OCSL - Earnings call transcript Q2 2019 | Oaktree Specialty Lending Corporation

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Operator

Welcome and thank you for joining Oaktree Specialty Lending Corporation Second Fiscal Quarter 2019 Conference Call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode.

We will be prompted for a question-and-answer session following the prepared remarks.

Now I would like to introduce Michael Mosticchio of Investor Relations, who will host today's conference call. Mr. begin. may you Mosticchio,

Michael Mosticchio

and conference Oaktree call. operator, fiscal Lending second quarter welcome you, Specialty to Corporation's Thank

on of Our morning slide accessed and release the Investors earnings which accompanying presentation we could oaktreespecialtylending.com. website at our issued this the section be

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

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

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

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

Edgar Lee

on combination non-core strategic and of representing per through our results on In continue appreciate performance our increasing number investment to of of call. certain of the plans your realizing factors, driven OCSL. increase This was X% positions quarter, NAV investments, $X.XX producing our and in share by for Thank second a previous gains the quarter consecutive our you, strong monetization deliver loans. or growth. quarter our of We everyone equity fifth we a including NAV Mike, second to the from quarter, shareholders. sizeable valuations increased conference and interest welcome and earnings private

team from the a XXXX and in of $XX on a sale Further experienced rebound quarter, the In of to accrued management maximize in second up including for risk. $X.XX a navigate quarter. outcome to of exits last we Maverick to our and entire per the to Additionally, quarter, investment. portfolio from in portfolio the we million first portfolio abilities with to as manage the led rally income investments, the our $X.XX These prior Consistent in Maverick, and the following second par our the defensively realizations successful increase the healthy for late process we which syndicated $XX With position and interest recoveries. we produced worked $XX values positive shareholders sponsor demonstrates result received the our the decline investment continue market investments quarters, equity value underperforming broad share net investment expertly diversified detail the Healthcare loans. and in second quarter, This with noncore discussed contributed reduced received Group, million NAV. call. quarter's from in private million and

the We have successfully received the lending progress and extended We rate these we credit our also positive adding interest amendments over basis made margin We taking the years. and the and points second amended, a extended two participants, portfolio by since repositioning on validate maturity quarter. over new by believe management. revolving XX the our we in lowered two facility upsized group, from reception

and detail on middle our lending you view of environment. more into I Before our market composition, the update go portfolio investments on I'll

a strong favorable early potential outlook heightened experienced downturn market for further trade last driven markets XXXX. several prices. steep near-term. including the rebound U.S.-China was This Following earnings, the for to rally OCSL's in and both optimism in corporate positive support by helped deal a benefited messaging from credit in markets for December, provide unlikely These that Federal a and factors, equity rally rates the Reserve a were and a recovery broad events to the in interest from related rise credit portfolio loan importantly,

to in that which the we high Borrower transactions, level of of saturate driven experiencing traditional in Although Notably, few opportunities. bypassing in corresponding was essentially club a a investors reemerged direct is friendly in done relatively funds sponsored lending. issuance market lending in a the conditions large syndication quarter competition experienced supply a quality direct investment also as deals the terms aggressive market. marketplace return have of much low of improved, co-invested continue

market To emphasis has borrowers; our and believe second our powder. size posture towards invested of XX% $XXX investment more excess of increasingly billion selective this of participated on the to one, and new Oaktree million. XX% ability diversified larger the $X.X maintaining objectives: and portfolio respond larger risk generating quickly, industries; diversified environment, In XXX of three, portfolio remain to two highly lower four, we of middle Nearly the of was near-term companies. well generating on with borrowers Given the We preserve in risk are EBITDAS secured approximately and of And maintaining a with five adjusted which transactions. management, in investment underwriting two, we the to senior five, continue the to end, attractive continue we quarter, At our capital levered competitive value the portfolio invested top will with in is fair seeking structure end was ample that lending and companies The companies across hallmarks weighted as returns. while focusing on borrowers; place always loans. to position opportunities; dry focus such capital, portfolio conservative approach. defensive diversity a our originations. across strong

leverage has X.X market declined companies remain while at portfolio at The times continue elevated from to In to addition, times. portfolio, levered multiples X.X managing began we times we around leverage since target our lower X.X average companies. average the middle

we remain attractive We $XXX end, dry that over quarter-to-quarter, vary enough of to are we advantage growth. of at from more well million patient than take had mindful investment quarter powder While opportunities positioned liquidity and for opportunities. new will

of portfolio Moving decreased on efforts, to non-core to the of million Healthcare. positions XX% our to repositioning portfolio, the Maverick due or primarily $XXX exit

quarter. one at XX% XXst, comprehensive March We of period of the $X which the additional the ago. contributed equity $X position million billion, the and or from exit investments represented increase million portfolio $X pharmacy also approximately of over received an in year of an to Core XX%, NAV same services, an from one

highly a approach Given And to identified met committed our conservative posture investments. few we quarter opportunities in origination new and our therefore, standards. prudent continue to risk we management, that the to selective take second

originated investments. six $XXX were million the quarter. investments across new our down As $XXX originations in a of million first in prior the result, transactions, we quarter lien from XX% of

new yield two results. transactions origination very source fund mentioned pleased were channels, was we second size, deals, ability our investments four and for previously, including market. defensive our quarter healthier of These quickly valuations broadly investments. In to ability investments underwrite reflecting club originations with our to strong The were our sponsor participate. to from X.X%, are were and all us investments lending highlight more multiple The sponsor As Oaktree enabled syndicated remaining the and transactions. average summary, reputation

Our the appropriately for in positioned where portfolio are is we cycle. economic

to a bolster platform opportunities broader also is scale new our reach ample of liquidity well investment capitalized We in pipeline. our remain with for discuss in advantage to assess significant abilities investments detail. and our that Oaktree's turn OCSL. Its financial results to advantage take identify competitive relationships to more our returns like that, to leads strong for With risk I'd over Mel shareholders. call the and adjusted

Mel Carlisle

quarter. million, interest first primarily quarters. Diagnostics. $XX.X Alvatech. of million, Contributing lien in diluted our This $X and of fee the first from and investment were combined of operating Maverick Net was or related term PIK incentive from and second between is XX% quarter management strong you, Thank income higher investment improved the $X.X Dividend per last by due and per to solid or up driven income loan was was mostly consistent quarter, million income financial consistent income investment expenses and earnings. to compared Total of with increased up Total $X.XX to Edgar. million OCSL to our million last another quarter, investment income accretion quarter $X.XX, $XX.X share. OID to basic mainly due share was $X.X when reporting million the to XXXX. with Dominion fees income from $XX.X performance.

of of which quarter, accrued we Part like incentive million, the accrued of addition, flavor. as first fee $X.X included part was all In the expense II

fees. expense were expenses operating by our incentives, the and quarter, administrator $XXX,XXX fees professional driven lower prior management Excluding down from and

to quality. credit Moving

status, of for of March nonaccrual to investments our debt quarter. X.X% down Maverick. on due As XXst, of from was the were fair mainly decrease X.X% the The exit at prior value

net XXst, gains noncore and valuations to realized third, Turning our December first, our we private increased increased mainly share several due factors: on the value. $X.XX per syndicated equity positions; from to $X.XX loan NAV per on increased and loans share from asset exits; on the to three valuations recorded portfolio. second,

leverage. to on Moving

$XXX size Total $XXX our we basis growth paydowns. Investment in additional December rate amended, as from notes now subsequent our ratio fundings reflecting in other and NAV. and lowering proceeds extended interest and XX we mentioned, In Edgar the successful million we by leverage as increased investments made were On up exits facility. very the $XXX new X.XX Xst, matured. commitments credit times capacity, selective Our February, March to points. end our X.XX XXst, received million, including from on to times to and is million as XXXX quarter $XXX quarter decreased were approach million, of well in the prepayments,

$XXX the funded of incremental off paid we credit remaining balance the facility. this borrowings with So maturity on We million.

$XX next is five the years notes debt due. maturity away when million Our unsecured XXXX are

average and had down revolving prior and at the from $XXX quarter quarter of XXst, end. March million credit debt Shifting facility, interest under outstanding million capacity X.X%, of undrawn venture. cash commitments were Kemper Cash equivalents the now subsequent of joint weighted And X.X% in $XXX was to to $XX rate As million maybe we end. total having including quarter.

in times XX of XX, due total companies. secured X.X $XXX Leverage XX, compared to from undrawn the senior growth capacity March the assets This quarter. up quarter to $XXX $XX JV to assets companies the quarter XX million last of at in of times of credit end. invested JV at total loans last JV in invested X.X was million March million the had portfolio. The As at had facility

Matt. Now I will turn the call over to

Matt Pendo

Thank you, Mel.

position momentum returns. for OCSL to and build stronger continue We

and our on three initiatives As over that previous we and believe outlined efforts. progress the increase executing overtime last performance our are multiple demonstrated these on calls, ROE has we will quarters we

Importantly, out We we equity continue non-accrual of Maverick, earning of and to and build received foundation from status the was from of rotate generating our million million investments proceeds assets. a exit of a $X par, million $XX which of one investments. at $XX of strong non-income

remaining overall are to Our $XXX represents opportunity yield. ongoing non-income portfolio which generating million, increase investments

During plus improved the LIBOR portfolio below quarter, yields. points. overtime of second syndicated to for had yields intend lower million $XX and yielding investments also these positioning higher yielding We we XXX investments broadly proprietary with basis replace loans further with

the Finally, XX we companies JV added million to optimize efforts our during in progressing $XX across The JV. investments the are quarter. in steadily Kemper

positions. All were of these lien first

we're million $XXX up times. over target assuming increase of X.X able range We of our additional term to to investment capacity, longer have leverage

before We incremental accretive added be of plenty investments are us have and will overtime. it as expect runway ROE to

has We maintained the our for announced to dividend. dividend. the quarters. this turning OCSL board approved today last Now level five $X.XXX

as And goal update remains corporate consistent an a some Brookfield governance we by sustainable performance. the provide well portfolio pending and with are pay transaction Oaktree undertaking. on lastly, initiatives to I'll Our as supported dividend

economic rights know, own a the will Oaktree's entered company Capital structured management will approximately and to you Brookfield. initial parent Oaktree's employees held Inc, LLC Brookfield so As investment of and hold management the by XX% XX%, transaction management closes. in Oaktree's interest Oaktree. Founders [Indiscernible] the the Oaktree's transaction remaining other Management of the is The actual maintain Group advisor certain transaction an when consent of whereby members Oaktree business and limited with control into our Asset will Brookfield current

We merger years more the an closing the confirmation less initial seven are with with potential determination ability or Brookfield will period triggered. advisory on of deemed the Act whether certain control although the assignment. the closing assignment to of or purposes such In the believe XXXX and upon agreement from as approval current Brookfield an For of Board and of OCSL prevent between our agreement the deal OCSL advisor actual investment Oaktree uncertain. for investment if not would later to seeking and Investment result provide the a disruption be Ac, any conditions agreement XXXX, do result Oaktree, deemed terminate shareholder investment services to accordance the inherently to is of Company of is however, of an merger Oaktree To a exercising of its new Board recommended we advisor a occur, OCSL. automatically of assignment or approved once between or of as

see effectiveness. in advisor will existing our the of limits by we the The agreements, approval yesterday, statement. a such, increase the requirements. of leverage time, from changing its As same those will the investment terms shareholder we than our filed unchanged preliminary other coverage modifying to assets proxy At agreement remain date

recall effective to last received shareholder before approval Board leverage, unless XXXX, in quarter, our will then. approval to you receive we February we increase As were

expertise efficiently questions. we for shareholder to for and are leverage attractive deliver and in future, all will no X.X identify continued leverage joining continued higher are times opportunity In While is call have In on opportunities our times, using to that once Oaktree's cost adjusted methodically for please risk the open but effect. well we will you to on the your value investment to deploy approval leverage. reduced Thank Operator, With the an seeks our this leverage events, your X% our debt fee limits conclusion, of range to in management X.X us to near-term to and new in resources earnings finance strong X.XX in our this, the above that, we're above leverage with OCSL. positioned the shareholders. connection to plans today's lines. interest happy target appropriate deem equity assets, increase take base be we

Operator

Instructions] [Operator ahead. Shane from you. go comes Please Our Rick first J.P. question Thank Morgan. of

Rick Shane

policy, Just you capital obviously, next dividend churn want quarter. to think about the and for the dividend forward

accretion make that sense curious, there But or that like that back given you buying returning saw, that repurchase a describing, I'm instituting the NAV realized at I I of some does point, today liquidity Given will capital that are shares sort consider that opportunities way? base. start you're some relatively program? it's we still challenges. capital realized small it to

Matt Pendo

much Shane, the for its thanks so question. Matt,

I think we with quarter discussed the -- every our Board.

that made the shares. on I a and as not think we point focused underlying But you regarding liquidity, just underlying liquidity company. emphasize liquidity to liquidity shares,

We also impact share to rating focus the that. on our repurchase and credit

those done repurchase for date, to share reasons on haven't anything So we side. the

about the to talk to continue board We it.

the as come cash In terms were, dividend the the of focused payout of kind we we dividends, from discussed, the has we're to -- and earnings they the portfolio generated on dividend. the stable from

As primarily there OID, dominion. Mel $X mentioned, of during the million was quarter, from about

about think dividend as that and about thoughtful we we're our strategy. So capital

Edgar Lee

One under other Edgar consideration markets consider it's capital that asset an you shareholders, lead where sell swinging if facilities our create points right that it add credit now in to off our XXX imagine to environment that facilities companies a we I in experiencing have can markets can that mentioned. is, equities the sell to great what equity we out there. are sustained Matt the we're and just availability off opportunities a in credit sustained to as other on it should as our Rick, could extend revolving day, various And the for

available preserving to efficient we capital capital, sure make is structure. we in to and we're of that when others also an mindful sure have cycle us economic that actually can't. are around credit want while we where cost powder dry capital to investments that and great valuable and And are so make our And very we making cycle to the

Rick Shane

if or we get and don't to also one it. act. would base late get your the on that right, there Totally trying intent it We be I'm I value makes capital think road. -- in just a two and -- long-term figure your grow today to balancing it's a take it's to sense down a And out what intention, realize ultimately, opportunity is this there's to to step present month window, now from but if take steps there the you're itself mess too. the the And several forward opportunity back there's table difficult,

Edgar Lee

we is our we and we talk constituencies a lot you when that complex with it's math a don't and being Absolutely, it inputs about that. as meetings we of about consider, all just something to of It of thoughts something with how it's something thoughtful and do that. your Matt around Board But we we like the rollout. that again, think if at various that all -- were wouldn't and disagree were But as about. mentioned, and and mentioned, equation

Operator

Instructions] comes O'Shea [Operator question Finian of Our Wells Fargo. Please ahead. next go from

Finian O'Shea

synergetics element a you're touch on had? at can on just buybacks. having you've how look outcomes It's of follow here the another of, think given the portfolio dialogue current to on. assets might of You then now you names your sort Just like might or how maybe buyback you a paid that strategy? advanced potential view pain. play as delaying into or Any kind commentary you're maybe the in back going on your get And these

Edgar Lee

consideration and it. any our outlook amount know the environment. near-term from and don't --the I given the our be and of main our But quarter for is back that definitely proceeds would investing if in driver deployment a medium-term received net it's about of we one what

in, capital of from only I we generally wouldn't a various pace observation investments about say your that the which there. the factor return be would would but have So driver at

Finian O'Shea

mentioned this on of another you market just club sponsor the quarter. middle then deals sort And

would found go amount risk to a returns, into been that Or you a sort has environment of that, to be terms function say core, to you those those of of the you adjusted of attractive, Assuming the market there appearing a that migrating sponsor? enough good function assets middle of that attractive wheelhouse market now was in kind of rotation? way more of this is you

Edgar Lee

would platform, found the mix for to that quarter BDC, it's direct But and to only make broad BDC. we're more investment we're or manage that that opportunistic that of can and we So from of we add how we're attractive portfolio, that not universe But our individual lending we the call or we our than of loans, and -- rather in portfolio. not whether looks portfolio little that bit that of investors of BDC just we're public way much deploying financing, lending. looking at the not to consider at any that to the [indiscernible] our different overall a for for bridge different company it back lending, is we're acquisition we each of assessing a traditional always trying about so that means offices, of matter, a look very on of couple and but opportunities subtract with loans, perspectives. given the given that a range does risk opportunities be of going good it's something see at. And think traditional opportunity. that opportunities, much say than direct that quarter, -- just breath better fit of a assessment communicated be that dollars we making non-sponsored in we look terms number we at a we this we've thought additive have one-by-one the that macro capital, a including And look sponsored the happened whether broader to loans, we the from family loans billions direct that In characteristics sponsor were

Finian O'Shea

forgive Just as fair your this mentioned one to that this. about may. part to The me is offsetting fees more, incentive And fee? think you I quarter, if waived if

Mel Carlisle

equal Part Yes, that incentive we we my a waiver. II one. in fees in Mel. the we and million of stated of as offset prepared $X.X This I'll -- form take accrued I is an had comments,

Operator

of Our Lynch comes next Please from question ahead. Ryan KBW. go

Ryan Lynch

are -- This actually in that quarter there's about you goes the talk but a quarter on and guys balance is you guys you that first just asset have bit your seeing Can little obviously pretty the can a different growth had while, sheet. this in guys have classes your the senior significant that pretty the were asset that to what allowed fund, assets I loan substantial class remember in you growth?

Edgar Lee

would there's with process we thought generally factors one finished but that just a with They've them. there's The We or to or we don't call have quarterly into item with call know great partners. fed has if One, saw, I working. been partnership say couple I -- our are there. up of our any that them great. been Kemper

with partnership I working. is think Kemper happier this Oaktree both and couldn't how be

that So would that get had would would to the to mindful position grow we shareholders. we've really sets start payments, be making where that of to highly accretive the we can time tone that them something them vehicle now say our with to a dividend back specifically. which I are Two, work with think wanting like to we that to

view position saw coming that look those markets, of there yield, you latter markets. severe the cut markets market, that price occurring got have propel you in outflows quarters. pretty at were momentum of in yield syndicated sometime yield But December, rebound bonds the rate to credit amount quite And the look high significant amount high sitting cash a many mapped we to to I By we know out be the fixed was especially in of on get needing overall the weakness there, in good January, market. some And seeing we that plan us to credit were started all funds cash. over end And we high we -- significant saw deployed, time a at so three, of January hopefully of if starting And it a next at took various to the that think meaningful and as the credit there maybe syndicated And obviously, dramatically, stop. loans. were the bonds really interest the loan significant commentary overall didn't overall investors fixed And might were of forward. remaining reserves' who in the and a you overall rate see potential a be positions rate that if federal there balanced. helped liquidating to folks despite begin And early economic started motivated to part the we year. some this of or environments lag loans year relatively continue syndicated number the the

And saw we in so try we inefficiency continued step that aggressively see in persist because that loan didn't some of to take dislocation. syndicated advantage to and continue rebound we the decided to to market, more and

dislocation closed in were take has Now that managed down the over first fortunately, that the so. during JV advantage quarter -- able last we dislocations. expand the to, these to But GAAP have month of or investments or our would significantly and

Ryan Lynch

time the That's I and really appreciate my question. quarter. nice really color. was only That today, helpful

Operator

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

Michael Mosticchio

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

Operator

conference is attending Thank for now you today's The presentation. included.

disconnect. now may You

Oaktree Specialty Lending (OCSL) 8 May 192019 Q2 Earnings call transcript