Oaktree Specialty Lending (NASDAQ:OCSL) held its second-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.
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Access the full call at https://events.q4inc.com/attendee/630715121
Summary
Oaktree Specialty Lending reported a reduction in non-accruals to 2.6% of the total debt portfolio, down from 3.1% last quarter, and increased liquidity to $671 million.
Net asset value per share decreased to $15.69 from $16.30, driven by unrealized mark-to-market write-downs; adjusted net investment income was $33.7 million or $0.38 per share.
The company has sold certain liquid credit positions to build dry powder and maintain leverage, with a focus on investing in private credit deals with wider spreads and improved lender protections.
Management discussed the market environment, emphasizing the current volatility as a recalibration phase and highlighting the company’s preparedness to capitalize on future opportunities.
The board declared a total cash dividend of $0.34 per share, with a base dividend adjusted to $0.30 per share and maintaining a supplemental dividend based on excess adjusted net investment income.
Full Transcript
OPERATOR
Welcome and thank you for joining Oaktree Specialty Lending Corporation’s second fiscal quarter 2026 conference call. All lines have been placed on mute to prevent any background noise. After the Speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press STAR followed by the number one on your telephone keypad. If you would like to withdraw your question, press Star one again. Today’s conference call is being recorded. I’ll now turn the call over to Allison Murmy, OCFL’s Head of Investor Relations.
Allison Murmy (Head of Investor Relations)
Thank you operator. Our second quarter 2026 earnings release which we issued this morning along with the accompanying slide presentation can be accessed on the Investors section of our website oaktreespecialtylending.com. Before we begin, I want to remind you that the comments on today’s call include forward looking statements including reflecting current views with respect to, among other things, future operating results, and financial performance. Actual results could differ materially from those implied or expressed in the forward looking statements. Please refer to the relevant SEC filings for a discussion of these factors in further detail. Oaktree undertakes 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 an Oaktree fund. Investors and others should note that OCSL uses the Investor section of its corporate website to announce material information. The company encourages investors, the media and others to review information that it shares on its website. Now I’ll turn the call over to Matt Pendo, President of OCSL.
Matt Pendo (President)
Matt thank you Allison and good morning everyone. I will begin with an overview of our second quarter fiscal 2026 results, after which Armin Panozian, our CEO and co Chief Investment Officer, will share his perspective on the market environment. Raghav Khanna, our co Chief Investment Officer, will then cover portfolio activity and Chris McCown, our CFO and Treasurer. We’ll close with a review of our financial resultss before we open the call for questions. Despite external noise around private credit and BDCs, our team remained focused on reducing non accruals and positioning our balance sheet for flexibility. As of March 31, 2026, non accruals were 2.6% of the total debt portfolio measured at fair value, down from 3.1% last quarter and 4.6% one year ago. As an update post quarter in april we sold 2 legacy non accrual positions, Dominion Diagnostics and all web leads. We expect to make further progress reducing non accruals and realizing cash proceeds that we can deploy into performing assets over the coming months. Managing our balance sheet is a high priority as we position OCSL for a more attractive investment environment. During the quarter, we sold a portion of our liquid credit positions at cost, a strategic decision to build dry powder, maintain leverage below the midpoint of our target range and rotate out of lower yielding public credit. We ended the second quarter with available liquidity of 671 million, up $100 million from last quarter and net leverage of 1.04 times, down from 1.07 times last quarter. Turning to financial highlights, net asset value per share was $15.69 as of March 31, 2026 compared to $16.30 as of December 31, 2025. The decline was driven primarily by unrealized mark to market write downs of software loans. During the quarter, the fair value of our performing software loans declined by approximately 310 basis points, largely consistent with movements in broadly syndicated software loans. Importantly, we believe that these markdowns generally are not indications of deteriorating fundamentals in the underlying portfolio companies, but rather reflecting the repricing of risk in the broader markets. Adjusted net investment income from the quarter was $33.7 million, or $0.38 per share, as compared with $36.1 million or $0.41 per share in the prior quarter. The decrease reflected lower reference rates, lower non recurring income and ending leverage below the midpoint of our target range for the quarter. Our board declared a total cash dividend of $0.34 per share. Due to our conservative use of leverage, we have adjusted our base dividend to $0.30 per share while maintaining our supplemental dividend at 50% of excess adjusted net investment income above our base dividend. The dividends are payable on June 30, 2026. The stockholders are record as of June 15, 2026. With that, I’ll turn the call over to Armin to share his perspective on the market environment and what we see ahead.
Armin Panozian (CEO and Co Chief Investment Officer)
Thank you Matt. It was an eventful quarter for private credit. We believe the volatility that we are seeing reflects a period of recalibration rather than a systemic issue. Rising impairments, questions surrounding valuations, the use of leverage, liquidity mismatches, software exposure in an AI, driven world and refinancing risks are all part of the current dialogue surrounding private credit. This may help explain, at least in part, why market sentiment may appear more negative than borrower performance alone would suggest. As the confluence of concerns weigh on investor confidence. The current debate around private credit risks may conflate a range of distinct factors and lead to overly broad conclusions. It is important to differentiate between the fundamentally sound concept of private credit, namely tailored non bank lending, from specific challenges affecting certain segments of the market. Direct lending or making private loans to finance mid sized buyouts isn’t inherently flawed. The question for any manager is whether their portfolio assets and liabilities were built to handle a market correction. At Oaktree, we have more than three decades of experience investing in sub investment grade credit and navigating market cycles. This moment is familiar to us. For example, in 2020, OCSL’s positioning was the result of deliberate choices we made well before the COVID related market dislocation arrived. By late 2019 we had cleaned up the legacy portfolio that was acquired from the prior advisor, reduced leverage and built liquidity in the fund. When dislocation arrived in March 2020, we had the dry powder and the conviction to go on offense. In 2020 we deployed nearly $1 billion of capital and produced nearly an 11% total economic return in a year when many managers retrenched. Today, OCSL is executing with a similar mindset. We continue to make progress toward turning around underperforming assets, operating below the midpoint of our leverage target, remaining disciplined in deployment and maintaining strong liquidity. We did not predict the current environment, but we prepared to invest into it. Market volatility increased this quarter and AI, related concerns and geopolitical unrest resulted in wider spreads across public liquid credit markets. At the same time, elevated net redemptions in non traded BDCs prompted many managers to reassess their cost of capital and liquidity positions, pushing private credit into a phase of price discovery. Towards quarter end, market conditions stabilized and the private credit deal pipeline began to rebuild. We are encouraged that spreads on new private credit investments have widened to SOFR +500 to 550 basis points, approximately 50 to 100 basis points above the 2025 types and supports improved forward returns. We are also seeing modest improvements in …
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