Oaktree Specialty Lending (US:OCSL)2022-11-15 19:16Financial Data and Key Metrics Changes - For fiscal year 2022, adjusted net investment income (NII) was $0.71 per share, an increase from $0.64 in fiscal 2021, marking the highest annual level under Oaktree's management [10][11] - The quarterly adjusted NII for Q4 was $0.18 per share, up from $0.17 in the previous quarter, while net asset value (NAV) per share decreased by 1.5% from the prior quarter to $6.79 [14][37] - The Board increased the quarterly dividend by 6% to $0.18 per share, representing a 16% increase from the previous year and nearly 90% higher than pre-pandemic levels [12][13] Business Line Data and Key Metrics Changes - The company originated $97 million in new investment commitments in Q4, with a yield on new debt investments at 9.9% [15][34] - The portfolio consisted of $2.5 billion at fair value across 149 companies, with 87% invested in senior secured loans [30] - Median portfolio company EBITDA increased to approximately $130 million, up from $128 million in the prior quarter [32] Market Data and Key Metrics Changes - The company reported no investments on nonaccrual, indicating excellent credit quality [39] - The leverage in the portfolio remained steady at 5 times, with a weighted average interest coverage ratio declining slightly to 2.7 times due to rising base rates [33] Company Strategy and Development Direction - The company is focused on navigating unsteady markets with a cautious approach, selectively investing in both sponsor and non-sponsor backed markets while maintaining credit quality [27][29] - A merger agreement with Oaktree Strategic Income II, Inc. is expected to create a larger BDC with over $3 billion in total assets, improving trading liquidity and access to debt capital markets [18][20] Management's Comments on Operating Environment and Future Outlook - Management highlighted the challenges posed by high inflation, tightening monetary policy, and slowing consumption, while noting that credit quality remains strong [22][26] - The company expects continued positive impacts on earnings from rising interest rates, with 86% of the debt portfolio in floating rate investments [39][49] Other Important Information - The company declared a special distribution of $0.14 per share due to increased taxable income from foreign exchange hedge positions and taxable equity gains [13] - The company has ample liquidity with total dry powder of approximately $524 million, including $24 million in cash and $500 million in undrawn credit facilities [43] Q&A Session Summary Question: Investment landscape and leverage strategy - Management indicated that cautious navigation of the markets led to repayments and selective redeployment of capital, with a substantial amount of new deal flow in October [55][57] Question: Increase in PIK income - The increase in PIK income was attributed to the origination of new investments, particularly in life sciences, rather than amendments [58][59] Question: Pipeline and yield on new private deals - The pipeline appears strong with attractive pricing, and the mix of sales versus repayments was approximately 75% repayments and 25% sales [62][65] Question: Joint ventures and leverage - Management noted that leverage in joint ventures increased due to purchasing assets at attractive discounts, but future leverage levels remain uncertain [66][68] Question: Weighted average yield on new debt commitments - The lower yield on new debt commitments was attributed to borrower-specific factors and the purchase of large hung bridge loans, which typically yield lower than private loans [69][71] Question: Operating environment for portfolio companies - Companies are facing rising costs but are generally managing well, with revenue increases driven by higher prices rather than volume [75][78] Question: Special dividend distribution - The special dividend was a one-time payout to return capital to shareholders and avoid excise tax, calculated based on taxable income for the year [96][98]