Oaktree Specialty Lending (OCSL) - 2026 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Adjusted Net Investment Income for Q1 2026 was $36.1 million, or $0.41 per share, up from $35.4 million or $0.40 per share in the prior quarter [4][19] - NAV per share decreased to $16.30 from $16.64 in the previous quarter due to unrealized depreciation on certain investments [19] - Adjusted total investment income decreased to $74.5 million from $76.9 million in the prior quarter, primarily due to lower interest income [19][20] Business Line Data and Key Metrics Changes - New funded investments totaled $314 million, up from $220 million in the prior quarter, reflecting a 42% sequential increase [6][16] - Non-accruals represented 3.1% of the total debt portfolio, stable sequentially and down nearly 85 basis points year-over-year [7][18] - The weighted average yield on debt investments was 9.3%, with first lien senior secured debt comprising 85% of the total portfolio [15][21] Market Data and Key Metrics Changes - Current trends in private credit show a bifurcation in the economy, with companies of scale having ample access to capital while struggling companies face limited access [9] - Spreads in private credit have bottomed out at SOFR +450-475 basis points, with expectations for stability in 2026 [10] - The median portfolio EBITDA increased from $150 million to $190 million sequentially, driven by new originations in larger companies [30] Company Strategy and Development Direction - The company remains focused on disciplined capital deployment into income-generating assets and reducing non-accruals to improve earnings power [5][6] - Oaktree is prioritizing loans to businesses with resilient models and defensible market positions, particularly in the software sector [10][12] - The company is monitoring the impact of AI on private credit and is cautious about potential disruptions in the software industry [11][38] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding middle-market M&A activity improving over the year, despite current lower volumes [9] - The company is focused on maintaining strong alignment with shareholders while navigating an evolving credit landscape [8] - Concerns were raised about the long-term refinanceability of loans in the software sector due to potential AI disruptions [38][39] Other Important Information - The company ended the quarter with over $576 million in available liquidity, including $81 million in cash [21][22] - The joint ventures held $511 million of investments, generating ROEs of 12% in aggregate [22] Q&A Session Summary Question: Can you provide insight into the portion of the portfolio that is underperforming? - Management indicated that underperforming assets include non-accruals and positions trading below par, with most below-par loans being public positions [24][25] Question: What drove the increase in median portfolio EBITDA? - The increase was primarily driven by new originations funded in the fourth quarter, which were larger companies, contributing to a mix shift [30] Question: Can you discuss the unrealized appreciation and markdowns in the quarter? - Pluralsight was the largest driver of markdowns, accounting for about 38% of the total mark, with some smaller marks in other private positions [32] Question: How is the company characterizing top-line growth and EBITDA trends in the software sector? - Management noted that it is too early to see performance degradation in software names, but concerns exist regarding long-term refinanceability due to AI risks [36][38]