OAKTREE SPECIALTY LENDING CORPORATION The following discussion should be read in connection with our Consolidated Financial Statements and the notes thereto included elsewhere in this annual report on Form 10-K. Some of the statements in this annual report on Form 10-K constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K may include statements as to: •our future operating results and distribution projections; •the ability of Oaktree to reposition our portfolio and to implement Oaktree's future plans with respect to our business; •the ability of Oaktree and its affiliates to attract and retain highly talented professionals; •our business prospects and the prospects of our portfolio companies; •the impact of the investments that we expect to make; •the ability of our portfolio companies to achieve their objectives; •our expected financings and investments and additional leverage we may seek to incur in the future; •the adequacy of our cash resources and working capital; •the timing of cash flows, if any, from the operations of our portfolio companies; and •the cost or potential outcome of any litigation to which we may be a party. In addition, words such as "anticipate," "believe," "expect," "seek," "plan," "should," "estimate," "project" and "intend" indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Item 1A. Risk Factors" in this annual report on Form 10-K. Other factors that could cause actual results to differ materially include: •changes or potential disruptions in our operations, the economy, financial markets or political environment; •risks associated with possible disruption in our operations or the economy generally due to terrorism, natural disasters or the COVID-19 pandemic; •future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to Business Development Companies or RICs; •general considerations associated with the COVID-19 pandemic; •the ability to realize the anticipated benefits of the Mergers; and •other considerations that may be disclosed from time to time in our publicly disseminated documents and filings. We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with theSEC , including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. All dollar amounts in tables are in thousands, except share and per share amounts and as otherwise indicated. Business Overview We are a specialty finance company dedicated to providing customized, one-stop credit solutions to companies with limited access to public or syndicated capital markets. We are a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a Business Development Company under the Investment Company Act. In addition, we have qualified and elected to be treated as a RIC under the Code forU.S. federal income tax purposes. We are externally managed by Oaktree pursuant to the Investment Advisory Agreement. Oaktree Administrator, an affiliate of Oaktree, provides certain administrative and other services necessary for us to operate pursuant to the Administration Agreement. Our investment objective is to generate current income and capital appreciation by providing companies with flexible and innovative financing solutions, including first and second lien loans, unsecured and mezzanine loans, bonds, preferred equity and certain equity co-investments. We may also seek to generate capital appreciation and income through secondary 54 -------------------------------------------------------------------------------- investments at discounts to par in either private or syndicated transactions. Our portfolio may also include certain structured finance and other non-traditional structures. We invest in companies that typically possess resilient business models with strong underlying fundamentals. We intend to deploy capital across credit and economic cycles with a focus on long-term results, which we believe will enable us to build lasting partnerships with financial sponsors and management teams, and we may seek to opportunistically take advantage of dislocations in the financial markets and other situations that may benefit from Oaktree's credit and structuring expertise, including during the COVID-19 pandemic. Sponsors may include financial sponsors, such as an institutional investor or a private equity firm, or a strategic entity seeking to invest in a portfolio company. Oaktree is generally focused on middle-market companies, which we define as companies with enterprise values of between$100 million and$750 million . We generally invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as "high yield" and "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In the current market environment, Oaktree intends to focus on the following areas, in which Oaktree believes there is less competition and thus potential for greater returns, for our new investment opportunities: (1) situational lending, which we define to include directly originated loans to non-sponsor companies that are hard to understand and value using traditional underwriting techniques, (2) select sponsor lending, which we define to include financing to support leveraged buyouts of companies with specialized sponsors that have expertise in certain industries, and (3) stressed sector and rescue lending, which we define to include opportunistic private loans in industries experiencing stress or limited access to capital. Oaktree intends to continue to rotate our portfolio into investments that are better aligned with Oaktree's overall approach to credit investing and that it believes have the potential to generate attractive returns across market cycles (which we call "core investments"). Oaktree has performed a comprehensive review of our portfolio and categorized our portfolio into core investments, non-core performing investments and underperforming investments. Certain additional information on such categorization and our portfolio composition is included in investor presentations that we file with theSEC . Since an Oaktree affiliate became our investment adviser inOctober 2017 , Oaktree and its affiliates have reduced the investments identified as non-core by over$700 million at fair value. Over time, Oaktree intends to rotate us out of the remaining non-core investments, which were approximately$134 million at fair value as ofSeptember 30, 2021 . Oaktree periodically reviews designations of investments as core and non-core and may change such designations over time. OnMarch 19, 2021 , we acquired OCSI pursuant to the Merger Agreement. Pursuant to the Merger Agreement, Merger Sub was first merged with and into OCSI, with OCSI as the surviving corporation, and, immediately following the Merger, OCSI was then merged with and into us, with us as the surviving company. In accordance with the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of OCSI's common stock was converted into the right to receive 1.3371 shares of our common stock (with OCSI's stockholders receiving cash in lieu of fractional shares of our common stock). As a result of the Mergers, we issued an aggregate of 39,400,011 shares of our common stock to former OCSI stockholders. Business Environment and Developments The rapid spread of COVID-19 in early 2020 led to disruptions in theU.S. and global financial markets. While several countries, including theU.S. , have eased certain travel restrictions, business closures and social distancing measures, theU.S. and global economies continue to rapidly evolve and experience uncertainty, particularly due to recurring COVID-19 outbreaks, vaccine hesitancy and potential re-imposition of certain restrictions. The general uncertainty surrounding the dangers and long-term impact of COVID-19 have created significant disruption in supply chains and economic activity and have had a particularly adverse impact on transportation, oil-related, hospitality, tourism, entertainment and other industries. These uncertainties can ultimately impact the overall supply and demand of the market through changing spreads, deal terms and structures and equity purchase price multiples. We are unable to predict the full effects of the COVID-19 pandemic or how long any further outbreaks, market disruptions or volatility might last. We continue to closely monitor the impact that this has had on our business, industry and portfolio companies, which we believe may help us identify vulnerabilities and allow us to address potential problems early and provide constructive solutions if necessary. Despite the ongoing uncertainty surrounding the COVID-19 pandemic, we believe attractive risk-adjusted returns can be achieved by making loans to companies in the middle market. Given the breadth of the investment platform and decades of credit investing experience of Oaktree and its affiliates, we believe that we have the resources and experience to source, diligence and structure investments in these companies and are well placed to generate attractive returns for investors. 55 -------------------------------------------------------------------------------- As ofSeptember 30, 2021 , 91.5% of our debt investment portfolio (at fair value) and 91.8% of our debt investment portfolio (at cost) bore interest at floating rates indexed to the LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly or monthly at the borrower's option. As a result of the COVID-19 pandemic and the related decision of theU.S. Federal Reserve to reduce certain interest rates, LIBOR decreased beginning inMarch 2020 . A prolonged reduction in interest rates will result in a decrease in our total investment income and could result in a decrease in our net investment income to the extent the decreases are not offset by an increase in the spread on our floating rate investments, a decrease in our interest expense or a reduction of our incentive fee on income. InJuly 2017 , the head of theUnited Kingdom Financial Conduct Authority , or theFCA , announced the desire to phase out the use of LIBOR by the end of 2021. However, inMarch 2021 theFCA announced that mostU.S. dollar LIBOR would continue to be published throughJune 30, 2023 effectively extending the LIBOR transition period toJune 30, 2023 . However, theFCA has indicated it will not compel panel banks to continue to contribute to LIBOR after the end of 2021 and theFederal Reserve Board , theOffice of the Comptroller of the Currency , and theFederal Deposit Insurance Corporation have encouraged banks to cease entering into new contracts that useU.S. dollar LIBOR as a reference rate no later thanDecember 31, 2021 . TheU.S. Federal Reserve , in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of largeU.S. financial institutions, supports replacingU.S. -dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed byTreasury securities. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR. In anticipation of the cessation of LIBOR, we may need to renegotiate any credit agreements extending beyond the applicable phase out date with our prospective portfolio companies that utilize LIBOR as a factor in determining the interest rate. Certain of the loan agreements with our portfolio companies have included fallback language in the event that LIBOR becomes unavailable. This language generally provides that the administrative agent may identify a replacement reference rate, typically with the consent of (or prior consultation with) the borrower. In certain cases, the administrative agent will be required to obtain the consent of either a majority of the lenders under the facility, or the consent of each lender, prior to identifying a replacement reference rate. Certain of the loan agreements with our portfolio companies do not include any fallback language providing a mechanism for the parties to negotiate a new reference interest rate and will instead revert to the base rate in the event LIBOR ceases to exist. Critical Accounting Estimates Investment Valuation We value our investments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, which defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. ASC 820 prioritizes the use of observable market prices over entity-specific inputs. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: •Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date. •Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities. •Level 3 - Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. If inputs used to measure fair value fall into different levels of the fair value hierarchy, an investment's level is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. This includes investment securities that are valued using "bid" and "ask" prices obtained from independent third party pricing services or directly from brokers. These investments may be classified as Level 3 because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities or may require adjustments for investment-specific factors or restrictions. Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value. As such, Oaktree obtains and analyzes readily 56 -------------------------------------------------------------------------------- available market quotations provided by pricing vendors and brokers for all of our investments for which quotations are available. In determining the fair value of a particular investment, pricing vendors and brokers use observable market information, including both binding and non-binding indicative quotations. We seek to obtain at least two quotations for the subject or similar securities, typically from pricing vendors. If we are unable to obtain two quotes from pricing vendors, or if the prices obtained from pricing vendors are not within our set threshold, we seek to obtain a quote directly from a broker making a market for the asset. Oaktree evaluates the quotations provided by pricing vendors and brokers based on available market information, including trading activity of the subject or similar securities, or by performing a comparable security analysis to ensure that fair values are reasonably estimated. Oaktree also performs back-testing of valuation information obtained from pricing vendors and brokers against actual prices received in transactions. In addition to ongoing monitoring and back-testing, Oaktree performs due diligence procedures over pricing vendors to understand their methodology and controls to support their use in the valuation process. Generally, we do not adjust any of the prices received from these sources. If the quotations obtained from pricing vendors or brokers are determined to not be reliable or are not readily available, we value such investments using any of three different valuation techniques. The first valuation technique is the transaction precedent technique, which utilizes recent or expected future transactions of the investment to determine fair value, to the extent applicable. The second valuation technique is an analysis of the enterprise value, or EV, of the portfolio company. EV means the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The EV analysis is typically performed to determine (i) the value of equity investments, (ii) whether there is credit impairment for debt investments and (iii) the value for debt investments that we are deemed to control under the Investment Company Act. To estimate the EV of a portfolio company, Oaktree analyzes various factors, including the portfolio company's historical and projected financial results, macroeconomic impacts on the company and competitive dynamics in the company's industry. Oaktree also utilizes some or all of the following information based on the individual circumstances of the portfolio company: (i) valuations of comparable public companies, (ii) recent sales of private and public comparable companies in similar industries or having similar business or earnings characteristics, (iii) purchase prices as a multiple of their earnings or cash flow, (iv) the portfolio company's ability to meet its forecasts and its business prospects, (v) a discounted cash flow analysis, (vi) estimated liquidation or collateral value of the portfolio company's assets and (vii) offers from third parties to buy the portfolio company. We may probability weight potential sale outcomes with respect to a portfolio company when uncertainty exists as of the valuation date. Under the EV technique, the significant unobservable input used in the fair value measurement of our investments in debt or equity securities is the EBITDA, revenue or asset multiple, as applicable. Increases or decreases in the valuation multiples in isolation may result in a higher or lower fair value measurement, respectively. The third valuation technique is a market yield technique, which is typically performed for non-credit impaired debt investments. In the market yield technique, a current price is imputed for the investment based upon an assessment of the expected market yield for a similarly structured investment with a similar level of risk, and we consider the current contractual interest rate, the capital structure and other terms of the investment relative to risk of the company and the specific investment. A key determinant of risk, among other things, is the leverage through the investment relative to the EV of the portfolio company. As debt investments held by us are substantially illiquid with no active transaction market, we depend on primary market data, including newly funded transactions and industry-specific market movements, as well as secondary market data with respect to high yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable. Under the market yield technique, the significant unobservable input used in the fair value measurement of the Company's investments in debt securities is the market yield. Increases or decreases in the market yield may result in a lower or higher fair value measurement, respectively. In accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946 may be valued using net asset value as a practical expedient for fair value. Consistent with FASB guidance under ASC 820, these investments are excluded from the hierarchical levels. These investments are generally not redeemable. We estimate the fair value of certain privately held warrants using a Black Scholes pricing model, which includes an analysis of various factors and subjective assumptions, including the current stock price (by using an EV analysis as described above), the expected period until exercise, expected volatility of the underlying stock price, expected dividends and the risk-free rate. Changes in the subjective input assumptions can materially affect the fair value estimates. The fair value of our investments as ofSeptember 30, 2021 andSeptember 30, 2020 was determined in good faith by our Board of Directors. Our Board of Directors has and will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of a portion of our portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter, and the Board of Directors may reasonably rely on that assistance. As ofSeptember 30, 2021 , 88.4% of our portfolio at fair value was valued either based on market quotations, the transactions precedent approach or corroborated by independent valuation firms. However, our Board of Directors is responsible for the ultimate valuation of the portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process. 57 -------------------------------------------------------------------------------- Certain factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company's earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to these uncertainties, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale of one or more of our investments. As ofSeptember 30, 2021 , we held$2,556.6 million of investments at fair value, up from$1,573.9 million held atSeptember 30, 2020 , primarily driven by new originations, investment acquired in the Mergers and unrealized appreciation. As ofSeptember 30, 2021 andSeptember 30, 2020 , approximately 97.0% and 95.9%, respectively, of our total assets represented investments at fair value. Revenue Recognition Interest Income Interest income, adjusted for accretion of OID is recorded on an accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments when it is determined that interest is no longer collectible. Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when there is reasonable doubt that principal or interest cash payments will be collected. Cash interest payments received on investments may be recognized as income or a return of capital depending upon management's judgment. A non-accrual investment is restored to accrual status if past due principal and interest are paid in cash, and the portfolio company, in management's judgment, is likely to continue timely payment of its remaining obligations. In connection with our investment in a portfolio company, we sometimes receive nominal cost equity that is valued as part of the negotiation process with the portfolio company. When we receive nominal cost equity, we allocate our cost basis in the investment between debt securities and the nominal cost equity at the time of origination. Any resulting discount from recording the loan, or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan. PIK Interest Income Our investments in debt securities may contain PIK interest provisions. PIK interest, which typically represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest on a loan or debt security involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; financial statements and financial projections for the portfolio company; our assessment of the portfolio company's business development success; information obtained by us in connection with periodic formal update interviews with the portfolio company's management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Our determination to cease accruing PIK interest is generally made well before our full write-down of a loan or debt security. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of the loans or debt securities would be reduced by the amount of such previously accrued, but uncollectible, PIK interest. The accrual of PIK interest on our debt investments increases the recorded cost bases of these investments in our Consolidated Financial Statements including for purposes of computing the capital gains incentive fee payable by us to Oaktree. To maintain our status as a RIC, certain income from PIK interest may be required to be distributed to our stockholders, even though we have not yet collected the cash and may never do so. Portfolio Composition Our investments principally consist of loans, common and preferred equity and warrants in privately-held companies, and the JVs. Our loans are typically secured by a first, second or subordinated lien on the assets of the portfolio company and generally have terms of up to ten years (but an expected average life of between three and four years). During the fiscal year endedSeptember 30, 2021 , we originated$1,167.4 million of investment commitments in 55 new and 16 existing portfolio companies and funded$1,125.0 million of investments. 58 -------------------------------------------------------------------------------- During the fiscal year endedSeptember 30, 2021 , we received$762.0 million of proceeds from prepayments, exits, other paydowns and sales and exited 46 portfolio companies. A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables: September 30, 2021 September 30, 2020 Cost: Senior secured debt 85.85 % 80.58 % Debt investments in the JVs 5.79 5.77 Preferred equity 2.60 2.37 Common equity and warrants 2.15 3.69 LLC equity interests of the JVs 1.94 2.95 Subordinated debt 1.67 4.64 Total 100.00 % 100.00 % September 30, 2021 September 30, 2020 Fair value: Senior secured debt 86.72 % 84.06 % Debt investments in the JVs 5.94 6.12 Preferred equity 2.49 1.90 Common equity and warrants 1.71 2.40 Subordinated debt 1.67 4.17 LLC equity interests of the JVs 1.47 1.35 Total 100.00 % 100.00 % 59
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The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows:
September 30, 2021 September 30, 2020
Cost:
Application Software 14.49 % 9.71 %
Multi-Sector Holdings (1) 7.73 8.87
Pharmaceuticals 5.44 5.96
Data Processing & Outsourced Services 4.74 6.57
Biotechnology 4.41 5.36
Personal Products 4.08 3.00
Industrial Machinery 3.47 0.90
Health Care Services 3.34 4.26
Specialized Finance 2.70 3.11
Aerospace & Defense 2.66 1.68
Fertilizers & Agricultural Chemicals 2.63 2.02
Internet & Direct Marketing Retail 2.45 0.89
Construction & Engineering 2.44 0.80
Integrated Telecommunication Services 1.85 2.67
Internet Services & Infrastructure 1.85 1.72
Specialty Chemicals 1.84 2.68
Home Improvement Retail 1.83 -
Automotive Retail 1.65 -
Airport Services 1.64 1.34
Diversified Support Services 1.60 1.13
Real Estate Services 1.59 2.34
Oil & Gas Storage & Transportation 1.44 1.59
Oil & Gas Refining & Marketing 1.42 1.87
Soft Drinks 1.32 -
Electrical Components & Equipment 1.27 1.25
Health Care Supplies 1.17 1.30
Advertising 1.13 0.82
Real Estate Operating Companies 1.08 -
Cable & Satellite 1.05 -
Movies & Entertainment 1.02 2.68
Insurance Brokers 1.00 1.05
Leisure Facilities 0.99 0.11
Health Care Equipment 0.93 -
Independent Power Producers & Energy Traders 0.92 1.29
Airlines 0.88 0.63
Health Care Distributors 0.78 0.77
Commercial Printing 0.78 0.47
Home Furnishings 0.77 -
Managed Health Care 0.73 1.65
Metal & Glass Containers 0.69 0.68
Other Diversified Financial Services 0.63 0.01
Thrifts & Mortgage Finance 0.63 0.06
Health Care Technology 0.55 1.29
Auto Parts & Equipment 0.49 2.02
Electronic Components 0.40 1.53
Property & Casualty Insurance 0.39 2.88
Restaurants 0.37 0.61
IT Consulting & Other Services 0.30 0.89
Research & Consulting Services 0.29 1.49
Systems Software 0.26 1.24
Leisure Products 0.26 -
Alternative Carriers 0.26 -
Apparel, Accessories & Luxury Goods 0.20 0.82
Air Freight & Logistics 0.19 -
Integrated Oil & Gas 0.19 -
Food Distributors 0.18 -
Food Retail 0.15 0.41
Diversified Banks 0.14 -
Technology Distributors 0.12 -
Construction Materials 0.09 0.13
Housewares & Specialties 0.07 -
Education Services 0.04 1.37
General Merchandise Stores - 1.15
Hotels, Resorts & Cruise Lines - 0.92
Diversified Real Estate Activities - 0.92
Trading Companies & Distributors - 0.61
Oil & Gas Equipment & Services - 0.20
Health Care Facilities - 0.19
Specialty Stores - 0.08
Specialized REITs - 0.01
Total 100.00 % 100.00 %
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September 30, 2021 September 30, 2020
Fair value:
Application Software 14.58 % 10.21 %
Multi-Sector Holdings (1) 7.41 7.74
Pharmaceuticals 5.56 6.55
Data Processing & Outsourced Services 4.46 6.33
Biotechnology 4.44 6.14
Personal Products 4.13 3.24
Industrial Machinery 3.53 0.74
Health Care Services 3.31 3.81
Aerospace & Defense 2.72 1.56
Specialized Finance 2.69 3.08
Internet & Direct Marketing Retail 2.68 0.97
Fertilizers & Agricultural Chemicals 2.64 2.14
Construction & Engineering 2.47 0.86
Integrated Telecommunication Services 1.94 2.61
Internet Services & Infrastructure 1.87 1.69
Specialty Chemicals 1.82 2.48
Home Improvement Retail 1.82 -
Automotive Retail 1.65 -
Real Estate Services 1.61 2.40
Diversified Support Services 1.60 1.12
Airport Services 1.59 1.35
Oil & Gas Refining & Marketing 1.43 1.90
Oil & Gas Storage & Transportation 1.35 1.64
Soft Drinks 1.31 -
Electrical Components & Equipment 1.26 1.30
Advertising 1.19 0.85
Health Care Supplies 1.18 1.37
Real Estate Operating Companies 1.11 -
Insurance Brokers 1.08 1.15
Cable & Satellite 1.06 -
Movies & Entertainment 1.06 2.77
Airlines 0.96 0.83
Health Care Equipment 0.93 -
Independent Power Producers & Energy Traders 0.92 1.32
Leisure Facilities 0.90 -
Commercial Printing 0.79 0.47
Home Furnishings 0.77 -
Health Care Distributors 0.77 0.78
Managed Health Care 0.74 1.70
Metal & Glass Containers 0.68 0.75
Thrifts & Mortgage Finance 0.62 0.02
Other Diversified Financial Services 0.62 -
Health Care Technology 0.55 1.40
Auto Parts & Equipment 0.48 1.99
Electronic Components 0.40 1.69
Property & Casualty Insurance 0.39 2.97
Restaurants 0.37 0.50
Research & Consulting Services 0.30 1.54
IT Consulting & Other Services 0.29 0.88
Alternative Carriers 0.27 -
Systems Software 0.26 1.30
Leisure Products 0.26 -
Air Freight & Logistics 0.19 -
Integrated Oil & Gas 0.19 -
Food Distributors 0.18 -
Food Retail 0.15 0.44
Diversified Banks 0.14 -
Technology Distributors 0.12 -
Construction Materials 0.09 0.13
Housewares & Specialties 0.08 -
Education Services 0.04 0.45
Apparel, Accessories & Luxury Goods - 0.50
General Merchandise Stores - 1.14
Hotels, Resorts & Cruise Lines - 1.09
Diversified Real Estate Activities - 1.07
Trading Companies & Distributors - 0.64
Health Care Facilities - 0.23
Oil & Gas Equipment & Services - 0.16
Specialized REITs - 0.01
Total 100.00 % 100.00 %
___________________(1)This industry includes our investments in the JVs and certain limited partnership interests.
61
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Loans and Debt Securities on Non-Accrual Status
As of September 30, 2021 , there were no investments on non-accrual status. As of
September 30, 2020 , there were two investments on which we had stopped accruing
cash and/or PIK interest or OID income. During the year ended September 30,
2021 , we exited the two investments previously on non-accrual status as of
September 30, 2020 .
The percentages of our debt investments at cost and fair value by accrual status
as of September 30, 2020 were as follows:
September 30, 2020
% of Debt % of Debt
Cost Portfolio Fair Value Portfolio
Accrual $ 1,500,364 98.79 % $ 1,483,284 99.89 %
PIK non-accrual (1) 12,661 0.83 - -
Cash non-accrual (2) 5,712 0.38 1,571 0.11
Total $ 1,518,737 100.00 % $ 1,484,855 100.00 %
___________________
(1)PIK non-accrual status is inclusive of other non-cash income, where
applicable.
(2)Cash non-accrual status is inclusive of PIK and other non-cash income, where
applicable.
The Joint Ventures
Senior Loan Fund JV I, LLC
In May 2014 , we entered into an LLC agreement with Kemper to form SLF JV I. We
co-invest in senior secured loans of middle-market companies and other corporate
debt securities with Kemper through our investment in SLF JV I. SLF JV I is
managed by a four person Board of Directors, two of whom are selected by us and
two of whom are selected by Kemper. All portfolio decisions and investment
decisions in respect of SLF JV I must be approved by the SLF JV I investment
committee, which consists of one representative selected by us and one
representative selected by Kemper (with approval from a representative of each
required). Since we do not have a controlling financial interest in SLF JV I, we
do not consolidate SLF JV I. SLF JV I is not an "eligible portfolio company" as
defined in section 2(a)(46) of the Investment Company Act. SLF JV I is
capitalized pro rata with LLC equity interests as transactions are completed and
may be capitalized with additional subordinated notes issued to us and Kemper by
SLF JV I. The SLF JV I Notes are senior in right of payment to SLF JV I LLC
equity interests and subordinated in right of payment to SLF JV I's secured
debt.
As of September 30, 2021 and September 30, 2020 , we and Kemper owned, in the
aggregate, 87.5% and 12.5%, respectively, of the LLC equity interests of SLF JV
I and the outstanding SLF JV I Notes. As of each of September 30, 2021 and
September 30, 2020 , we and Kemper had funded approximately $165.5 million to SLF
JV I, of which $144.8 million was from us. As of September 30, 2021 , we had
aggregate commitments to fund SLF JV I of $35.0 million , of which approximately
$26.2 million was to fund additional SLF JV I Notes and approximately
$8.8 million was to fund LLC equity interests in SLF JV I. As of September 30,
2020 , we had commitments to fund LLC equity interests in SLF JV I of $17.5
million , of which $1.3 million was unfunded.
Both the cost and fair value of our SLF JV I Notes were $96.3 million as of each
of September 30, 2021 and September 30, 2020 . We earned interest income of
$7.4 million , $8.1 million and $9.8 million on our investment in the SLF JV I
Notes for the years ended September 30, 2021 , 2020 and 2019, respectively. The
cost and fair value of the LLC equity interests in SLF JV I held by us was $49.3
million and $37.7 million , respectively, as of September 30, 2021 and $49.3
million and $21.2 million , respectively, as of September 30, 2020 . We earned
$0.9 million in dividend income for the year ended September 30, 2021 with
respect to our investment in the LLC equity interests of SLF JV I. We did not
earn dividend income for the years ended September 30, 2020 and 2019 with
respect to our investment in the LLC equity interests of SLF JV I. The LLC
equity interests of SLF JV I are dividend producing to the extent SLF JV I has
residual cash to be distributed on a quarterly basis.
62
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Below is a summary of SLF JV I's portfolio as of
September 30, 2021 Senior secured loans (1)
Weighted average interest rate on senior secured loans (2)
5.60%
Number of borrowers in SLF JV I
55
Largest exposure to a single borrower (1)
Total of five largest loan exposures to borrowers (1)$46,984 __________________ (1) At principal amount. (2) Computed using the weighted average annual interest rate on accruing senior secured loans at fair value. See "Note 3. Portfolio Investments" in the notes to the accompanying financial statements for more information on SLF JV I and its portfolio.OCSI Glick JV LLC OnMarch 19, 2021 , as a result of the consummation of the Mergers, we became party to the LLC agreement of the Glick JV. The Glick JV invests primarily in senior secured loans of middle-market companies. We co-invest in these securities with GF Equity Funding through the Glick JV. The Glick JV is managed by a four person Board of Directors, two of whom are selected by us and two of whom are selected by GF Equity Funding. All portfolio decisions and investment decisions in respect of the Glick JV must be approved by the Glick JV investment committee, consisting of one representative selected by us and one representative selected by GF Equity Funding (with approval from a representative of each required). Since we do not have a controlling financial interest in the Glick JV, we do not consolidate the Glick JV. The Glick JV is not an "eligible portfolio company" as defined in section 2(a)(46) of the Investment Company Act. The Glick JV is capitalized as transactions are completed. The members provide capital to the Glick JV in exchange for LLC equity interests, and we and GF Debt Funding 2014 LLC, or GF Debt Funding, an entity advised by affiliates of GF Equity Funding, provide capital to the Glick JV in exchange for subordinated notes issued by the Glick JV, or the Glick JV Notes. The Glick JV Notes are junior in right of payment to the repayment of temporary contributions made by us to fund investments of the Glick JV that are repaid when GF Equity Funding and GF Debt Funding make their capital contributions and fund their Glick JV Notes, respectively. As ofSeptember 30, 2021 , we and GF Equity Funding owned 87.5% and 12.5%, respectively, of the outstanding LLC equity interests, and we and GF Debt Funding owned 87.5% and 12.5%, respectively, of the Glick JV Notes. Approximately$84.0 million in aggregate commitments was funded as ofSeptember 30, 2021 , of which$73.5 million was from us. As ofSeptember 30, 2021 , we had commitments to fund Glick JV Notes of$78.8 million , of which$12.4 million was unfunded. As ofSeptember 30, 2021 , we had commitments to fund LLC equity interests in the Glick JV of$8.7 million , of which$1.6 million was unfunded as of each such date. The cost and fair value of our aggregate investment in the Glick JV was$50.7 million and$55.6 million , respectively, as ofSeptember 30, 2021 . For the period fromMarch 19, 2021 toSeptember 30, 2021 , our investment in the Glick JV Notes earned interest income of$2.4 million . We did not earn any dividend income for the period fromMarch 19, 2021 toSeptember 30, 2021 with respect to our investment in the LLC equity interests of the Glick JV. The LLC equity interests of the Glick JV are income producing to the extent there is residual cash to be distributed on a quarterly basis. Below is a summary of the Glick JV's portfolio as ofSeptember 30, 2021 :September 30, 2021 Senior secured loans (1)
Weighted average current interest rate on senior secured loans (2)
5.86%
Number of borrowers in the Glick JV
37
Largest loan exposure to a single borrower (1)
Total of five largest loan exposures to borrowers (1)$28,324 __________ (1) At principal amount. (2) Computed using the weighted average annual interest rate on accruing senior secured loans at fair value. See "Note 3. Portfolio Investments" in the notes to the accompanying financial statements for more information on the Glick JV and its portfolio. 63 -------------------------------------------------------------------------------- Discussion and Analysis of Results and Operations Results of Operations Net increase (decrease) in net assets resulting from operations includes net investment income, net realized gains (losses) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends and fees and net expenses. Net realized gains (losses) is the difference between the proceeds received from dispositions of investment related assets and liabilities and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment related assets and liabilities carried at fair value during the reporting period, including the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized. OnMarch 19, 2021 , we completed our previously announced acquisition of OCSI pursuant to the Merger Agreement. We were the accounting survivor of the Mergers. The Mergers were accounted for as an asset acquisition in accordance with the asset acquisition method of accounting as detailed in ASC 805-50, Business Combinations-Related Issues, or ASC 805. We determined the fair value of the shares of our common stock that were issued to former OCSI stockholders pursuant to the Merger Agreement plus transaction costs to be the consideration paid in connection with the Mergers under ASC 805. The consideration paid to OCSI stockholders was less than the aggregate fair values of the assets acquired and liabilities assumed, which resulted in a purchase discount (the "purchase discount"). The consideration paid was allocated to the individual assets acquired and liabilities assumed based on the relative fair values of net identifiable assets acquired other than "non-qualifying" assets (for example, cash) and did not give rise to goodwill. As a result, the purchase discount was allocated to the cost basis of the OCSI investments acquired by us on a pro-rata basis based on their relative fair values as of the effective time of the Mergers. Immediately following the Mergers, the investments were marked to their respective fair values in accordance with ASC 820, which resulted in$34.1 million of unrealized appreciation in the Consolidated Statement of Operations as a result of the Mergers. The purchase discount allocated to the debt investments acquired will accrete over the life of each respective debt investment through interest income, with a corresponding adjustment recorded to unrealized appreciation on such investment acquired through its ultimate disposition. The purchase discount allocated to equity investments acquired will not amortize over the life of such investments through interest income and, assuming no subsequent change to the fair value of the equity investments acquired and disposition of such equity investments at fair value, we will recognize a realized gain with a corresponding reversal of the unrealized appreciation on disposition of such equity investments acquired. The Mergers were considered a tax-free reorganization and we have elected to carry forward the historical cost basis of the acquired OCSI investments for tax purposes. Comparison of Years endedSeptember 30, 2021 andSeptember 30, 2020 Total Investment Income Total investment income includes interest on our investments, fee income and dividend income. Total investment income for the years endedSeptember 30, 2021 and 2020 was$209.4 million and$143.1 million , respectively. For the year endedSeptember 30, 2021 , this amount consisted of$190.8 million of interest income from portfolio investments (which included$16.4 million of PIK interest),$14.1 million of fee income and$4.5 million of dividend income. For the year endedSeptember 30, 2020 , this amount consisted of$133.4 million of interest income from portfolio investments (which included$7.9 million of PIK interest),$8.5 million of fee income and$1.2 million of dividend income. The increase of$66.3 million , or 46.3%, in our total investment income for the year endedSeptember 30, 2021 , as compared to the year endedSeptember 30, 2020 , was due primarily to (1) a$57.4 million increase in interest income, which was primarily driven by a larger investment portfolio primarily due to the increase in assets resulting from the Mergers and new originations, OID accretion that resulted from merger-related accounting adjustments and higher OID acceleration resulting from exits of investments, (2) a$5.6 million increase in fee income primarily due to higher prepayment fees and amendment fees and (3) a$3.3 million increase in dividend income mainly driven by dividends received from two investments that did not pay dividends in the prior year. Expenses Net expenses (expenses net of fee waivers) for the years endedSeptember 30, 2021 and 2020 were$109.5 million and$71.1 million , respectively. Net expenses increased for the year endedSeptember 30, 2021 , as compared to the year endedSeptember 30, 2020 , by$38.3 million , or 53.9%, primarily due to (1)$18.0 million of higher accrued Part II incentive fees (net of waivers) as a result of higher cumulative capital gains earned and the impact of the waiver reversal in the prior year, (2)$7.8 of higher base management fees (net of management fee waivers) primarily as a result of a larger investment portfolio, including due to the Mergers, (3) a$6.4 million increase in Part I incentive fees mainly due to increased total investment income and (4) a$4.2 million increase in interest expense due to higher borrowings outstanding. 64 -------------------------------------------------------------------------------- Net Investment Income Primarily as a result of the$66.3 million increase in total investment income and the$38.3 million increase in net expenses, net investment income for the year endedSeptember 30, 2021 increased by$25.1 million , or 34.9%, compared to the year endedSeptember 30, 2020 . Realized Gain (Loss) Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of investments and foreign currency and the cost basis without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules. During the years endedSeptember 30, 2021 , 2020 and 2019, we recorded aggregate net realized gains (losses) of$26.4 million ,$(13.9) million and$20.8 million , respectively, in connection with the exits or restructurings of various investments. See "Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation" in the notes to the accompanying Consolidated Financial Statements for more details regarding investment realization events for the years endedSeptember 30, 2021 , 2020 and 2019. Net Unrealized Appreciation (Depreciation) Net unrealized appreciation or depreciation is the net change in the fair value of our investments and foreign currency during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. During the years endedSeptember 30, 2021 , 2020 and 2019, we recorded net unrealized appreciation (depreciation) of$114.5 million ,$(20.6) million and$38.5 million , respectively. For the year endedSeptember 30, 2021 , this consisted of$70.0 million of net unrealized appreciation on debt investments,$36.3 million of net unrealized appreciation on equity investments,$6.6 million of net unrealized appreciation related to exited investments (a portion of which resulted in a reclassification to realized losses) and$1.7 million of net unrealized appreciation of foreign currency forward contracts. For the year endedSeptember 30, 2020 , this consisted of$35.3 million of net unrealized depreciation on equity investments,$12.0 million of net unrealized depreciation on debt investments and$0.3 million of net unrealized depreciation of foreign currency forward contracts, partially offset by$26.9 million of net unrealized appreciation related to exited investments (a portion of which resulted in a reclassification to realized losses). For the year endedSeptember 30, 2019 , this consisted of$57.0 million of net unrealized appreciation related to exited investments (a portion of which results in a reclassification to realized losses),$10.6 million of net unrealized appreciation on equity investments and$0.3 million net unrealized appreciation of foreign currency forward contracts, partially offset by$26.8 million of net unrealized depreciation on debt investments and$2.7 million of net unrealized depreciation of secured borrowings (which results in a reclassification to realized gains). For the year endedSeptember 30, 2021 , there were$22.8 million of net realized and unrealized gains (losses) that resulted solely from accounting adjustments related to the Mergers. Comparison of Years endedSeptember 30, 2020 andSeptember 30, 2019 The comparison of the fiscal years endedSeptember 30, 2020 and 2019 can be found within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our annual report on Form 10-K for the fiscal year endedSeptember 30, 2020 which is incorporated by reference herein. Financial Condition, Liquidity and Capital Resources We have a number of alternatives available to fund our investment portfolio and our operations, including raising equity, increasing or refinancing debt and funding from operational cash flow. We generally expect to fund the growth of our investment portfolio through additional debt and equity capital, which may include securitizing a portion of our investments. We cannot assure you, however, that our efforts to grow our portfolio will be successful. For example, our common stock has generally traded at prices below net asset value for the past several years, and we are currently limited in our ability to raise additional equity at prices below the then-current net asset value per share. We intend to continue to generate cash primarily from cash flows from operations, including interest earned, and future borrowings. We intend to fund our future distribution 65 -------------------------------------------------------------------------------- obligations through operating cash flow or with funds obtained through future equity and debt offerings or credit facilities, as we deem appropriate. Our primary uses of funds are investments in our targeted asset classes and cash distributions to holders of our common stock. We may also from time to time repurchase or redeem some or all of our outstanding notes. At a special meeting of our stockholders held onJune 28, 2019 , our stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act to us effective as ofJune 29, 2019 . As a result of the reduced asset coverage requirement, we can incur$2 of debt for each$1 of equity as compared to$1 of debt for each$1 of equity. As ofSeptember 30, 2021 , we had$1,280.0 million in senior securities and our asset coverage ratio was 201.7%. As ofSeptember 30, 2021 , our debt to equity ratio was 0.97x. Our target debt to equity ratio is 0.85x to 1.0x (i.e.,one dollar of equity for each$0.85 to$1.00 of debt outstanding) as we plan to continue to opportunistically deploy capital into the markets. For the year endedSeptember 30, 2021 , we experienced a net decrease in cash and cash equivalents (including restricted cash) of$7.5 million . During that period, we used$230.5 million of net cash from operating activities, primarily from funding$1,120.2 million of investments, partially offset by$792.2 million of principal payments and sale proceeds received,$20.9 million of cash acquired in the Mergers, the cash activities related to$97.1 million of net investment income and$10.1 million of net increases in payables and net decreases in receivables from unsettled transactions. During the same period, net cash provided by financing activities was$224.2 million , primarily consisting of$349.0 million of borrowings of unsecured notes (net of OID), partially offset by$24.6 million of net repayments under the credit facilities,$79.9 million of cash distributions paid to our stockholders,$9.3 million of repayments of secured borrowings,$2.2 million of repurchases of common stock under our dividend reinvestment plan, or DRIP, and$8.9 million of deferred financing costs paid. For the year endedSeptember 30, 2020 , we experienced a net increase in cash and cash equivalents of$23.7 million . During that period, we used$152.9 million of net cash from operating activities, primarily from funding$727.2 million of investments, a$63.7 million of net decrease in payables from unsettled transactions, partially offset by$579.6 million of principal payments and sale proceeds received and the cash activities related to$72.0 million of net investment income. During the same period, net cash provided by financing activities was$176.3 million , primarily consisting of$100.0 million of net borrowings under the Credit Facility (as defined below) and$136.2 million net incurrence of unsecured notes, partially offset by$53.1 million of cash distributions paid to our stockholders,$4.8 million of deferred financing costs paid and$1.9 million of repurchases of common stock under our dividend reinvestment plan, or DRIP. For the year endedSeptember 30, 2019 , we experienced a net increase in cash and cash equivalents and restricted cash of$1.9 million . During that period, we received$215.8 million of net cash from operating activities, primarily from$606.3 million of principal payments and sale proceeds received,$44.5 million of a net increase in payables from unsettled transactions and the cash activities related to$67.9 million of net investment income, partially offset by funding$478.0 million of investments. During the same period, net cash used in financing activities was$214.1 million , primarily consisting of$228.8 million of repayments of unsecured notes,$2.7 million of repayments of secured borrowings,$52.2 million of cash distributions paid to our stockholders,$2.9 million of deferred financing costs paid and$1.3 million of repurchases of common stock under our DRIP, partially offset by$73.8 million of net borrowings under the Credit Facility. As ofSeptember 30, 2021 , we had$31.6 million in cash and cash equivalents (including$2.3 million of restricted cash), portfolio investments (at fair value) of$2.6 billion ,$22.1 million of interest, dividends and fees receivable,$470.0 million of undrawn capacity on our credit facilities (subject to borrowing base and other limitations),$0.1 million of net receivables from unsettled transactions,$630.0 million of borrowings outstanding under our credit facilities and$638.7 million of unsecured notes payable (net of unamortized financing costs, unaccreted discount and interest rate swap fair value adjustment). As ofSeptember 30, 2020 , we had$39.1 million in cash and cash equivalents, portfolio investments (at fair value) of$1.6 billion ,$6.9 million of interest, dividends and fees receivable,$285.2 million of undrawn capacity on the Syndicated Facility (as defined below) (subject to borrowing base and other limitations),$8.6 million of net receivables from unsettled transactions,$414.8 million of borrowings outstanding under our Syndicated Facility and$294.5 million of unsecured notes payable (net of unamortized financing costs and unaccreted discount). We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As ofSeptember 30, 2021 , our only off-balance sheet arrangements consisted of$264.9 million of unfunded commitments, which was comprised of$212.4 million to provide debt and equity financing to certain of our portfolio companies,$49.0 million to provide financing to the JVs and$3.5 million related to unfunded limited partnership interests. As ofSeptember 30, 2020 , our only off-balance sheet arrangements consisted of$157.5 million of unfunded commitments, which was comprised of$152.7 million to provide debt financing to certain of our portfolio companies,$1.3 million to provide equity financing to SLF JV I and$3.5 million related to unfunded limited partnership interests. Such commitments are subject to our portfolio companies' satisfaction of certain financial and nonfinancial covenants 66 -------------------------------------------------------------------------------- and may involve, to varying degrees, elements of credit risk in excess of the amount recognized in our Consolidated Statements of Assets and Liabilities. As ofSeptember 30, 2021 , we have analyzed cash and cash equivalents, availability under our credit facilities, the ability to rotate out of certain assets and amounts of unfunded commitments that could be drawn and believe our liquidity and capital resources are sufficient to take advantage of market opportunities in the current economic climate. Contractual Obligations The following table reflects information pertaining to our principal debt outstanding under the Syndicated Facility, Citibank Facility, Deutsche Bank Facility, 2025 Notes, 2027 Notes and secured borrowings: Maximum debt Weighted average debt outstanding for Debt Outstanding Debt Outstanding outstanding for the the year ended as of September 30, as of September 30, year ended September 30, 2020 2021 September 30, 2021 2021 Syndicated Facility $ 414,825 $ 495,000 $ 455,292$ 700,025 Citibank Facility - 135,000 65,478 149,057 Deutsche Bank Facility - - 13,107 115,700 2025 Notes 300,000 300,000 300,000 300,000 2027 Notes - 350,000 130,411 350,000 Secured borrowings - - 102 9,341 Total debt $ 714,825$ 1,280,000 $ 964,390
The following table reflects our contractual obligations arising from the Syndicated Facility, Citibank Facility, 2025 Notes and 2027 Notes:
Payments due by period as of
Less than
Contractual Obligations Total 1 year 1-3 years 3-5 years More than 5 years Syndicated Facility$ 495,000 $ - $ -$ 495,000 $ - Interest due on Syndicated Facility 49,305 10,731 21,462 17,112 - Citibank Facility 135,000 - 135,000 - - Interest due on Citibank Facility 7,311 2,611 4,700 - - 2025 Notes 300,000 - - 300,000 - Interest due on 2025 Notes 35,786 10,500 21,000 4,286 - 2027 Notes 350,000 - - - 350,000 Interest due on 2027 Notes (a) 33,607 6,346 12,692 12,692 1,877 Total$ 1,406,009 $ 30,188 $ 194,854 $ 829,090 $ 351,877 __________
(a) The interest due on the 2027 Notes was calculated net of the interest rate swap.
Equity Issuances OnMarch 19, 2021 , in connection with the Mergers, we issued an aggregate of 39,400,011 shares of our common stock to former OCSI stockholders. There were no other common stock issuances during the year endedSeptember 30, 2021 , 2020 and 2019. 67 -------------------------------------------------------------------------------- Significant Capital Transactions The following table reflects the distributions per share that we have paid, including shares issued under our DRIP, on our common stock sinceOctober 1, 2018 : Amount Cash DRIP Shares DRIP Shares Date Declared Record Date Payment Date per Share Distribution Issued (1) Value November 19, 2018 December 17, 2018 December 28, 2018$ 0.095 $ 13.0 million 87,429$ 0.4 million February 1, 2019 March 15, 2019 March 29, 2019 0.095 13.1 million 59,603 0.3 million May 3, 2019 June 14, 2019 June 28, 2019 0.095 13.1 million 61,093 0.3 million August 2, 2019 September 13, 2019 September 30, 2019 0.095 13.1 million 61,205 0.3 million November 12, 2019 December 13, 2019 December 31, 2019 0.095 12.9 million 87,747 0.5 million January 31, 2020 March 13, 2020 March 31, 2020 0.095 12.9 million 157,523 0.5 million April 30, 2020 June 15, 2020 June 30, 2020 0.095 13.0 million 87,351 0.4 million July 31, 2020 September 15, 2020 September 30, 2020 0.105 14.3 million 102,404 0.5 million November 13, 2020 December 15, 2020 December 31, 2020 0.11 15.0 million 93,964 0.5 million January 29, 2021 March 15, 2021 March 31, 2021 0.12 16.4 million 81,702 0.5 million April 30, 2021 June 15, 2021 June 30, 2021 0.13 22.9 million 76,979 0.5 million July 30, 2021 September 15, 2021 September 30, 2021 0.145 25.5 million 85,075 0.6 million ______________ (1)Shares were purchased on the open market and distributed. Indebtedness See "Note 6. Borrowings" in the Consolidated Financial Statements for more details regarding our indebtedness. Syndicated Facility As ofSeptember 30, 2021 , (i) the size of the Syndicated Facility was$950 million (with an "accordion" feature that permits us, under certain circumstances, to increase the size of the facility to up to the greater of$1.25 billion and our net worth (as defined in the Syndicated Facility) on the date of such increase), (ii) the period during which we may make drawings will expire onMay 4, 2025 and the maturity date wasMay 4, 2026 and (iii) the interest rate margin for (a) LIBOR loans (which may be 1-, 2-, 3- or 6-month, at our option) was 2.00% and (b) alternate base rate loans was 1.00%. Each loan or letter of credit originated or assumed under the Syndicated Facility is subject to the satisfaction of certain conditions. Borrowings under the Syndicated Facility are subject to the facility's various covenants and the leverage restrictions contained in the Investment Company Act. We cannot assure you that we will be able to borrow funds under the Syndicated Facility at any particular time or at all. The following table describes significant financial covenants, as ofSeptember 30, 2021 , with which we must comply under the Syndicated Facility on a quarterly basis: Financial Covenant Description Target Value June 30, 2021 Reported Value (1) Minimum shareholders' equity Net assets shall not be less than the sum of$600 million $1,302 million (x)$600 million , plus (y) 50% of the aggregate net proceeds of all sales of equity interests after May 6, 2020 Asset coverage ratio Asset coverage ratio shall not be less than 1.50:1 2.16:1 the greater of 1.50:1 and the statutory test applicable to us Interest coverage ratio Interest coverage ratio shall not be less than 2.25:1 4.18:1 2.25:1 Minimum net worth Net worth shall not be less than$550 million $550 million $1,121 million ___________ (1) As contractually required, we report financial covenants based on the last filed quarterly or annual report, in this case our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2021 . We were in compliance with all financial covenants under the Syndicated Facility based on the financial information contained in this Annual Report on Form 10-K. As ofSeptember 30, 2021 andSeptember 30, 2020 , we had$495.0 million and$414.8 million of borrowings outstanding under the Syndicated Facility, respectively, which had a fair value of$495.0 million and$414.8 million , respectively. Our borrowings under the Syndicated Facility bore interest at a weighted average interest rate of 2.197%, 3.028% and 4.550% for the years endedSeptember 30, 2021 , 2020 and 2019, respectively. For the years endedSeptember 30, 2021 , 2020 and 2019, we 68 -------------------------------------------------------------------------------- recorded interest expense (inclusive of fees) of$13.8 million ,$14.9 million and$17.1 million , respectively, related to the Syndicated Facility. Citibank Facility OnMarch 19, 2021 , as a result of the consummation of the Mergers, we became party to the Citibank Facility. As ofSeptember 30, 2021 , we were able to borrow up to$150 million under the Citibank Facility (subject to borrowing base and other limitations). As ofSeptember 30, 2021 , the reinvestment period under the Citibank Facility was scheduled to expire onJuly 18, 2023 and the maturity date for the Citibank Facility wasJuly 18, 2024 . As ofSeptember 30, 2021 , borrowings under the Citibank Facility are subject to certain customary advance rates and accrue interest at a rate equal to LIBOR plus between 1.25% and 2.20% per annum on broadly syndicated loans, subject to observable market depth and pricing, and LIBOR plus 2.25% per annum on all other eligible loans during the reinvestment period. In addition, as ofSeptember 30, 2021 , for the duration of the reinvestment period there is a non-usage fee payable of 0.50% per annum on the undrawn amount under the Citibank Facility. The minimum asset coverage ratio applicable to us under the Citibank Facility is 150% as determined in accordance with the requirements of the Investment Company Act. Borrowings under the Citibank Facility are secured by all of the assets ofOCSL Senior Funding II LLC and all of our equity interests inOCSL Senior Funding II LLC . We may use the Citibank Facility to fund a portion of our loan origination activities and for general corporate purposes. Each loan origination under the Citibank Facility is subject to the satisfaction of certain conditions. As ofSeptember 30, 2021 , we had$135.0 million outstanding under the Citibank Facility, which had a fair value of$135.0 million . Our borrowings under the Citibank Facility bore interest at a weighted average interest rate of 2.086% for the period fromMarch 19, 2021 toSeptember 30, 2021 . For the period fromMarch 19, 2021 toSeptember 30, 2021 , we recorded interest expense (inclusive of fees) of$1.9 million related to the Citibank Facility. Deutsche Bank Facility OnMarch 19, 2021 , as a result of the consummation of the Mergers, we became party to a loan financing and servicing agreement, or, as amended, the Deutsche Bank Facility, withOCSI Senior Funding Ltd. , our wholly-owned, special purpose financing subsidiary, as borrower, us, as equityholder and as servicer, the lenders from time to time party thereto, Deutsche Bank AG,New York Branch, as facility agent, andWells Fargo Bank, National Association , as collateral agent and as collateral custodian. OnMay 4, 2021 , we repaid all outstanding borrowings under the Deutsche Bank Facility using borrowings under the Syndicated Facility, following which the Deutsche Bank Facility was terminated. For the period fromMarch 19, 2021 toMay 4, 2021 , our borrowings under the Deutsche Bank Facility bore interest at a weighted average interest rate of 2.900%. For the period fromMarch 19, 2021 toSeptember 30, 2021 , we recorded interest expense (inclusive of fees) of$0.3 million related to the Deutsche Bank Facility. 2025 Notes OnFebruary 25, 2020 , we issued$300.0 million in aggregate principal amount of the 2025 Notes for net proceeds of$293.8 million after deducting OID of$2.5 million , underwriting commissions and discounts of$3.0 million and offering costs of$0.7 million . The OID on the 2025 Notes is amortized based on the effective interest method over the term of the notes. 2027 Notes OnMay 18, 2021 , we issued$350.0 million in aggregate principal amount of the 2027 Notes for net proceeds of$344.8 million after deducting OID of$1.0 million , underwriting commissions and discounts of$3.5 million and offering costs of$0.7 million . The OID on the 2027 Notes is amortized based on the effective interest method over the term of the notes. In connection with the 2027 Notes, we entered into an interest rate swap to more closely align the interest rates of our liabilities with our investment portfolio, which consists of predominately floating rate loans. Under the interest rate swap agreement, we receive a fixed interest rate of 2.7% and pay a floating interest rate of the three-month LIBOR plus 1.658% on a notional amount of$350 million . We designated the interest rate swap as the hedging instrument in an effective hedge accounting relationship. 69 --------------------------------------------------------------------------------
The below table presents the components of the carrying value of the 2025 Notes
and the 2027 Notes as of
As of September 30, 2021
($ in millions) 2025 Notes 2027 Notes
Principal $ 300.0 $ 350.0
Unamortized financing costs (2.6) (4.0)
Unaccreted discount (1.7) (0.9)
Interest rate swap fair value adjustment - (2.1)
Net carrying value $ 295.7 $ 343.0
Fair Value $ 314.5 $ 351.1
The below table presents the components of the carrying value of the 2025 Notes
as of September 30, 2020 :
As of September 30, 2020
($ in millions) 2025 Notes
Principal $ 300.0
Unamortized financing costs (3.3)
Unaccreted discount (2.2)
Net carrying value $ 294.5
Fair Value $ 301.4
The below table presents the components of interest and other debt expenses
related to the 2025 Notes and the 2027 Notes for the year ended September 30,
2021 :
($ in millions) 2025 Notes 2027 Notes
Coupon interest $ 10.5 $ 3.5
Amortization of financing costs and discount 1.3 0.3
Effect of interest rate swap - (1.1)
Total interest expense $ 11.8 $ 2.7 Coupon interest rate (net of effect of interest rate swap for 2027 Notes)
3.500 % 1.813 %
The below table presents the components of interest and other debt expenses
related to the 2025 Notes for the year ended
2025 Notes
Coupon interest $ 6.3
Amortization of financing costs and discount 0.7
Total interest expense $ 7.0
Coupon interest rate 3.500 %
2024 Notes
For the years ended September 30, 2020 and 2019, we recorded interest expense of
$1.9 million and $4.6 million (inclusive of fees), respectively, related to our
5.875% notes due 2024, or the 2024 Notes.
On March 2, 2020 , we redeemed 100%, or $75.0 million aggregate principal amount,
of the issued and outstanding 2024 Notes. The redemption price per 2024 Note was
$25 plus accrued and unpaid interest. We recognized a loss of $1.0 million in
connection with the redemption of the 2024 Notes during the year ended
September 30, 2020 . As of September 30, 2021 and September 30, 2020 , there were
no 2024 Notes outstanding.
2028 Notes
For the year ended September 30, 2020 and 2019, we recorded interest expense of
$2.5 million and $5.5 million (inclusive of fees), respectively, related to our
6.125% notes due 2028, or the 2028 Notes.
On March 13, 2020 , we redeemed 100%, or $86.3 million aggregate principal
amount, of the issued and outstanding 2028 Notes. The redemption price per 2028
Note was $25 plus accrued and unpaid interest. We recognized a loss of $1.5
million in connection with the redemption of the 2028 Notes during the year
ended September 30, 2020 . As of September 30, 2021 and September 30, 2020 , there
were no 2028 Notes outstanding.
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Secured Borrowings
As of September 30, 2021 and September 30, 2020 , we did not have any secured
borrowings outstanding. On March 19, 2021 , as a result of the consummation of
the Mergers, we became party to a secured borrowing arrangement under which
certain securities were sold and simultaneously repurchased at a premium. The
amounts due under the secured borrowing arrangement were settled prior to
September 30, 2021 . For the period from March 19, 2021 to September 30, 2021 , we
recorded less than $0.1 million of interest expense in connection with secured
borrowings. Our secured borrowings bore interest at a weighted average rate of
3.123% for the period from March 19, 2021 to September 30, 2021 .
During the year ended September 30, 2019 , $7.2 million of secured borrowings
were extinguished in exchange for $7.2 million of preferred stock in C5
Technology Holdings, LLC , which was restructured during the year. For the year
ended September 30, 2019 , we recorded interest expense of $0.1 million related
to the secured borrowings. For the year ended September 30, 2019 , we recorded
unrealized depreciation on secured borrowings of $2.7 million . For the year
ended September 30, 2019 , we recorded a realized gain of $2.6 million as a
result of the extinguishment of secured borrowings in connection with the C5
Technology Holdings, LLC restructuring.
Regulated Investment Company Status and Distributions
We have qualified and elected to be treated as a RIC under Subchapter M of the Code forU.S. federal income tax purposes. As long as we continue to qualify as a RIC, we will not be subject to tax on our investment company taxable income (determined without regard to any deduction for dividends paid) or realized net capital gains, to the extent that such taxable income or gains is distributed, or deemed to be distributed as dividends, to stockholders on a timely basis. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation. Distributions declared and paid by us in a taxable year may differ from taxable income for that taxable year as such distributions may include the distribution of taxable income derived from the current taxable year or the distribution of taxable income derived from the prior taxable year carried forward into and distributed in the current taxable year. Distributions also may include returns of capital. To maintain RIC tax treatment, we must, among other things, distribute dividends, with respect to each taxable year, of an amount at least equal to 90% of our investment company taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any), determined without regard to any deduction for dividends paid. As a RIC, we are also subject to a federal excise tax, based on distribution requirements of our taxable income on a calendar year basis. We anticipate timely distribution of our taxable income in accordance with tax rules. We did not incur aU.S. federal excise tax for calendar years 2019 and 2020. We may incur a federal excise tax in future years. We intend to distribute at least 90% of our annual taxable income (which includes our taxable interest and fee income) to our stockholders. The covenants contained in our credit facilities may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement associated with our ability to be subject to tax as a RIC. In addition, we may retain for investment some or all of our net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal and taxable year fall below the total amount of our dividend distributions for that fiscal and taxable year, a portion of those distributions may be deemed a return of capital to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a Business Development Company under the Investment Company Act and due to provisions in our credit facilities and debt instruments. If we do not distribute a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level. A RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder elects to receive his or her entire distribution in either cash or stock of the RIC, subject to certain limitations regarding the aggregate amount of cash to be distributed to all stockholders. If these and certain other requirements are met, forU.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. 71 -------------------------------------------------------------------------------- We may generate qualified net interest income or qualified net short-term capital gains that may be exempt fromU.S. withholding tax when distributed to foreign stockholders. A RIC is permitted to designate distributions of qualified net interest income and qualified short-term capital gains as exempt fromU.S. withholding tax when paid to non-U.S. shareholders with proper documentation. The following table, which may be subject to change as we finalize our annual tax filings, lists the percentage of qualified net interest income and qualified short-term capital gains for the year endedSeptember 30, 2021 .
Qualified Net Interest Qualified Short-Term
Year Ended Income Capital Gains
September 30, 2021 89.8 % -
We have adopted a DRIP that provides for the reinvestment of any distributions
that we declare in cash on behalf of our stockholders, unless a stockholder
elects to receive cash. As a result, if our Board of Directors declares a cash
distribution, then our stockholders who have not "opted out" of the DRIP will
have their cash distributions automatically reinvested in additional shares of
our common stock, rather than receiving a cash distribution. If our shares are
trading at a premium to net asset value, we typically issue new shares to
implement the DRIP, with such shares issued at the greater of the most recently
computed net asset value per share of our common stock or 95% of the current
market value per share of our common stock on the payment date for such
distribution. If our shares are trading at a discount to net asset value, we
typically purchase shares in the open market in connection with our obligations
under the DRIP.
Related Party Transactions
We have entered into the Investment Advisory Agreement with Oaktree and the
Administration Agreement with Oaktree Administrator, an affiliate of Oaktree.
Mr. John B. Frank , an interested member of our Board of Directors, has an
indirect pecuniary interest in Oaktree. Oaktree is a registered investment
adviser under the Investment Advisers Act of 1940, as amended, that is partially
and indirectly owned by OCG. See "Note 11. Related Party Transactions -
Investment Advisory Agreement" and "- Administrative Services" in the notes to
the accompanying Consolidated Financial Statements.
Recent Developments
Distribution Declaration
On October 13, 2021 , our Board of Directors declared a quarterly distribution of
$0.155 per share, payable in cash on December 31, 2021 to stockholders of record
on December 15, 2021 .
Election of Chief Financial Officer and Treasurer
On November 12, 2021 , our Board of Directors elected Christopher McKown , age 40,
as its Chief Financial Officer and Treasurer effective as of November 30, 2021 .
Mr. McKown is also expected to succeed Mel Carlisle as Chief Financial Officer
and Treasurer of OSI II as of December 31, 2021 . Mr. McKown joined OCM in 2011
and currently serves as a Managing Director responsible for fund accounting and
reporting for Oaktree's Strategic Credit strategy and as the Assistant Treasurer
of the Company and OSI II . Prior to joining OCM., he worked in the audit
practice at KPMG LLP . Mr. McKown received a B.A. degree in business economics
with a minor in accounting cum laude from the University of California, Los
Angeles and is a Certified Public Accountant (inactive).
Mr. McKown has no family relationships with any current director, executive
officer, or person nominated to become a director or executive officer, of us,
and there are no transactions or proposed transactions, to which we are a party,
or intended to be a party, in which Mr. McKown has, or will have, a material
interest subject to disclosure under Item 404(a) of Regulation S-K.
Election of Chief Compliance Officer
On November 12, 2021 , our Board of Directors, including a majority of our
independent directors, elected Ashley Pak , age 43, as its Chief Compliance
Officer effective as of the close of business on November 12, 2021 . Ms. Pak was
also elected as Chief Compliance Officer of OSI II as of the close of business
on November 12, 2021 . Ms. Pak joined OCM in 2007 and currently serves as a
Senior Vice President in the Compliance Department . Prior to joining OCM, she
was a Compliance/Legal Specialist at Associated Securities Corp. Ms. Pak
received a B.A. in Business Administration from Seattle University and an MBA
from the University of Massachusetts, Amherst - Isenberg School of Management .
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Ms. Pak has no family relationships with any current director, executive
officer, or person nominated to become a director or executive officer, of us,
and there are no transactions or proposed transactions, to which we are a party,
or intended to be a party, in which Ms. Pak has, or will have, a material
interest subject to disclosure under Item 404(a) of Regulation S-K.
Election of Independent Director
On November 12, 2021 , the Board of Directors elected Phyllis R. Caldwell to the
Board of Directors and each of its committees effective as of December 31, 2021 .
Ms. Caldwell is founder and has served since 2012 as the managing member of
Wroxton Civic Ventures , which provides advisory services on various financial,
housing and economic development matters. Previously, Ms. Caldwell was Chief
Homeownership Preservation Officer at the U.S. Department of the Treasury ,
responsible for oversight of the U.S. housing market stabilization, economic
recovery and foreclosure prevention initiatives established through the Troubled
Asset Relief Program. In addition, Ms. Caldwell held various leadership roles
during eleven years at Bank of America , including serving as President of
Community Development Banking. Ms. Caldwell has served as Chair of the board of
directors of Ocwen Financial Corporation since March 2016 and has served as a
director of the company since January 2015 . In June 2021 , Ms. Caldwell became a
member of the board of directors of OneMain Holdings, Inc., the country's
largest nonprime installment lender. In March 2021 , Ms. Caldwell was appointed
as a member of the board of trustees of JBG SMITH, an owner and developer of
mixed-use properties in the Washington, D.C. market. From December 2020 to July
2021 , Ms. Caldwell served as a member of the board of directors of Revolution
Acceleration Acquisition Corp. , a special purpose acquisition company, and from
January 2014 through September 2018 , she served as an independent director of
American Capital Senior Floating, Ltd. , a Business Development Company. Ms.
Caldwell also serves or has served on the boards of other public and private
businesses and numerous non-profit organizations engaged in housing and
community development finance. Ms. Caldwell received her Master of Business
Administration from the Robert H. Smith School of Business at the University of
Maryland, College Park and holds a Bachelor of Arts in Sociology, also from the
University of Maryland .
Ms. Caldwell has no family relationships with any current director, executive
officer, or person nominated to become a director or executive officer, of us,
and there are no transactions or proposed transactions, to which we are a party,
or intended to be a party, in which Ms. Caldwell has, or will have, a material
interest subject to disclosure under Item 404(a) of Regulation S-K.
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