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Oaktree Specialty Lending Corporation Announces First Fiscal Quarter 2020 Financial Results and Declares Distribution of $0.095 Per Share
Source: Nasdaq GlobeNewswire / 06 Feb 2020 06:00:11 America/New_York
LOS ANGELES, Feb. 06, 2020 (GLOBE NEWSWIRE) -- 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 December 31, 2019.
Financial Highlights for the Quarter Ended December 31, 2019
- Total investment income was $31.0 million ($0.22 per share) for the first fiscal quarter of 2020, down from $34.5 million ($0.24 per share) for the fourth fiscal quarter of 2019, primarily reflecting lower call protection fees earned on exits of investments as compared to the prior quarter as well as lower interest income resulting from decreases in LIBOR.
- GAAP net investment income was $7.8 million ($0.06 per share) for the first fiscal quarter of 2020, down from $16.3 million ($0.12 per share) for the fourth fiscal quarter of 2019, primarily resulting from lower investment income and higher net expenses due to an increase in accrued capital gain incentive fees primarily driven by the impact of the two-year contractual fee waiver expiration. This was partially offset by lower interest expense resulting from decreases in LIBOR.
- Adjusted net investment income was $14.1 million ($0.10 per share) for the first fiscal quarter of 2020, down from $16.7 million ($0.12 per share) for the fourth fiscal quarter of 2019, primarily reflecting lower investment income, partially offset by lower interest expense resulting from decreases in LIBOR.
- Net asset value ("NAV") per share was $6.61 as of December 31, 2019, up from $6.60 as of September 30, 2019.
- Originated $134.2 million of new investment commitments and received $97.0 million of proceeds from prepayments, exits, other paydowns and sales during the quarter ended December 31, 2019.
- A quarterly distribution was declared of $0.095 per share, payable on March 31, 2020 to stockholders of record on March 13, 2020.
- Moody's and Fitch each assigned OCSL investment grade credit ratings (Moody’s, Baa3 / Stable, and Fitch, BBB- / Stable)1.
Armen Panossian, Chief Executive Officer and Chief Investment Officer, said, “OCSL delivered another quarter of strong performance, highlighted by our eighth consecutive quarter of NAV growth. We successfully exited three non-core positions and added $134 million of new investments, the majority of which were privately placed to businesses that align with our late-cycle approach to investing. While leverage grew as a result of these originations, we remain below our target range and have ample dry powder and liquidity to invest opportunistically. In addition, we were recently assigned investment grade credit ratings by Fitch and Moody’s, reflecting the strength and quality of Oaktree’s credit platform, the progress that we have made in reducing exposure to non-core investments and our significant borrowing capacity. All told, we are off to a solid start to the fiscal year and believe we are well-positioned to deliver continued attractive risk-adjusted returns to our shareholders.”
Distribution Declaration
The Board of Directors declared a quarterly distribution of $0.095 per share, payable on March 31, 2019 to stockholders of record on March 13, 2019.
Distributions are paid primarily from distributable (taxable) income. To the extent taxable earnings for a fiscal taxable year fall below the total amount of distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to the Company’s stockholders.
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1 Ratings assigned in Moody’s report as of January 28, 2020 and Fitch report as of December 3, 2019.Results of Operations
For the three months ended ($ in thousands, except per share data) December 31,
2019
(unaudited)September 30,
2019
(unaudited)December 31,
2018
(unaudited)GAAP operating results: Interest income $ 28,405 $ 30,662 $ 35,789 PIK interest income 1,161 1,187 832 Fee income 1,071 2,550 1,202 Dividend income 323 114 453 Total investment income 30,960 34,513 38,276 Net expenses 23,124 18,238 20,959 Net investment income 7,836 16,275 17,317 Net realized and unrealized gains (losses), net of taxes 6,007 (2,304 ) 10,401 Net increase (decrease) in net assets resulting from operations $ 13,843 $ 13,971 $ 27,718 Net investment income per common share $ 0.06 $ 0.12 $ 0.12 Net realized and unrealized gains (losses), net of taxes per common share $ 0.04 $ (0.02 ) $ 0.08 Earnings (loss) per common share — basic and diluted $ 0.10 $ 0.10 $ 0.20 Non-GAAP Financial Measures2: Adjusted net investment income $ 14,087 $ 16,713 $ 17,317 Adjusted net investment income per common share $ 0.10 $ 0.12 $ 0.12 ______________________
2 See Non-GAAP Financial Measures — Adjusted Net Investment Income below for a description of this non-GAAP measure and a reconciliation from net investment income to adjusted net investment income, including on a weighted-average per share basis. The Company's management uses this non-GAAP financial measure internally to analyze and evaluate financial results and performance and believes that this non-GAAP financial measure is useful to investors as an additional tool to evaluate ongoing results and trends for the Company without giving effect to capital gains incentive fees. The presentation of adjusted net investment income is 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) December 31, 2019 (unaudited) September 30, 2019 Select balance sheet and other data: Investment portfolio at fair value $ 1,467,627 $ 1,438,042 Total debt outstanding 536,468 473,367 Net assets 931,082 930,630 Net asset value per share 6.61 6.60 Total leverage 0.58x 0.51x Total investment income for the quarter ended December 31, 2019 was $31.0 million and included $28.4 million of interest income from portfolio investments, $1.2 million of payment-in-kind ("PIK") interest income, $1.1 million of fee income and $0.3 million of dividend income. Total investment income decreased by $3.6 million as compared to the quarter ended September 30, 2019, primarily reflecting lower call protection fees earned on exits of investments as compared to the prior quarter as well as decreases in LIBOR that impacted our floating rate investments.
Net expenses for the quarter totaled $23.1 million, up $4.9 million from the quarter ended September 30, 2019. The increase in net expenses was primarily due to a $5.2 million reversal of previously accrued fee waivers3. This was partially offset by lower interest expense resulting from decreases in LIBOR.
Adjusted net investment income was $14.1 million ($0.10 per share) for the quarter ended December 31, 2019, down from $16.7 million ($0.12 per share) for the quarter ended September 30, 2019, primarily reflecting lower investment income, partially offset by lower interest expense resulting from decreases in LIBOR.
Net realized and unrealized gains, net of taxes, were $6.0 million for the quarter, primarily reflecting realized gains from the sale of a portion of our investment in Yeti Holdings, Inc. and unrealized appreciation on certain debt and equity investments.
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3 To ensure compliance with Section 15(f) of the Investment Company Act, Oaktree Capital Management, L.P. ("Oaktree") entered into a two-year contractual fee waiver with the Company, which ended on October 17, 2019, pursuant to which Oaktree waived any management or incentive fees payable under the investment advisory agreement that exceeded what would have been paid to the Company's former investment adviser in the aggregate under the former investment advisory agreement. At the end of the two-year period, Oaktree permanently waived $3.9 million. Prior to the end of the two-year period, amounts potentially subject to waiver under the two-year contractual fee waiver were accrued quarterly based on a theoretical “liquidation basis.” As of September 30, 2019, the Company had accrued cumulative fee waivers of $9.1 million. During the three months ended December 31, 2019, the Company reversed $5.2 million of previously accrued fee waivers since the two-year fee waiver period has ended.Portfolio and Investment Activity
As of ($ in thousands) December 31, 2019 (unaudited) September 30, 2019 (unaudited) December 31, 2018 (unaudited) Investments at fair value $ 1,467,627 $ 1,438,042 $ 1,464,885 Number of portfolio companies 106 104 110 Average portfolio company debt size $ 15,300 $ 15,300 $ 15,000 Asset class: Senior secured debt 79.5 % 78.6 % 80.0 % Unsecured debt 4.8 % 5.7 % 7.8 % Equity 6.7 % 6.7 % 3.3 % SLF JV I 8.8 % 8.8 % 8.4 % Limited partnership interests 0.2 % 0.2 % 0.5 % Non-accrual debt investments: Non-accrual investments at fair value $ 461 $ 2,706 $ 132,355 Non-accrual investments as a percentage of debt investments — % 0.2 % 9.6 % Number of investments on non-accrual 3 3 7 Interest rate type: Percentage floating-rate 90.6 % 89.8 % 86.6 % Percentage fixed-rate 9.4 % 10.2 % 13.4 % Yields: Weighted average yield on debt investments (1) 8.6 % 8.9 % 8.7 % Cash component of weighted average yield on debt investments 7.8 % 8.1 % 8.0 % Weighted average yield on total portfolio investments (2) 7.9 % 8.2 % 8.1 % Investment activity: New investment commitments $ 134,200 $ 138,400 $ 231,100 New funded investment activity (3) $ 136,200 $ 128,500 $ 162,400 Proceeds from prepayments, exits, other paydowns and sales $ 97,000 $ 139,000 $ 208,300 Net new investments (4) $ 39,200 $ (10,500 ) $ (45,900 ) Number of new investment commitments in new portfolio companies 9 5 14 Number of new investment commitments in existing portfolio companies 4 4 3 Number of portfolio company exits 7 7 14 _________
(1 ) Annual stated yield earned plus net annual amortization of original issue discount or premium earned on accruing investments, including the Company's share of the return on debt investments in the SLF JV I. (2 ) Annual stated yield earned plus net annual amortization of original issue discount 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. (3 ) New funded investment activity includes drawdowns on existing revolver commitments. (4 ) Net new investments consists of new funded investment activity less proceeds from prepayments, exits, other paydowns and sales. As of December 31, 2019, the fair value of the investment portfolio was $1.5 billion and was comprised of investments in 106 companies. These included debt investments in 81 companies, equity investments in 33 companies, including our limited partnership interests in two private equity funds, and our investment in Senior Loan Fund JV I, LLC (“SLF JV I”).
Nine of the equity investments were in companies in which the Company also had a debt investment.As of December 31, 2019, 90.9% of the Company's portfolio as of December 31, 2019 consisted of debt investments, including 56.7% of first liens, 22.8% of second liens and 11.4% of unsecured debt investments, including the debt investments in SLF JV I at fair value.
As of December 31, 2019, there were three investments on which the Company had stopped accruing cash and/or PIK interest or OID income that, in aggregate, represented 4.3% of the Company's debt portfolio at cost and 0.03% at fair value.
As of December 31, 2019, SLF JV I had $351.7 million in assets, including senior secured loans to 51 portfolio companies. The joint venture generated income of $2.2 million for the Company during the quarter ended December 31, 2019. As of December 31, 2019, SLF JV I had $60.3 million of undrawn capacity on its senior revolving credit facility.
Over time, the Company intends to rotate out of the remaining investments it has identified as non-core investments, which were approximately $174.0 million at fair value as of December 31, 2019. It will also seek to redeploy non-income generating investments comprised of equity investments, limited partnership interests and loans currently on non-accrual status into proprietary investments with higher yields. Certain additional information on such categorization and the portfolio composition is included in investor presentations that the Company files with the Securities and Exchange Commission ("SEC").
Liquidity and Capital Resources
As of December 31, 2019, the Company had $21.5 million of cash and cash equivalents, total principal value of debt outstanding of $539.1 million and $322.2 million of undrawn capacity on its credit facility, subject to borrowing base and other limitations. The weighted average interest rate on debt outstanding was 4.5% and 4.8% as of December 31, 2019 and September 30, 2019, respectively.
The Company’s total leverage ratio was 0.58x and 0.51x as of December 31, 2019 and September 30, 2019, respectively.
Non-GAAP Financial Measures
Adjusted Net Investment Income
On a supplemental basis, the Company is disclosing adjusted net investment income and per share adjusted net investment income, each of which is a financial measure that is calculated and presented on a basis of methodology other than in accordance with U.S. GAAP (“non-GAAP”). Adjusted net investment income represents net investment income, excluding capital gains incentive fees ("Part II incentive fee"). The Company's management uses this non-GAAP financial measure internally to analyze and evaluate financial results and performance and believes that this non-GAAP financial measure is useful to investors as an additional tool to evaluate ongoing results and trends for the Company without giving effect to capital gains incentive fees. The Company’s investment advisory agreement provides that a capital gains-based incentive fee is determined and paid annually with respect to realized capital gains (but not unrealized capital appreciation) to the extent such realized capital gains exceed realized capital losses and unrealized capital depreciation on a cumulative basis. Refer to Note 11 – Related Party Transactions in our Quarterly Report on Form 10-Q for further discussion. The Company believes that adjusted net investment income is a useful performance measure because it reflects the net investment income produced on the Company's investments during a period without giving effect to any changes in the value of such investments and any related capital gains incentive fees between periods. The presentation of adjusted net investment income is not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation.
The following table provides a reconciliation of net investment income (the most comparable U.S. GAAP measure) to adjusted net investment income for the periods presented (dollars in thousands, except per share amounts; unaudited):
For the three months ended December 31, 2019 September 30, 2019 December 31, 2018 ($ in thousands, except per share data) Amount Per Share Amount Per Share Amount Per Share GAAP net investment income $ 7,836 $ 0.06 $ 16,275 $ 0.12 $ 17,317 $ 0.12 Part II incentive fee (net of waivers) 6,251 0.04 438 — — — Adjusted net investment income $ 14,087 $ 0.10 $ 16,713 $ 0.12 $ 17,317 $ 0.12 Conference Call Information
Oaktree Specialty Lending will host a conference call to discuss its first fiscal quarter 2020 results at 11:00 a.m. Eastern Time / 8:00 a.m. Pacific Time on February 6, 2019. The conference call may be accessed by dialing (877) 507-3275 (U.S. callers) or +1 (412) 317-5238 (non-U.S. callers), participant password “Oaktree Specialty Lending.” During the earnings conference call, Oaktree Specialty Lending intends to refer to an investor presentation that will be available on the Investors section of the Oaktree Specialty Lending website, www.oaktreespecialtylending.com. Alternatively, a live webcast of the conference call can be accessed on Oaktree Specialty Lending’s website.
For those individuals unable to listen to the live broadcast of the conference call, a replay will be available on Oaktree Specialty Lending’s website, or by dialing (877) 344-7529 (U.S. callers) or +1 (412) 317-0088 (non-U.S. callers), access code 10138082, beginning approximately one hour after the broadcast.
About Oaktree Specialty Lending Corporation
Oaktree Specialty Lending Corporation (NASDAQ:OCSL) is a specialty finance company dedicated to providing customized one-stop credit solutions to companies with limited access to public or syndicated capital markets. The Company seeks 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, and preferred equity. The Company is regulated as a business development company under the Investment Company Act of 1940, as amended. Oaktree Specialty Lending is managed by Oaktree Capital Management, L.P. For additional information, please visit Oaktree Specialty Lending's website at www.oaktreespecialtylending.com.
Forward-Looking Statements
Some of the statements in this press release constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements may include statements as to: our future operating results and distribution projections; our business prospects and the prospects of our portfolio companies; and the impact of the investments that we expect to make. 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 press release 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 “Risk Factors” and elsewhere in our annual report on Form 10-K and our quarterly reports on Form 10-Q. Other factors that could cause actual results to differ materially include: changes in the economy, financial markets and political environment; risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; 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; 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 presentation on information available to us on the date of this presentation, 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 the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Contacts
Investor Relations:
Oaktree Specialty Lending Corporation
Michael Mosticchio
(212) 284-1900
ocsl-ir@oaktreecapital.comMedia Relations:
Financial Profiles, Inc.
Moira Conlon
(310) 478-2700
mediainquiries@oaktreecapital.comOaktree Specialty Lending Corporation
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)December 31, 2019 (unaudited) September 30, 2019 ASSETS Investments at fair value: Control investments (cost December 31, 2019: $205,608; cost September 30, 2019: $224,255) $ 192,528 $ 209,178 Affiliate investments (cost December 31, 2019: $8,449; cost September 30, 2019: $8,449) 9,106 9,170 Non-control/Non-affiliate investments (cost December 31, 2019: $1,324,201; cost September 30, 2019: $1,280,310) 1,265,993 1,219,694 Total investments at fair value (cost December 31, 2019: $1,538,258; cost September 30, 2019: $1,513,014) 1,467,627 1,438,042 Cash and cash equivalents 21,527 15,406 Interest, dividends and fees receivable 10,356 11,167 Due from portfolio companies 2,931 2,616 Receivables from unsettled transactions 5,458 4,586 Deferred financing costs 6,034 6,396 Deferred offering costs 65 — Derivative assets at fair value — 490 Other assets 2,602 2,335 Total assets $ 1,516,600 $ 1,481,038 LIABILITIES AND NET ASSETS Liabilities: Accounts payable, accrued expenses and other liabilities $ 1,540 $ 1,589 Base management fee and incentive fee payable 15,971 10,167 Due to affiliate 2,548 2,689 Interest payable 2,402 2,296 Payable to syndication partners 1 — Payables from unsettled transactions 24,687 59,596 Derivative liability at fair value 972 — Deferred tax liability 929 704 Credit facility payable 377,825 314,825 Unsecured notes payable (net of $2,607 and $2,708 of unamortized financing costs as of December 31, 2019 and September 30, 2019, respectively) 158,643 158,542 Total liabilities 585,518 550,408 Commitments and contingencies Net assets: Common stock, $0.01 par value per share, 250,000 shares authorized; 140,961 shares issued and outstanding as of December 31, 2019 and September 30, 2019 1,409 1,409 Additional paid-in-capital 1,487,774 1,487,774 Accumulated overdistributed earnings (558,101 ) (558,553 ) Total net assets (equivalent to $6.61 and $6.60 per common share as of December 31, 2019 and September 30, 2019, respectively) 931,082 930,630 Total liabilities and net assets $ 1,516,600 $ 1,481,038 Oaktree Specialty Lending Corporation
Consolidated Statements of Operations
(in thousands, except per share amounts)Three months ended
December 31, 2019 (unaudited)Three months ended
September 30, 2019 (unaudited)Three months ended
December 31, 2018 (unaudited)Interest income: Control investments $ 2,551 $ 2,836 $ 3,339 Affiliate investments 114 101 13 Non-control/Non-affiliate investments 25,659 27,640 32,167 Interest on cash and cash equivalents 81 85 270 Total interest income 28,405 30,662 35,789 PIK interest income: Control investments — — 67 Non-control/Non-affiliate investments 1,161 1,187 765 Total PIK interest income 1,161 1,187 832 Fee income: Control investments 6 6 6 Affiliate investments 5 5 4 Non-control/Non-affiliate investments 1,060 2,539 1,192 Total fee income 1,071 2,550 1,202 Dividend income: Control investments 323 114 453 Total dividend income 323 114 453 Total investment income 30,960 34,513 38,276 Expenses: Base management fee 5,607 5,496 5,568 Part I incentive fee 2,988 3,545 3,728 Part II incentive fee 1,051 (403 ) 1,820 Professional fees 640 720 966 Directors fees 143 142 143 Interest expense 6,535 6,960 8,904 Administrator expense 428 388 763 General and administrative expenses 532 549 631 Total expenses 17,924 17,397 22,523 Reversal of fees waived / (fees waived) 5,200 841 (1,564 ) Net expenses 23,124 18,238 20,959 Net investment income 7,836 16,275 17,317 Unrealized appreciation (depreciation): Control investments 1,997 52 (5,820 ) Affiliate investments (64 ) (179 ) — Non-control/Non-affiliate investments 2,408 2,621 (784 ) Secured borrowings — (2,624 ) (19 ) Foreign currency forward contracts (1,462 ) 695 (352 ) Net unrealized appreciation (depreciation) 2,879 565 (6,975 ) Realized gains (losses): Non-control/Non-affiliate investments 3,839 (6,248 ) 16,761 Secured borrowings — 2,625 — Foreign currency forward contracts (551 ) 1,097 1,201 Net realized gains (losses) 3,288 (2,526 ) 17,962 Provision for income tax (expense) benefit (160 ) (343 ) (586 ) Net realized and unrealized gains (losses), net of taxes 6,007 (2,304 ) 10,401 Net increase (decrease) in net assets resulting from operations $ 13,843 $ 13,971 $ 27,718 Net investment income per common share — basic and diluted $ 0.06 $ 0.12 $ 0.12 Earnings (loss) per common share — basic and diluted $ 0.10 $ 0.10 $ 0.20 Weighted average common shares outstanding — basic and diluted 140,961 140,961 140,961 
- Total investment income was $31.0 million ($0.22 per share) for the first fiscal quarter of 2020, down from $34.5 million ($0.24 per share) for the fourth fiscal quarter of 2019, primarily reflecting lower call protection fees earned on exits of investments as compared to the prior quarter as well as lower interest income resulting from decreases in LIBOR.
