Oaktree Specialty Lending Corp Q2 FY2022 Earnings Call

Welcome and thank you for joining Oaktree Specialty Lending Corporation Second Fiscal Quarter 2022 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, Head 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 second 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 Chris McKown, Chief Financial Officer and Treasurer. Also joining us on the call today for the question-and-answer session is Matt Stewart, Chief Operating Officer. 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 a 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.

Thanks, Mike, and thank you everyone for joining the call today. OCSL generated solid results in the second quarter. Adjusted net investment income was up, supported by higher prepayment fees and we increased our dividend for an eighth consecutive quarter. We produced robust origination activity, including several new investments in the attractive life sciences sector, while maintaining the portfolio’s excellent credit quality. Adjusted net investment income per share was $0.18 for the quarter, compared with $0.17 for the prior quarter, extending the momentum we steadily built throughout the calendar year 2021. Earnings were supported by the portfolio’s improved yield and larger size, higher prepayment fees and OID acceleration related to investment exits, as well as modestly lower professional fees. Based on the strength and consistency of our earnings, our Board increased the quarterly dividend by 3% to $0.60 per share. Our dividend is now up more than 70% from its pre-COVID level. We reported NAV per share of $7.26, down 1% from the prior quarter. The decrease was primarily driven by the impact of wider credit market spreads and associated mark-to-market price declines. We also experienced a modest decline in the valuation of certain equity investments, given the broader stock market volatility. Now, turning to the portfolio, we originated $220 million of new investment commitments in the second quarter. Of these, 70% were first-lien loans consistent with the prior quarter and included $162 million in private transactions and $26 million in the new issue primary market. We also took advantage of some volatility in the liquid credit markets by purchasing $40 million of discounted loans and bonds at an average purchase price of 96%. The weighted average yield on all the new debt originations in the quarter was 8.7%, up from 8.1% the prior quarter. Drawing upon the power and reach of the Oaktree platform and our team’s deep experience investing across multiple cycles, we expect to continue identifying compelling investment opportunities. As always, we will focus on deals that are structured and priced attractively. We received $180 million from prepayments and paid down in exits in the second quarter. The average yield of investments that we exited was 8.2%. Our non-core portfolio continued to run off as we were able to monetize $3 million across three equity positions at slight gains to their previous fair values. This book represented $86 million at the close of the quarter or about 3% of the portfolio at fair value. Credit quality remains a consistent strength, with disciplined underwriting we invest collectively across a wide range of opportunities. This allows us to identify compelling low-risk opportunities. Underscoring this, we had no investment on non-accrual at the close of the second quarter. Importantly, we continued to be rated investment grade by both Moody’s and Fitch, and we maintain borrowing flexibility and ample liquidity to meet funding needs. We finished the quarter with $455 million of underlying capacity under our credit facilities and $39 million of cash. The weighted average interest rate on debt outstanding was 2.5% in the March quarter, a modestly increase from 2.3% in the prior quarter due to higher LIBOR. In February, we entered into an equity distribution agreement for an at-the-market equity program. During the second quarter, we sold 2.6 million shares under this program at a slight premium to NAV, generating net proceeds totaling $19.4 million after giving effect to sales agents, commissions and operating expenses. We believe this program is a cost-efficient way to raise equity capital over time and we’ll continue to utilize it when market conditions are favorable. With that, I’ll turn the call over to Armen.

Thanks, Matt, and hello, everyone. I’ll begin with comments on the market environment and continue with some additional highlights from our fiscal second quarter. Overall, credit quality held strong throughout the quarter, supported by broadly favorable conditions, including low unemployment and steady demand for products and services across sectors. That noted, potential uncertainties remain from the lingering impact of the pandemic on supply chains and surging costs. The U.S. inflation rate reached a 40-year high in March. The war in Ukraine and Western government sanctions against Russia in protests with a conflict curtailed global oil supply and exacerbated already high gasoline costs. This conflict has also disrupted already fragile supply chains and boosted other commodity prices, putting even more pressure on the Fed to bring down the elevated inflation rates. At the same time, Coronavirus flare-ups in China and its renewed restrictions on business and travel threatened to further disrupt supply chains, potentially adding to inflationary pressures. Against this backdrop, the Fed started to raise short-term interest rates in March to taper demand and cool the economy. And while markets have widely expected these and future rate hikes, uncertainty surrounding the pace of tightening and the economic implications of the war created volatility in the calendar first quarter, adversely impacting credit spreads across all sectors and leading to the modest write-down in our portfolio. Historically, in periods of Fed tightening, the risk of recession increases, given the possibility that policymakers may overreach, raising interest rates too much or too quickly. At Oaktree, we don’t invest based on macroeconomic predictions. But we do believe that it is important to pay attention to the major forces impacting securities markets, the economy, industries and individual companies. If this volatile environment intensifies and causes market dislocations, we are well prepared to act. Oaktree’s roots are in opportunistic credit investing and we have demonstrated over the years our deep expertise in investing in these types of markets. This environment may also lead to an increase in demand for private credit solutions. Debt issuance in the private markets reached record highs in 2021 and is expected to be robust this year, partly due to the abundance of capital raised to support M&A activity. However, rising interest rates, declining valuation multiples and ongoing inflationary pressures could reduce private equity backed deal flow over the near term. While issuers may favor private over public funding sources due to the ongoing volatility in public markets, competition to provide private financing may be significant. Compelling opportunities may therefore be found in the non-sponsor-backed market. In situations where the required financing solutions are bespoke, assets are difficult to value, and sector-specific expertise is rewarded. In this less crowded segment of the market, we believe that our skill and capacity to make complex loans is a competitive advantage that can lead to superior investment results. We also remain focused on identifying deal flow in the life sciences and technology industries. We expect to see a steady stream of lending opportunities in these sectors as applied sciences and digital commerce continue to gain prominence throughout the global economy. In summary, we are actively but judiciously investing, working diligently to make sure that we control risk while delivering strong returns for our shareholders. Now turning to the overall portfolio. At the close of the second quarter, our portfolio was well diversified with more than $2.6 billion at fair value across 146 companies. 86% of the portfolio was invested in senior secured loans, with first-lien loans representing 69% of the portfolio. This reflects our emphasis on being at the top of the capital structure. Nearly 90% of our loans are floating rate, positioning us well for rising rates. As you know, we have been lending to larger, more diversified businesses to lower risk and bolster credit quality. Medium portfolio company EBITDA at March 31 was approximately $180 million. The underlying leverage at our portfolio companies was approximately 5 times, lower than middle market leverage multiples, which are near historical highs at around 5.6 times. The portfolio’s weighted average interest coverage is strong at approximately 3 times, meaning our borrowers are well positioned for a rising interest rate environment. Moving on to investment activity, our $228 million of new investment commitments are spread across 16 new and nine existing portfolio companies in the second quarter. Of the 24 portfolio companies we invested in during the quarter, nine were private deals, three were primaries, and the remaining 12 are secondary purchases, which were generally smaller in size and purchased at a discount to par. Our ongoing progress in the life sciences sector was particularly pronounced in the March quarter. We invested a total of $62 million in three companies that are well positioned for growth in the sector. These included InterCall, a provider of healthcare supply chain and emergency preparedness infrastructure services to government and commercial customers; Impel, a commercial stage biopharma company focused on developing transformative therapies for people suffering from central nervous system diseases; and SiO2 Materials Science, an advanced material sciences company that has invented a new technology for the packaging and containment of biological drugs and molecular diagnostics. These are each compelling investments priced attractively with favorable terms that provide meaningful downside protection. Our origination activity remains healthy in this sector and across a wide range of industries, fueling steady momentum as we progress further into 2022. Now, I will turn the call over to Chris to discuss our financial results in more detail.

Thank you, Armen. OCSL delivered another quarter of solid financial performance, continuing strong momentum from the first fiscal quarter of 2022 and fiscal year 2021. For the second quarter, we reported adjusted net investment income of $32.3 million or $0.18 per share, up from $31.2 million or $0.17 per share in the first quarter. The increase was primarily the result of higher income from prepayments and lower professional fees. Partially offsetting this was higher interest expense related to the impact of rising LIBOR on our floating rate liabilities. Net expenses for the second quarter totaled $24.2 million, down $5.1 million sequentially. The decrease was mainly due to lower incentive fees, driven by a $5.5 million decrease in accrued capital gains incentive fees resulting from the unrealized losses during the quarter and $0.5 million of lower professional fees. This was partially offset by a $0.5 million increase of higher interest expense due to an increase in borrowings in our larger investment portfolio. Turning to our credit quality which continues to be excellent, as Matt mentioned, we had no investments on non-accrual at quarter end, as all of our portfolio companies made their scheduled interest payments. Now moving to the balance sheet. OCSL’s net leverage ratio at quarter end increased moderately from the December quarter to 1.02 times. Net leverage continues to be at the high end of our target range of 0.85 times to 1 times and will tend to fluctuate every quarter depending on the timing of investment fundings and portfolio prepayments. As of March 31st, total debt outstanding was $1.4 billion and had a weighted average interest rate of 2.5%, up from 2.3% at December 31st, due to a rising LIBOR. Unsecured debt represented 47% of total debt at quarter end, down slightly from 50% in the prior quarter. At quarter end, we had total liquidity of approximately $494 million, including $39 million of cash and $455 million of undrawn capacity on our credit facilities. Unfunded commitments, excluding unfunded commitments to joint ventures, were $195 million, with approximately $152 million of this amount eligible to be drawn immediately, as the remaining amount is subject to certain milestones that must be met by portfolio companies. Now turning to our two joint ventures. At quarter end, the Kemper JV had $390 million of assets invested in senior secured loans to 60 companies, down slightly from last quarter, driven by portfolio payoff during the second quarter, as well as spread widening across the portfolio. The JV generated $1.9 million of cash interest income for OCSL in the quarter, and we also received a $700,000 dividend, up from $450,000 in the prior quarter, as a result of the portfolio’s continued strong performance. Leverage at the JV was 1.4 times at quarter end in line with prior quarter. The Glick JV had $150 million of assets at March 31st. These consisted of senior secured loans to 44 companies. Leverage at the JV was 1.2 times at quarter end. During the quarter, we received $1.1 million of principal and interest payments on OCSL subordinated notes in the Glick JV. In summary, we continue to be very pleased with our financial results and believe our diverse portfolio and flexible balance sheet positions us well for the future. Now, I will turn the call back to Matt.

Thank you, Chris. Our strong financial results for the quarter enabled us to generate an annualized return on equity of 9.7%, slightly higher than the 9.5% we generated last quarter. While we were very pleased with our results this quarter, we believe there are still ways for OCSL’s return on assets to increase going forward. First, we remain focused on positioning our portfolio for an improved yield by rotating out of lower yielding investments and into higher yielding loans. At quarter end, we had $41 million of loans priced at or below LIBOR plus 4.5%, which we will look to opportunistically exit over time. Our new investments continue to come on the books at attractive yields, which means there’s more upside in yield on that portion of the portfolio that we expect to realize over time. As we discussed before, another ongoing opportunity for us to support our return on equity target is to further optimize our joint ventures. We can accomplish this by selectively rotating out of lower yielding investments into higher yielding ones, as well as increasing leverage at the JVs. We made good progress on this to date as both vehicles are generating returns of just over 10% for OCSL. That said, the joint ventures continue to have capacity and we will selectively rotate and grow these portfolios over time, which we believe will be accretive to return on assets. Finally, we believe OCSL is well positioned for a rising rate environment, with 89% of our investment portfolio in floating rate assets. An increase in base rates over our weighted average interest rate floor of approximately 80 basis points may positively impact our net interest margin. In conclusion, we’re very pleased with our strong second-quarter financial results. We are excited about our prospects for the remainder of the year and are optimistic that we will continue to be able to identify new attractive risk-adjusted investment opportunities, allowing us to provide strong 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.

Thank you. Our first question comes from Kevin Fultz with JMP Securities. Please go ahead.

Hi. Good morning, everyone. Clearly, there’s been a significant slowdown in deal activity so far in 2022 relative to 2021. Parsing out sponsor activity versus non-sponsor, it appears that non-sponsor activity levels have been more resilient than on the sponsor side. Just curious if that’s what you’ve seen so far in 2022 and maybe also if you could share your thoughts on why that’s been the case?

Thanks for the question. This is Armen. Yeah. I think it’s hard to deduce meaningful conclusions from just one quarter. What I would say is that, and this is more anecdotal, but on the sponsor side, I think there was a flurry of activity last year, the debt capital markets were pretty open, and the private credit markets were quite strong, valuation multiples were high. And then as we got into November and December of last year, there’s a little bit of volatility, and then a lot more volatility in January and February. What we found is that sponsor activity with new LBOs, as well as re-pricing activity in the broadly syndicated loan market took a really big step back, just given the volatility in the markets and so very few deals got done with all those buyer sponsors in the first few months of the year. And again, anecdotally, it sort of felt like it was coming back in March and April. The last two weeks of March were quite strong, and then into April, for the first two weeks, it was okay. And so we did see some new LBOs get announced. But if we look forward this year and if we look at the broadly syndicated loan market as an indicator of health for the sponsor LBO activity, it would suggest that LBO activity is going down, and that sponsors are taking a little bit of a step back, and/or prospective sellers are not interested in transacting at depressed valuation multiples. So I think it’s true that on the sponsor side, things appear slower in comparison to last year, and we would expect that if the current market conditions persist, that they will continue to be slow. On the non-sponsor side, it’s hard to gauge the resilience or lack thereof of that part of the market. But the reason it is likely to be resilient, relative to the ups and downs or cyclicality of the sponsor market is that generally speaking on the non-sponsor side, borrowers are taking on credit for strategic reasons. They’re not doing it for a transaction; they’re not funding a dividend. They’re doing it to acquire a competitor, to build out a manufacturing plant, to onshore what was historically offshore production, given some of the supply chain disruptions that have occurred over the last couple of years. And so those strategic initiatives are typically not really tied to market conditions; they’re just tied to the return on investment or the return on equity that that particular borrower assesses with that initiative and whether they could find a willing private credit or direct lending counterparty to transact that. So, I think the drivers are just different between sponsor and non-sponsor, but I do think I would be remiss not to say that the total size or the opportunity set of attractive non-sponsor deal flow is probably still smaller than the sponsor side of the market. So even though it might be resilient, it’s still not likely to pick up with such alacrity that it would counter all the kind of reduction in deal flow on the sponsor side.

Okay. That’s really helpful color, Armen. And then just one follow-up in regards to portfolio positioning, are there any pockets or industries that you find particularly attractive in the current climate?

I think life sciences is definitely the one that comes to mind, mainly because, well, it’s kind of two things. One is if you look at the equity index for life sciences companies, it is down over 30% year-to-date, over 50% year-over-year, and that volatility in the equity market and the depressed valuation multiples for some of these life sciences companies makes it such that those borrowers would prefer to finance themselves differently rather than tapping equity, diluted equity, and so we’ve seen a meaningful uptick in our pipeline of potential deal volume on the life sciences side. And the second reason we like it: the first was just taking advantage of market volatility. And we’d like doing that at Oaktree. The second is that life sciences as an industry, I wouldn’t say it’s entirely this way, but it’s substantially this way; it is fairly uncorrelated with global GDP. The reason is, generally speaking, the pace of scientific innovation is what drives the profitability and growth and value of these businesses. It isn’t kind of like general industrial or consumer packaged goods or a discretionary item. It is, generally speaking, the places that we invest in life sciences; these are need-to-have, must-have, life-saving, life-changing therapies and drugs. And therefore, if a company is successful in innovating in those areas, there is a large unmet need that will buy that product or need that product irrespective of what’s going on in the global economy. So that lack of correlation from a portfolio management perspective is quite attractive, so that you don’t have an entirely procyclical sponsor-only set of deal flow that will correlate to one in a pandemic type of setting or some other global economic slowdown. I think we are more focused on the industries that are or the companies that are going to be problematic and that’s where we’re spending most of our time. We are just avoiding land mines, to be honest with you. We’d rather not pivot towards what’s most attractive; I think there’s more danger in the market than there is opportunity right now.

Got it. I’ll leave it there and thanks for taking my questions.

Thank you.

Our next question comes from Bryce Rowe with Hovde Group. Please go ahead.

Thanks. Good morning. I wanted to start by discussing balance sheet leverage and future prospects. You are currently slightly above your targeted range, and I'm curious about your thoughts on balance sheet leverage at this moment. Is there a willingness to increase it further if opportunities in the secondary market continue to arise, or do you prefer to bring it back into the range of 85 to 100?

Hey, Bryce. It’s Matt. I think we are currently at 1.02 times, but I see that as closer to one time. We did have a loan coming back after the end of the quarter that we were aware of, which is one reason we’re slightly above. However, I still consider it to be around 0.85 to 1. We have a lot of liquidity and capacity in our capital structure, and I believe we’re at the lower end compared to many of our peers. I feel we have significant capacity if a good investment opportunity arises. As Armen mentioned, we will be very disciplined due to market volatility. However, as you saw during the last period before the pandemic, we had ample dry powder, considerable flexibility, and we invested aggressively, which increased our leverage. It’s a bit early to make predictions on that now, but we have the flexibility and capacity to act appropriately. I believe we are well positioned with our leverage, capital structure, and liquidity, and we will be ready when an opportunity comes up. Nonetheless, I think it’s premature to make a call on that at this moment.

Okay. That’s helpful, Matt. I appreciate it. And then maybe one other question just around the dividend and the dividend level, I certainly appreciate the eighth consecutive dividend increase here. Just want to try to understand kind of what the thought process might be against the current macro backdrop with layering in the prospects for higher interest rates having a positive impact on the revenue stream and on net investment income. Just kind of wondering if we should think about maybe future dividend increases despite a murkier backdrop and just want to understand how much cushion you might want to have for any kind of deterioration or downturn? Thanks.

Sure, it's Matt again. That's a great question. As you mentioned, we have successfully increased the dividend for eight consecutive quarters, which we are pleased about. Looking ahead, the decision about future dividends is ultimately up to the Board. As we've discussed before, dividends reflect the earnings from the portfolio. You are right that rising interest rates can positively impact the portfolio, and we will have more details on that soon. However, we are currently in a phase where LIBOR is increasing, and some loans are just beginning to exceed the floor while others remain below it. Therefore, it's a bit too early to determine how this dynamic will affect the dividend and earnings. For now, I want to express our confidence in our ability to increase the dividend, and we take a careful approach to managing dividends in relation to the portfolio. I’d advise against assuming numerous dividend increases solely based on interest rates, as they can fluctuate quite dramatically from day to day or week to week. So, I wouldn't make those assumptions just yet.

Okay. Thanks for that. Guys appreciate the time this morning.

Our next question comes from Ryan Lynch with KBW. Please go ahead.

Hey. Good morning. First question I had is just looking at your investment activity this quarter. After several quarters of basically staying out of the secondary market, you guys got back into that marketplace with $40 million of funding this quarter. My question is, can you explain what is the nature or the investment thesis behind those investments? Obviously, there was some volatility in the marketplace this quarter. Is it the intent that you find good companies there that you can get at a price that you think will make an attractive return and hold those securities until maturity and discounted price will allow you to generate a sufficient return for OCSL or are those more dislocations that you see that are more temporary securities that you can buy and what you think at a discounted price and then trade out of them, whether it’s a couple of months or a couple of quarters down the road?

Thank you for the question. This is Armen. Firstly, I want to emphasize that any purchases we make, whether primary or secondary, are intended to be held until maturity, and we always consider the associated risk and return. In the case of tradable credit, you might find that an asset appreciates faster or declines due to changes affecting the company, which necessitates a reassessment of the risk-adjusted prospective return whenever there are significant price fluctuations. Although we aim to hold assets to maturity, we will consider trading them if market conditions shift. The increase in secondary purchases is due to our continuous search for the best relative value in credit for OCSL and our clients at Oaktree. When we assess the market, we see various types of lending, including sponsor and non-sponsor lending, along with some opportunistic or rescue lending, and tradable credit across loans and bonds. Currently, there's limited opportunistic or episodic rescue lending available. On the sponsor side, we observed less deal flow, but the terms for completed deals remained consistent with those from most of 2021, including spreads, returns, and legal protections. In contrast, the publicly traded market has experienced notable declines, with spreads widening by approximately 25 to 50 basis points in both bonds and loans. However, the dollar price of bonds dropped significantly due to duration factors. Upon analyzing the quality of issuers in both the public and private credit sectors, we realized that investing in larger businesses with more substantial capital structures made more sense, especially since bonds have been trading down. Some of these bonds are currently valued in the 80s, down from 105 or 110 just nine months ago. This presents an opportunity to achieve both convexity and NAV appreciation through diligent underwriting and ongoing evaluation of prospective returns, leveraging our trading desk and other complementary strategies at Oaktree. This approach explains the activity observed in the first quarter and the relative quiet in the previous five or six quarters.

That makes sense. That’s helpful color. So I would assume based on how markets have kind of acted so far in the calendar second quarter, based on your kind of outlook for a lot more economic uncertainty, I would assume that you guys are anticipating continuing to be fairly active in that secondary market and that could become more of a consistent component of funding going forward. Is that a fair assumption?

Yes. I wouldn’t go that far, but what I would say is that it is a very active area of interest for us and we will always think about the incremental publicly traded opportunity versus the private opportunity we’re seeing. And I don’t want to make any sort of forward-looking guidance or statement on that. But it continues to be a very attractive opportunity set right now, but you have to understand that there is likely to be continued volatility this year with inflation, with Fed action, and to be measured in pace and approach and always think about what the alternative is. So, that’s all I’ll be able to say about that.

Okay. Fair enough. I appreciate the time today. Thanks.

Thank you.

Our next question comes from Melissa Wedel with JPMorgan. Please go ahead.

I appreciate you taking my questions this morning. The first thing I’m trying to reconcile a little bit is what sounds like a somewhat cautious tone on your part in terms of potential Fed policy. And I know that your general approach is often to keep some dry powder available, and yet you’re running towards the higher end of your target leverage range. Can you sort of help reconcile that? Are there any larger anticipated repayments coming up that we should be thinking about?

We are always experiencing some repayments, but I cannot provide any forward guidance on expected repayments. We feel very positive about our portfolio's performance. Additionally, we have a life sciences segment that is uncorrelated, high yielding, and performing well. We consistently assess the appropriate composition of our capital structure. Typically, we maintain a more conservative approach to leverage compared to many publicly traded BDCs, and we prefer it that way. Making decisions in this regard is a routine, day-to-day process. We are certainly cautious about the current market conditions, but we are very comfortable with our existing portfolio. We are not aiming to generate cash or hold cash unnecessarily; instead, we believe we have sufficient liquidity to seize opportunities if they arise. However, we remain cautious and are focusing on strengthening our portfolio incrementally.

And we do have, as we’ve discussed many times, some very high-quality, liquid, relatively lower-yielding assets that we can redeploy into higher-yielding investments as we’ve been doing over the quarters. We have that option as well.

Sure. I appreciate that. And I guess another question is bigger picture in nature. Given the volatility that we’ve seen in the forward curve, I think back to a couple of quarters ago when you were talking about potentially investors, there being a greater risk of rate increases or rate hikes that weren’t being priced into the forward curve. It seems like we’ve come full circle on that a little bit with a lot of volatility in the forward curve. So to the extent that you think about sort of policy mistakes, I guess I’m curious about your thoughts if you think that the forward curve is has overshot to any extent.

That's a difficult question to answer. I would say I'm uncertain. I don't believe it has overshot, but it definitely reflects the Federal Reserve's aggressive stance, at least in the short term regarding rate hikes to address inflation. When you examine the euro-dollar forward curve, which indicates short-term rates and anticipated rate hikes, it suggests that additional rate increases are likely this year. I think it might imply another 75 to 100 basis points for the remainder of the year. However, it also forecasts a decline in short-term rates for next year. This leads to a sort of upside-down V shape in market expectations for short-term rates, indicating that inflation remains too high, above 8%, and the Fed must act to contain it. Given the persistent issues in the economy related to inflation and potential demand destruction from higher rates, the market generally anticipates a recession in 2023. Thus, the Fed would need to lower rates that year. I believe this balancing act between raising rates to curb inflation and subsequently reducing them to address a recession will lead to ongoing volatility. That's what I am most concerned about regarding Fed policy and their overall tone. Regarding long-term rates, the return on the 10-year is currently above 3%. If it were to rise to 4% and stay there for an extended period, it could pose significant stress on consumers and businesses without any counteractions from the Fed or Treasury. We would need to maintain that level for a couple of years, not just a few months. If you were to ask what worries me most, it would be the prospect of high rates persisting longer than expected at the long end of the curve, which would affect real estate values and other lending types, potentially causing a need for deleveraging that many consumers and corporations aren't currently considering.

Armen, I appreciate that. Thank you.

Welcome. Thank you.

I am showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mosticchio for any closing remarks.

Great. Thanks, Sarah, and thank you all for joining us on today’s earnings conference call. A replay of this call will be available for 30 days on OCSL’s website in the Investors section or by dialing 877-344-7529 for U.S. callers or 1-412-317-0088 for non-U.S. callers with the replay access code 4588025 beginning approximately one hour after this broadcast.

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