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 quarterly report on Form 10-Q.
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to: •our future operating results and distribution projections; •the ability ofOaktree Fund Advisors, LLC , or 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 quarterly report on Form 10-Q 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 our annual report on Form 10-K for the year endedSeptember 30, 2022 and elsewhere in this quarterly report on Form 10-Q. 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, including the impacts of inflation and rising interest rates; •risks associated with possible disruption in our operations or the economy generally due to terrorism, war or other geopolitical conflict (including the current conflict betweenRussia andUkraine ), natural disasters or pandemics; •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, regulated investment companies, or RICs; •the ability to realize the benefits of the OSI2 Merger (as defined below); 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 quarterly report on Form 10-Q on information available to us on the date of this quarterly 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 theSecurities and Exchange Commission , or 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 of 1940, as amended, or the Investment Company Act. In addition, we have qualified and elected to be treated as a RIC under the Internal Revenue Code of 1986, as amended, or the Code, forU.S. federal income tax purposes. We are externally managed by Oaktree pursuant to an investment advisory agreement, as amended from time to time, or the Investment Advisory Agreement.Oaktree Fund Administration, LLC , or Oaktree Administrator, an affiliate of Oaktree, provides certain administrative and other services necessary for us to operate pursuant to an administration agreement, as amended from time to time, or the Administration Agreement. 85 -------------------------------------------------------------------------------- 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 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. 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 area, 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 approximately$800 million at fair value. Over time, Oaktree intends to rotate us out of the remaining non-core investments, which were approximately$71 million at fair value as ofDecember 31, 2022 . Oaktree periodically reviews designations of investments as core and non-core and may change such designations over time. OnMarch 19, 2021 , we acquiredOaktree Strategic Income Corporation , or OCSI, pursuant to an agreement and plan or merger, or the OCSI Merger Agreement, dated as ofOctober 28, 2020 , by and among OCSI, us,Lion Merger Sub, Inc. , our wholly-owned subsidiary, and, solely for the limited purposes set forth therein, Oaktree. Pursuant to the OCSI Merger Agreement, OCSI was merged with and into us in a two-step transaction with us as the surviving company, or the OCSI Merger. OnJanuary 23, 2023 , we acquiredOaktree Strategic Income II, Inc. , or OSI2, pursuant to that certain Agreement and Plan of Merger, or the OSI2 Merger Agreement, dated as ofSeptember 14, 2022 , by and among OSI2, us,Project Superior Merger Sub, Inc. , a wholly-owned subsidiary of us, and, solely for the limited purposes set forth therein, Oaktree. Pursuant to the OSI2 Merger Agreement, OSI2 was merged with and into us in a two-step transaction with us as the surviving company, or the OSI2 Merger.
Business Environment and Developments
Global financial markets have experienced an increase in volatility as concerns about the impact of higher inflation, rising interest rates, a potential recession and the current conflict inUkraine have weighed on market participants. These factors have created disruptions in supply chains and economic activity and have had a particularly adverse impact on certain companies in the energy, raw materials and transportation sectors, among others. 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 these macroeconomic events or how long any further market disruptions or volatility might last. We continue to closely monitor the impact these events have on our business, industry and portfolio companies and will provide constructive solutions where necessary. Against this uncertain macroeconomic backdrop, we believe attractive risk-adjusted returns can be achieved by making loans to middle market companies that typically possess resilient business models with strong underlying fundamentals. 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. 86 -------------------------------------------------------------------------------- As ofDecember 31, 2022 , 87.3% of our debt investment portfolio (at fair value) and 87.2% of our debt investment portfolio (at cost) bore interest at floating rates. Most of our floating rate loans are indexed to the London Interbank Offered Rate, or LIBOR, and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly or monthly at the borrower's option. Certain loans may also be indexed to the Secured Overnight Financing Rate, or SOFR, or the Sterling Overnight Index Average, or SONIA. MostU.S. dollar LIBOR rates will continue to be published throughJune 30, 2023 . TheFCA no longer compels panel banks to continue to contribute to LIBOR 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. 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 SOFR. Although there are an increasing number of issuances utilizing SOFR or SONIA, these alternative reference rates may not 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 withFinancial Accounting Standards Board , or FASB, Accounting Standards Codification, or 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 Oaktree'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. Oaktree's 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
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.
Oaktree seeks to obtain at least two quotations for the subject or similar
securities, typically from pricing vendors. If Oaktree is unable to obtain two
quotes from pricing vendors, or if the prices obtained from pricing vendors are
not within our set threshold, Oaktree seeks to obtain a quote directly from a
broker making a market for the asset. Oaktree evaluates the
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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, Oaktree does 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, Oaktree values 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. Oaktree 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, Oaktree depends 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 our 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.
Oaktree estimates 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 of December 31, 2022 and September 30, 2022
was determined by Oaktree, as our valuation designee. We have 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. As of
December 31, 2022 , 92.1% of our portfolio at fair value was valued either based
on market quotations, the transactions precedent approach or corroborated by
independent valuation firms.
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, Oaktree's 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.
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As of December 31, 2022 , we held $2,642.9 million of investments at fair value,
up from $2,494.1 million held at September 30, 2022 , primarily driven by new
originations outpacing the rate of repayments. As of December 31, 2022 and
September 30, 2022 , approximately 95.5% and 94.2%, respectively, of our total
assets represented investments at fair value.
Revenue Recognition
Interest Income
Interest income, adjusted for accretion of original issue discount, or 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. As of each ofDecember 31, 2022 andSeptember 30, 2022 , there were no investments on non-accrual status. 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 payment-in-kind, or 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,Senior Loan Fund JV I, LLC , or SLF JV I, a joint venture through which we andTrinity Universal Insurance Company , a subsidiary of Kemper Corporation, or Kemper, co-invest in senior secured loans of middle-market companies and other corporate debt securities, andOCSI Glick JV LLC , or the Glick JV, a joint venture through which we and GF Equity Funding 2014 LLC, or GF Equity Funding, co-invest primarily in senior secured loans of middle-market companies. We refer to SLF JV I and the Glick JV collectively as 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 three months ended
During the three months ended
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--------------------------------------------------------------------------------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:
December 31, 2022 September 30, 2022
Cost:
Senior secured debt 84.94 % 85.08 %
Debt investments in the JVs 5.85 5.59
Preferred equity 3.16 3.26
Subordinated debt 2.48 2.57
LLC equity interests of the JVs 1.97 1.88
Common equity and warrants 1.60 1.62
Total 100.00 % 100.00 %
December 31, 2022 September 30, 2022
Fair value:
Senior secured debt 86.32 % 86.86 %
Debt investments in the JVs 6.14 5.88
Preferred equity 3.05 3.19
Subordinated debt 2.35 2.28
Common equity and warrants 1.23 0.96
LLC equity interests of the JVs 0.91 0.83
Total 100.00 % 100.00 %
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The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows:
December 31, 2022 September 30, 2022
Cost:
Application Software 15.66 % 14.98 %
Multi-Sector Holdings (1) 8.27 7.48
Pharmaceuticals 4.73 4.83
Data Processing & Outsourced Services 4.25 4.60
Biotechnology 4.02 4.20
Health Care Technology 3.97 3.82
Specialized Finance 3.15 3.09
Industrial Machinery 2.93 3.12
Health Care Services 2.37 2.24
Internet & Direct Marketing Retail 2.36 2.59
Aerospace & Defense 2.23 2.37
Construction & Engineering 2.19 2.33
Health Care Distributors 2.10 2.18
Other Diversified Financial Services 2.06 1.12
Personal Products 1.91 2.03
Automotive Retail 1.86 2.26
Auto Parts & Equipment 1.84 0.48
Real Estate Operating Companies 1.80 1.82
Fertilizers & Agricultural Chemicals 1.77
1.88
Internet Services & Infrastructure 1.77 2.07 Metal & Glass Containers 1.70 1.82 Home Improvement Retail 1.63 1.75 Soft Drinks 1.58 1.31 Airport Services 1.57 1.65 Leisure Facilities 1.48 1.52 Insurance Brokers 1.41 1.36 Diversified Support Services 1.37 1.45 Specialty Chemicals 1.34 1.43 Health Care Supplies 1.32 1.39 Real Estate Services 1.30 1.54 Integrated Telecommunication Services 1.25
1.32
Electrical Components & Equipment 1.22 1.29 Advertising 0.99 1.08 Movies & Entertainment 0.94 1.00 Distributors 0.91 0.97 Airlines 0.87 - Health Care Equipment 0.79 0.93 Environmental & Facilities Services 0.76
0.80
Oil & Gas Storage & Transportation 0.72 0.85 Home Furnishings 0.70 0.75 Systems Software 0.54 0.57 Consumer Finance 0.52 0.55 Hotels, Resorts & Cruise Lines 0.50
0.53
IT Consulting & Other Services 0.42 0.45 Restaurants 0.34 0.36 Education Services 0.33 0.35 Cable & Satellite 0.29 0.79 Research & Consulting Services 0.28
0.35
Apparel, Accessories & Luxury Goods 0.19 0.20 Air Freight & Logistics 0.18 0.28 Integrated Oil & Gas 0.18 0.19 Apparel Retail 0.17 0.20 Food Distributors 0.17 0.18 Specialized REITs 0.16 0.16 Real Estate Development 0.15 - Diversified Banks 0.13 0.13 Technology Distributors 0.11 0.12 Construction Materials 0.08 0.09 Housewares & Specialties 0.08 0.09 Electronic Components 0.08 0.08 Alternative Carriers 0.01 0.01 Oil & Gas Refining & Marketing -
0.33
Trading Companies & Distributors - 0.29
Total 100.00 % 100.00 %
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December 31, 2022 September 30, 2022
Fair value:
Application Software 15.95 % 15.43 %
Multi-Sector Holdings (1) 7.53 6.71
Pharmaceuticals 4.82 4.79
Biotechnology 4.37 4.35
Data Processing & Outsourced Services 4.02 4.46
Health Care Technology 3.92 3.90
Industrial Machinery 3.02 3.25
Specialized Finance 3.02 2.93
Internet & Direct Marketing Retail 2.50 2.82
Aerospace & Defense 2.33 2.48
Construction & Engineering 2.31 2.45
Health Care Distributors 2.08 2.19
Other Diversified Financial Services 2.05 0.98
Fertilizers & Agricultural Chemicals 1.98 2.08 Health Care Services 1.94 1.84 Automotive Retail 1.92 2.31 Real Estate Operating Companies 1.90
1.93
Auto Parts & Equipment 1.89
0.46
Internet Services & Infrastructure 1.85 2.16 Personal Products 1.85 2.01 Home Improvement Retail 1.71 1.82 Metal & Glass Containers 1.69 1.91 Soft Drinks 1.68 1.35 Airport Services 1.64 1.72 Leisure Facilities 1.54 1.57 Insurance Brokers 1.48 1.33 Health Care Supplies 1.43 1.47 Diversified Support Services 1.35 1.47 Real Estate Services 1.35 1.59 Electrical Components & Equipment 1.25
1.32
Integrated Telecommunication Services 1.21 1.29 Specialty Chemicals 1.19 1.36 Movies & Entertainment 1.00 1.07 Advertising 0.98 1.08 Airlines 0.98 - Distributors 0.93 0.98 Health Care Equipment 0.86 0.97 Environmental & Facilities Services 0.78
0.83
Oil & Gas Storage & Transportation 0.69
0.84
Home Furnishings 0.68
0.73
Hotels, Resorts & Cruise Lines 0.53 0.56 Systems Software 0.46 0.51 Consumer Finance 0.43 0.53 Education Services 0.34 0.34 Restaurants 0.33 0.35 Cable & Satellite 0.30 0.78 Research & Consulting Services 0.27
0.34
IT Consulting & Other Services 0.26 0.34 Integrated Oil & Gas 0.18 0.20 Apparel Retail 0.18 0.21 Real Estate Development 0.16 - Air Freight & Logistics 0.16 0.26 Food Distributors 0.14 0.13 Diversified Banks 0.13 0.14 Specialized REITs 0.12 0.13 Technology Distributors 0.11 0.12 Housewares & Specialties 0.09 0.10 Construction Materials 0.07 0.08 Electronic Components 0.06 0.08 Alternative Carriers 0.01 0.01 Oil & Gas Refining & Marketing -
0.34
Trading Companies & Distributors - 0.22 Total 100.00 % 100.00 % ___________________
(1)This industry includes our investments in the JVs.
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--------------------------------------------------------------------------------The Joint Ventures Senior Loan Fund JV I, LLC InMay 2014 , we entered into a limited liability company, or 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 subordinated notes issued by SLF JV I are referred to as the SLF JV I Notes. 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 ofDecember 31, 2022 andSeptember 30, 2022 , 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 ofDecember 31, 2022 , we and Kemper had funded approximately$190.5 million to SLF JV I, of which$166.7 million was from us. As ofSeptember 30, 2022 , we and Kemper had funded approximately$165.5 million to SLF JV I, of which$144.8 million was from us. As ofDecember 31, 2022 , we had aggregate commitments to fund SLF JV I of$13.1 million , of which approximately$9.8 million was to fund additional SLF JV I Notes and approximately$3.3 million was to fund LLC equity interests in SLF JV I. During the three months endedDecember 31, 2022 , we contributed$16.4 million to fund additional SLF JV I Notes and approximately$5.5 million to fund additional LLC equity interests in SLF JV I. As ofSeptember 30, 2022 , 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. Both the cost and fair value of our SLF JV I Notes were$112.7 million as ofDecember 31, 2022 . Both the cost and fair value of our SLF JV I Notes were$96.3 million as ofSeptember 30, 2022 . We earned interest income of$2.6 million and$2.0 million on the SLF JV I Notes for the three months endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , the SLF JV I Notes bore interest at a rate of one-month LIBOR plus 7.00% per annum with a LIBOR floor of 1.00% and will mature onDecember 29, 2028 . The cost and fair value of the LLC equity interests in SLF JV I held by us was$54.8 million and$24.1 million , respectively, as ofDecember 31, 2022 , and$49.3 million and$20.7 million , respectively, as ofSeptember 30, 2022 . We earned$1.1 million and$0.5 million in dividend income for the three months endedDecember 31, 2022 andDecember 31, 2021 , respectively, with respect to our investment in the LLC equity interests of SLF JV I.
Below is a summary of SLF JV I's portfolio as of
December 31, 2022 September 30, 2022
Senior secured loans (1) $382,148 $383,194
Weighted average interest rate on senior secured loans 9.55% 8.33%
(2)
Number of borrowers in SLF JV I 59 60 Largest exposure to a single borrower (1)$11,337 $10,093 Total of five largest loan exposures to borrowers (1)$51,990 $48,139 __________________ (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.
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--------------------------------------------------------------------------------OnMarch 19, 2021 , 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, 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 ofDecember 31, 2022 andSeptember 30, 2022 , 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 of each ofDecember 31, 2022 andSeptember 30, 2022 , of which$73.5 million was from us. As ofDecember 31, 2022 andSeptember 30, 2022 , we had commitments to fund Glick JV Notes of$78.8 million , of which$12.4 million was unfunded. As of each ofDecember 31, 2022 andSeptember 30, 2022 , we had commitments to fund LLC equity interests in the Glick JV of$8.7 million , of which$1.6 million was unfunded. The cost and fair value of our aggregate investment in the Glick JV was$50.0 million and$49.5 million , respectively, as ofDecember 31, 2022 . The cost and fair value of our aggregate investment in the Glick JV was$50.2 million and$50.3 million , respectively, as ofSeptember 30, 2022 . For the three months endedDecember 31, 2022 andDecember 31, 2021 , our investment in the Glick JV Notes earned interest income of$1.6 million and$1.1 million , respectively. We did not earn any dividend income for the three months endedDecember 31, 2022 andDecember 31, 2021 with respect to our investment in the LLC equity interests of the Glick JV.
Below is a summary of the Glick JV's portfolio as of
December 31, 2022 September 30, 2022
Senior secured loans (1) $134,080 $143,225
Weighted average current interest rate on senior 9.86% 8.52%
secured loans (2)
Number of borrowers in the Glick JV 40 43
Largest loan exposure to a single borrower (1) $7,476 $6,562
Total of five largest loan exposures to borrowers (1) $29,830 $28,973
__________
(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.
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--------------------------------------------------------------------------------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.
Comparison of three months ended
Total Investment Income
Total investment income includes interest on our investments, fee income and dividend income.
Total investment income for the three months endedDecember 31, 2022 and 2021 was$79.2 million and$64.9 million , respectively. For the three months endedDecember 31, 2022 , this amount consisted of$76.1 million of interest income from portfolio investments (which included$6.1 million of PIK interest),$2.0 million of fee income and$1.1 million of dividend income. For the three months endedDecember 31, 2021 , this amount consisted of$60.1 million of interest income from portfolio investments (which included$4.7 million of PIK interest),$0.9 million of fee income and$3.9 million of dividend income. The increase of$14.2 million , or 21.9%, in our total investment income for the three months endedDecember 31, 2022 , as compared to the three months endedDecember 31, 2021 , was due primarily to (1) a$16.0 million increase in interest income, which was primarily driven by the impact of rising reference rates on interest income and (2) a$1.1 million increase in fee income primarily due to higher exit and amendment fees. This was partially offset by a$2.9 million decrease in dividend income. Expenses Net expenses (expenses net of fee waivers) for the three months endedDecember 31, 2022 and 2021 were$40.3 million and$29.3 million , respectively. Net expenses increased for the three months endedDecember 31, 2022 , as compared to the three months endedDecember 31, 2021 , by$11.0 million , or 37.3%, primarily due to (1) a$11.3 million increase in interest expense due to higher borrowings outstanding and the impact of rising reference rates and (2) a$1.2 million increase in Part I incentive fees mainly due to higher total investment income. These were partially offset by$1.8 million of lower accrued Part II incentive fees. Net Investment Income Primarily as a result of the$14.2 million increase in total investment income, the$11.0 million increase in net expenses and a$3.3 million decrease in the provision for taxes on net investment income, net investment income for the three months endedDecember 31, 2022 increased by$6.5 million compared to the three months endedDecember 31, 2021 .
Realized Gain (Loss)
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of investments and foreign currency and the cost basis without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules. During the three months endedDecember 31, 2022 and 2021, we recorded aggregate net realized gains (losses) of$(3.2) million and$9.3 million , respectively, in connection with the exits of various investments and foreign currency forward contracts. See "Note 8. 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 three months endedDecember 31, 2022 and 2021.
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.
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During the three months ended December 31, 2022 and 2021, we recorded net
unrealized depreciation of $23.0 million and $4.6 million , respectively. For the
three months ended December 31, 2022 , this consisted of $18.7 million of net
unrealized depreciation on debt investments and $11.0 million of net unrealized
depreciation of foreign currency forward contracts, partially offset by $3.9
million of net unrealized appreciation related to exited investments (a portion
of which resulted in a reclassification to realized losses) and $2.8 million of
net unrealized appreciation on equity investments. For the three months ended
December 31, 2021 , this consisted of $4.7 million of net unrealized depreciation
related to exited investments (a portion of which resulted in a reclassification
to realized gains), $1.8 million of net unrealized depreciation on debt
investments and $0.8 million of net unrealized depreciation of foreign currency
forward contracts, partially offset by $2.8 million of net unrealized
appreciation on equity investments.
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 may not be able 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 or equity offerings. We intend to fund our future distribution 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 ofDecember 31, 2022 , we had$1,514.4 million in senior securities and our asset coverage ratio was 176.3%. During the year endedSeptember 30, 2022 , we increased our target debt to equity ratio from 0.85x to 1.0x to 0.90x to 1.25x (i.e.,one dollar of equity for each$0.90 to$1.25 of debt outstanding) to provide us with increased capacity to opportunistically deploy capital into the markets. As ofDecember 31, 2022 , our net debt to equity ratio was 1.24x. For the three months endedDecember 31, 2022 , we experienced a net decrease in cash and cash equivalents (including restricted cash) of$7.1 million . During that period, net cash used in operating activities was$109.9 million , primarily from funding$261.4 million of investments and$10.0 million of net decrease in payables from unsettled transactions, partially offset by$108.8 million of principal payments and sale proceeds received, the cash activities related to$38.8 million of net investment income and a$16.3 million increase in due from portfolio companies. During the same period, net cash provided by financing activities was$103.3 million , primarily consisting of$160.0 million of net borrowings under the credit facilities, partially offset by$56.7 million of cash distributions paid to our stockholders. For the three months endedDecember 31, 2021 , we experienced a net increase in cash and cash equivalents (including restricted cash) of$14.4 million . During that period, we received$23.2 million of net cash from operating activities, primarily from$235.0 million of principal payments and sale proceeds received,$15.0 million of net increases in payables from unsettled transactions and the cash activities related to$32.3 million of net investment income, partially offset by funding$246.6 million of investments. During the same period, net cash used by financing activities was$7.5 million , primarily consisting of$27.2 million of cash distributions paid to our stockholders and$0.3 million of deferred financing costs paid, partially offset by$20.0 million of net borrowings under the credit facilities. As ofDecember 31, 2022 , we had$19.2 million in cash and cash equivalents (including$1.9 million of restricted cash), portfolio investments (at fair value) of$2.6 billion ,$37.8 million of interest, dividends and fees receivable,$6.2 million of due from portfolio companies,$340.0 million of undrawn capacity on our credit facilities (subject to borrowing base and other limitations),$12.3 million of net payables from unsettled transactions,$860.0 million of borrowings outstanding under our credit facilities and$603.6 million of unsecured notes payable (net of unamortized financing costs, unaccreted discount and interest rate swap fair value adjustment). As ofSeptember 30, 2022 , we had$26.4 million in cash and cash equivalents (including$2.8 million of restricted cash), portfolio investments (at fair value) of$2.5 billion ,$35.6 million of interest, dividends and fees receivable,$22.5 million of due from portfolio companies,$500.0 million of undrawn capacity on our credit facilities (subject to borrowing base and other limitations),$22.3 million of net payables from unsettled transactions,$700.0 million of borrowings outstanding under our credit facilities and$601.0 million of unsecured notes payable (net of unamortized financing costs, unaccreted discount and interest rate swap fair value adjustment). 96 -------------------------------------------------------------------------------- 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 ofDecember 31, 2022 , our only off-balance sheet arrangements consisted of$198.9 million of unfunded commitments, which was comprised of$171.8 million to provide debt and equity financing to certain of our portfolio companies and$27.1 million to provide financing to the JVs. As ofSeptember 30, 2022 , our only off-balance sheet arrangements consisted of$224.2 million of unfunded commitments, which was comprised of$175.2 million to provide debt and equity financing to certain of our portfolio companies and$49.0 million to provide financing to the JVs. As ofDecember 31, 2022 , 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 (as defined below), Citibank Facility
(as defined below), our 3.500% notes due 2025, or the 2025 Notes, and our 2.700%
notes due 2027, or the 2027 Notes:
Maximum debt
Weighted average debt outstanding for
Debt Outstanding Debt Outstanding outstanding for the the three months
as of September 30, as of December 31, three months ended ended
2022 2022 December 31, 2022 December 31, 2022Syndicated Facility $ 540,000 $ 695,000 $ 627,826$ 710,000 Citibank Facility 160,000 165,000 163,500 175,000 2025 Notes 300,000 300,000 300,000 300,000 2027 Notes 350,000 350,000 350,000 350,000 Total debt$ 1,350,000 $ 1,510,000 $ 1,441,326
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 December 31, 2022
Contractual Obligations Total Less than 1 year 1-3 years 3-5 years
Syndicated Facility $ 695,000 $
- $ -
145,376 43,494 86,988 14,894
Citibank Facility 165,000 - 165,000 -
Interest due on Citibank Facility 20,573 10,915 9,658 -
2025 Notes 300,000 - 300,000 -
Interest due on 2025 Notes 22,640 10,500 12,140 -
2027 Notes 350,000 - - 350,000
Interest due on 2027 Notes (a) 81,200 20,080 40,160 20,960
Total $ 1,779,789 $ 84,989 $ 613,946 $ 1,080,854
__________(a) The interest due on the 2027 Notes was calculated net of the interest rate swap.
Equity Issuances
During the three months ended
OnFebruary 7, 2022 , we entered into an equity distribution agreement by and among us, Oaktree, Oaktree Administrator andKeefe, Bruyette & Woods, Inc. ,JMP Securities LLC, Raymond James & Associates, Inc. andSMBC Nikko Securities America, Inc. , as placement agents, in connection with the issuance and sale by us of shares of common stock, having an aggregate offering price of up to$125.0 million . Sales of the common stock, if any, may be made in negotiated transactions or transactions that are deemed to be "at the market," as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the Nasdaq Global Select Market or similar securities exchanges or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. 97 --------------------------------------------------------------------------------
In connection with the "at the market" offering, we did not issue or sell any
shares of common stock during the three months ended
Distributions
The following table reflects the distributions per share that we have paid, including shares issued under our DRIP, on our common stock sinceOctober 1, 2020 . The distributions per share and shares issued under our DRIP information disclosed in this table has been retrospectively adjusted to reflect our 1-for-3 reverse stock split completed onJanuary 20, 2023 and effective as of the commencement of trading onJanuary 23, 2023 . Amount Cash DRIP Shares DRIP Shares Distribution Date Declared Record Date Payment Date per Share Distribution Issued (1) Value QuarterlyNovember 13, 2020 December 15, 2020 December 31, 2020 $ 0.33 $ 15.0 million 31,321$ 0.5 million QuarterlyJanuary 29, 2021 March 15, 2021 March 31, 2021 0.36 16.4 million 27,234 0.5 million QuarterlyApril 30, 2021 June 15, 2021 June 30, 2021 0.39 22.9 million 25,660 0.5 million QuarterlyJuly 30, 2021 September 15, 2021 September 30, 2021 0.435 25.5 million 28,358 0.6 million QuarterlyOctober 13, 2021 December 15, 2021 December 31, 2021 0.465 27.2 million 35,990 0.8 million QuarterlyJanuary 28, 2022 March 15, 2022 March 31, 2022 0.48 28.5 million 34,804 0.8 million QuarterlyApril 29, 2022 June 15, 2022 June 30, 2022 0.495 29.4 million 43,676 0.9 million QuarterlyJuly 29, 2022 September 15, 2022 September 30, 2022 0.51 30.2 million 51,181 1.0 million QuarterlyNovember 10, 2022 December 15, 2022 December 30, 2022 0.54 32.0 million 53,369 1.1 million SpecialNovember 10, 2022 December 15, 2022 December 30, 2022 0.42 24.8 million 41,510 0.8 million ______________
(1)Shares were purchased on the open market and distributed other than with
respect to the distributions paid on
Indebtedness
See "Note 6. Borrowings" in the Consolidated Financial Statements for more details regarding our indebtedness.
Syndicated Facility
As ofDecember 31, 2022 , (i) the size of our senior secured revolving credit facility, or, as amended and/or restated from time to time, the Syndicated Facility, pursuant to a senior secured revolving credit agreement, with the lenders,ING Capital LLC , as administrative agent,ING Capital LLC ,JPMorgan Chase Bank, N.A .,BofA Securities, Inc. andMUFG Union Bank, N.A. as joint lead arrangers and joint bookrunners, andJPMorgan Chase Bank, N.A . andBank of America, N.A ., as syndication agents, was$1.0 billion (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. 98 -------------------------------------------------------------------------------- The following table describes significant financial covenants, as ofDecember 31, 2022 , with which we must comply under the Syndicated Facility on a quarterly basis: September 30, 2022 Financial Covenant Description Target Value Reported Value (1) Minimum shareholders' equity Net assets shall not be less than the sum of$610 million $1,246 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 1.89:1 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 4.01:1 2.25:1 Minimum net worth Net worth shall not be less than$550
million$550 million $1,034 million ___________ (1) As contractually required, we report financial covenants based on the last filed quarterly or annual report, in this case our Annual Report on Form 10-K for the year endedSeptember 30, 2022 . We were in compliance with all financial covenants under the Syndicated Facility based on the financial information contained in this Quarterly Report on Form 10-Q. As ofDecember 31, 2022 andSeptember 30, 2022 , we had$695.0 million and$540.0 million of borrowings outstanding under the Syndicated Facility, respectively, which had a fair value of$695.0 million and$540.0 million , respectively. Our borrowings under the Syndicated Facility bore interest at a weighted average interest rate of 5.849% and 2.174% for the three months endedDecember 31, 2022 and 2021, respectively. For the three months endedDecember 31, 2022 and 2021, we recorded interest expense (inclusive of fees) of$10.0 million and$3.8 million , respectively, related to the Syndicated Facility.
Citibank Facility
OnMarch 19, 2021 , we became party to a revolving credit facility, or, as amended and/or restated from time to time, the Citibank Facility, withOCSL Senior Funding II LLC , our wholly-owned, special purpose financing subsidiary, as the borrower, us, as collateral manager and seller, each of the lenders from time to time party thereto,Citibank, N.A ., as administrative agent, andWells Fargo Bank, National Association , as collateral agent and custodian. As ofDecember 31, 2022 , we were able to borrow up to$200 million under the Citibank Facility (subject to borrowing base and other limitations). As ofDecember 31, 2022 , the reinvestment period under the Citibank Facility was scheduled to expire onNovember 18, 2023 and the maturity date for the Citibank Facility wasNovember 18, 2024 . As ofDecember 31, 2022 , 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 ofDecember 31, 2022 , 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 ofDecember 31, 2022 andSeptember 30, 2022 , we had$165.0 million and$160.0 million outstanding under the Citibank Facility, respectively, which had a fair value of$165.0 million and$160.0 million , respectively. Our borrowings under the Citibank Facility bore interest at a weighted average interest rate of 6.508% and 1.830% for the three months endedDecember 31, 2022 andDecember 31, 2021 , respectively. For the three months endedDecember 31, 2022 andDecember 31, 2021 , we recorded interest expense (inclusive of fees) of$2.7 million and$0.8 million , respectively, related to the Citibank 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
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agreement, we receive a fixed interest rate of 2.700% and pay a floating
interest rate of the three-month LIBOR plus 1.658% on a notional amount of $350
million . We designated the interest rate swap as the hedging instrument in an
effective hedge accounting relationship.
The below table presents the components of the carrying value of the 2025 Notes
and the 2027 Notes as of
As of December 31, 2022 As of September 30, 2022
($ in millions) 2025 Notes 2027 Notes 2025 Notes 2027 Notes
Principal $ 300.0 $ 350.0 $ 300.0 $ 350.0
Unamortized financing costs (1.6) (3.1) (1.8) (3.2)
Unaccreted discount (1.1) (0.7) (1.2) (0.7)
Interest rate swap fair value adjustment - (39.9) - (42.0)
Net carrying value $ 297.3 $ 306.3 $ 297.0 $ 304.1
Fair Value $ 286.7 $ 296.8 $ 283.1 $ 294.0 The below table presents the components of interest and other debt expenses
related to the 2025 Notes and the 2027 Notes for the three months ended
($ in millions) 2025 Notes 2027 Notes Coupon interest $ 2.6 $ 2.4 Amortization of financing costs and discount 0.3 0.2 Effect of interest rate swap - 2.5 Total interest expense $
2.9 $ 5.1 Coupon interest rate (net of effect of interest rate swap for 2027 Notes)
3.500 % 5.586 %
The below table presents the components of interest and other debt expenses
related to the 2025 Notes and the 2027 Notes for the three months ended
($ in millions) 2025 Notes 2027 Notes Coupon interest $ 2.6 $ 2.4 Amortization of financing costs and discount 0.3 0.2 Effect of interest rate swap - (0.7) Total interest expense $ 2.9 $ 1.9 Coupon interest rate (net of effect of interest rate swap for 2027 Notes) 3.500 % 1.782 %
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 100 -------------------------------------------------------------------------------- not incur aU.S. federal excise tax for calendar year 2021. For the calendar year 2022, we incurred$0.1 million of excise tax. We do not expect to incur aU.S. federal excise tax for calendar year 2023. 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. 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, 2022 .
Qualified Net Interest Qualified Short-Term
Year Ended Income Capital Gains
September 30, 2022 80.8 % -
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 Oaktree Capital Group, LLC. See "Note 10. Related Party
Transactions - Investment Advisory Agreement" and "- Administrative Services" in
the notes to the accompanying Consolidated Financial Statements.
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Distribution Declaration
OnJanuary 27, 2023 , our Board of Directors declared a quarterly distribution of$0.55 per share, payable in cash onMarch 31, 2023 to stockholders of record onMarch 15, 2023 . Investment Advisory Agreement OnJanuary 23, 2023 , in connection with the consummation of the OSI2 Merger, we entered into an amended and restated investment advisory agreement with Oaktree to amend and restate the prior investment advisory agreement, dated as ofMarch 19, 2021 , by and between us and Oaktree to (1) waive an aggregate of$9.0 million of base management fees otherwise payable to the Oaktree in the two years following the closing of the OSI2 Merger and (2) revise the calculation of the incentive fees to eliminate certain unintended consequences of the accounting treatment of the OSI2 Merger on the incentive fees payable to Oaktree. None of the other terms were changed, and the services to be provided by Oaktree and the term of the Investment Advisory Agreement remain the same.
OSI2 Merger
OnJanuary 23, 2023 , we completed the OSI2 Merger. In accordance with the terms of the OSI2 Merger Agreement, at the effective time of the OSI2 Merger, each outstanding share of OSI2 common stock was converted into the right to receive 0.9115 shares of our common stock (with OSI2's stockholders receiving cash in lieu of fractional shares of our common stock). As a result of the OSI2 Merger, we issued an aggregate of 15,860,200 shares of its common stock to former OSI2 stockholders. Following completion of the OSI2 Merger, we had 77,079,805 shares of common stock outstanding. OSI2 Citibank Facility
On
OSI 2Senior Lending SPV, LLC , or OSI 2 SPV, our wholly-owned and consolidated subsidiary, is party to a loan and security agreement dated as ofJuly 26, 2019 , which was subsequently amended onSeptember 20, 2019 ,July 2, 2020 ,December 31, 2020 ,March 31, 2021 andDecember 2, 2022 , or, as amended, the OSI2 Citibank Loan Agreement, with the lenders from time to time party thereto and the other parties referenced below. Under the terms of the OSI2 Citibank Loan Agreement, we serve as the collateral manager and seller and OSI 2 SPV serves as borrower withCitibank, N.A ., as administrative agent, andDeutsche Bank Trust Company Americas , as collateral agent. The OSI2 Citibank Loan Agreement provides for a senior secured revolving credit facility, or the OSI2 Citibank Facility of up to$250 million , or the Citibank Maximum Commitment, in aggregate principal amount, subject to the lesser of (i) the borrowing base, which is an amount based on advance rates that vary depending on the class of assets and the value assigned to such assets under the OSI2 Citibank Loan Agreement and (ii) the Citibank Maximum Commitment. The OSI2 Citibank Facility has a reinvestment period throughMay 26, 2023 , during which advances may be made, and matures onJanuary 26, 2025 . Following the reinvestment period, OSI 2 SPV will be required to make certain mandatory amortization payments. Borrowings under the OSI2 Citibank Facility bear interest payable quarterly at a rate per year equal to (a) in the case of a lender that is identified as a conduit lender under the OSI2 Citibank Loan Agreement, the lesser of (i) the applicable commercial paper rate for such conduit lender and (ii) LIBOR for a three month maturity and (b) for all other lenders under the OSI2 Citibank Facility, LIBOR, plus, in each case, an applicable spread. During the reinvestment period, the applicable spread is the greater of (i) a weighted average rate of (x) 1.65% per year for broadly syndicated loans and (y) 2.25% per year for all other eligible loans and (ii) 1.85%. After the reinvestment period, the applicable spread is 3.00% per year. There is also a non-usage fee of 0.50% per year thereafter on the unused portion of the OSI2 Citibank Facility, payable quarterly; provided that if the unused portion of the OSI2 Citibank Facility is greater than 30% of the commitments under the OSI2 Citibank Facility, the non-usage fee will be based on an unused portion of 30% of the commitments under the OSI2 Citibank Facility.
The OSI2 Citibank Facility is secured by a first priority security interest in substantially all of OSI 2 SPV's assets.
As part of the OSI2 Citibank Facility, OSI 2 SPV is subject to certain
limitations as to how borrowed funds may be used and the types of loans that are
eligible to be acquired by OSI 2 SPV including restrictions on sector
concentrations, loan size, tenor and minimum investment ratings (or estimated
ratings). The OSI2 Citibank Facility also contains certain requirements relating
to interest coverage, collateral quality and portfolio performance, certain
violations of which could result in the acceleration of the amounts due under
the OSI2 Citibank Facility.
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Under the OSI2 Citibank Facility, we and OSI 2 SPV, as applicable, have made
customary representations and warranties, and are required to comply with
various affirmative and negative covenants, reporting requirements and other
customary requirements for similar credit facilities.
OSI 2 SPV's borrowings are non-recourse to us but are considered our borrowings for purposes of complying with the asset coverage requirements under the Investment Company Act.
As of
Reverse Stock Split
OnJanuary 20, 2023 , we amended our restated certificate of incorporation, as amended and corrected, to effect a 1-for-3 reverse stock split. Following completion of the reverse stock split, we had 61,219,605 shares of common stock outstanding. 103
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