Earnings Call Transcript - OCSL Q1 2022

Operator, Operator

Welcome, and thank you for joining Oaktree Specialty Lending Corporation's First Fiscal Quarter 2022 Conference Call. Today's conference is being recorded. Now I would like to introduce Michael Mosticchio of Investor Relations, who will host today's conference call. Mr. Mosticchio, you may begin.

Michael Mosticchio, Investor Relations

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 Chris McKown, Chief Financial Officer and Treasurer. Also joining us on the call today for the question-and-answer session is Matt Stewart, the company's newly appointed Chief Operating Officer, the role he took over from Matt Pendo last week. 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.

Mathew Pendo, President

Thank you, Mike, and welcome, everyone. We appreciate your interest in and support of OCSL. We produced strong results in the first quarter and started our fiscal year with steady origination activity and solid credit quality. We again grew NAV and adjusted net investment income, supporting our seventh consecutive quarterly dividend increase. We reported NAV per share of $7.34, up 1% from the prior quarter. The increase was primarily driven by unrealized gains in our portfolio as well as undistributed net investment income and successful realizations of noncore positions. Adjusted net investment income per share was $0.17 for the quarter compared with $0.16 for the prior quarter. This was driven by higher interest income and fee income, partially offset by increases in incentive fees and interest expense. This builds on the earnings power we established in 2021 when we achieved record annual adjusted net investment income under Oaktree's four years of management. Given the strength and consistency of our earnings, our Board once again increased our quarterly dividend, lifting it by 3% to $0.16 per share. Our dividend is now up 68% from its pre-COVID level. Now turning to the portfolio. We originated $300 million of new investment commitments in the first quarter. Of these, 73% were first lien loans and included $227 million in private transactions and $73 million in the new issue primary market. The weighted average yield on new debt investments in the quarter was 8.1%. Capitalizing on the full breadth of the Oaktree platform as well as our team's experience investing across multiple cycles, we expect continued strong origination activity. Even in a highly competitive environment, we are confident we can continue to leverage the platform and invest resources to find deals that are structured and priced favorably. We received $235 million from prepayments, paydowns, and exits in the December quarter. This included exits and payoffs of $44 million of lower-yielding investments. The average yield of investments that we exited was 7.5%. Notably, our noncore portfolio declined by nearly $40 million and now stands at $95 million or just under 4% of the portfolio at fair value at the close of the quarter. We continue to selectively reinvest these proceeds into higher-yielding attractive opportunities. Credit quality remains excellent, reflecting our sourcing capabilities and disciplined approach to underwriting. We invest selectively across a wide range of opportunities, enabling us to identify attractive prospects while minimizing risks. As with the prior quarter, we had no investments on nonaccrual at the close of the first quarter. With respect to the right side of our balance sheet, we have also identified additional opportunities to further enhance our borrowing flexibility and ensure we maintain ample liquidity to meet funding needs. During the quarter, we increased capacity on our credit facilities, increasing the size of our revolver to $1 billion from $950 million with the addition of a new bank. We also increased our low-cost Citibank Facility to $200 million from $150 million. The weighted average interest rate on debt outstanding was 2.3% in the December quarter, down slightly from 2.4% the prior quarter. I would also like to share an important addition to our leadership team. Last week, our Board appointed Matthew Stewart as Chief Operating Officer of OCSL. I will continue in my role as President. Matt joined Oaktree in 2017 and prior to this promotion, served as the Senior Vice President and Investment professional on our strategic credit team. Matt brings a wealth of experience and expertise in the role, and we are confident he is well suited for the job. Now I would like to turn the call over to Armen.

Armen Panossian, CEO & CIO

Thanks, Matt, and good day, everyone. I'll begin with comments on the market environment and continue with some additional highlights from our fiscal first quarter. Macroeconomic conditions held strong through the December quarter, supporting continued low default rates in the credit markets and overall strong credit quality. Supply chain disruptions and inflationary pressures, however, remain reasons for caution. Pandemic-induced supply constraints and labor shortages intersected with pent-up demand for a range of goods, resulting in elevated prices and the highest level of inflation in the U.S. since the 1980s. Many economists expect inflationary pressures to persist through the first half of 2022, and the Federal Reserve has signaled that it will raise interest rates soon to tackle inflation and cool the economy before it overheats. Should rates climb this year, investors may look for value and floating rate asset classes, including private credit. However, investors venturing into this market now must be especially selective because private equity firms, which in 2021 had record levels of available capital, are pushing up prices for companies in private markets as they deploy stockpiles of dry powder. Beneath all of this, of course, is the ongoing pandemic. Like the Delta variant before it, the Omicron strain has spread rapidly throughout the United States and globally, forcing new travel restrictions in a number of countries around the world. This has reminded all of us that the coronavirus remains a concern as we enter 2022. Its ultimate impact on both global demand and supply remains unknown. So we continue to believe it's important to view the current environment with caution and flexibility. As we have seen in January, the equity and government-related fixed income markets have experienced a good deal of volatility. Investors are expressing a high degree of uncertainty regarding how forceful the Fed will be in returning to a more historically normalized monetary policy. If this volatility continues or increases, it raises the potential for some market dislocation in our investing universe. If that is the case, we are well prepared to act. Oaktree's roots are in opportunistic credit investing, and we have demonstrated time and again our deep expertise in investing in these types of market environments. As you may remember, in 2020, when the financial markets experienced significant dislocations as an initial response to the pandemic, OCSL made several investments that turned out to be quite profitable and accretive to NAV. While we can't predict what the future holds, we can assure you that we are well prepared for all possible scenarios. With all of that in mind, we maintain our focus on relative value and the best risk-adjusted returns. We capitalize on Oaktree's scale to invest across multiple industries with a diversified group of issuers and leverage Oaktree's vast resources and capabilities to negotiate and structure customized private deals that provide downside protection. In some cases, we are identifying opportunities in less trafficked corners of the market by lending to nonsponsor-owned businesses. But we also continue to assess the sponsor lending market, teaming with trusted private equity firms with operational advantages in attractive industries. We also continue to identify compelling borrowers in the life sciences and technology arenas. We view these sectors as long-term beneficiaries of the increasing importance of applied sciences and digital commerce. In summary, we are actively but carefully putting capital to work on favorable terms, ensuring that as we grow, we do so in ways that minimize risk while also generating solid returns for our shareholders. Now turning to the overall portfolio. At the close of the first quarter, our portfolio was well diversified with $2.6 billion at fair value across 140 companies. 87% of the portfolio was invested in senior secured loans. Importantly, first liens have grown to represent 70% of the portfolio, up from 60% one year ago, reflecting our conservative investment approach and emphasis on being at the top of the capital structure. Nearly 92% of our loans are floating rate, positioning us well if rates rise. Median portfolio company EBITDA at December 31 was approximately $105 million. As you know, we have been lending to larger, more diversified businesses to lower risk and bolster credit quality. Moving on to investment activity. Although competition remained elevated, we leveraged the Oaktree platform to originate $300 million of new investment commitments across 12 new and nine existing portfolio companies in the December quarter. I'd like to share with you a couple of illustrative examples of the opportunities we are finding, beginning with Mesoblast. This biotech firm develops and commercializes allogeneic cellular medicines in the United States and several other countries overseas. Mesoblast offers products addressing a wide spectrum of medical conditions, including in the areas of cardiovascular, spine/orthopedic disorders, oncology, hematology, and inflammatory diseases. The company is currently collecting royalties on multiple products and has a range of late-stage product candidates that give it a robust pipeline. Oaktree provided a $90 million sole commitment to support the company's continued growth activities. OCSL was allocated $11 million of this first lien term loan at an attractively priced 9.75% yield. Another compelling investment for us in the first quarter was our loan to PF Supreme, one of the largest Planet Fitness franchises in the U.S. with 70 locations, primarily in New York and California. This is a sponsor-backed investment in a company that has been steadily recovering from the shocks of the coronavirus and has seen its membership rebound close to pre-pandemic levels. The company sought more flexible capital to fund its recovery and anticipated future growth. Oaktree provided a $120 million commitment priced at LIBOR plus 7% in a first lien term loan, of which OCSL was allocated $30 million. Following this financing, the company is appropriately capitalized, even when considering the impact that the pandemic had on its performance. Our origination activity remains healthy and gives us substantial momentum as we progress further into 2022. Finally, I also want to congratulate Matt Stewart on his new role within Oaktree. He is a key contributor on our deep and talented team. Now I will turn the call over to Chris to discuss our financial results in more detail.

Christopher McKown, CFO

Thank you, Armen. Hello, everyone. OCSL delivered another quarter of solid financial performance, starting off fiscal year 2022 with strong momentum. For the first quarter, we reported adjusted net investment income of $31.2 million or $0.17 per share, up from $29.1 million or $0.16 per share in the fourth quarter of 2021. The increase was the result of higher interest income generated from a larger average portfolio, combined with higher income from prepayments. Partially offsetting this was higher interest expense and higher incentive fees. Net expenses for the first quarter totaled $29.3 million, up $1 million sequentially. The increase was mainly due to higher incentive fees driven by our continued strong financial performance as well as higher interest expense due to an increase in borrowings in our larger investment portfolio. We accrued $1.8 million of Part II incentive fees under GAAP in the December quarter. As a reminder, while GAAP requires us to take unrealized gains into account when accruing Part II incentive fee expense each quarter, OCSL will only pay these incentive fees annually and to the extent that it has realized gains that exceed realized and unrealized losses at fiscal year-end. Turning to credit quality, which continues to be excellent. As Matt mentioned, we had no investments on nonaccrual 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 remained consistent with the September quarter at 0.95x. Net leverage continues to be near the high end of our target range of 0.85 to 1x. As of December 31, total debt outstanding was $1.3 billion and had a weighted average interest rate of 2.3%. Unsecured debt represented 50% of the total debt at quarter end, in line with the prior quarter. At quarter end, we had total liquidity of approximately $594 million, including $44 million in cash and $550 million of undrawn capacity on our upsized credit facilities. Unfunded commitments, excluding unfunded commitments to the joint ventures, were $246 million, with approximately $203 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. As Matt mentioned, we increased capacity on our credit facilities in the quarter, raising our revolver to $1 billion from $950 million and welcoming a new bank to our syndicate of 19 lenders. We also increased our Citi Facility to $200 million from $150 million. We continue to maintain ample liquidity to meet our funding needs. Now turning to our two joint ventures. At quarter end, the Kemper JV had $393 million of assets invested in senior secured loans to 61 companies. This compared to $379 million of total assets invested in 55 companies last quarter. Assets grew as a result of new originations made during the quarter. The JV generated $2 million of cash interest income for OCSL in the quarter, and we also received a $450,000 dividend. Leverage at the JV was 1.4x at quarter end comparable to the September quarter. The Glick JV had $145 million of assets on December 31. These consisted of senior secured loans to 44 companies. Leverage at the JV was 1.1x at quarter end. OCSL's subordinated note in the Glick joint venture totaling $56 million continues to be current. During the quarter, we received $1.2 million of principal and interest payments on the notes. 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.

Mathew Pendo, President

Thank you, Chris. Our strong financial results for the quarter enabled us to generate an annualized return on adjusted net investment income of 9.5%, higher than last fiscal year's quarterly average of just over 9%. We have been targeting ROE in the high single digits, and we are now right where we said we would be. However, we believe that we still have some room for improvement. We remain focused on positioning the portfolio for an improved yield by rotating out of lower-yielding investments and into higher-yielding proprietary loans. We made good progress again this quarter, exiting $44 million of loans priced at or below LIBOR plus 4.5%, leaving only $40 million left in the portfolio. Our new investments continue to come on the books at attractive yields, which means there is more upside in yield on that portion of the portfolio that we expect to realize over time. And to the extent that we see additional incremental investment opportunities, we may look to exit loans that are priced below LIBOR plus 5.5% as a source of reinvestment capital. As we've discussed before, another ongoing opportunity for us to increase ROE 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 have capacity and will select to grow these portfolios over time, which we believe will be accretive to ROE. In conclusion, we are very pleased with our strong first 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, enabling us to 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.

Operator, Operator

And the first question comes from Kevin Fultz with JMP Securities.

Kevin Fultz, Analyst

Armen, we always appreciate your insight on what you're seeing in the market, both on the sponsor side and the non-sponsor side where you like to play. Could you give us a high-level overview of the opportunities you're currently seeing as well as the competitive environment relative to the last few quarters?

Armen Panossian, CEO & CIO

Sure, and thank you for the question. I don't think much has changed in the fourth quarter compared to much of 2021. There continues to be significant competition among our peers focused on sponsor-oriented lending products and direct lending. Generally, spreads and legal terms have remained consistent throughout the quarter. I wouldn’t say there has been a significant increase in pressure on spreads and legal protections, but the environment is highly competitive and weaker in terms of coupons and covenants compared to three, four, or five years ago. So, there isn't anything particularly notable happening in that part of the market. We are monitoring the situation closely because there was some volatility in the publicly traded below investment-grade markets in January and November of last year, with some spread widening in high-yield bonds during that time. In fact, we observed some spread widening in high-yield bonds last week. Much of this price movement appears to be initially influenced by duration-oriented trades related to rising rates. However, we are seeing spread widening in the publicly traded markets, particularly in high-yield bonds, which makes us cautious about whether this will also affect broadly syndicated loans and direct lending. As you know, we are evaluating various securities and investment opportunities suitable for OCSL, including publicly traded debt, and assessing where we can find the best risk-adjusted returns. By taking this broad view, we are analyzing how appealing the direct lending markets are compared to other opportunities we observe. Specifically regarding your question about direct lending over the past 12 months, I wouldn’t say there has been an increase in market rationalization. The competition remains robust, and I would note that coupons and legal protections have been relatively stable for the last couple of quarters.

Kevin Fultz, Analyst

Great. That's really helpful color. And then just a question relating to interest rate sensitivity. Could you provide the weighted average LIBOR floor for floating investments?

Armen Panossian, CEO & CIO

I would probably need to get back to you. I don't know if Matt or Chris have that, but typically, our LIBOR floors are between 50 and 100 basis points and really closer to 100 basis points. We generally have LIBOR floors on most, if not all, of our floating rate investments. But I don't know, Matt, Stewart or Chris, if you have that information handy?

Unidentified Company Representative, Company Representative

Approximately 80% of our loans have LIBOR floors of 1% or 75 basis points, while the rest vary, reaching up to 1.5%. All our assets have some form of LIBOR floors, ranging from 0 to 1.5%, but 80% of our portfolio is concentrated around 75 basis points or 1%.

Kevin Fultz, Analyst

Okay. Got it. And I'll leave it there. Congratulations on the quarter.

Operator, Operator

The next question comes from Kyle Joseph with Jefferies.

Kyle Joseph, Analyst

Just a quick modeling question. In terms of the interest income accretion related to the merger. How long should we expect that to kind of impact results? And should we kind of expect a diminishing amount in that line item going forward?

Christopher McKown, CFO

It's Chris here. The impact is likely to be felt for another couple of years as assets continue to be removed from the books. You may have observed a noticeable decline from the previous quarter in that adjustment. This is mainly due to some names that repaid last quarter, which resulted in significant OID acceleration on a GAAP basis. As those assets are phased out, we anticipate the numbers will decrease. We expect this trend to continue downward, but it will remain present for a bit longer, and we will keep providing adjusted figures to filter out any distortions.

Kyle Joseph, Analyst

Yes. Appreciate that. And then probably for Armen or Matt, obviously, credit performance has been very, very strong, but can you give us a high-level sense in terms of what you're seeing from portfolio companies, fully recognizing you guys have a very diversified portfolio, but any sort of impacts from either wage or raw material inflation on EBITDA growth or EBITDA margins at the portfolio level?

Armen Panossian, CEO & CIO

Sure. This is Armen. Looking at the bigger picture, supply chain disruptions are significant and have been affecting us for several quarters. I didn't see a substantial improvement in the fourth quarter, just a slight enhancement in removing some of those supply chain obstacles. These issues have led to two main effects: a decline in revenues and a drop in unit sales for certain products that rely on components shipped from abroad. There are indeed shipping challenges that are causing delays in getting necessary products out. Although unit sales have decreased, this doesn't necessarily mean revenues have fallen, as we've managed to pass on price increases across various products, with consumer demand remaining strong for much of the last two years. However, rising energy and commodity prices, along with ongoing supply chain problems, have also resulted in increased costs, which are being gradually reflected across multiple industries. This hasn’t created a significant performance issue overall, but the drop in unit sales, or the inability to meet demand, presents challenges for some businesses. Generally speaking, when we compare late 2021 to late 2020, our portfolio companies are performing better year-over-year despite these challenges, inflation, and supply chain issues. Most businesses haven't returned to 2019 levels yet, but they're performing better than in 2020 and showing signs that 2022 may see a recovery closer to 2019 levels, depending on the industry. For example, we recently invested in a new company, PF Supreme, which is a Planet Fitness franchisee. This business had already recovered to about 85% of its membership subscription base compared to its 2019 figures before our investment. That indicates we are moving in a positive direction, although there are still hurdles ahead.

Operator, Operator

The next question comes from Ryan Lynch with KBW.

Ryan Lynch, Analyst

First one I had, you gave some good commentary about market conditions, but I wanted to drill down a little bit further was just how are you guys seeing market activity shaping up in the first month? And what is kind of your outlook from a market activity standpoint as far as yield values go just because 2021 was such a unique year where we saw such kind of a flood of increased origination and deal activity in the back half of the year? I'm just wondering if you're seeing any spillover in the early month of 2022. And kind of what is your outlook for the next, maybe call it the first half of 2022?

Armen Panossian, CEO & CIO

Sure. This is Armen. It's a good question. I don't think one month is enough to really reduce any sort of meaningful trend on deal activity. But a little bit of a feeling or a concern that I have about deal activity for this year, especially as it pertains to sponsor activity. With the rise in rates, we have seen a contraction in valuation multiples generally even for companies that are not levered. If you just look at the equity market, there is a general downward trend in valuation multiples. And that should cause a pause in LBO sponsor activity for new deals. As multiples decline, sellers are unwilling to sell because they kind of remember what their valuation multiples were six or twelve months ago. And then even private equity firms that bought a company three years ago at 12x EBITDA may not be willing to sell that company or an interest in that company to another private equity firm at 10x EBITDA or 9x EBITDA. So I would expect that private equity firms will take a pause on deal volume as valuation multiples become more reflected in deal terms. But I think one month is too soon to make such an assessment. It's just more of a market prediction than something that I would think is, at this point, really reflected in deal flow. We are seeing a lot of volume; we could definitely invest capital very rapidly. In sponsor deals, we are seeing nonsponsor deal activity as well. We're quite busy, especially in our life sciences area right now. So we're not seeing our type of deal volume really take a hit so far this year. But we are cautious. We're cautious because of what we're seeing in the markets. We're cautious because of what we're seeing in the publicly traded fixed income areas. And so we're going to be very vigilant and look for opportunities to once again drive NAV if it presents itself at some point in the next 12 or 24 months.

Ryan Lynch, Analyst

That's helpful information. Yes, your deal flow is a bit unique, as you tend to pursue more off-the-run transactions outside of sponsor activity. This places you in a favorable position even if private equity-sponsored deal flow experiences a slowdown. Regarding your current leverage, you are now at the upper limit of your target range. It seems you've previously indicated no immediate plans to change this. What are your objectives for OCSL in 2022, given your targeted leverage range? How do you plan to manage the portfolio and drive growth?

Mathew Pendo, President

Ryan, it's Matt Pendo. Regarding the first question about our leverage range, we are comfortable with the higher end and this has been true for the last few quarters. Compared to our peers, we are at the lower end of the range, which we prefer as it gives us more flexibility and available resources if opportunities arise. We feel confident in our access to capital markets and have executed several successful transactions. In terms of portfolio growth, this is related to our return on equity and leverage. We are shifting away from lower-yielding assets, which we still have, and we’ve discussed yields around LIBOR plus 450 and LIBOR plus 550. There are still opportunities to enhance yields by moving from lower-yielding to higher-yielding loans, and we are actively pursuing this. We have gained significant advantages from the merger with OCSI, but I believe there are still further opportunities for scale and diversification. Additionally, we see room for improvement in our joint ventures regarding leverage. Overall, we remain focused on continuing our portfolio rotation strategy, which may seem routine, but there is still a lot to achieve in that area.

Operator, Operator

The next question comes from Melissa Wedel with JPMorgan.

Melissa Wedel, Analyst

I was hoping we could touch on the weighted average yield of new investments during the quarter, trying to sort of understand the context of that given sort of a 50 basis point decline in yield quarter-over-quarter with a little bit less first lien in the mix this quarter versus last. So if I'm looking at that right, does that sort of imply that, that was really all spread compression.

Armen Panossian, CEO & CIO

Matt Stewart, do you want to take that question?

Matthew Stewart, COO

Yes, that's correct. We did have a few second liens in the portfolio that were refinanced, and we chose to remain invested in those, which led to some compression in our yield. We are still seeing deals in line with what we've been producing over the past couple of quarters. Although we have experienced a decline of 50 basis points and nearly a point from two quarters ago, our yields remain in the mid-8% range, and we expect to continue originating as Armen previously mentioned. There are opportunities emerging in the life science and technology sectors. It's important to note that we shouldn't focus solely on one data point for a quarter as timing and those refinances play a role. However, we are experiencing some spread compression and yield changes due to the increasingly competitive market environment.

Mathew Pendo, President

Yes, this is Matt Pendo. If you go back to like our quarter there, the yield on new commitments was 8.2%. So we'll have quarters where it will move in that range.

Melissa Wedel, Analyst

Sure. Okay. So to take it then that that's really sort of similar to the March quarter of '21 where there was a dip down and then sort of a rebound back up? Are you looking at sort of the new investments this quarter as a bit more of a blip albeit in a still competitive environment?

Unidentified Company Representative, Company Representative

Yes, I think that's...

Armen Panossian, CEO & CIO

This is Armen. Yes, I would say that's fair. I wouldn't say we have enough data points in any given quarter to consider it a statistically significant set for determining if this is the new norm in our pipeline. It's quite variable. There are deals that are significantly above 8.1% and 8.5%, and there are some below that. So I just think it's difficult to make any sort of directional assessment based on one quarter.

Melissa Wedel, Analyst

Okay. Fair enough. I have a follow-up question regarding the leverage position at the end of the quarter. In the past, you indicated that you like to take advantage of volatility and have maintained some amount of dry powder ready to deploy if needed. Armen, you mentioned potential volatility due to uncertainty around Fed actions. Given this potential uncertainty and possible volatility, combined with your current high leverage position, does this suggest an assessment of the likelihood of market volatility at this time?

Armen Panossian, CEO & CIO

Yes, this is Armen. It's challenging to forecast the timing and degree of any potential volatility. We are currently at the upper limit of our leverage target, but we still possess low-yielding assets that can be quickly converted into cash if a chance arises to purchase or originate underpriced assets. We are not adjusting our leverage target. There could be a scenario in which we acquire assets and temporarily increase leverage beyond our target in a given quarter. However, we do not anticipate significant volatility at this time that would warrant drastic actions. We acknowledge that we are trading at or above NAV, and if an opportunity to invest arises, we may consider equity, particularly if we identify weaknesses in the market that could create substantial prospects. With Oaktree's expertise in identifying such opportunities, both through private negotiations and public avenues, we are well-prepared and have the credibility to act with confidence when the right moment comes. I expect we will do so if that situation develops. However, I don't presently foresee distressed opportunities comparable to those during the pandemic. It does seem, at least in January, that there is a repricing or adjustment of market spreads and yields on fixed-rate instruments. This does not indicate a distressed situation or suggest that defaults will increase. Instead, it represents a repricing, and there could be total return opportunities in the future at the appropriate time. While those opportunities aren't available now, we will manage our liquidity over the coming quarters to seize them as they arise. Nonetheless, I wouldn't interpret our current leverage level as a sign that we don't see any developing issues in the markets.

Melissa Wedel, Analyst

That's very helpful.

Operator, Operator

It looks like we have no further questions. So this concludes our question-and-answer session. Mr. Mosticchio.

Michael Mosticchio, Investor Relations

Great. Thanks, Tom, 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 3546944, beginning approximately 1 hour after this broadcast.

Operator, Operator

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