Oaktree Specialty Lending : Q4 2021 Oaktree Specialty Lending Corporation Earnings Conference Call Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q4 2021 Oaktree Specialty Lending Corp Earnings Call

EVENT DATE/TIME: NOVEMBER 16, 2021 / 6:00PM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

1

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

NOVEMBER 16, 2021 / 6:00PM GMT, Q4 2021 Oaktree Specialty Lending Corp Earnings Call

CORPORATE PARTICIPANTS

Armen Panossian Oaktree Specialty Lending Corporation - CEO & CIO

Mathew M. Pendo Oaktree Specialty Lending Corporation - President & COO

Mel Carlisle Oaktree Specialty Lending Corporation - CFO & Treasurer

Christopher McKown Oaktree Specialty Lending Corporation - Assistant Treasurer

Michael Mosticchio Oaktree Specialty Lending Corporation - IR

CONFERENCE CALL PARTICIPANTS

Bryce Wells Rowe Hovde Group, LLC, Research Division - Research Analyst

Devin Patrick Ryan JMP Securities LLC, Research Division - MD and Equity Research Analyst

Ryan Patrick Lynch Keefe, Bruyette, & Woods, Inc., Research Division - MD

PRESENTATION

Operator

Welcome, and thank you for joining Oaktree Specialty Lending Corporation's Fourth Fiscal Quarter and Full Year 2021 Conference Call. Today's conference call is being recorded.

(Operator Instructions)

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

Michael Mosticchio Oaktree Specialty Lending Corporation - IR

Thank you, operator, and welcome to Oaktree Specialty Lending Corporation's Fourth Fiscal Quarter and Full Year 2021 Conference Call. Our earnings release, which we issued this morning, and the accompanying slide presentation can be accessed on the Investors section of our website at oaktreespecialtylending.com.

Our speakers today are Armen Panossian, Chief Executive Officer and Chief Investment Officer; Matt Pendo, President and Chief Operating Officer; and Mel Carlisle, Chief Financial Officer and Treasurer. Also joining us on today's call for the question-and-answer session is Chris McKown, the company's current Assistant Treasurer, who will be taking over the CFO and Treasurer positions from Mel next month.

Before we begin, I want to remind you that comments on today's call include forward-looking statements reflecting our current views with respect to, among other things, the ability to realize the anticipated benefits of the merger and our future operating results and financial performance. Our actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to our SEC filings for a discussion of these factors in further detail.

We undertake no duty to update or revise any forward-looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell, or solicitation of an offer to purchase any interest in any Oaktree fund. Investors and others should note that Oaktree Specialty Lending uses the Investors section of its corporate website to announce material information. The company encourages investors, the media and others to review the information that it shares on its website. With that, I would now like to turn the call over to Matt.

Mathew M. Pendo Oaktree Specialty Lending Corporation - President & COO

Thanks, Mike, and thank you to everyone for joining this call. The fourth quarter completed a strong fiscal year for OCSL. We generated solid financial results and investment performance that was highlighted by robust origination activity and pristine credit quality. We, again, grew NAV and meaningfully increased our dividend.

Full year 2021 adjusted net investment income per share was $0.64, up from $0.51 for fiscal 2020, driven by higher adjusted investment income reflecting our larger investment portfolio, as well as higher prepayment fees and OID acceleration on some of our investments

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

2

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

NOVEMBER 16, 2021 / 6:00PM GMT, Q4 2021 Oaktree Specialty Lending Corp Earnings Call

made in the wake of the pandemic. Importantly, this marked our highest annual level of adjusted net investment income under Oaktree's management, and represents the tremendous progress we have made since taking over management of the company four years ago, as well as the realization of synergies from the merger with OCSI, which closed earlier this year.

Given the strength and consistency of our earnings, our Board increased our quarterly dividend by 7% to $0.155 per share. This was the sixth consecutive quarterly increase and represented a 41% increase from a year earlier. Our dividend is now up 63% from its pre-COVID level.

We reported NAV per share of $7.28, up 1% from the prior quarter, and up 12% for the full year. The quarterly increase reflected the continued price appreciation on certain debt and equity investments, and, for the annual increase, successful realizations contributed as well. Importantly, our NAV continued to exceed its pre-COVID high and was up more than 10% from the end of calendar 2019.

We had another strong year of originations. During full year 2021, we leveraged Oaktree's credit platform to generate nearly $1.2 billion of new investment commitments. Many of our new originations have been in the form of directly originated investments where we co-invested alongside other Oaktree funds. These new originations, in aggregate, were attractively priced at approximately 8.6%, which exceeded the yield on investments that were exited the year by approximately 2%. This ongoing shift in the portfolio towards higher-yielding proprietary investments has led to improved debt portfolio yield, which increased to 8.7% at year-end from 8.3% one year ago. Importantly, this all occurred against the backdrop of LIBOR remaining at all-time lows throughout the fiscal year.

Credit quality remains very strong. It's a testament to our disciplined underwriting and risk-controlled approach to investing. As with the prior quarter, we had no investments on nonaccrual at the close of the fourth quarter, and noncore investments represented just 5% of the portfolio at fair value at quarter end.

As it is our fiscal year-end, I also wanted to reiterate some of the key improvements we have made to our capital structure since the closing of the merger with OCSI in March. These changes enhance our flexibility and meaningfully lowered our cost of debt capital.

In May, we issued $350 million of senior notes at a 2.7% coupon, which we subsequently swapped to a floating rate at LIBOR plus 1.66% to better match the floating rate nature of our underlying investment portfolio. We also amended our syndicated credit facility, increasing the size to $950 million from $800 million and extending maturity by two years to May 2026. Additionally, we retired a higher-cost credit facility acquired from OCSI, and we amended the Citi facility to reduce costs in some of our lower-yielding quoted loans. By taking these steps, we proactively reduced our weighted average interest rate on debt outstanding to 2.4%, down 30 basis points from 2.7% in last year's fourth quarter.

We also improved our funding profile by more than doubling our unsecured borrowings outstanding, and boosted our borrowing capacity by more than $300 million.

Finally, we received a strong vote of support from our investment advisor, Oaktree, who purchased 2.3% of outstanding shares from our largest shareholder in September. Oaktree, along with our management team and directors, now own 3.1% of OCSL shares, which we believe further strengthens the alignment between us and our advisors.

Before turning the call over to Armen, I wanted to remind you that Mel has announced he will step down as CFO and Treasurer of OCSL at the end of November to assume another senior management role within Oaktree. We thank Mel for his financial stewardship over the last four years, and of course, wish him well in the new position. Chris McKown, a Managing Director of Oaktree, will become OCSL's CFO and Treasurer, effective upon Mel's resignation. Chris currently serves as OCSL's assistant treasurer and has worked closely with Mel since we took over management of the company in 2017. Chris is very well suited and prepared to step into his new role, and he will do so at a time when we are exceptionally well positioned for fiscal 2022.

Now I would like to turn the call over to Armen.

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

3

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

NOVEMBER 16, 2021 / 6:00PM GMT, Q4 2021 Oaktree Specialty Lending Corp Earnings Call

Armen Panossian Oaktree Specialty Lending Corporation - CEO & CIO

Thanks, Matt, and hello, everyone. I'll begin with comments on the market environment and continue with some additional highlights from our fiscal fourth quarter.

Markets held up well in the September quarter, supported by economic growth and expectations for continued expansion. This resulted in further spread compression and continued low default rates in the credit markets. However, as we cautioned last quarter, inflation pressures in the economy merit careful examination. U.S. inflation is currently running above 6%, and both food and energy costs are rapidly rising. Natural gas prices, for example, have doubled in 2021, and oil is up more than 50%.

Inflation is very difficult to predict, and many market participants believe it will prove short-lived. But the events of the past 1.5 years have been unprecedented in both impact and government reaction. Before 2020, the world had never purposely shut down a significant percentage of its economy and then tried to restart it. No one knows how long it will take for bottlenecks in the supply chain to fully open up and for the labor force to be reconstituted. As such, inflationary pressures may persist. This could force the Fed to increase interest rates faster than investors currently expect. So we believe it's important to view inflation and the current environment carefully and with objectivity.

With that in mind, we are focusing on finding good relative value and are investing where we believe the best risk-adjusted returns are. We are utilizing the full scope of Oaktree's scale and resources to uncover and invest across a wide array of industries to a diversified group of issuers. We are leveraging Oaktree's ability to negotiate and structure customized private deals that we believe provide downside risk protection, and we are finding opportunities in less congested areas of the market by lending to non-sponsor owned businesses.

As we've highlighted on past calls, we also continue to identify compelling opportunities among companies in life sciences and technology, sectors that are poised for long-term growth as the global economy becomes increasingly driven by applied sciences and digital commerce.

We also continue to evaluate opportunities in the sponsor lending market, partnering with select private equity firms that we think have subject matter expertise in particular industries and sectors. Altogether, we are judiciously deploying capital on favorable terms and in a risk-controlled manner to further grow our portfolio and generate strong returns for our shareholders.

Now turning to the overall portfolio. At the end of the fourth quarter, our portfolio was well diversified, with $2.6 billion at fair value across 138 companies. 87% portfolio was invested in senior secured loans, including 69% in first liens.

Median portfolio company EBITDA as of September 30 was approximately $106 million, reflecting our preference of lending to larger, more diversified businesses, which we believe reduces risk and has contributed to our consistently solid credit quality.

Moving on to investment activity. While the market remains competitive, we leveraged the Oaktree platform to originate $385 million of new investment commitments across 14 new and 6 existing portfolio companies in the quarter. Of these, 91% were first lien loans and included $304 million in private transactions and $79 million in the new issue primary market.

Our investment in RumbleOn is a compelling example of the unique opportunities we are finding in the non-sponsored area of the market. RumbleOn is an omnichannel platform that operates the largest network of powersports dealerships in the U.S., and an e-commerce marketplace that aggregates and distributes preowned power sports and motor vehicles to and from consumers and dealers. Its e-commerce business is the only online marketplace capable of facilitating consumer-to-consumer sales in the power sports sector, and it is rapidly growing its omnichannel offering by expanding its dealership footprint. Oaktree provided a $240 million first lien commitment to support the company's continued growth activities. OCSL was allocated $54 million at an attractively priced LIBOR plus 825 basis points, as well as warrants in the company.

With respect to repayments, we received $202 million from paydowns and exits in the fourth quarter. This amount included payoffs and

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

4

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

NOVEMBER 16, 2021 / 6:00PM GMT, Q4 2021 Oaktree Specialty Lending Corp Earnings Call

proactive sales of lower-yielding investments, which we were able to selectively reinvest into our higher-yielding originations this quarter.

The weighted average yield on our new debt investment commitments for the quarter was 8.6%, which exceeded a 6.4% average yield of investments that we exited. This helped to further increase the yield on our debt portfolio, which grew by 30 basis points to 8.7% at year-end from 8.4% in the prior quarter.

Looking ahead, our pipeline remains robust as we are evaluating a range of interesting investment opportunities that we believe present an attractive risk reward. Our strong balance sheet and liquidity position us well to take advantage of attractive opportunities.

Finally, I also want to wish Mel all the best in his new role within Oaktree and congratulate Chris on his promotion to CFO. Chris is a key contributor on a deep and talented team, and we are confident that he will maintain our tradition of providing you with high-quality financial reporting and transparency. Now I will turn the call over to Mel to discuss our financial results in more detail.

Mel Carlisle Oaktree Specialty Lending Corporation - CFO & Treasurer

Thank you, Armen. I greatly appreciate your kind words. I've been fortunate to have worked with a great team here. Ever since Oaktree took over the management of the company and strongly believe that OCSL will be in very capable hands with Chris McKown at the helm as CFO. I've known and worked with Chris for 10 years, and I'm very confident that he is the right person for the job.

Before I turn to our financial results, I'd like to take a moment to remind you of the several non-GAAP measures we put in place to make the company's post-merger financial results easier to understand and more comparable to our results prior to the merger. These non-GAAP measures are intended to remove the impact of the income accretion, as well as any net realized and unrealized gains or losses arriving solely from the merger accounting adjustments. More information about these supplemental disclosures can be found in our earnings release and slide presentation.

Now turning to our financial results. OCSL delivered another quarter of solid financial performance, which also contributed to exceptionally strong full year results. For the fourth quarter of fiscal year 2021, we reported adjusted net investment income of $29.1 million or $0.16 per share, down modestly from $33.7 million or $0.19 per share in the third quarter. The decline was the result of much lower prepayment fees and OID income in the fourth quarter, primarily driven by $7 million in such fees last quarter in connection with the payoff of our loan to William Morris Endeavor. Partially offsetting this decline was higher interest income as the earnings power of the portfolio has grown as a result of the larger investment portfolio and increased yield.

Net expenses for the fourth quarter totaled $28.3 million, down $0.8 million sequentially. The decrease was mainly due to lower incentive fees, offset by higher base management fees and interest expense, driven by an increase in borrowings and our larger investment portfolio.

For the fiscal year 2021, we accrued $17.6 million of Part II incentive fees under GAAP based on the very strong portfolio performance we delivered. As a reminder, OCSL pays Part II incentive fees annually, and to the extent that it has realized gains that exceed realized and unrealized losses at fiscal year-end. Based on realized gains, the actual amount of those fees payable for full year 2021 was $8.8 million, according to the calculations under the Investment Advisory Agreement.

Turning to credit quality, which continues to be excellent. As Matt mentioned, we had no investments on nonaccrual at quarter end, and all of our portfolio companies made their scheduled interest payments.

Now moving to the balance sheet. OCSL's net leverage ratio increased to 0.95x from 0.79x at June 30, reflecting the strong investment originations that we made during the quarter. Net leverage is now near the high end of our target range of 0.85x to 1.0x. At September 30, total debt outstanding was $1.3 billion and had a weighted average interest rate of 2.4%. Unsecured debt represented 51% of total debt at year-end, up from 42% at the beginning of the year following the 2027 note offering.

At year-end, we had total liquidity of approximately $500 million, including $29 million of cash and $470 million of undrawn capacity on our credit facility. Unfunded commitments, excluding unfunded commitments to the joint ventures, were $216 million, with

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

5

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.