlevered performance is generally flat to down, with elevated risks in the portfolio due to rising costs outpacing revenue increases [44][47] Question: How does the company view the current investment landscape compared to historical periods? - Management noted that non-sponsored deals are more bespoke and competitive dynamics have changed, with tighter loan-to-values and wider pricing compared to previous years [108][110] Question: What are the expectations for repayments in 2023? - Management expects repayments primarily from non-sponsored deals where borrowers have achieved strategic goals, while sponsored LBO transaction volume is likely to decline due to elevated borrowing costs [11][10]