Oaktree Specialty Lending Corp Q1 FY2020 Earnings Call

Welcome, and thank you for joining Oaktree Specialty Lending Corporation's first fiscal quarter 2020 conference call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode but will be prompted for a question-and-answer session following the prepared remarks. Now, I would like to introduce Michael Mosticchio of Investor Relations, who will host today's conference call. Mr. Mosticchio, you may begin.

Thank you, operator, and welcome to Oaktree Specialty Lending Corporation's first fiscal quarter 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. We will be happy to take your questions following their prepared remarks. 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, 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 corporate website. With that, I would now like to turn the call over to Matt Pendo.

Thank you, Mike, and welcome everyone to our first quarter earnings conference call. We appreciate your interest in and support of OCSL. We are off to a solid start to fiscal year 2020, with a stable NAV, portfolio appreciation, strong investment activity, and continued progress reducing our non-core investments. We reported first quarter NAV per share of $6.61, up $0.01 from the previous quarter. This marked our eighth consecutive quarter of increasing NAV and again demonstrated the consistency of our performance. Our cumulative NAV growth over the past eight quarters was $0.79 per share, or 14%. Adjusted net investment income was $0.10 per share for the first quarter, down modestly from the prior two quarters, when we experienced a number of non-recurring events, including strong prepayment fees from U.S. Wealth Services and other investments, as well as higher OID accretion from uncertain investments. In addition, interest income was lowered due to declines in LIBOR during the quarter. That said, we generated $134 million of originations in the quarter. The majority of our first quarter investments were private placement transactions, where we co-invested alongside other Oaktree funds. Importantly, robust origination activity continued into January, giving us a great start on the current quarter. Armen will discuss this in more detail in a few moments. As a result of these investments, we ended the quarter with leverage of 0.58 times, up from 0.51 times last quarter, but it was still short of our target range of 0.70 to 0.85 times. So, we have plenty of runway ahead of us. We also continue to reduce risk across the portfolio and position it for a stronger long-term performance by further exiting non-core investments. We monetized $26 million across three names in the quarter. Following these exits, non-core investments accounted for 13% of our overall portfolio at the end of the quarter, down from 16% at September 30, 2019. Non-core investments have declined from $893 million to $174 million since we began managing OCSL more than two years ago. We continue to work diligently on maximizing the values of remaining non-core investments, which will occur over time and are dependent on each specific situation. With respect to our capital structure, we’ve recently received positive news: both Moody's and Fitch assigned OCSL investment-grade ratings, citing our successful progress to date in exiting non-core investments, the strengthening quality of Oaktree, and our low leverage relative to peers. Additionally, we amended our credit facility to allow for the full two to one leverage, and we received unanimous support from our banking partners to make this change. This provides us with greater flexibility and is an important milestone as we continue to evaluate ways to optimize and enhance our capital structure. With that, I will now turn the call over to Armen.

Thanks, Matt, and good morning, everyone. I'd like to start by sharing our view on the overall market environment. The loan markets rallied in the quarter, buoyed by improving investor sentiment, as positive macroeconomic conditions endured, including ongoing job growth and GDP expansion. This helped drive some appreciation of our portfolio and support the increase in NAV. That said, direct lending continues to be highly competitive, given the abundance of capital that private credit funds raised over the past several years to meet demand from institutional investors, including BDCs, CLOs, and other private lending vehicles. Private equity purchase price multiples continued to be at all-time highs, and spreads are historically tight. Intense competition continues to produce terms and conditions that overall favor borrowers. Against that backdrop, we remain mindful of relative value in our investing where we can find the best risk-adjusted returns. As many of you know, here at Oaktree, we are able to source from multiple origination channels, including middle market sponsor and non-sponsor lending, as well as broadly syndicated loans and bonds. This provides us with a unique and wide array of investment opportunities. Overall, borrowers' financial health and their ability to repay are both stable in concert with the growing US economy. We continue to see one-off instances of deterioration in certain loans held by a number of direct lending funds. We believe that this could create more attractive investment opportunities for OCSL in the future. Despite competitive challenges and our conservative posture, we were able to capitalize on the Oaktree platform to originate $134 million in new investment commitments across 13 issuers. One of these transactions was an add-on investment to support the growth of an existing portfolio company, while the remaining were new portfolio company investments made across the primary market of our first quarter originations. $98 million, or 73%, were privately placed. I'd like to provide you with a few prominent investment examples from the first quarter. To start, Oaktree was the sole lender of a $35 million first lien loan made to E2G Power Finance, a power plant operation that generates and distributes energy to customers in the Midwest and the northeastern US. OCSL was allocated $23 million of the deal, and the loan is priced at LIBOR plus 650. In another deal, we were allocated $12.5 million of a $40 million Oaktree commitment to help finance a private equity firm's acquisition of TEG, an Australian-based provider of ticketing, promotions, venue operations, and data analytics to the growing live entertainment industry. The second lien loan was a club deal and was attractively priced at LIBOR plus 800. Lastly, we co-invested with another Oaktree strategy on a $43 million first lien loan priced at LIBOR plus 575 to Corona, a provider of real-world observational data for autoimmune diseases used to support the pharma industry. OCSL was allocated $16 million of this loan. As Matt noted, the pace of originations remained strong. We have closed $112 million in six deals to date in January. In total, these deals were attractively priced with a weighted average yield of 8.7%, and 94% were first lien loans. Among these originations was a $31 million first lien loan to CIG Logistics, a provider of logistics services to the energy sector. Oaktree was the sole lender in this $100 million deal, which was well-structured and priced at LIBOR plus 850. Another deal that funded in January was a $39 million investment in OLAPLEX, a leading global specialty hair care product company with a proprietary patented formula that repairs and strengthens damaged hair. Oaktree committed $139 million in total to this first lien loan, which was priced at LIBOR plus 650. The CIG and OLAPLEX investments, coupled with the first quarter deals I shared, demonstrate our capabilities to identify unique and attractive opportunities across multiple industries and origination channels. Importantly, we also continue to identify timely and profitable exits that help position us for continued growth. Early this calendar year, for example, we completed the process of selling our position in YETI. This highly accretive exit allowed us to convert equity to cash that we can redeploy into interest-earning investments over time, which is one of our ongoing objectives toward improving our ROE. Looking ahead, we are patiently yet opportunistically evaluating a range of interesting investment possibilities in our pipeline that we believe present an attractive risk-reward. We believe we are well-positioned with ample liquidity to take advantage of attractive opportunities. Now turning to the overall portfolio, we remain focused on defensively positioning OCSL's portfolio by maintaining diversity across issuers and borrowers, focusing on senior secured opportunities and lending to larger and more diversified businesses with lower leverage levels. The portfolio's characteristics were relatively stable from the prior quarter. We held $1.5 billion of investments across 106 portfolio companies. 80% of our investments were senior secured, of which 57% were first lien. This slight increase from 54% the previous quarter continued a gradual migration to more first lien positions. The remainder of our investments consisted of 5% unsecured debt, 7% equity, and LP interest, and 9% investments in the Kemper JV. The medium portfolio company EBITDA was flat at $156 million, and leverage was five times at the close of the first quarter, below overall middle market leverage levels, which remain elevated. Turning to the non-core portfolio, we continue to make meaningful progress reducing exposure to non-core investments in the first quarter. The $26 million of non-core positions that we monetized in the first quarter brought the non-core portfolio down to $174 million, or 13% of the portfolio. In summary, we are pleased with the ongoing progress of reducing the size and risk in the non-core portfolio, and we are confident that we are well-positioned to deliver attractive risk-adjusted returns to our shareholders throughout 2020. Now I will turn the call over to Mel to discuss our financial results in more detail.

Thank you, Armen. For the first quarter, OCSL reported net investment income of $7.8 million, adjusted net investment income of $14.1 million, or $0.06 and $0.10 per share respectively. As a reminder, we defined adjusted NII as NII, excluding capital gains incentive fees, or part 2 incentive fees. Including the impact of a two-year contractual fee waiver expiration, which ended on October 17th, OCSL accrued a total of $6.3 million in part 2 incentive fees during the first quarter. This amount was composed of a non-recurring $5.2 million reversal of previously accrued fee waivers stemming from the October 17th waiver expiration, and $1.1 million of accrued part 2 incentive fees related to net appreciation in the portfolio during the first quarter. Ultimately, the $6.3 million part 2 incentive fee accrual recognized this quarter was primarily driven by unrealized gains in the portfolio. It is important to note that while GAAP requires us to take unrealized gains into account when accruing part 2 incentive fee expense each quarter, OCSL will only pay part 2 incentive fees annually and to the extent that it has realized gains that exceed realized and unrealized losses. During the quarter, the total investment income was $31 million, down from $34.5 million in the previous quarter. The $3.5 million decline was due to lower interest and fee income, partially offset by higher dividend income. Interest income was down by $2.3 million quarter-over-quarter, mainly due to the decrease in LIBOR building downward pressure on interest income from our floating rate investments. We recorded $1.5 million in lower fee income quarter-over-quarter, mostly due to higher loan prepayment fees that we received last quarter relative to this quarter. Net expenses for the first quarter totaled $23.1 million, up $4.9 million sequentially. The increase was primarily driven by higher accrued part 2 incentive fees, including the non-recurring impact of a two-year contractual fee waiver expiration. This was partially offset by lower interest expense due to the decrease in LIBOR and lower part 1 incentive fees, mainly due to the decrease in investment income. Turning to net asset value, NAV was $6.61 per share at quarter end, up slightly from this level at September 30th. Market appreciation on a number of portfolio investments benefited NAV in the first quarter. This was offset by the increase in accrued part 2 incentive fees that I previously mentioned. Moving to credit quality, as of December 31st, only $461,000 of debt investments at fair value ran non-accrual status, which represents less than one-tenth of 1% of the total portfolio. Turning to the balance sheet, our leverage ratio increased to 0.58 times from 0.51 times on September 30th as the portfolio grew modestly during the quarter. We funded $136 million in investments, which was greater than the $97 million in payoffs and exits. As of December 31st, total debt outstanding was $539 million and had a weighted average interest rate of 4.5%, down slightly from the September quarter. Cash and cash equivalents were $21.5 million; there was $322 million undrawn capacity on the revolving credit facility. Last week, we announced that we will redeem the 5.875% 2024 notes in full on March 2nd. As you know, we're always focused on improving our capital structure and reducing our cost of funding. To that end, we believe that repaying these notes will be accretive to shareholders. Shifting now to the Kemper joint venture. As of quarter-end, the JV had $352 million of assets invested in senior secured loans to 51 companies. This compared to $361 million of total assets invested in the same number of companies last quarter. Leverage at the JV was 1.3 times at December 31st, up from 1.2 times last quarter. Its credit facility had $60 million of undrawn capacity at quarter end. Now I'll turn the call over to Matt.

Thank you, Mel. We are proud of the progress we have made in delivering improved performance and returns. Since we took over management of OCSL in late 2017, we continue to believe that we have additional runway in front of us to further enhance our ROE while maintaining our conservative approach to managing the portfolio. We have discussed these initiatives in the past, and we have made important progress on all of them. One way that we will be able to drive higher returns is by deploying more leverage at the portfolio level. We have made some progress on this during the quarter as we selectively grow our portfolio with what we believe to be attractive, conservative investments, given where we are in the economic cycle. That said, we are still operating below our long-term target of 0.7 times to 0.85 times. So, we do have the ability to enhance returns as we continue to make investments and deploy higher leverage. However, we will only grow the portfolio as we find opportunities that are consistent with our investment approach, and that we believe offer attractive risk-adjusted returns. In addition, we continue to exit non-interest-generating investments and deploy the capital into core earning assets. At quarter-end, we had approximately $100 million of non-interest-generating investments, which we recently just reduced by $15 million with the exit of our YETI stock. Finally, our efforts to optimize the Kemper JV are contributing positively to our results. The JV added $44 million in first lien investments across nine companies during the quarter, and the weighted average yield on the portfolio was 6.5%. Mel mentioned the JV's leverage at quarter-end was 1.3 times, well below the longer-term target of 2.0 times. We expect that over time, the JV will increase leverage as it incrementally adds attractive investments. Turning now to the dividend. This morning, we announced a $0.095 dividend that is consistent with our prior seven distributions. We intend to continue paying sustainable and consistent dividends that are supported by portfolio performance. In conclusion, we are pleased with our overall performance for the first quarter. We remain confident that we will strategically leverage Oaktree's significant platform to identify attractive risk-adjusted investment opportunities that deliver improved returns to our shareholders. Thank you for joining us on today's call, and for your continued interest in OCSL. With that, we're happy to take your questions. Operator, please open the lines.

We will now begin the question-and-answer session. Our first question comes from Rick Shane of JPMorgan. Please go ahead.

Hi guys. Thanks for taking my questions this morning. I'd like to delve into footnote 3 in the press release related to the reversal of the fee waivers. It implies there's about $3.9 million of waived fees that remain sort of subject to this reversal going forward. I'm curious what the triggering events for that will be, the timeline, and whether or not that is a liability that shows up on the balance sheet anywhere?

Thanks, Rick. It's a good question. This is Mel. The $3.9 million is permanently waived. As it relates to gains that occurred during the waiver period. So, to put it in context going forward, we'll look at the cumulative realized gains, unrealized losses, and realized losses, and that $3.9 million will be netted against that. So, there’s not a future liability there. It's already taken into account when we calculate future Part 2 incentive fees.

I misunderstood that. So, then I thought the $9.1 million was net of the $3.9 million. You drew $5.2 million against it this quarter, and there was $3.9 million remaining. I understand now. So basically, the $9.1 million was allocated $3.9 million permanently waived, $5.2 million expense this quarter.

Yes, $5.2 million related to the reversal of the waiver that expired on October 17. That's correct.

Okay, that makes sense. That's it for me. Thank you.

Our next question comes from Kyle Joseph of Jefferies. Please go ahead.

Apologies. Thanks for taking my questions, guys. I was going to say congratulations on the investment-grade rating. I just wanted to get your initial sense of any sort of outlook on the right side about the balance sheet and how the investment-grade rating would impact that from your perspective. I know you guys did mention you're going to redo some of the 2024 notes, but from a longer-term perspective, how you envision the right side of the balance sheet now that you guys are investment-grade?

Thanks, Kyle. It's Matt. So, a couple of things: as you mentioned, we did receive investment grade ratings from both Moody's and Fitch, which is good news. That was extremely important to us and a very good milestone. We also mentioned that we announced the redemption of our five and seven-eighths notes; that redemption date is March 2nd. We have a shelf on file, and we'll continue to evaluate opportunities in the markets where other notes are redeemable at par with 30 days’ notice. We have not announced that redemption, but those are kind of the pieces that we have, and we continue to look at the market and evaluate opportunities there.

Got it. That's helpful. And then just one follow up for me just in terms of the originations in the December 31st quarter. Could you give us a sense of timing and were any of them back-weighted just to get a better sense for the yield dynamics in the quarter?

Yes, Kyle. This is Armen. I think your instinct is correct: a good amount of the originations was more in the second part of the quarter rather than the first part, and some of our repayments were a little bit front-end loaded. So, there was a little bit of intra-quarter timing there, and we found that some of our originations got pushed later into the quarter and into January, frankly, that we've been working on in the fourth quarter.

Got it. That's it for me. Thanks very much for answering my question.

Our next question comes from Finn O'Shea of Wells Fargo. Please go ahead.

Hi, guys. Good morning. Thanks for having me on. Just the first question to expand on the fee waiver. It sounds like you partially reversed what you waived that you would have accrued. But just a bit of a surprise given it was a waiver, and it sounds like you weren't counting the capital gains incentive fee part of that waiver. So, why are the three points signed out of the nine or so you are entitled to from what would have been a capital gains fee of accrual over this period?

Sure, this is Mel. Let me take you through it. The thing that's driving the difference that I think that getting caught on is the inclusion of unrealized gains. Under GAAP, we are required to take into account unrealized gains but unrealized gains over realized and unrealized losses, and that's different than the way that we calculate on an annual basis under the investment management agreement. Under the investment management agreement, we are taken into account realized gains over realized losses and unrealized losses, so that the gains that are related to the $5.2 million reversal are unrealized gains. So, at September 30th for the fiscal year-end, we calculated under the investment management agreement the incentive fees, the Part 2 incentive fees that would be due to Oaktree. And as part of that, realized gains that occurred during the waiver period: $3.9 million was permanently waived. And hopefully that math gets you there.

And so that is helpful. But the unrealized part, those weren't ever really being waived because you reversed it, is that correct to say that you reversed…

You’re being waived during the waiver period. So, we would otherwise have accrued higher Part 2 incentive fees. But for the waiver, we were currently under GAAP during the waiver period.

Okay, thank you for that. I appreciate the color. And one more on Demand Diagnostics; this is I think your major remaining legacy name. It looks like you moved the rate this quarter; it's still past maturity. The sub that was a few moving parts or sub that was written down—the first lien is still pretty far. Can you explain that to the extent you can what's happening in that credit?

Sure, this is Armen. We are in the midst of closing a restructuring transaction there. We have signed an agreement with the company and other stakeholders. So, it is a little bit of a fluid situation; we'll have more to report as on our next quarterly call, but right now, there isn't much more that I could say beyond that.

Okay, thank you for taking my questions.

Our next question comes from Ryan Lynch of KBS. Please go ahead.

Good morning, guys. First question has to do with the origination that you guys have made in calendar 2020. You guys had really strong origination so far quarter-to-date. Was that simply due to you mentioned some investments that you were maybe hoping to close in a calendar fourth quarter that spilled over, or should we view that as a sign of a growing pipeline of increased deal activity that you guys are seeing to start off the year?

Thanks for the question, Ryan. I think that maybe one or two of the deals we had thought could close later in the year and they slipped. But I would say, generally speaking, the trend in the fourth quarter and into this year that we're seeing is a byproduct of kind of expanding our funnel, looking at a lot more sourcing and origination opportunities, leveraging the entirety of the Oaktree platform. We've talked about this in the past as an opportunity that we think we could mine a little bit further and deeper at Oaktree, and we've done that. And so, you know, working in concert with other strategies at Oaktree, leveraging our trading desk, frankly, because as there is potentially volatility in the markets, we're able to do some interesting things in the secondary market. So just kind of thinking more broadly, I don't want to give any sort of forward-looking guidance about origination, but we are pleased with some of the progress we've made to-date and hope to continue to expand our efforts there.

Okay, that's helpful. And then I think you guys mentioned about 90% of your new investments originated this quarter were also investments held by other Oaktree funds. Can you just give us a reminder of the different Oaktree funds that OCSL can invest with across the platform and what sort of size and AUM you guys have at your capacity that you can invest and what can Oaktree kind of hold in the kind of middle market direct lending across its platform that OCSL could participate in?

Sure, I can give you a sense for what those other strategies are. But by and large several strategies at Oaktree are able to invest in different parts of what we would consider middle market. Our opportunities funds, to the extent that these are more storage credits, they have capital available to invest in the middle market as well. We have a special situations group that invests in the middle market more on a control-oriented style, but they participate as well. There are sometimes situations that may be inherent through their activities that may interfere to our benefit or vice versa. Opportunities that we find that frankly are probably too high risk, and we show it to them. And we also have a middle market sponsor finance team that also invests in both mezzanine and middle market direct loans that are sponsored-backed. That's probably the most center of the fairway middle-market direct lending activities that we have at the firm. And then finally, our strategic credit strategy, which is the strategy that I am the portfolio manager of—this is Armen speaking. We are looking for middle market direct loans and frankly are more specialized in highly structured non-sponsor deals. That's where I think our competitive strength is, given the background of that team being in large part from our distressed debt team or opportunities funds, where structure matters a lot and deep analytics matter a lot. And so, we think that we have a competitive advantage there and frankly are most excited when we see deals that meet that description. I would direct you to our website for AUM details, but those strategies are the ones that are most applicable to what we do in the middle market. And as you know, Oaktree is predominantly a credit-oriented and below-investment grade credit-oriented shop with a significant amount of AUM totaling about $120 billion. So, there are a lot of pockets of information and opportunity that we could tap for the benefit of OCSL shareholders, and it's something that I'm very focused on expanding.

Okay, that's helpful color. And then one more. Oaktree has done a really good job since taking over as the manager of this entity in some of your accomplishments; you've done a good job of stabilizing distressed investments, reducing some non-core investments, growing NAV, improving the JV. And I know on your slide 16, you guys have some areas that you guys are looking to continue to improve. But even having said all those accomplishments you've done since taking over the BDC, this quarter, your adjusted NII was a 6.1% operating adjusted ROE, which is far below the BDC average. So, how do you guys plan on improving that ROE? And what do you think is a reasonable expectation for a ROE that OCSL should generate once you've accomplished those strategies?

This is Armen. I'll take a crack at that. So, we are very focused on improving ROE, but it isn't a single lever that we can pull to get us there quickly and predictably. One of the levers Matt discussed, which was the investment-grade rating and bringing down our cost of debt, that's been a very primary focus on that over the medium to long term should adhere to the benefit of our shareholders through higher ROE. Working down our non-core assets are, as Matt mentioned, about $100 million at quarter-end of non-yielding assets, turning those into cash so that we could redeploy into yielding instruments. That takes time. But we have done—as you mentioned—done a good job of doing that. We don't want to rush that. We want to maximize recoveries and improve NAV. And that's the other level. I mean, we've been—we've had several consecutive quarters of NAV growth. And that's been because of our patience and working out some tough situations. We still have a few tough situations to go, and we don't want to be hasty about converting those tough situations into a lower than what we think is optimal cash out because we are in a rush. In addition to that, we do want to be prudent in our investing. We're not looking to increase leverage for leverage’s sake, just to drive up ROE and dividends in a prudent fashion. Our leverage levels are quite low relative to the rest of the BDC universe as well. That explains a lot of why ROE is lower than the rest of the market. And we don't have any intentions of massively increasing leverage, but we are meaningfully below our target range. And as we find good businesses that, in our estimation, do not have meaningful cyclical issues and are well-structured investments and we will add them to the portfolio, and hopefully we will increase the portfolio size overall to get a little bit closer to our targeted leverage levels, and thereby increase ROE that way as well. So, I can't give you a sense for timing or an estimate on ROEs, but you should just know that we are pushing forward all of the various tools we have at our disposal to increase shareholder value by increasing NAV, ROE, etcetera.

Okay, that's helpful commentary. Those are all my questions. I appreciate the time today.

Thank you.

And our next question comes from Chris York of JMP Securities. Please go ahead.

Good morning, guys. Thanks for taking my questions. First one is just kind of a housekeeping one for Mel. Will you guys be kicking a Part 2 incentive fee on YETI exit in this quarter?

So, under GAAP, we're required to—again as I stated before, we are required to accrue Part 2 incentive fees, both realized and unrealized gains. But we will only pay at the end of the fiscal year, and although YETI would be included in that calculation, we would also include any realized or unrealized losses at that time.

Understood. And then would you consider making any discretionary adjustments at year-end for waivers?

We don't have any plans to do that. We have the two-year waiver period, during which we permanently waived $3.9 million of Part 2 incentive fees for fiscal 2019.

Okay, some questions for Armen. So, you've been in your role here as CEO for, I think six months. So, could you explain where you have spent the most amount of your time since being brought in to run the track planning business and Edgar's departure?

Thanks for the question, Chris. Yes, I think where I've been spending the most amount of time is working with the team on originating and analyzing loans. I would say I'm spending almost as much time understanding and working through some of the tougher assets that remain in OCSL. I think we have a very strong team that's been doing some great things for the last two plus years, and so I'm not looking to get in the way of that. But I do want to, for the benefit of our shareholders, understand what's going on in our corporate situations. But I think my highest and best use vis-a-vis OCSL is to make sure that we're seeing as many deals as possible, expanding our funnel as wide as possible so that we can be very selective in what we do put into the portfolio while still being able to ramp, and that's where I've been spending most of my time—just with the analyst team, with our originators, and with other strategies at Oaktree that are looking at credit. Frankly, as you know, Oaktree has a very close relationship with Brookfield, understanding where there may be opportunities there as well that could benefit OCSL. There's a lot of potential there, and it just takes time and effort to work all of those different opportunity sets, and those are my areas of focus.

Got it, understood. Just kind of enlighten that obviously change worries investors. So, what expectations should investors have about the change in leadership? And then maybe your proprietary expertise or relationships you talked a little bit about focusing on the funnel. So, maybe how does that change translate into better portfolio outcomes for shareholders?

Yes, it's a great question. So, by way of background, Edgar Lee and I joined Oaktree within a couple weeks of each other—both in our distressed debt group. We have a very similar background. From an investment standpoint, our career trajectory at Oaktree has been identical. When he left our distressed group to start our strategic credit strategy, I also left our distressed group to build out our senior loan strategy and structured credit strategies. As a result of our trajectory, we interacted at least weekly if not daily on many situations as we both departed our distressed group. During our distressed days, we restructured and invested in meaningful amounts of capital in meaningful situations and learned a lot—compared notes a lot. So, I don't think that from a background perspective and downside-oriented investing perspective, Edgar and I are any different. We were cut from the same cloth and build within the DNA of Oaktree, and specifically within the same group at Oaktree. Where we may differ is, at this point, I'm also the head of performing credit at Oaktree, which means that all of our liquid and illiquid strategies report to me. I work very closely with all of those portfolio managers in a variety of different contexts. But what I am most interested in, in terms of leveraging that position is to make sure that we are benefiting from the analytics that are available through all of those different strategies at Oaktree. For example, emerging markets, high yield bonds, convertibles, structured credit—there's a lot of information that is developed at Oaktree and can be delivered for the benefit of OCSL shareholders, and I'm very focused on making sure that we see that information. There's also deal flow that, under our prior leadership, we did not really see and we probably didn't do as much as we could have in terms of leveraging some of those other strategies for that deal flow. And now, with the combination of all of those strategies under one umbrella, I've made it very clear that it is in everyone's best interest to work with each other to share information, analytics, and opportunities. And we're doing a lot in that regard. For our sourcing and origination efforts, we are making sure that all of our sourcing and origination folks at Oaktree that up until now have been very focused on individual strategies are working across strategies now. Such that when we do have somebody who is looking for more opportunistic credit, higher yielding equity-like returns, to the extent that they see something that is interesting for OCSL, that we see that opportunity. And that wasn't something that was emphasized in the past, and it's being emphasized right now in meaningful ways. That's probably the biggest difference. I can't give guidance on when that will materialize into meaningful and significant or appreciable value creation; but I think we're on our way, and I'm encouraged by what I'm seeing in terms of engagement across the firm and the opportunity sets that we have been seeing in the fourth quarter and in January.

That's great color. Again, very helpful for us. To have some visibility and understanding of where you're focusing your time. A follow up to that would be kind of on sourcing, so I'm not entirely sure if Edgar was responsible for sourcing unique deals, maybe like Sorrento, as an example. But should investors expect that you will be instrumental in sourcing unique direct deals for Oaktree and then that could end up in the portfolio at OCSL?

So, first, I would say we have a very, very strong team at Oaktree. In the strategic credit team, in our middle market direct lending team, as well as the other strategies at Oaktree. It has never been a one-man show at Oaktree in any strategy. Edgar is an amazing talent—very smart, great relationships, and had created a lot of value and still does. Frankly, on Sorrento, he continues to serve on the Board of Sorrento, representing Oaktree. So, there continues to be a relationship with Edgar. But I would say that a lot of the origination that you've seen in OCSL and frankly, across Oaktree, it's really been driven by a variety of different individuals. We have a lot of talented individuals there, each with their own relationships and perspectives. And so, I'm not concerned about loss of origination. Edgar was not an originator per se; he's an analyst, like me, and as a result of just being in the markets as I've been as well. There are relationships and opportunities that you see. And so, I don't see that losing Edgar is going to be an impediment that way. I would also say that a lot of what I see or what Andrew sees, we see it because we're in—Oaktree has a reputation in the market for understanding tough situations, getting to structure a resolution that works in a very time-efficient manner. That cannot be delivered by one individual; it has to be delivered by an institution, and the institution is as strong today as it ever has been.

Yes, I think investors know that Oaktree is a very strong institution. Appreciate that. Last question is with significant available capital. You're obviously operating below pure leverage. Investors have been patient for a while on redeployment, and they've been incurring an opportunity cost. So, what conditions specifically do you need to see in the market to be more opportunistic with capital, and could you provide a frame for maybe what the return expansion potential looks like when you are opportunistic?

Yes, this is Armen again. I don't— that's not something that we are considering doing right now, and we're always looking at enhancing shareholder value and liquidity. But from our perspective, OCSI and OCSL have different positioning. We think that there's value in having those two disparate strategies in a public format. We would like to improve both of them and enhance shareholder value in both of them. But we do believe that they are distinct, and so there really is no plan right now to merge those two.

Thank you.

Thank you again for joining us for the first quarter earnings conference call. A replay of this conference call will be available for 30 days on OCSL's website in the investor section or by dialing 877-344-7529 for U.S. callers or +41 412 317 0088 for non-U.S. callers with the replay access code 1013808 beginning approximately one hour after this broadcast.

Thank you for joining us for first quarter earnings conference call. A replay of this conference call will be available for 30 days on OCSL's website in the investor section or by dialing 877-344-7529 for U.S. callers or +41 412 317 0088 for non-U.S. callers with the replay access code 1013808 beginning approximately one hour after this broadcast.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.