OCSL - Earnings call transcript Q2 2018 | Oaktree Specialty Lending Corporation

Due to licensing restrictions, you must log in to view earnings call transcripts.

Operator

Welcome and thank you for joining Oaktree Specialty Lending Corporation’s Second Quarter 2018 Conference Call. Today’s conference call is being recorded. [Operator Instructions] Now, I would like to introduce Michael Mosticchio of Investor Relations, who will host today’s conference call. Mr. Mosticchio, you may begin.

Michael Mosticchio

results. welcome today’s of Specialty call second XXXX and joined who Lending operator quarter for us to financial you, to you all have Corporation’s Thank discuss Oaktree

morning Our and this earnings can on website of accessed Investors be we at release, issued oaktreespecialtylending.com. call, the presentation that which slide accompanies section our the this

Chief Pendo. Our are Oaktree and and Edgar Officer, Investment Financial speakers Specialty Officer Officer Matt today Lee; Mel Treasurer, Operating and Carlisle; Chief Lending’s Chief Officer, Chief Executive

We to their happy will remarks. prepared following be questions your take

Before our our we with forward-looking our you and begin, I things, want views operating future to statements comments remind that performance. respect current other financial include today among results to, will reflecting

that to Investors in of that Oaktree the should Oaktree its Lee. fund. and note the encourages Edgar call turn interest revise duty forward-looking to shares Lending of others Accordingly, to uses corporate filings nothing statements you our any our that media With Investors refer others Specialty the could on Executive like review to to statements. to a update no would the or We also Please information. call offer Officer, any now like for for or I actual purchase implied would any it that, remind from offer and an announce over to information to sell Our its results website the I this differ reason. any SEC company of materially corporate website. Chief to undertake in forward-looking the in material constitutes these an section discussion factors. investors, those solicitation or expressed

Edgar Lee

with I on Then Mel and second to our results. an efforts overview portfolio Carlisle of quarter Mike repositioning portfolio. earnings will call. you, review will financial investment an and everyone our update our welcome our Thank begin

provide on dividend will Pendo Matt our company’s return our discuss equity. enhance to on the an and update Finally, initiative

the can to equity. significant Oaktree’s significant executing relationship, progress approach to quarter and part portfolio on the results in our extensive pleased attributed plan the our with investing. and reposition including This on made be record flexible we of platform, track return credit a scale are We second advantages to have enhance and

Our key X Page of noted the earnings quarter are for accomplishments on the presentation.

credit our the with of NAV by quarter. stable from First, or increasing the quality $X.XX remains portfolio X% first

non-core Second, investments during our monetizing quarter. million we the to continue $XXX reduce

end We investments expect decline anticipate of next non-core our to based monetizations one-third will quarter the portfolio about XX. June will before of on we by the occur

XX% quarter, million originating, investments are number In $XXX of the originated the of discuss idea share. made other fourth, alongside we net these which new per provide of last a during by more order we were transactions improved in will of from earnings income detail we one what $X.XX increased And funds. of the as Third, to investment to an Oaktree quarter portfolio shortly.

continue in Matt environment, was to and December which debt floating on primarily loans. to in majority discuss up XX% This yielding yield operating Turning was into quarter higher of presentation, provide rate billion improving lien to first performed portfolio XX% the majority companies a of portfolio Page rates the later. increase as portfolio of interest investments securities XX. value our weighted average is rotation rising X% due fair March nearly loans trends. of March portfolio Overall, the a of from X.X%, summary which from in well investments our X The of of rate as earnings the and we lien at second XX. were our a the portfolio or exhibit interest continued with in second $X.X was At debt amount stable our to instruments, will rising of loans. The debt that benefit will XX, that in XX% had

has continue we the to manage Last and managing risk more from that diversifying our I portfolio into rotating since we to portfolio concentrations, to segmented investors began much the order investments am core progress OCSL, non-core perspective. pleased industry in help track And We quarter, our diversification respect with our portfolio. become portfolio. industry by balanced an in

the Turning the value. the X was portfolio at of $XXX of Page non-core during or quarter earnings core XX% fair increased to of million XX% the by remaining investments. The to presentation investments past XX% portfolio comprised of total

monetized $XXX we During the investments. non-core million quarter of

these most value exited previous marks. were at fair of or above investments Importantly, their

a robust provide before earnings the additional expect of Page investments on investments. significant non-core On will X XX. We environment non-core credit of the to details monetize June amount to the we continue us enable performing presentation

OCSL’s portfolio March increasing we XX, classify and and long-term quarter, the have to of they align them Nevertheless, was to $XXX last of low well, with non-core do and trends. thus Similar investments. amounts objectives generally revenue million these performing leverage in are stable not as investment investments performing relatively are non-core. exhibiting EBITDA of As

performing quarter equity limited investments partnership were non-core $XX at Our million and end.

and by We these XXXX. a monetize end some expect the are investments paths to meaningful of exit portion exploring currently of to of several these positions

sales over X, million non-core teams to was investments, quarter. With the asset dialogue monetizations the Turning the continue exit XX% of including to that advisors restructurings, during options of to opportunities. we the XX% during sheet with management underperforming maintain to their place quarter investments $XXX of financial the Page ongoing and at discuss fair and other result an balance remaining this portfolio by respect decreased to took value, reduction

these investments, And $XXX OCSL invested first several lien million instances Page highlighted loans. new XX% we alongside funds. the on other Oaktree As X, in quarter during in the of investments were originated of

quarter to of A fund in for the that OCSL’s loan credits a profiles. This a priced Oaktree a the mentioned As well-known with new similar in meaningfully cable the is million was issued new lien included allocation to our which of of received company of of we earlier network. one originations lenders. loan the and other the was acquisition structuring I transaction. and media to attractively loan funds plus million was syndicated used number X.XX%, risk $XXX at first yields transaction a portion was comparable loan than for $XX the fees participated higher LIBOR also

we We underscores covenant transactions. to believe a this were strong of ability Additionally, to large significant package. established Oaktree deal with transaction able structure our relationships advantages the and negotiate including our the originate and platform sources

team our through in market. origination as bank the origination additions strategic that We platform joint capabilities as direct operates also with well to an lending expanded venture leading middle our new a a credit new investment

update seeing to in the we I in comments lending and to the are an market. highly on what will covenant turn in Similar prior I for quarters, Before deterioration call loan spread competitive, environment to over see continue structures market Mel, compression. remains we middle provide our the

in if sacrificing pace are capital maintain protecting Some or volume point these places the across able And our we over historical that I meaningful In Financial the lender our lenders the Treasurer turn cycle given investors’ moderating some investments like detail. deployment. by results the are track that and yields. to short-term market demonstrated capital even our generate to pursuing dynamics, will financial to The Carlisle, or of in portfolio of our now Officer to to yields core or riskier standards at future requires cycles. Mel believe it credit advantage our market environment. likely the event disruption Despite is emphasis which record current investment loan shift arise in philosophy, long correction opportunities to back friendly our sticking order on would take investing Chief significant a to a credit will and we that occurs, more more discuss of be we call in a

Mel Carlisle

Thank you, Edgar.

from million the Total increase quarter offset OCSL’s $X This quarter. primarily income Net in improving higher OID by with quarter declined lower quarter. average by an originations. second quarter facility lower $XX.X interest operating $XX.X an an forward. were million, capital higher primarily reflecting higher with acceleration. expenses from due average Net were income the expense dividend and of last was million due the quarter. partially revolving cost are the for our last for credit up financial in diluted with increase partially fees in basic quarter, sequentially is expense Interest offset more and income per to These professional $XX.X million from decline run-rate primarily due investment increases by performance This due well rising approximate up borrowings in in investment or as lower share as in fee due fee expenses was by associated million lower income $XX.X loan was under December to for borrowings. down going in to performance, lower income million $XX.X quarter $XX.X in improved portfolio lower second million, share. rates. partially income expected million pleased the $X.XX prepayments reflecting loan the incentive are quarter from primarily the and This G&A or decline our and interest fees to to $X.XX interest offset per was line income expenses sequentially $X.X We quarter

X investments credit loan December depreciation gains payoffs for was the the December on Net at non-accrual unrealized portfolio on occurred marks. at to were that at par our No our in investments investments or new portfolio reflecting quarter our value in XX, added turning X.X% were fair XX and sold non-accrual of quarter that of quality the million Realized above $X.X above status. debt were Now, their quarter. second were $XXX,XXX. representing

factors share As at the per Edgar provided in $X.XX On key as NAV. per led that compared December the bridge XX. that value asset to presentation end of $X.XX XX Page we a have explains mentioned, increase at quarter earnings net increased the to share

our At resulting net net X.X%. $X.XX to of quarter of gains investment contributed debt average total XX, dividend million contributed outstanding income weighted a This $XXX increase realized $X.XX Net by March interest to offset NAV. our $X.XXX was was at rate $X.XX. Second partially NAV. in

facilities ratio lower on times December million At facility. million cash undrawn capacity and we primarily of Our quarter equivalents to loans. X.XX times $X our XX companies had credit delayed the quarter facility. end revolving decreased with draw at $XXX of end, $XX.X term borrowings our on were were million reflecting at the at million X.XX March credit commitments Unfunded to $XXX portfolio cash credit from or due and outstanding debt equity to XX

investments facility continue a capacity. optimize with $XX the X.XX turning debt-to-equity JV $XX and venture, times new had our assets $XXX March during million of a the total JV the of to of joint at undrawn Now, ratio credit to of XX, Kemper across At X companies we million million, a quarter.

on update turn like call an to equity. the Officer to over our on our Matt to Operating to would enhance Chief initiatives return and I dividend our Now, the company’s Pendo, discuss provide

Matt Pendo

Thank you, Mel.

begin first the dividend. with me Let

As dividend you our we is dividend and income increase in in release, from the share saw earned investment XX% of quarter. today. This press quarter’s the approximately XX% net a per a $X.XXX second declared last represents

on portfolio. we the pay As quarter, earnings plan mentioned to by dividends the last we generated based

pleased financial quarter-to-quarter are that with increase our continue still we the quarter, portfolio anticipate early and this trajectory our efforts. we vary improving from in upward process While results our are we and in results an repositioning as dividend the likely will

on Now, we discussed an company’s to return update initiatives on provide equity. increase last the I will the quarter

broadly we plans into higher loans lower yielding at rotate to First, yielding Oaktree. and loans by discussed originated our syndicated

of $XX we so of impact realized until million exited $XX that to the second exposure be quarter, quarter. in full the loans lower Most late occurred reducing end March, million the During at of won’t quarter. the yielding activity next our

In reduced equity, we March partnership of including to investments plan by the generating and reduce $XX our these to we loans. interests non-accrual $XXX limited categories million. investments of quarter, Second, balance non-income million

the are monetize by ways investments these meaningful continuing of generating exit We expect of the non-income to end year. portion a explore to to and positions

expected we leveraging Oaktree expenses. to cost one-time Third, and from operational realize savings platform reducing scaled

March that held given primarily we deployed professional January. million fees rates our subsidiaries our During over benefit at finally, expenses G&A in floating un-invested The of we floating Fourth, our majority rate won’t the will to million. rising interest cash the investments continue expectation the end additional increases XX% debt this portfolio. Currently reset at $XX from to and until realized portfolio expect the loans continue consists of the quarter, the from of increase of of of rate next impact rate and benefit so be LIBOR we to full And SBIC $X quarter investment is declined by year. quarter.

ROE forward. Our our to to has well team and executed going progress we quarter on initiatives show continued during enhance expect the

recent the our enabling leverage legislation on discuss light ratios. in to leverage want I Now, the view BDCs of to increase

the leverage As of ended Mel the X.XXx. mentioned, we quarter with ratio

between credit with leverage second and and we lien mix of our maintain and comfortable ratio expect the a current X.XXx. and first are environment, to loans and target X.XXx expected Given current our leverage

As we last or are take repositioning such in process is In approve we our began in we the we while don’t summary, anticipate October. leverage done, asking at work increase made any this be to lending and since early our are there shareholders progress time. Board are the encouraged to to we specialty happy managing your Oaktree that, have questions. With by still

please operator, up open So the lines.

Operator

you. Thank

And now come We Wells from our of the begin Fargo. will Instructions] first Jonathan will question session. question-and-answer [Operator Bach

Joe Mazzoli

for to you to ask that first leverage recent Bach, in from Jonathan that Good morning, consider increase to now trading leverage mentioned net and to the X stock? forward would X, ROE, X.Xx question asset going filling so leverage, but Joe seems value, it the to considerable could especially right, potentially you would be at Mazzoli you buying allowing for with additional opportunity X not increase with BDCs there stock back legislation X increasing

Matt Pendo

So It’s question. Matt Pendo. Thanks thanks. – for hi the

going I agencies we is early continue parts we said just and study checking is lot time, this but leverage there weren’t up think etcetera. it’s something It’s at it. double take am we at moving a rating to with I that what look of with the days, to it

to to it. it as are on we not the but this watch leverage, think Board the time or will I that, continue to shareholders So asking we at again relates vote

rating of the repurchase to lot a S&P, of repurchase. S&P. a related view bit share terms a and in the BDC right BB+ the particularly we In share from negatively have They little things now space

time, are more think this for constrained this repurchase than at at a I leverage So the by share we ratings time. the

Joe Mazzoli

times I of the portfolio that, would say and it would a lot just there appreciate to There that of is if with moving interesting certainly $X provides if that it it like. be information might an think or that you see within view going have mark was more what is would a underlying that think the I aircraft was be provide investment, guess leasing at helpful to seems reevaluated parts lot aircraft helpful to be I the protection, million that folks that but the down, and about can That’s I asset just a not collateral the downside case? an meaningful it currently some of was a guess rotation I be might strategy kind look times

Edgar Lee

on Aviation briefly reflective aircraft of a just really not And Sure. the declines company Star underlying related of that’s to in First leasing more of the value is our that, that assets. calls have accounting of looking are prior more assets but these accounted for, monetize said on rather but I an assets, around nuance think we as we how are these to

Joe Mazzoli

million with a are Okay, already broader OCSL kind the of you. is shareholders additional run-rate savings going clearly terms pretty $X was cost there any or there finally then expectations this benefiting efficiencies in in platform decline of for good forward? Oaktree the thank And from G&A,

Mel Carlisle

question. This good a is It’s Mel.

this forward. that expect going good be We will a run-rate

in that As last expected create $X.X we we of call to annual stated about savings million. quarter’s

We done opening that. remarks. better we think $X actually We million have stated our in it’s than as

Joe Mazzoli

for it That’s questions. you Thank taking for my me.

Operator

Securities. our And question [Operator York Instructions] Chris of from JMP will come next

Chris York

Good morning guys.

Edgar Lee

morning. Good

Chris York

an your on elaborate bank? you prepared JV you into could Edgar, entered investment comments a new with that

Edgar Lee

Sure.

opportunities. say lending to a This in new lend we And be advisory pretty amount looks entity equity to are seeing and So, ultimately additional of we we are advisor this too the potential financing early the of situations pretty to we get opportunities. a we will does middle-market starting significant significant The an opportunities capital any entered see provided exclusive into new we middle-market first amount a already, provided It��s those area. works of at to, amount to whether opportunities. a work leading partnership is say that entity a can of but new definitely significant we that additional firm. way debt commitment

Chris York

but this then it. and this show by does it then your on could up probably return investment investment? that, Got are what reviewing expectations where deduce And there

Edgar Lee

Sure.

formed, actual, there equity invest. to the commitment if is way a to the binding there want not find don’t inject the on So, entity part not we is an our opportunities is we that

won’t the it show will entity, up we loan so the opportunities. fund and item underlying those line line show And as in item as as a until up we up those won’t start investments – a more it making the holdings show on but as actually

underlying the you loans there. actual see So, will

Chris York

are it. the you thinking? profile Got that then And return

Edgar Lee

see of terms everything in seeing. low terms opportunities we as Well, about up way the range types in the XX% it type are the as as opportunities of we X% them, high from all will of from of as

Chris York

it. that Got do? not partner are is is you can your reveal And who or something you willing to

Edgar Lee

Jaffray. Piper It’s

Chris York

Kemper as okay. see a And expectations to BDC? dividend on the to you assets could and on Mel, it, know small asset and growth portfolio, of Got net likelihood the some touched is in future then equity JV your The update but income you percentage growth via the I us for nice prepared it’s the then return for remarks income the in of the there.

Matt Pendo

it’s I think, Matt. Chris,

expect we into quarter a last line. good straight JV, a think the necessarily it’s continue, had be might putting not think that but quarter we – I assets to I it

think kind of opportunity of are the what working I just the [indiscernible]. part in is we seeing So, flow through

Kemper. have good dialogue with We a

So, we I quarter-by-quarter on stay think progressed that. tuned just kind as of

Chris York

target the aren’t planning X.XX you then on I then X.X on a wrote Matt, leverage Q&A, taking thought is the up. said I comment remarks, as prepared leverage in in okay. here And it, but your you clarifying Got down just to

balance at of comment is here the SBCAA, in low the of because view we the latter terms sheet range? the should So, end

Matt Pendo

Yes. my was X. taking to up comment, the That’s X leverage above

Chris York

solutions deal, deal, curious the and characterize growth last year? okay. the the sponsors And whether conversations back. Oaktree’s And over Got maybe the really the new nice proposition media your million then offer am direct about capital or then that existing lastly of I then in not how and a it, platform then given today with sponsored secondly, was you would can value $XXX lending that you

Edgar Lee

Sure.

and a both of So for owned non-sponsor terms have our conversations been matter in conversations non-sponsor terms transactional fantastic. that was sponsors that transaction. in of And companies the with

for very capital, because flexibility propose think I of the any of we from positive generally, very so opportunities offer we I’d of will expect is range any it their Oaktree, solution of have at the our that these set and to with one-stop a to allows our characterize – of pleased really see conversations a partners. of to capital as everyone additional us needs, that it continue

Chris York

That’s Great. Thanks me. it for guys.

Edgar Lee

you. Thank

Operator

have questions [Operator We Mr. Instructions] no further Mosticchio.

Michael Mosticchio

us our this for quarter for with by joining broadcast. the of XX for fiscal Investor X-XXX-XXX-XXXX the this section replay non-U.S. second approximately dialing days after beginning be callers earnings callers you OCSL’s conference U.S. call or Thank on conference in hour website again for call. XXX-XXX-XXXX or replay will A code for XXXXXXXX XXXX available one access

Operator

The conference for Thank today’s has presentation. you attending now concluded.

may now You disconnect.

Oaktree Specialty Lending (OCSL) 8 May 182018 Q2 Earnings call transcript