Oaktree Specialty Lending Corp Q4 FY2022 Earnings Call

Good day, and welcome. Thank you for joining the Oaktree Specialty Lending Corporation's Fourth Fiscal Quarter and Year-End 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 today’s 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 fourth fiscal quarter and year-end 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, our 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, the timing or likelihood of the closing of the merger with Oaktree Strategic Income II, Inc., the expected synergies and savings associated with the merger, the ability to realize the anticipated benefits of the merger, and our future operating results and financial performance. Our actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to our SEC filings for a discussion of these factors in further detail. We undertake no duty to update or revise any forward-looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or 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 welcome, everyone. Thank you to all on the call for your interest in and support of OCSL. We finished our fiscal year with strong momentum driven by increasing asset yields, productive origination activity, and excellent credit quality. Full year fiscal 2022 adjusted NII was $0.71 per share, up from $0.64 for fiscal 2021. These results reflect the growth in the earnings power of our portfolio over the course of the year driven by higher interest income from our predominantly floating rate portfolio, continued portfolio repositioning and optimization, and ongoing credit stability. Importantly, this marked our highest annual level of adjusted net investment income under Oaktree's management and represents the tremendous progress we have made since taking up our management of the Company five years ago. Importantly, we are well positioned for the year ahead as rising interest rates have bolstered the earnings power of our portfolio. 86% of our loans are floating rate, and we expect our interest income will continue to rise in tandem with increasing base rates. Given the strength and consistency of our earnings as well as the potential for continued solid results, our Board increased our quarterly dividend by 6% to $0.18 per share. This was the tenth consecutive quarterly increase and represented a 16% increase from the distribution we announced a year earlier. Notably, our dividend is up nearly 90% from its pre-pandemic level at the close of fiscal 2019. Our Board also declared a special distribution of $0.14 per share, primarily as a result of increased taxable income derived from our foreign exchange hedge positions as well as certain taxable equity gains. Turning to our fourth quarter results. Adjusted net investment income per share was $0.18 for the quarter compared with $0.17 for the prior quarter. We reported NAV per share of $6.79, down 1.5% from the prior quarter and down 6.7% from a year earlier. The quarterly decrease primarily reflected credit spread widening on debt investments and unrealized losses on certain equity investments, partially offset by undistributed net investment income. Looking more closely at the portfolio, we originated $97 million of new investment commitments in the fourth quarter. Most of these were private placement transactions to a diverse group of companies and the yield on new debt investments was 9.9%. We received $146 million from paydowns and exits in the fourth quarter. This included exits and paydowns of lower-yielding investments as light gains to their previous fair value. We continue to selectively reinvest proceeds into higher-yielding attractive opportunities. Given our experience across multiple cycles and our ability to draw upon the breadth of the Oaktree platform, our origination activity continues to be strong in the current quarter. And while credit markets have experienced one of the most challenging years on record, we are finding some of the most attractive opportunities we've seen in a long time. Credit quality remains pristine. We continue to have no investments on non-accrual. This reflects the breadth of our sourcing and our disciplined and prudent approach to investing selectively across a wide range of opportunities. As we end the fiscal year, I also want to touch on our entry into a merger agreement with Oaktree Strategic Income II, Inc., or OSI 2, which was announced in September. We believe this transaction represents a compelling opportunity for shareholders of both OCSL and OSI 2. We expect it would create a larger, more scaled BDC with just over $3 billion in total assets, increase our trading and liquidity, and should improve our access to the debt capital markets. We also anticipate that it will create efficiencies and cost savings to drive NII accretion over both the near and long term. Importantly, consummation of the merger remains on track. On October 24th, we filed a registration statement on Form N-14, which is currently under review by the SEC. Once the registration statement is declared effective, we will schedule the OCSL and OSI 2 shareholder meetings and begin mailing materials to shareholders. We expect the transaction will close in the first calendar quarter of 2023, subject to shareholder approval and satisfaction of other closing conditions as outlined in the merger agreement. And finally, this year, our proxy statement will include a proposal, which, if approved by the shareholders and implemented by the Board, would result in an amendment to our certificate of incorporation to affect a reverse stock split of our standing shares of common stock at a ratio of 1 for 3. We believe that this will benefit OCSL shareholders as we'll bring our stock price more in line with our BDC peer group and OSI 2's NAV per share. We look forward to receiving your approval for this proposal as well as the OSI 2 merger. With that, I would like to turn the call over to Armen to provide more color on our portfolio activity and the market environment.

Thanks, Matt, and good day, everyone. I'll begin with comments on the market environment. Although the strength of the U.S. job market endures and the economy expanded modestly in the calendar third quarter, macro conditions continue to warrant careful attention. Challenges such as persistently high inflation, tightening monetary policy, a surging U.S. dollar, and slowing consumption weigh on markets and lurk as threats to both the domestic and global economies late in 2022 and heading into 2023. The Federal Reserve's aggressive actions to tame inflation by rapidly raising interest rates have dominated the credit market story in 2022. While fixed-rate assets are negatively impacted by rising treasury yields, most leveraged loans have floating rates that reset higher and generate more income as short-term interest rates continue to rise. However, floating rates are a double-edged sword. Rising interest expenses clearly hinder some borrowers. When a borrower struggles to service floating rate debt, the Company’s problem can quickly become the loan investor's problem. Keep in mind that while higher interest rates are intended to tame inflation, the process takes time. As such, companies are facing the prospects of elevated borrowing costs at a time when input costs are at the highest level in four decades and the global economy is slowing. While many companies were able to pass through cost increases to customers in the first half of 2022, this capacity is now likely low, especially for those that are smaller or in cyclical industries. Near-term default risk is fairly low as companies have limited maturities in the next two years, and many still have relatively high levels of cash on their balance sheets because of savings accrued during the height of the pandemic. The more interest rates rise and the longer they remain elevated, the more likely it is that the cracks in loan fundamentals could widen and eventually lead to greater instability. At Oaktree, we have lived through many of these cycles and have been able to capitalize on them. Having ample capital, a long-term perspective, and the conviction needed to withstand short-term volatility are all key ways to how we have succeeded in these types of environments and how we plan on continuing to do so. Moving forward, we believe caution is necessary when navigating such unsteady markets, but we also continue to draw upon our team's long history of opportunistic investing to identify compelling new deals. We are prudently growing our portfolio, as Matt noted, selectively investing across both the sponsor and non-sponsor-backed markets while maintaining excellent credit quality. With all that in mind, we are focused on relative value and are investing where we can find the best risk-adjusted returns. We are utilizing the full scope of Oaktree's scale and resources to invest across multiple markets with a diversified group of issuers. We are leveraging Oaktree's ability to negotiate and structure customized private deals that provide downside protection. Altogether, we are carefully deploying capital on favorable terms to further build our portfolio and generate strong returns for our shareholders. Now turning to the portfolio. At the end of the fourth quarter, our portfolio was well diversified with $2.5 billion at fair value across 149 companies, up from 138 a year earlier. 87% of the portfolio was invested in senior secured loans, with first lien loans representing 71%, underscoring our emphasis on the top of the capital structure. We continue to target larger, more mature businesses that operate in non-cyclical, defensive, or structurally growing industries that tend to be diversified companies with lower amounts of leverage, which we believe reduces risk and contributes to our consistently solid credit quality. Overall, our borrowers have been navigating the current inflationary environment very well and have continued to experience solid performance, despite the challenging market conditions. Median portfolio company EBITDA as of September 30 was approximately $130 million, up modestly from $128 million in the prior quarter. Leverage in our portfolio of companies was relatively steady at 5 times, well below overall middle market leverage levels. Portfolio's weighted average interest coverage declined slightly to 2.7 times as of September 30 from 3 times in the prior quarter due to rising base rates. We leveraged the Oaktree platform to originate $97 million of new investment commitments across 6 new and 5 existing portfolio companies in the quarter. The majority of these new investments, in terms of dollar amounts, were in more defensive industries such as life sciences and application software, reflecting our cautious approach to growing our portfolio. We also participated alongside other Oaktree funds and accounts in purchasing two home loan syndications at attractive discounts to par. Importantly, our origination activity is steady early in our new fiscal year. We originated over $100 million of investment commitments in five new private deals in the month of October. In total, these deals were attractively priced with a weighted average yield of 12.6%, and 100% were senior secured. Continued momentum, coupled with our robust liquidity and the deep resources of Oaktree, positions us well for the year ahead. 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 strong financial performance, finishing the fiscal year 2022 on a high note. For the fourth quarter, we reported adjusted net investment income of $33.7 million or $0.18 per share, up 7% from $31.4 million or $0.17 per share in the third quarter. The increase was primarily driven by higher interest income resulting from rising base rates, partially offset by lower prepayment fees and higher interest expense. Net expenses for the fourth quarter totaled $34.3 million, up $11.5 million sequentially. The increase was mainly due to a $6.8 million reversal of accrued capital gains incentive fees in the prior quarter that did not recur in the fourth quarter, $3.9 million of higher interest expense as a result of the impact of rising rates on the Company's floating rate liabilities, and slightly higher part 1 incentive fees and seasonally higher professional fees. Turning to our credit quality, which continues to be excellent. As Matt mentioned, we had no investments on non-accrual at quarter end. With respect to interest rate sensitivity, OCSL remains well situated to continue to benefit from a rising rate environment. As of September 30th, 86% of our debt portfolio at fair value was in floating rate investments. Our strong earnings in the fourth quarter were primarily due to the higher base rates, which in turn, drove our interest income higher. We expect the most recent rate hikes will continue to have a positive impact on earnings. If base rates as of September 30th were in effect for the entire quarter, we estimate that our adjusted net investment income per share would have been about $0.015 higher, resulting in adjusted NII of $0.20 per share. Now moving to the balance sheet. OCSL's net leverage ratio at quarter-end decreased slightly from the June quarter to 1.06 times. As a reminder, last quarter, we announced that we were increasing our leverage target higher to a range of 0.9 times to 1.25 times debt to equity. We believe this range is appropriate given the portfolio's strong credit quality, and it provides us with increased capacity to deploy capital where we may see an expanded set of investment opportunities given the ongoing market volatility. As of the September 30th, total debt outstanding was $1.35 billion and had a weighted average interest rate of 4.4%, up from 3.2% at June 30th due to higher base rates. Unsecured debt represented 48% of total debt at quarter end, up slightly from the prior quarter. At quarter end, we had ample liquidity to meet our funding needs with total dry powder of approximately $524 million, including $24 million of cash and $500 million of undrawn capacity on our attractively priced credit facilities. Unfunded commitments, excluding unfunded commitments to the joint ventures, were $175 million, with approximately $142 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. Shifting to our two joint ventures. At quarter-end, the Kemper JV had $385 million of assets invested in senior secured loans to 60 companies, up from $365 million last quarter, driven by new originations. The JV generated $2.2 million of cash interest income for OCSL in the quarter, up from $1.9 million in the third quarter as a result of the portfolio's continued strong performance and the impact of rising interest rates on floating rate investments. We also received an $875,000 dividend, consistent with the prior quarter. Leverage at the JV was 1.7 times at quarter-end, up slightly from the prior quarter. The Glick JV had $147 million of assets as of September 30th, up from $142 million at June 30th. These consisted of senior secured loans to 43 companies. Leverage at the JV was 1.4 times at quarter end, and we received $1.4 million of principal and interest repayments on OCSL's subordinated note in the Glick JV during the quarter. In summary, we are very pleased with our financial results for the quarter and full fiscal year. We believe our solid portfolio and strong balance sheet position us well for the year ahead. 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 adjusted net investment income of 10.7%. We have generated an average ROE of just under 10% over the last four quarters. While we are pleased with our recent results, we believe OCSL remains well positioned to maintain our strong ROE going forward. First, we believe OCSL continues to be positioned well for this rising rate environment. As Chris noted earlier, with the vast majority of our investment portfolio in floating rate assets, we expect that further increases in base rates will positively impact our net interest margin. Additionally, with our increased leverage target range, we have the opportunity to continue deploying more leverage at the portfolio level. However, we will only grow the portfolio as we find opportunities that are consistent with our investment approach that we believe offer an attractive risk reward. And as we have discussed on prior calls, we continue to benefit from higher ROEs being generated at our joint ventures. During the fourth quarter, both joint ventures delivered ROEs in excess of 13% as they are benefiting from the rising rates and modestly higher levels of leverage as they prudently grow their portfolios. In conclusion, we are very pleased with our strong fourth quarter and full year financial results against the volatile market backdrop. Our portfolio is healthy, and we are well positioned to capitalize on this increasingly attractive investment environment with our expanded leverage target and ample dry powder. 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 today comes from Kevin Fultz with JMP Securities.

Hi. Good morning. Congratulations on a really nice quarter. I want to start with digging in a bit more on the investment landscape and how you're thinking about leverage. You had a fairly normal quarter in terms of repayments. And on the other side, origination activity was relatively light. So, I'm curious if that was intentional deleveraging in the portfolio or more so driven by the attractiveness of investment opportunities that you were seeing in the market in the September quarter.

Thank you for the question. This is Armen. We are approaching the markets with caution. We received repayments connected to our non-sponsor lending activities, which were triggered by events related to those borrowers. We were selective in where and how we redeployed our resources. Additionally, there was an end-of-quarter timing factor; we originated a significant amount of new deal flow in October that might have otherwise occurred in the fiscal fourth quarter. Therefore, we were managing a future pipeline while remaining attentive to credit quality and avoiding aggressive moves in the current market environment.

Okay. That makes sense. And then my follow-up is related to PIK income, which I think in the absolute is relatively immaterial, but it did increase roughly 16% compared to the June quarter. I'm just curious if you could talk about what drove the increase, whether that was amendment-driven or if you originated or purchased new investments that were structured with a PIK component.

Yes. I'll provide a general answer before turning it over to Chris. Overall, we did not have any significant amendments that led to the rise in the PIK income. The increase was primarily due to the origination of new investments, particularly in our life sciences sector, which are classified as PIK. This does not indicate any change in credit quality at all. Chris, do you have anything to add?

No, Armen. I think that covers it.

And our next question will come from Bryce Rowe with B. Riley.

Thanks. Just maybe a follow-up on the line of questioning from Kevin there. Armen, you noted in the prepared remarks, the 12.6% yield on the new private deals that you've done so far in October, can you talk a little bit about the pipeline? Does the pipeline kind of look like that, which would obviously be a good thing. And then, wanted to also kind of dig into the mix of sales versus repayments for this last quarter, if you would.

Sure. Regarding the pipeline, I believe the October quarter reflects the pricing trends we are generally experiencing in our type of deals. We are also observing a broader market expansion and an increase in traditional sponsor-led direct lending, which both we and our peers are considering. I feel quite positive about our current pipeline concerning pricing. We remain cautious about credit quality, particularly uncertain about the depth of a potential recession and the timeline for market recovery. Therefore, we are not looking to significantly increase our leverage or to originate debt that is pro-cyclical. Generally speaking, the pipeline is robust, and the pricing today is significantly wider than it was nine months ago. Matt Stewart, would you like to provide some insights into the sales and repayments for the last quarter?

Sure. It's Matt Stewart. It was a mix of both. There were some significant repayments we received on a few portfolio companies throughout the quarter. And then, we also sold during the quarter a few names, either higher dollar-priced term loans and rotated into some better opportunities or privates. We also have some lower-yielding opportunities that we've been holding on to for a long time that we were able to rotate into some of the private pipeline that Armen mentioned that came in October. So, it was a mix of both. Rough numbers are kind of 75% repayments and 25% sales on those.

That's helpful. Could you clarify about the joint ventures? You've mentioned increased income levels, larger portfolios, and higher leverage. Are you planning to continue building leverage in both joint ventures, or do you expect to stabilize over the next few quarters?

This is Armen. I don't think we could give forward-looking guidance on that. But I would generally say that in the broadly syndicated loan markets, which is really the majority of the asset base in those joint ventures, we did see volatility in the markets. We saw buying opportunities at nice discounts of well-structured paper. And that's why the leverage went up because we were buying assets. But I wouldn't want to make a forward-looking statement because our consideration and perception of that market may change. So, I couldn't tell you whether it will sort of level off here or grow. But we like the positions we own, we like the positions we bought, and that's why the leverage went up a little bit.

And our next question will come from Erik Zwick with Hovde Group.

To start just asking a question about the weighted average yield on the new debt commitments here in the most recent quarter at the 9.9%, which was kind of below the 10.6% in the whole portfolio, and I would have expected that to be maybe higher to what you referenced that you're seeing in October, with the 12 handle on it. So, curious if you could just provide any color whether that was related to some certain specific borrowers that were larger, maybe lower risk or things like that that drove that yield up in the most recent quarter here.

I can't provide a direct comparison to clarify the differences. I don't believe the new origination in October reflects higher risk; rather, it's more about individual borrowers that creates some variation. However, I don't have a specific comparison to help answer your question. One possible factor is that we acquired some large hung bridge loans that you might have heard about, which were stuck on bank balance sheets, as well as some smaller issuances that were also held. Generally, I would say the yield to maturity on those positions was lower than what we usually see in our private loans. This might have affected the numbers a bit. However, regarding those purchases, whether they are hung deals or bonds, they are priced significantly lower than the market average, presenting an opportunity for convexity and potential price recovery over two to three years rather than to maturity. The total return potential in these situations would likely meet or surpass what we typically observe with near par price private loans. Therefore, there might be a slight disconnect when comparing discounted paper in the public market with near par paper in the private market; there is a yield to maturity difference, but probably not a significant difference when looking at yield to recovery.

Thank you for the explanation. I have a question regarding your portfolio companies; you mentioned that the debt service coverage ratio decreased from 3% to 2.7% quarter-over-quarter. However, that 2.7% still appears to be significantly higher than many of your peers. I'm interested in how your companies are feeling about the current operating environment. Are they reducing their growth investments or considering deleveraging due to rising interest rates? Do you have any anecdotal insights on this?

The decline in the fixed charge coverage is primarily due to an increase in base rates and not a significant deterioration in credit quality or performance. Companies, whether in our portfolio or not, are facing rising commodity and labor costs, which is impacting their bottom line. As a result, they are raising prices. Generally, companies are experiencing revenue increases driven more by higher prices than by greater sales volumes. However, this revenue growth is being counteracted by inflation in labor and commodity costs, leading to modest growth in cash flow and EBITDA across the board. Some companies are performing better, while others are not, but all are conscious of their cash balances and liquidity amid the current uncertain economic climate. No one seems overly concerned about rising default rates at this time, although it remains a risk we monitor closely. We aim to invest in companies that can withstand economic fluctuations, benefiting from excess cash flows and having strategies in place to manage their liquidity during potentially challenging times, though the outlook is uncertain.

Our next question will come from Ryan Lynch with KBW.

First question I had, I wanted to follow up on your commentary regarding the hung deals. I think you said you had two hung deals that you guys participated in during the September quarter. I would just love to hear what was the thought process behind those deals? How is that market activity going right now? Are you seeing a lot of those in the marketplace? Is that a market that you expect to participate in? And then also, on that note, what were the size of those two hung deals? And then also, where do you guys classify those in your security types? Are those classified as private placements because you guys only had about $4 million of the secondary market? I would have thought those would have been classified as secondary market purchases.

We acquired between $10 million and $12 million of each, and both were first lien primary issuances. They aren't categorized as private placements or primary issuances, so we report them as primaries on the balance sheet. Regarding the overall market, these hung deals are typically the largest commitments from investment banks over the past year, often involving billions of dollars. This is significant because these loans usually originate from very large borrowers supported by major private equity firms, which invest substantial equity amounts. These companies are often leaders in their industries. From an underwriting viewpoint, even when disregarding the capital structure, these firms generally maintain stability through various economic cycles. Therefore, we assess the appropriate price for these positions based on the underlying market conditions. We have observed that due to the size of these loans and the current disarray in the bank syndication market, there is a technical disparity that has exceeded the risk profile of these credits. Essentially, the technical outlook is much worse than the actual credit situation for these investments. Are there many of these deals available? Not particularly. There are numerous hung loans we would consider, but there are a few currently on the market in both the U.S. and Europe. Given Oaktree’s global presence, we are examining several of these opportunities. I wouldn't be surprised if we engaged in more, but each is evaluated individually. We approach these on a credit-by-credit basis, using a bottoms-up underwriting process as we would for private deals, taking advantage of the technical imbalance that is leading banks to sell these assets at significant losses, creating attractively priced opportunities for the BDC.

That makes sense, and it's helpful to understand your thought process regarding these deals and what your future considerations are. I have another question. You have generally operated your business with a conservative leverage ratio and indicated your intention to maintain that approach while selectively increasing leverage during periods of market dislocation. How do you perceive the current market? There are certainly appealing opportunities available now in terms of spreads, leverage, and loan-to-value ratios. However, it seems there hasn't been significant disruption reflected in the financials of businesses at this point. While it might be emerging, this trend is likely to intensify in the coming quarters and into 2023. Do you see the current environment, which offers better structures and terms for deals without substantial financial disturbance, as a chance to expand your portfolio? Or do you believe it's necessary to witness a decline in the fundamentals of these businesses first to create a more advantageous scenario for growth?

Yes, it's a good question. It's important to distinguish between technical factors and fundamentals. The fundamentals in the market are showing some signs of weakness, but they are not at a level that indicates serious distress or a need for rescue lending. We haven't experienced a significant increase in rescue lending opportunities like we saw in 2020. During the second and third quarters of that year, we actively increased our leverage because we identified market and economic dislocations that created significant return opportunities with manageable risk. This is not the current situation. Fundamentally, the economy is not experiencing maximum pain. However, technical factors and the markets are often ahead of the economy in most normal cycles. Equity and debt capital markets typically move in anticipation of fundamental changes. This creates scenarios where the market overshoots the fundamentals, but eventually, the fundamentals catch up, leading to a return to normal conditions. Sometimes, markets rebound quickly while economic fundamentals are still bottoming out, which happens frequently in buyer cycles. Timing these situations is challenging, so we need to be aware of the structures we establish and market pressures surrounding fund flows that may create less attractive competitive dynamics. We also have to consider potential future declines in economic performance for underlying companies and their ability to meet financial obligations. Right now, is it a favorable environment to increase leverage? We are seeing attractive pricing opportunities and widening in sponsor-led, sponsor-owned private credit. Sponsors are contributing more equity to deals than they were 6 or 12 months ago. Overall, this indicates a more rational market as some direct lenders and investors have taken a step back, leading to improved negotiations between borrowers and creditors. This is positive, but conditions could worsen, so we will continue to exercise caution with our leverage, anticipating potential alpha-generating opportunities in direct lending over the next few quarters.

That's a helpful context. I appreciate your cautious approach to investing, capital deployment, and leverage. I just have one final question about the special dividend distribution of $0.14. I understand what led to those gains, but I'm interested in learning more about the reasoning behind the payout. You're opting for a one-time special dividend; was there a specific reason to do this before the year-end? Why not consider a more regular supplemental dividend spread over several quarters? Additionally, how was the $0.14 amount determined? Are you looking to maintain a certain level of spillover income? Did you aim to eliminate it all? How did you arrive at that payout figure?

Yes, Brian, it's Matt. I'll address the philosophical aspects, and then Chris can go over the specifics. We took everything into consideration. This is the first time we've issued this dividend. Ultimately, we decided to return the capital to the shareholders instead of paying the excise tax, which is around 4%. Essentially, we want to give all the capital back to the shareholders so they can use it as they choose, rather than using it for internal projects and paying the tax. That's the philosophy behind our decision. I understand some of our peers do things differently, but for us, it was about avoiding the excise tax and distributing to shareholders. I'll let Chris discuss the details, but that's the general perspective on where we ended up.

Yes. I think, Matt, I think you covered it pretty well, but that's right. We looked at what our taxable income was for the year, what we would need to pay out to try to minimize or outright avoid that excise tax, and that's where we shook out with respect to the $0.14 special.

Okay. Was there any thought of paying that out over multiple quarters or anything like that, or why was it, I guess, the decision to pay before in kind of one go? And did the closing of the merger, did you pay that out before that did that have anything to do with it?

No, the merger did not have anything to do with it. It was really a matter of the calendar year-end. We paid it out for the calendar year-end as part of our approach. So, the merger had no impact on this decision.

Thanks, Cole, 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 8580879, beginning approximately one hour after this broadcast.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.