Oaktree Specialty Lending : Announces Second Fiscal Quarter 2021 Financial Results

Oaktree Specialty Lending Corporation Announces Second Fiscal Quarter 2021 Financial

Results and Declares Increased Distribution of $0.13 Per Share

LOS ANGELES, CA, May 6, 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 ended March 31, 2021.

Financial Highlights for the Quarter Ended March 31, 2021

• Total investment income was $41.9 million ($0.29 per share) for the second fiscal quarter of 2021, up from $38.2 million ($0.27 per share) for the first fiscal quarter of 2021. The increase was primarily driven by a larger investment portfolio due to new originations, the increase in assets resulting from the merger with Oaktree Strategic Income Corporation ("OCSI") that was completed during the quarter (the "Merger") and OID accretion that resulted from merger-related accounting adjustments. Excluding the merger-related income accretion, adjusted total investment income was $41.3 million ($0.28 per share) for the second fiscal quarter of 2021.
• GAAP net investment income was $18.1 million ($0.12 per share) for the second fiscal quarter of 2021, as compared with $10.0 million ($0.07 per share) for the first fiscal quarter of 2021. The increase was primarily driven by higher total investment income and lower accrued Part II incentive fees.
• Adjusted net investment income was $21.1 million ($0.14 per share) for the second fiscal quarter of 2021, up slightly from $19.6 million ($0.14 per share) for the first fiscal quarter of 2021.
• Net asset value ("NAV") per share was $7.09 as of March 31, 2021, up 4% from $6.85 as of December 31, 2020. The increase was primarily driven by realized and unrealized gains on certain debt and equity investments during the quarter.
• Originated $317.7 million of new investment commitments1 and received $228.9 million of proceeds from prepayments, exits, other paydowns and sales during the quarter ended March 31, 2021. Of these new investment commitments, 80% were first lien loans, 14% were second lien loans and 5% were preferred equity investments. The weighted average yield on new debt investments was 8.2%.
• No investments were on non-accrual status as of March 31, 2021.
• Total debt outstanding was $1,114.8 million as of March 31, 2021. The total debt to equity ratio was 0.87x, and the net debt to equity ratio was 0.84x, after adjusting for cash and cash equivalents.
• Liquidity as of March 31, 2021 was composed of $39.9 million of unrestricted cash and cash equivalents and $325.2 million of undrawn capacity under the credit facilities (subject to borrowing base and other limitations). Unfunded investment commitments were $257.1 million, or $241.8 million excluding unfunded commitments to the Company's joint ventures. Of the $241.8 million, approximately $191.7 million can be drawn immediately as the remaining amount is subject to certain milestones that must be met by portfolio companies.
• Completed the Merger on March 19, 2021, which added $504.2 million of investments at fair value.
• A quarterly cash distribution was declared of $0.13 per share, up 8% from the prior quarter and the fourth consecutive quarterly distribution increase. The distribution will be paid in cash and is payable on June 30, 2021 to stockholders of record on June 15, 2021.

• Amounts exclude assets acquired in the Merger.

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Armen Panossian, Chief Executive Officer and Chief Investment Officer, said, "OCSL generated solid earnings results in the second quarter. Net asset value per share grew by 4%, supported by continued price appreciation on our high-quality investment portfolio. Our originations were once again strong and spread across a variety of industries to a mix of sponsor and non-sponsor owned businesses, demonstrating the breadth of Oaktree's sourcing platform. Additionally, we capitalized on the current market environment by harvesting realized gains on some of our liquid debt securities and rotating out of lower yielding investments into higher yielding, proprietary ones."

Mr. Panossian continued, "The closing of the Merger on March 19 was, of course, another highlight of the quarter. We believe the combined company will provide significant value to our shareholders. As a result of our continued strong performance and potential to improve earnings following the merger, our Board of Directors announced a fourth consecutive quarterly dividend increase to $0.13 per share, up 37% from the level one year ago."

Mathew Pendo, President and Chief Operating Officer, said, "Since the closing of the Merger, we've made great progress in improving the flexibility of our balance sheet. Earlier this week, we amended and extended our syndicated credit facility, increasing its size to $950 million while achieving favorable terms. We also retired a higher-cost SPV facility that was inherited from OCSI. While there is still more to be done, we believe these actions will allow us to more optimally fund investments while reducing our overall cost of debt capital."

Distribution Declaration

The Board of Directors declared a quarterly distribution of $0.13 per share, an increase of 8%, or $0.01 per share, from the prior quarter and the fourth consecutive quarterly distribution increase, payable on June 30, 2021 to stockholders of record on June 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
		March 31,		December 31,			March 31,
		2021			2020			2020
($ in thousands, except per share data)		(unaudited)			(unaudited)			(unaudited)
GAAP operating results:
Interest income	$	35,655	$	31,633	$	29,898
PIK interest income		3,801			3,089			1,946
Fee income		2,278			3,352			2,050
Dividend income		209			130			277
Total investment income		41,943			38,204			34,171
Net expenses		23,829			28,186			11,330
Net investment income		18,114			10,018			22,841
Net realized and unrealized gains (losses), net of taxes		70,003			55,526			(188,308)
Net increase (decrease) in net assets resulting from operations	$	88,117		$	65,544		$	(165,467)
Total investment income per common share
$	0.29		$	0.27		$	0.24
Net investment income per common share	$	0.12	$	0.07	$	0.16
Net realized and unrealized gains (losses), net of taxes per common share	$	0.48	$	0.39	$	(1.33)
Earnings (loss) per common share - basic and diluted	$	0.60	$	0.46	$	(1.17)
Non-GAAP Financial Measures1:
Adjusted total investment income	$	41,278	$	38,204	$	34,171
Adjusted net investment income	$	21,058	$	19,558	$	16,233
Adjusted net realized and unrealized gains (losses), net of taxes	$	36,607	$	55,526	$	(188,308)
Adjusted earnings (loss)	$	54,056	$	65,544	$	(165,467)
Adjusted total investment income per share	$	0.28	$	0.27	$	0.24
Adjusted net investment income per share	$	0.14	$	0.14	$	0.12
Adjusted net realized and unrealized gains (losses), net of taxes per share	$	0.25	$	0.39	$	(1.33)
Adjusted earnings (loss) per share	$	0.37	$	0.46	$	(1.17)

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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)		March 31, 2021		December 31, 2020		September 30, 2020
	(unaudited)			(unaudited)
Select balance sheet and other data:
Cash and cash equivalents	$	39,872	$	24,234	$	39,096
Investment portfolio at fair value		2,327,353			1,712,324			1,573,851
Total debt outstanding (net of unamortized financing costs)		1,109,897			694,827			709,315
Net assets		1,278,823			964,917			914,879
Net asset value per share		7.09			6.85			6.49
Total debt to equity ratio		0.87x			0.73x			0.78x
Net debt to equity ratio		0.84x			0.70x			0.74x

Adjusted total investment income for the quarter ended March 31, 2021 was $41.3 million and included $35.0 million of interest income from portfolio investments, $3.8 million of payment-in-kind ("PIK") interest income, $2.3 million of fee income and $0.2 million of dividend income. The increase of $3.1 million in adjusted total investment income for the quarter was primarily driven by a larger investment portfolio due to new originations and the increase in assets resulting from the Merger.

Net expenses for the quarter totaled $23.8 million, down $4.4 million from the quarter ended December 31, 2020. The decrease in net expenses was primarily driven by $5.9 million of lower accrued Part II incentive fees, partially offset by $0.5 million of higher interest expense due to an increase in borrowings outstanding and $0.4 million of higher net base management fees resulting from the larger investment portfolio.

Adjusted net investment income was $21.1 million ($0.14 per share) for the quarter ended March 31, 2021, up slightly from $19.6 million ($0.14 per share) for the quarter ended December 31, 2020, primarily driven by $3.1 million of higher adjusted total investment income, partially offset by higher net expenses excluding Part II incentive fees.

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Adjusted net realized and unrealized gains, net of taxes, were $36.6 million for the quarter and were primarily driven by gains on certain debt and equity investments.

Portfolio and Investment Activity

As of

		March 31, 2021			December 31,			March 31, 2020
($ in thousands)				2020
	(unaudited)			(unaudited)			(unaudited)
Investments at fair value	$	2,327,353	$	1,712,324	$	1,392,187
Number of portfolio companies		137			115			128
Average portfolio company debt size	$	17,600	$	16,200	$	11,900
Asset class:
Senior secured debt		86.5 %			85.7 %			81.9 %
Unsecured debt		1.1 %			3.1 %			5.8 %
Equity		4.4 %			3.8 %			5.5 %
JV interests		8.0 %			7.3 %			6.6 %
Limited partnership interests		- %			0.1 %			0.2 %
Non-accrual debt investments:
Non-accrual investments at fair value	$	-	$	470	$	5,864
Non-accrual investments as a percentage of debt investments		- %			- %			0.5 %
Number of investments on non-accrual		-			1			3
Interest rate type:
Percentage floating-rate		91.8 %			88.8 %			90.6 %
Percentage fixed-rate		8.2 %			11.2 %			9.4 %
Yields:
Weighted average yield on debt investments1		8.3 %			8.5 %			8.0 %
Cash component of weighted average yield on debt investments		7.1 %			7.2 %			6.9 %
Weighted average yield on total portfolio investments2		7.8 %			8.0 %			7.5 %
Investment activity3:
New investment commitments3	$	317,700	$	286,300	$	272,900
New funded investment activity4	$	301,800	$	241,500	$	251,700
Proceeds from prepayments, exits, other paydowns and sales	$	228,900	$	160,700	$	154,500
Net new investments5	$	72,900	$	80,800	$	97,200
Number of new investment commitments in new portfolio companies		18			14			32
Number of new investment commitments in existing portfolio companies		2			7			8
Number of portfolio company exits		12			12			10

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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.

• 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.

• 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 March 31, 2021, the fair value of the investment portfolio was $2.3 billion and was composed of investments in 137 companies. These included debt investments in 116 companies, equity investments in 35 companies, including limited partnership interests in one private equity fund, and the Company's joint venture investments in Senior Loan Fund JV I, LLC ("SLF JV I") and OCSI Glick JV LLC ("Glick JV"). 16 of the equity investments were in companies in which the Company also had a debt investment.

As of March 31, 2021, 94.1% of the Company's portfolio at fair value consisted of debt investments, including 68.3% of first lien loans, 18.2% 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 60.3% of first lien loans, 25.4% of second lien loans and 8.7% of unsecured debt investments, including the debt investments in SLF JV I, at fair value as of December 31, 2020.

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As of March 31, 2021, there were no investments on non-accrual status. During the quarter ended March 31, 2021, the Company exited one investment that was previously on non-accrual above its fair value as of December 31, 2020.

The Company's investments in SLF JV I totaled $130.4 million at fair value as of March 31, 2021, up 4% from $125.5 million as of December 31, 2020. The increase in the value of the Company's investments in SLF JV I was primarily driven by unrealized appreciation of certain liquid debt investments in the underlying investment portfolio.

As of March 31, 2021, SLF JV I had $352.4 million in assets, including senior secured loans to 55 portfolio companies. This compared to $341.2 million in assets, including senior secured loans to 56 portfolio companies, as of December 31, 2020. As of March 31, 2021, one investment held by SLF JV I was on non-accrual status, which represented 0.7% of the SLF JV I portfolio at cost and 0.6% at fair value. SLF JV I generated income of $1.7 million for the Company during the quarter ended March 31, 2021, down $0.1 million from $1.8 million in the prior quarter. As of March 31, 2021, SLF JV I had $30.6 million of undrawn capacity (subject to borrowing base and other limitations) on its $225 million senior revolving credit facility, and its debt to equity ratio was 1.3x.

The Company's investments in Glick JV totaled $54.6 million at fair value as of March 31, 2021. As of March 31, 2021, Glick JV had $137.3 million in assets, including senior secured loans to 36 portfolio companies. As of March 31, 2021, one investment held by Glick JV was on non-accrual status, which represented 1.1% of the Glick JV portfolio at cost and 0.9% at fair value. Glick JV generated income of $0.1 million for the Company from its acquisition on March 19, 2021 to March 31, 2021. As of March 31, 2021, Glick JV had $16.6 million of undrawn capacity (subject to borrowing base and other limitations) on its $90 million senior revolving credit facility, and its debt to equity ratio was 1.2x.

Liquidity and Capital Resources

As of March 31, 2021, the Company had total principal value of debt outstanding of $1,114.8 million, including $814.8 million of outstanding borrowings under its revolving credit facilities and $300.0 million of the 3.500% Notes due 2025. The funding mix was composed of 73% secured and 27% unsecured borrowings as of March 31, 2021. The Company was in compliance with all financial covenants under its credit facilities as of March 31, 2021.

As of March 31, 2021, the Company had $39.9 million of unrestricted cash and cash equivalents and $325.2 million of undrawn capacity on its credit facilities (subject to borrowing base and other limitations). As of March 31, 2021, unfunded investment commitments were $257.1 million, or $241.8 million excluding unfunded commitments to the Company's joint ventures. Of the $241.8 million, approximately $191.7 million could be drawn immediately as the remaining amount is subject to certain milestones that must be met by portfolio companies. The Company has analyzed cash and cash equivalents, availability under its credit facilities, the ability to rotate out of certain assets and amounts of unfunded commitments that could be drawn and believe its liquidity and capital resources are sufficient to take advantage of market opportunities in the current economic climate.

As of March 31, 2021, the weighted average interest rate on debt outstanding was 2.6%, down from 2.7% as of December 31, 2020.

The Company's total debt to equity ratio was 0.87x and 0.73x as of March 31, 2021 and December 31, 2020, respectively. The Company's net debt to equity ratio was 0.84x and 0.70x as of March 31, 2021 and December 31, 2020, respectively.

Recent Developments

Amendment of Syndicated Credit Facility

On May 4, 2021, the Company amended its syndicated credit facility to, among other things, (1) increase the size of the facility to $950 million (and increase the "accordion" feature to permit the Company, under certain circumstances, to increase the size of the facility to up to the greater of $1.25 billion and the Company's net worth, as defined in the facility),

1. extend the period during which the Company may make drawings to May 4, 2025, (3) extend the final maturity date to May 4, 2026 and (4) provide that the interest rate for margin for LIBOR loans is 2.00% and the margin for alternate base rate loans is 1.00%, in each case regardless of the Company's senior debt coverage ratio.

Termination of Deutsche Bank Facility

On May 4, 2021, the Company repaid all outstanding borrowings under its Deutsche Bank facility using borrowings under its syndicated credit facility, following which the Deutsche Bank facility was terminated.

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