Oaktree Specialty Lending : Announces Fourth Fiscal Quarter 2021 Financial Results

Oaktree Specialty Lending Corporation Announces Fourth Fiscal Quarter and Full Year 2021

Financial Results and Declares Increased Distribution of $0.155 Per Share

LOS ANGELES, CA, November 16, 2021 - Oaktree Specialty Lending Corporation (NASDAQ: OCSL) ("Oaktree Specialty Lending" or the "Company"), a specialty finance company, today announced its financial results for the fiscal quarter and year ended September 30, 2021.

Financial Highlights for the Quarter and Year Ended September 30, 2021

• Total investment income was $63.8 million ($0.35 per share) and $209.4 million ($1.29 per share) for the fourth fiscal quarter and full year, respectively, as compared with $65.4 million ($0.36 per share) and $143.1 million ($1.02 per share) for the third fiscal quarter of 2021 and the full year of 2020, respectively. The decrease for the quarter primarily reflected lower prepayment and amendment fees, partially offset by higher interest income and dividend income. The increase for the full year primarily reflected higher interest income, prepayment fees and dividend income. Excluding income accretion related to the Company's merger with Oaktree Strategic Income Corporation ("OCSI") (the "Merger"), adjusted total investment income was $58.2 million ($0.32 per share) and $198.1 million ($1.22 per share) for fiscal quarter and full year ended September 30, 2021, respectively.
• GAAP net investment income was $33.0 million ($0.18 per share) and $97.1 million ($0.60 per share) for the fourth fiscal quarter and full year, respectively, as compared with $35.9 million ($0.20 per share) and $72.0 million ($0.51 per share) for the third fiscal quarter of 2021 and the full year of 2020, respectively. The decrease for the quarter was principally from lower total investment income, higher base management fees (net of waivers) and higher interest expense, partially offset by lower incentive fees. The full year increase was primarily driven by higher total investment income, partially offset by higher base management fees (net of waivers), incentive fees, interest expense and professional fees.
• Adjusted net investment income was $29.1 million ($0.16 per share) and $103.4 million ($0.64 per share) for the fourth fiscal quarter and full year, as compared with $33.7 million ($0.19 per share) and $71.6 million ($0.51 per share) for the third fiscal quarter of 2021 and the full year of 2020, respectively. The decrease for the quarter primarily reflected lower adjusted total investment income and higher net expenses. The full-year increase was primarily driven by higher adjusted total investment income, partially offset by higher net expenses.
• Net asset value ("NAV") per share was $7.28 as of September 30, 2021, up 0.8% from $7.22 as of June 30, 2021. The increase was primarily driven by realized and unrealized gains on certain debt and equity investments and undistributed net investment income. NAV was up 12% from $6.49 as of September 30, 2020 primarily reflecting realized and unrealized gains on certain debt and equity investments and undistributed net investment income.
• Originated $385.0 million of new investment commitments and received $201.8 million of proceeds from prepayments, exits, other paydowns and sales during the quarter ended September 30, 2021. Of these new investment commitments, 91% were first lien loans, 3% were second lien loans, 5% were subordinated debt investments and 1% were equity investments. The weighted average yield on new debt investments was 8.6%.
• No investments were on non-accrual status as of September 30, 2021.
• Total debt outstanding was $1,280.0 million as of September 30, 2021. The total debt to equity ratio was 0.97x, and the net debt to equity ratio was 0.95x, after adjusting for cash and cash equivalents.
• Liquidity as of September 30, 2021 was composed of $29.3 million of unrestricted cash and cash equivalents and $470.0 million of undrawn capacity under the credit facilities (subject to borrowing base and other limitations). Unfunded investment commitments were $264.9 million, or $215.9 million excluding unfunded commitments to the Company's joint ventures. Of the $215.9 million, approximately $153.6 million can be drawn immediately as the remaining amount is subject to certain milestones that must be met by portfolio companies.
• A quarterly cash distribution was declared of $0.155 per share, up 7% from the prior quarter and the sixth consecutive quarterly distribution increase. The distribution will be paid in cash and is payable on December 31, 2021 to stockholders of record on December 15, 2021.

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Armen Panossian, Chief Executive Officer and Chief Investment Officer, said, "The fourth quarter of 2021 capped a strong fiscal year for OCSL. We delivered solid investment performance and financial results, underscored by our highest annual level of adjusted net investment income per share under Oaktree's management. As a result, we increased the dividend level by 41% and grew NAV by more than 12% in fiscal year 2021. We leveraged Oaktree's broad credit platform to judiciously deploy our capital on attractive terms, further growing the portfolio's size and improving the overall debt portfolio yield. We also made several enhancements to our capital structure, creating flexibility and reducing our borrowing costs, following the closing of the merger with OCSI. We are proud of our performance over the last year and believe we are very well-positioned for fiscal year 2022."

Distribution Declaration

The Board of Directors declared a quarterly distribution of $0.155 per share, an increase of 7%, or $0.01 per share, from the prior quarter and the sixth consecutive quarterly distribution increase, payable on December 31, 2021 to stockholders of record on December 15, 2021.

Distributions are paid primarily from distributable (taxable) income. To the extent taxable earnings for a fiscal taxable year fall below the total amount of distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to the Company's stockholders.

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Results of Operations

		For the three months ended			For the year ended
	September 30,		June 30, 2021		September 30,		September 30,		September 30,
($ in thousands, except per share data)		2021				2020
	(unaudited)			(unaudited)			(unaudited)			2021			2020
GAAP operating results:
Interest income	$	55,094	$	51,999	$	37,153	$	174,381	$	125,568
PIK interest income		4,960			4,597			2,573			16,447			7,863
Fee income		645			7,823			3,571			14,098			8,519
Dividend income		3,101			1,019			302			4,459			1,183
Total investment income		63,800			65,438			43,599			209,385			143,133
Net expenses		28,321			29,148			19,054			109,484			71,141
Net investment income before taxes		35,479			36,290			24,545			99,901			71,992
(Provision) benefit for taxes on net investment income		(2,437)			(358)			-			(2,795)			-
Net investment income		33,042			35,932			24,545			97,106			71,992
Net realized and unrealized gains (losses), net of taxes		3,519			11,106			46,072			140,154			(32,768)
Net increase (decrease) in net assets resulting from operations	$	36,561		$	47,038		$	70,617		$	237,260		$	39,224
Total investment income per common share
$	0.35		$	0.36		$	0.31		$	1.29		$	1.02
Net investment income per common share	$	0.18	$	0.20	$	0.17	$	0.60	$	0.51
Net realized and unrealized gains (losses), net of taxes per	$	0.02	$	0.06	$	0.33	$	0.86	$	(0.23)
common share
Earnings (loss) per common share - basic and diluted	$	0.20	$	0.26	$	0.50	$	1.46	$	0.28
Non-GAAP Financial Measures1:
Adjusted total investment income	$	58,229	$	60,378	$	43,599	$	198,089	$	143,133
Adjusted net investment income	$	29,100	$	33,709	$	24,545	$	103,425	$	71,635
Adjusted net realized and unrealized gains (losses), net of taxes	$	9,088	$	16,151	$	46,072	$	117,372	$	(32,768)
Adjusted earnings (loss)	$	36,559	$	47,023	$	70,617	$	203,182	$	39,224
Adjusted total investment income per share	$	0.32	$	0.33	$	0.31	$	1.22	$	1.02
Adjusted net investment income per share	$	0.16	$	0.19	$	0.17	$	0.64	$	0.51
Adjusted net realized and unrealized gains (losses), net of taxes	$	0.05	$	0.09	$	0.33	$	0.72	$	(0.23)
per share
Adjusted earnings (loss) per share	$	0.20	$	0.26	$	0.50	$	1.25	$	0.28

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• See Non-GAAPFinancial Measures below for a description of the non-GAAP measures and the reconciliations from the most comparable GAAP financial measures to the Company's non-GAAP measures, including on a per share basis. The Company's management uses these non-GAAP financial measures internally to analyze and evaluate financial results and performance and believes that these non-GAAP financial measures are useful to investors as an additional tool to evaluate ongoing results and trends for the Company and to review the Company's performance without giving effect to non-cash income/ gain resulting from the Merger and in the case of adjusted net investment income, without giving effect to capital gains incentive fees. The presentation of non-GAAP measures are not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation.

					As of
($ in thousands, except per share data and ratios)	September 30, 2021			June 30, 2021		September 30, 2020
		(unaudited)
Select balance sheet and other data:
Cash and cash equivalents	$	29,334	$	84,689	$	39,096
Investment portfolio at fair value		2,556,629			2,339,301			1,573,851
Total debt outstanding (net of unamortized financing costs)		1,268,743			1,104,099			709,315
Net assets		1,312,823			1,302,414			914,879
Net asset value per share		7.28			7.22			6.49
Total debt to equity ratio		0.97x			0.86x			0.78x
Net debt to equity ratio		0.95x			0.79x			0.74x

Adjusted total investment income for the quarter ended September 30, 2021 was $58.2 million and included $49.5 million of interest income from portfolio investments, $5.0 million of payment-in-kind ("PIK") interest income, $0.6 million of fee income and $3.1 million of dividend income. The decrease of $2.1 million from the June quarter reflected $7.2 million of lower fee income resulting from lower prepayment fees and amendment fees. This was partially offset by $3.0 million of higher interest income resulting from a larger investment portfolio and $2.1 million of higher dividend income from one investment.

Adjusted total investment income for full-year 2021 was $198.1 million and included $163.1 million of interest income from portfolio investments, $16.4 million of PIK interest income, $14.1 million of fee income and $4.5 million of dividend income. The increase of $55.0 million from the year ended September 30, 2020 reflected (i) $46.1 million of higher interest income principally from a larger investment portfolio stemming from net new investment growth and the assets acquired in the

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Merger and higher OID acceleration, (ii) $5.6 million of higher fee income primarily driven by increased prepayment and amendment fees and (iii) $3.3 million of higher dividend income from two investments that did not pay dividends in the prior year, including the Company's investment in Senior Loan Fund JV I, LLC ("SLF JV I").

Net expenses for the quarter ended September 30, 2021 totaled $28.3 million, down $0.8 million from the quarter ended June 30, 2021. The decrease reflected $1.0 million of lower Part I incentive fees resulting from a decline in adjusted total investment income and $1.2 million of lower accrued Part II incentive fees. This was partially offset by $0.9 million of higher base management fees (net of waivers) due to the larger investment portfolio, $0.2 million of higher interest expense resulting from an increase in borrowings outstanding and $0.2 million of higher professional fees.

Net expenses for full-year 2021 totaled $109.5 million, up $38.3 million from the year ended September 30, 2020. The increase reflected $7.8 million of higher base management fees (net of waivers) from the larger investment portfolio (including assets acquired in the Merger), $6.4 million of higher Part I incentive fees due to increased adjusted total investment income, $18.0 million of higher accrued Part II incentive fees (net of waivers) and $4.2 million of higher interest expense resulting from an increase in borrowings outstanding.

Adjusted net investment income was $29.1 million ($0.16 per share) for the quarter ended September 30, 2021, down from $33.7 million ($0.19 per share) for the quarter ended June 30, 2021. The decrease reflected $2.1 million of lower adjusted total investment income, $0.4 million of higher net expenses (excluding Part II incentive fees) and a $2.1 million increase in income tax expense.

Adjusted net investment income for full-year 2021 was $103.4 million ($0.64 per share), up from $71.6 million ($0.51 per share) for the year ended September 30, 2020. The increase reflected $55.0 million of higher adjusted total investment income, partially offset by $20.3 million of higher net expenses (excluding Part II incentive fees) and $2.8 million of increased income tax expense.

Adjusted net realized and unrealized gains, net of taxes, were $9.1 million and $117.4 million for the quarter and year ended September 30, 2021, respectively, primarily reflecting gains on certain debt and equity investments.

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Portfolio and Investment Activity

As of

($ in thousands)	September 30, 2021			June 30, 2021		September 30, 2020
	(unaudited)			(unaudited)			(unaudited)
Investments at fair value	$	2,556,629	$	2,339,301	$	1,573,851
Number of portfolio companies		138			135			113
Average portfolio company debt size	$	18,700	$	17,600	$	15,800
Asset class:
Senior secured debt		86.7 %			86.7 %			84.1 %
Unsecured debt		1.7 %			1.4 %			4.2 %
Equity		4.2 %			3.9 %			4.1 %
JV interests		7.4 %			8.1 %			7.5 %
Limited partnership interests		- %			- %			0.2 %
Non-accrual debt investments:
Non-accrual investments at fair value	$	-	$	-	$	1,571
Non-accrual investments as a percentage of debt investments		- %			- %			0.1 %
Number of investments on non-accrual		-			-			2
Interest rate type:
Percentage floating-rate		91.5 %			91.4 %			88.3 %
Percentage fixed-rate		8.5 %			8.6 %			11.7 %
Yields:
Weighted average yield on debt investments1		8.7 %			8.4 %			8.3 %
Cash component of weighted average yield on debt investments		7.4 %			7.1 %			7.0 %
Weighted average yield on total portfolio investments2		8.3 %			8.0 %			7.8 %
Investment activity3:
New investment commitments	$	385,000	$	178,400	$	148,500
New funded investment activity4	$	416,400	$	165,300	$	146,300
Proceeds from prepayments, exits, other paydowns and sales	$	201,800	$	170,600	$	184,200
Net new investments5	$	214,600	$	(5,300)	$	(37,900)
Number of new investment commitments in new portfolio companies		14			9			8
Number of new investment commitments in existing portfolio companies		6			1			3
Number of portfolio company exits		11			11			12

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• Annual stated yield earned plus net annual amortization of OID or premium earned on accruing investments, including the Company's share of the return on debt investments in the SLF JV I and Glick JV, and excluding any amortization or accretion of interest income resulting solely from the cost basis established by ASC 805 (see Non-GAAP Financial Measures below) for the assets acquired in connection with the Merger.

• Annual stated yield earned plus net annual amortization of OID or premium earned on accruing investments and dividend income, including the Company's share of the return on debt investments in the SLF JV I and Glick JV, and excluding any amortization or accretion of interest income resulting solely from the cost basis established by ASC 805 for the assets acquired in connection with the Merger.

• Excludes the assets acquired as part of the Merger.

• New funded investment activity includes drawdowns on existing revolver and delayed draw term loan commitments.

• Net new investments consists of new funded investment activity less proceeds from prepayments, exits, other paydowns and sales.

As of September 30, 2021, the fair value of the investment portfolio was $2.6 billion and was composed of investments in 138 companies. These included debt investments in 121 companies, equity investments in 35 companies, including limited partnership interests in one private equity fund, and the Company's joint venture investments in SLF JV I and OCSI Glick JV LLC ("Glick JV"). 20 of the equity investments were in companies in which the Company also had a debt investment.

As of September 30, 2021, 94.3% of the Company's portfolio at fair value consisted of debt investments, including 69.1% of first lien loans, 17.6% of second lien loans and 7.6% of unsecured debt investments, including the debt investments in SLF JV I and Glick JV. This compared to 67.6% of first lien loans, 19.1% of second lien loans and 7.9% of unsecured debt investments, including the debt investments in SLF JV I and Glick JV, as of June 30, 2021.

As of September 30, 2021, there were no investments on non-accrual status.

The Company's investments in SLF JV I totaled $133.9 million at fair value as of September 30, 2021, up 1% from $132.9 million as of June 30, 2021. The increase in the value of the Company's investments in SLF JV I was primarily driven by undistributed net investment income.

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