Oaktree Specialty Lending Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

Key Takeaways

  • Adjusted net investment income was $0.62 per share in Q3, in line with the prior quarter, and the Board maintained the quarterly dividend at $0.55 per share.
  • New investment commitments totaled $251 million, more than double the prior quarter, with 90% in private direct first-lien loans at a 12.6% weighted average yield.
  • Realized $1.4 million in annualized operating expense synergies from the OSI 2 merger, and enhanced funding flexibility by upsizing the syndicated facility to $1.2 billion and extending maturities.
  • Net asset value per share edged down to $19.58 from $19.66 last quarter, driven by modest valuation declines in certain debt investments.
  • Three new non-accruals were added but represent just ~1% of the debt portfolio, and management expects to recover a significant portion of invested capital over time.
AI Generated. May Contain Errors.
Earnings Conference Call
Oaktree Specialty Lending Q3 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Welcome, and thank you for joining Oaktree Specialty Lending Corporation's 3rd Fiscal Quarter 2023 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.

Operator

Mostiju, you may begin.

Speaker 1

Thank you, operator, and welcome to Oaktree Specialty Lending Corporation's 3rd 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 Armin Panosian, Chief Executive Officer and Chief Investment Officer Matt Pendo, President and Chris McCown, Chief Financial Officer and Treasurer. Also joining us on the call 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 expected synergies and savings associated with the merger with Oaktree Strategic Income II, Inc, The ability to realize the anticipated benefits of the merger and our future operating results and financial performance.

Speaker 1

Our actual results could differ materially from those implied or expressed in the forward looking statements. Please refer to our SEC filings for a discussion of these factors in further detail. We undertake no duty to update or revise any forward looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any Oaktree fund. Investors and others should note that Oaktree Specialty Lending uses the Investors section of its corporate website to announce material information.

Speaker 1

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.

Speaker 2

Thanks, Mike, and welcome, everyone. Thank you for your interest and support of OCSL. We appreciate your participation on this call. We produced strong results in our fiscal Q3, bolstered by robust origination activity and attractive yields and the positive impact of higher base rates on our predominantly floating rate portfolio. Combined with the cost synergies arising from the recently closed merger with OSI 2, we generated strong earnings on behalf of our shareholders.

Speaker 2

3rd quarter adjusted NII was $0.62 per share, in line with the prior quarter. This was supported primarily by higher total investment income and lower operating expenses, partly offset by increased interest expense as well as higher management and incentive fees. We reported NAV per share of $19.58 down slightly from $19.66 for the prior quarter. The decrease reflected a modest decline in the value of certain debt investments and was offset by net investment income in excess of 0.55 dollars per share quarterly dividend. Given the strong overall earnings, our Board maintained our quarterly dividend at $0.55 per share.

Speaker 2

As a reminder, this is nearly double our pre pandemic quarterly dividend run rate of $0.285 Our investment activity in the 3rd quarter was strong with $251,000,000 of new investment commitments, more than double the level of the prior quarter. Of the new originations, nearly 90% were private direct lending opportunities and 90% were first lien loans, reflecting our emphasis on being at the top of the capital structure. The weighted average yield on new originations was attractive at 12.6%. Pay downs and exits in the quarter were also strong as we received $261,000,000 of proceeds. While broader market activity has been slower Importantly, the Q3 marked our 1st full quarter realizing synergies following the merger with OSI 2.

Speaker 2

We are pleased to be on track to achieve $1,400,000 worth of operating expense synergies on an annualized basis. We've also been focused on streamlining our capital structure, leveraging OCSO's greater scale to improve our financial flexibility. During the quarter, we increased the size of our syndicated credit facility to $1,200,000,000 from $1,000,000,000 and extend the maturity by 2 years to 2028. We also consolidated a credit facility acquired from Mosai II with our existing Citibank facility and pushed out the maturity by 2 years to 2027. We appreciate our banking partners' support and their confidence in Oaktree as a manager.

Speaker 2

These improvements further strengthen our funding options and enhance our ability to capitalize on new investment opportunities. Altogether, our strong balance sheet puts OCSL in excellent shape to continue delivering attractive returns to our shareholders. Before I turn the call over to Armen, on behalf of the team, I wanted to congratulate him on being selected as Co CEO of Oaktree along with Bob O'Leary meaning the Q1 of calendar 2024. Well deserved, Armin.

Speaker 3

Thanks, Matt. Much appreciated and good day, everyone. The current market environment presents a complex landscape. On one hand, headline inflation has responded to the most aggressive rate hiking cycle in 40 years. However, core inflation, which excludes food and energy prices, has proven more challenging to control.

Speaker 3

Meanwhile, unemployment numbers and consumer spending are both relatively stable. Against the backdrop of rapid rate increases, This economic resilience could be at least partially attributed to the U. S. Government's aggressive fiscal policy that has buoyed the economy. In the near term, investors have become exuberant and the public markets have rallied over the last several weeks.

Speaker 3

If inflation continues to trend in the right direction and a recession does not occur, the likely scenario would be that rates would remain higher for longer. Such a condition would create elevated default risk among interest rate sensitive assets such as real estate and highly levered equities even if a recession does not materialize first. Many companies have capital structures put in place during the easy money era of near 0 base rates. And we have only recently begun to see the elevated impact of higher rates on levered free cash flow. This might lead borrowers to seek concessions from lenders or additional equity objections from owners.

Speaker 3

As a result, availability of capital for new deals may become limited at times, benefiting managers like Oaktree who consider these risks well in advance of them materializing, helping our portfolios withstand volatility and capitalize on opportunities. At OCSL, our timely merger with OSI 2 provided us with important scale and as Matt noted, Additional financial flexibility. Combined with our team's long history of opportunistic investing, we believe that we are well positioned to leverage the power of the Oaktree platform and to negotiate and structure deals that provide downside risk protection and generate excellent risk adjusted returns over the long term. Now turning to the overall portfolio. At the close of the June quarter, our portfolio was well diversified with $3,100,000,000 At fair value across 156 companies, 88% of the portfolio was invested in senior secured loans with 1st lead loans representing 76%, underscoring our emphasis on being at the top of the capital structure.

Speaker 3

We continue to emphasize investing in larger, more diversified businesses that are better positioned to weather downturns or market turbulence. To that end, median portfolio company EBITDA as of June 30 was approximately $119,000,000 and leverage in our portfolio companies was 5.0x, well below overall middle market leverage levels. The portfolio's weighted average interest coverage based on trailing 12 month performance was steady at 2.5 times. Turning now to our origination activity. Our $251,000,000 of new investment commitments were spread over 6 new and 4 existing portfolio companies in the quarter.

Speaker 3

I'd like to highlight 2 representative examples from the quarter. First, Oaktree led a direct lending financing for Melissa and Doug, which sells children's toys to retailers in North America and Europe, Known for reimagining classic educational play patterns to promote creativity, imagination and social connection, The company's toys encourage free play and reduce screen time, an increasingly popular mission. Oaktree approached a sponsor who was originally planning to amend and extend its existing broadly syndicated loan in the public market and offered several flexible financing solutions. This resulted in an Oaktree led transaction consisting of a $260,000,000 first lien turnover and a $65,000,000 revolving credit facility. OCSL was allocated $51,300,000 in total and the deal was priced at SOFR plus $7.50 Second, Oaktree originated a $550,000,000 commitment and allocated $50,000,000 to OCSL as part of a larger loan to Vedanta Group, an India based diversified resources company.

Speaker 3

Its presence spans across the zinc, aluminum, oil and gas, copper power, iron ore in Steel Industries. The company was looking to raise capital to refinance debt that was set to mature in the near term. This first lien loan was priced favorably with a 13% fixed rate and carried strong downside protections. Turning to credit quality. We moved 3 investments to non accrual during the quarter.

Speaker 3

One involved a very small immaterial position with a fair value of $325,000 Another, AllWebLeads, which provides insurance lead services is a non core position we inherited from the prior manager that is maturing later this year. While the company is exploring options, including the possible sale of some or all of its assets, we felt it was prudent to place it on non accrual at this time. The other new non accrual is an investment that we made in Athenex, a biopharmaceutical company dedicated to the discovery, development and commercialization of novel therapies for the treatment of cancer and related conditions. It has many subdivisions and uncorrelated assets that it has been selling over time to pay down our loan. To date, OCSL has been repaid on roughly 90% on its original funded amount of $55,000,000 and the position totaled $7,500,000 fair value as of June 30, 2023.

Speaker 3

In May, the company filed for Chapter 11 to facilitate an orderly sale of wind down of the remaining assets, which we expect to conclude in the near term. To that end, since quarter end, we received an additional pay down of $2,300,000 Altogether, the new non accruals represented just 1% and 0.8% of the debt portfolio at cost and fair value respectively. Importantly, our overall portfolio is in solid shape. With each of these loan accruals, We expect to arrive at successful outcomes on behalf of our shareholders. In summary, our increased scale of experience across various cycles paired with the power of the Oaktree platform, places OCSL in great shape to close out fiscal 2023 and move into the next year.

Speaker 3

Now, I will turn the call over to Chris to discuss our financial results in more detail.

Speaker 4

Thank you, Armin. OCSL Continues to deliver consistently strong financial performance and we demonstrated that again this quarter. For the Q3, we reported adjusted net investment income of primarily driven by the 1st full quarter of interest income earned on the assets acquired in the merger, the impact of higher base rates on the company's floating rate debt portfolio and lower operating expenses, which were partially offset by higher interest expense, management fees and incentive fees. Net expenses for the Q3 totaled $53,500,000 up $3,200,000 sequentially. The increase was mainly driven by $3,000,000 of higher interest expense due to the impact of rising interest rates on the company's floating rate liabilities and an increase in the average borrowings outstanding.

Speaker 4

Further contributing to the increase was a $800,000 increase in base management fees, primarily resulting from the 1st full quarter of the assets acquired in the OSI2 merger as well as $600,000 of higher Part 1 incentive fees resulting from the higher adjusted net investment income during the quarter. These were partially offset by $1,200,000 of lower professional fees in general and administrative expenses, including realized synergies from the OSI2 merger. With respect Interest rate sensitivity, OCSL remains well situated to further benefit from the increasing rate environment. As of quarter end, 86% of our debt portfolio at fair value was in floating rate investments. Our strong earnings in the Q3 were again driven by the higher base rates as Matt noted.

Speaker 4

Now moving to our balance sheet. OCSL's net leverage ratio at quarter end was 1.14 times, consistent with the end of the March quarter and it continues to be within our targeted range of 0.9 times to 1.25 times. As of June 30, total debt outstanding was $1,800,000,000 and had a weighted average interest rate of 6.6%, including the effect of our interest rate swap agreement, up from 6.2% at March 31 due to the impact of higher interest rates. Unsecured debt represented 36% of total debt at quarter end, down modestly from the prior quarter. At quarter end, we had ample liquidity to meet our funding needs with total dry powder of approximately $542,000,000 including $60,000,000 of cash and $483,000,000 of undrawn capacity on our credit facilities.

Speaker 4

Unfunded commitments, Excluding unfunded commitments to the joint ventures were $247,000,000 with approximately $185,000,000 eligible to be drawn immediately, whereas the remaining amount is subject to certain milestones that must be met by portfolio companies before funds can be drawn. With respect to our credit facilities, during the quarter, we entered into an amendment to our syndicated credit facility that among other things increased The size of the facility from $1,000,000,000 to $1,200,000,000 and extended its maturity by 2 years to June 2028 with no change in the margin. There are now 20 lenders in the syndicate. Also during the quarter, we consolidated the OCSL and OSI2 PV Facilities with Citibank entering into a new $400,000,000 facility that matures in 2027. Shifting to our 2 joint ventures.

Speaker 4

At quarter end, the Kemper JV had $370,000,000 of assets invested in senior secured loans to 52 companies, down from $393,000,000 last quarter, primarily as a result of exit exceeding new originations. The JV generated $3,400,000 of cash interest income for OCSL in the quarter, up from $3,200,000 in the 2nd 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 a $1,100,000 dividend consistent with the 2nd quarter dividend. Leverage at the JV was 1.2x@quarterenddownfrom1.4x in the prior quarter. The Glick JV had $127,000,000 of assets as of June 30, down from $131,000,000 at March 31.

Speaker 4

These consisted of senior secured loans to 38 companies. Leverage at the JV was 1.2x at quarter end and we received $1,700,000 of principal and interest payments on OCSL's subordinated note in the Glick JV during the quarter. In summary, we're very pleased with our financial results and we continue to believe that our strong balance sheet positions us well for the remainder of the fiscal year. Now I will turn the call back to Matt for some closing remarks.

Speaker 2

Thank you, Chris. Our strong financial results for the quarter enabled us to generate an annualized return on adjusted net investment income of 12.6%, consistent with the prior quarter. We are very pleased with the growth in our earnings over the past several years and believe that OCSO remains well positioned to continue delivering strong ROE going forward. First, we believe we are well situated for the prevailing higher As Chris noted earlier, with 86% of our investment portfolio in floating rate assets, We expect that the July rate hike and future potential increases in base rates will positively impact our net interest margin. We also continue to benefit from higher ROEs generated at our joint ventures.

Speaker 2

During the Q3, Both joint ventures delivered ROEs of over 14.5% due to strong credit quality and positive impacts from the rising rate environment. As noted earlier, we expect that the synergies resulting from the OSI2 merger will support our returns and generate substantial long term value for our shareholders. In conclusion, we are very pleased with the continued strength in our results and our ongoing momentum. Our portfolio is diverse and healthy, We are in excellent financial shape to capitalize on this volatile but attractive investment environment with our robust liquidity, extensive relationships and disciplined underwriting expertise. We believe that our solid portfolio and strong balance sheet position us favorably for the remainder of the fiscal year.

Speaker 2

As always, we thank you for joining us on the call today and for your continued interest in OCSL. With that, we're happy to take your questions. Operator, please open the lines.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Eric Zulik from Hovde Group. Eric, please go ahead.

Speaker 3

Good morning. Thank you. I wanted to first just start, you had Very strong quarter in terms of new commitments and curious what that might mean for the pipeline going forward and in the next quarter or so if you Seeing similar strong opportunities at this point. Hi, Eric. It's Armin.

Speaker 3

Yes, it has been a strong quarter in terms of originations. What you do see in the quarter represents originations that have been in the pipeline now for At least a quarter, if not 2 or 3. And so there is a little bit of a lag in terms of the actual origination If you see in any particular quarter, I would say that generally speaking, the next quarter, the quarter on mid September 30, We'll probably be a little bit lighter, just given the fact that the elevated cost of borrowing as base rates have risen So much and spreads have widened, has caused a bit of a decline in M and A volume as well as a little bit of a Pause button being hit by non sponsored transactions or non sponsored investment opportunities that we're considering as well. So I expect it to be a little bit lighter over the next quarter or so. Thanks.

Speaker 3

That's helpful. And then, Armin, in your prepared comments you mentioned that the higher for longer rate environment can create elevated default risk. And I know you typically try and Focus on kind of more conservative and I guess kind of a defensive portfolio, but you have the opportunity to look across A broad number of sectors. So I'm curious, at this point, are you seeing any signs of weakness or concern in any particular sectors? Or is it still kind of too early at this point see how that might play out?

Speaker 3

Yes, it's a good question. So we are I wouldn't say that we are See huge alarm bells at the moment. But certainly the stresses The early signs of stress, I would say, are most acute in companies that didn't benefit from COVID and have experienced some inflationary impact in their costs. So healthcare services, Transactions of an older vintage that are in healthcare services, I would say, are showing a little bit more stress than the average borrower. Some technology companies are, I think, seeing some stress and they are Working on their cash flow generation potential, I think a lot of technology companies are Actually focusing on generating cash flow or becoming cash flow neutral because the assumption of having access to the capital markets Has gone away a bit.

Speaker 3

And so you are probably more likely to see stress in some technology oriented companies versus the average borrower as well. But net net, I think it is a bit early to really tease out an industry or sector specific That's great color. Thanks for taking my questions today.

Operator

And we now have a question from Melissa Wedel from JPMorgan. Elisa, please go ahead.

Speaker 5

Good morning. Thanks for taking my questions today. Following up on the new activity in the portfolio, I was just curious, was there anything Kind of idiosyncratic around timing of new deployments versus repayments during the quarter. I guess more Specifically, did you see repayments earlier in the quarter and put capital to work later?

Speaker 3

Hi Melissa, it's Armand again. I don't think that there was Any discernible trend that way in terms of timing. I think we were Fairly active in originating throughout the quarter. We had a couple specialty loans that were done in partnership with our opportunistic credit group that It's hard to predict if they close in a certain week or a certain month, they just take longer to document. And So I wouldn't say that there was any sort of trend in that regard.

Speaker 5

Okay. Appreciate that. And I do appreciate the detail that you provided on the 3 new non accruals in the portfolio. I was hoping to circle back to the previous Two companies that you talked about last quarter. I believe, as I recall, with regard to both of those companies that were already on non accrual headed into the June quarter.

Speaker 5

You'd indicated that you expected somewhat near term resolutions on those as well. Just curious if that's still your outlook or if things have evolved? Thank you.

Speaker 3

Thanks. So The other 2, one was called the Avery, one is SiO2. Avery is a real estate asset in the San Francisco market. We are we continue to work with the sponsor there, the developer. They are a very skilled Developer and marketer of all types of real estate assets.

Speaker 3

And so we think their highest and best use is to have That developer continued to sell the units. The good news is that the units are continuing to sell at accretive prices relative to our attachment point on a detachment point on our loan. So it's just going to take a little bit longer. I don't think we're going to do a bulk sale of the Remaining units anytime soon, but I think it's kind of steady as it goes and it will take a little bit of time To get all of the capital back. I wouldn't be surprised if they did a bulk sale, but that's certainly not we're not putting the pressure on to get the I'll talk about quickly rather do an orderly liquidation.

Speaker 3

In the case of SiO2, the company had its confirmation hearing for emergence from bankruptcy. That is an ongoing situation. It is going to exit bankruptcy very soon and we will have more to report Probably at the end of the fiscal year, at the end of the next quarter as to an update. We have been very heavily involved with operational changes for the business during the pendency of the case. We are also engaging with strategic Partners and investors as well as financial investors to help in terms of the equity infusion that the company We'd like to engage in to grow.

Speaker 3

There is a lot of interest in the intellectual property and the capabilities of this business. And we at Oaktree are not really of the mindset to grow our equity exposure to the company, but we are happy to have Especially strategic investors joined in and helped grow that business. So we are cautiously optimistic about that situation, but it is not, I would say, a resolution, a complete resolution of the position over the course of the next few weeks. I think it will take at least a few quarters to have a clear path here, but We are, I think, in the thick of the bankruptcy and the operational changes to the business as well as Engaging with many investors on the equity side to help kind of take the business to the next level as it emerges from bankruptcy in the coming weeks. So I think the only update there is that it is going to emerge from bankruptcy quickly.

Speaker 3

It's a very quick bankruptcy. We are in control of the business And we are really setting it up for success, but that success is not at hand at the moment or in near term.

Speaker 5

Got it. Thank you, Irma.

Operator

We have a question coming from Bryce Rowe from B. Riley. Bryce, please go ahead.

Speaker 6

Thank you so much. Good morning. Wanted to maybe start on some of the repayment activity and then also on the portfolios of the JVs, somewhat elevated repayment activity here this quarter. And then the portfolios of the JVs fell in terms of their outstanding. So kind of curious if it's more if that's intentional both with the own balance sheet and the JV portfolios in terms of trying to exit with a market that might be more active than not?

Speaker 7

Yes. Hi, it's Matt Stewart. I would say across both the on balance sheet and the JVs, we were better as the syndicated loan market rallied during the quarter. If you look at our repayment activity on balance sheet, about a third of that was us actively Selling. Some of the positions that we purchased in the secondary market at the end of last year or that Came along with the OSI 2 merger, we were better sellers of.

Speaker 7

So we were selling out of those positions and then we did some more themes in the JV as well, just given the strength in the loan market. But we continue to monitor the primary market for broadly syndicated loans for the JVs. And then on balance sheet, we again, we've been rotating out of some of the liquid positions in anticipation of our private pipeline.

Speaker 6

Okay. And Matt, are there maybe continued opportunities to do that or pretty well exhausted at this

Speaker 7

We worked through most of our liquid positions from the OSA2 merger and So the balance of our OCSI merger a few years back, but there's still some rotation opportunities in the portfolio, just not as plentiful as it was previously.

Speaker 6

Okay. All right. Maybe shifting to capital structure, obviously active with some of the amendments with the credit facilities. Just kind of curious how you're thinking about the unsecured opportunity At this point to maybe layer in some more unsecured notes. And then a follow-up to that, any appetite To use the ATM, now that your stock price is over NAV?

Speaker 7

So we're still watching the unsecured market. We feel comfortable where our capital structure is today. As you mentioned, we pushed out both our secured by a little over 2 years, so our near term maturities of 25% and 26% are now 27% and 28%. We're about 36% unsecured at this point. So we're going to continue to watch that market.

Speaker 7

It's tightened about 100 basis points, if you look at some of the recent in the market versus where we were a few quarters ago. But we do feel comfortable about where we are today. Our next maturity is February of 2025, so we have significant runway. But we'll continue to evaluate that market and see if there's any opportunities. But then on the ATM side, we've had the ATM in place for about 1.5 years now.

Speaker 7

We've accessed it Very little last year. We'll continue to watch that and we'll see how Stock trades and what our pipeline looks like and if there's any opportunities for ROE in the future there.

Speaker 6

Got it. Okay. Thanks for taking the questions.

Operator

We have a question from Ryan Lynch from KBW. Ryan, please proceed.

Speaker 8

Hey, good morning. First question I had was just, you had about $2,600,000 of non interest operating Expenses this quarter, that was a little bit lower than we were expecting. I know there was expected to be some synergies. Is that a pretty good run rate that we should expect going forward? Or is there anything That kind of lowered that or is there anything in other quarters that expected to kind of make that a little bit higher?

Speaker 8

Hey Ryan, Chris McAllen here. Thanks for the question. Yes, we were very happy to realize some of the synergies from the OSI 2 merger. We're always going to have some puts and takes quarter in and quarter out with Back to the operating expenses, but I do think that where we landed this quarter is a decent run rate again, taking into account Puts and takes. In addition to the synergies, we did have some items that were kind of a non recurring nature last quarter that also contributed to the decline.

Speaker 8

And then outside of the maybe the non accruals that you guys have had Put on this quarter. Have you guys been receiving many amendment activity requests from borrowers in your portfolio Relative to call it, request you would have received on a 100 normal basis like a year ago?

Speaker 3

Yes, I think it's been pretty light so far. It's been, I would say, consistent What it's been it was in 2022 or 2021, so not really an uptick. I would expect some of those conversations to happen at some point in the markets broadly. But for now, It's really been pretty quiet on that front.

Speaker 8

And then just one final question that I had, kind of a higher level question, but you guys have really good insights on the credit markets. You mentioned no higher base rates that are borrowers are just now starting to feel the effect of higher base rates kind of on their financials. I Yes, Chris, we've heard in the past that higher base rates alone are probably not going to put a lot of borrowers into default. It's probably going to take some sort Weakness in the business in combination with higher base rates. So I'm just curious, do you expect sort of broadly and then Maybe with your portfolio specifically, because the economy has been so resilient, now there's it's been uneven in certain areas, but it's been pretty resilient.

Speaker 8

Are you expecting sort of a meaningful increase in defaults If the economy does stay this strong, if and base rates stay this high, do you think base rates alone are effective enough to kind of meaningfully increase the defaults going forward?

Speaker 3

Yes. I mean, it's obviously very hard to predict, but You're right that base rates on the road are probably not going to result in a wave of default. It should result in an increase in the default rate by a couple of 100 basis points from historical averages And over a period of time, over an extended period of time, I think that you won't see the big spike in defaults until you get to closer to a maturity wall, which in the public market, you start seeing more heavy maturities in 2025 or 2026. You don't really see A very heavy maturity wall in 2024. The comment about base rates The problematic is that if base rates remain this elevated for an extended period of time, And what you will find is a maturity wall issue potentially.

Speaker 3

You will find some number of companies, albeit maybe not A big distress cycle, but you will see defaults growing. And you will see just asset bubble Deflation. As companies and asset owners need to decide, are they going to invest additional equity into these businesses If they are underwater from a capital structure perspective. So you will see a combination of factors that don't bode well, underinvestment in assets, Some level of defaults, some requests for picking interest, some requests for amendments and waivers. It's really hard to see In the I would say the medium term, a very positive outlook in the case of a higher for longer scenario.

Speaker 3

And For those businesses that are able to grow nominal profitability or nominal dollars of profit over the medium to long term, Then they may be better off if they're able to survive this capital crunch That is probably going to occur over the next 6 to 18 months is the guess that I would have as to when the impact of the base rates and the access to the capital markets for highly levered capital structures put in place Before the pandemic. I think that this next year or 2 is going to be when we see Some pretty key decisions about asset owners support those businesses.

Speaker 8

Okay. Understood. That's all for me. Thanks.

Operator

And we have a question from Kyle Joseph from Jefferies. Kyle, please go ahead.

Speaker 9

Hey, good morning guys. Thanks for taking my questions. Apologies if I missed this, been too many earnings this morning. But just it was an active quarter of both deployments and repayments

Speaker 8

and then it looked To me, like fee income was a

Speaker 9

little lighter than I was expecting. Anything you'd highlight there? Was it just kind of the nature of some of the repayments there Are there anything any other nuance?

Speaker 7

Hi, it's Matt Stewart. Not too much to report there. I mean, we got some of our repayments were older vintage loans, that didn't have Significant call protection, the call protection had run out. So there's really not much to report there. And to Harmon's Point around amendment activity, the amendment fees during the quarter weren't significant either.

Speaker 7

So not much to report on that line item.

Speaker 9

Got it. And then, stepping back, Armin or Matt, Pendo, just want to get your thoughts in terms of Kind of the potential fallout from what's going on with regional banks and rumors and headlines about increasing capital Requirements of banks and how big of an opportunity you think that is for the

Speaker 8

sector and OCSL in particular?

Speaker 3

Yes, this is Armin. I mean, I'll jump in and Matt feel free to add. I do think that it's going to Present a very attractive opportunity. In some ways, it gives us the opportunity to partner with those banks And in other situations, it gives us the opportunity to buy portfolios. And then finally, I think generally speaking, whether There is an increase in required equity capital.

Speaker 3

We're not. I think the higher level of Excuse me from the regulators, we are already seeing it kind of play through with an expansion in the aperture of the possible deals That we may do with or without partnership with the bank. So we're just, I think beginning to see an increase in deal flow, but I think there's also opportunities to work with the To work with the banks as an off taker of some of their assets at a price or as a partner with them going forward through origination. But I think it's early days in terms of figuring that out.

Speaker 2

Yes. It's Matt Pfennel, Kyle. I think just to echo Amarin's comments, I do think it's early days. That being said, I do think it will be a big opportunity. There's no question that from the bank's perspective, The regulatory oversight capital charges are increasing and only going to continue to increase.

Speaker 2

And we can really partner well with banks. There's a lot of services and products they offer that we don't offer and we're not interested in. But We have a lot of capital. We can structure, execute transactions very quickly and thoughtfully. So I think the trend and this trend has been going on for a while, and I think it's only going to increase And discussions around kind of partnering with banks and doing things together, combining our capital and kind of their sales force and I think it's well, it'll take a while to play out.

Speaker 2

I think it's going to be a positive.

Speaker 9

Got it. Thanks very much for answering my questions.

Operator

And we have no further questions at this time. So I will turn the word back to Mr. Mosticchio.

Speaker 1

Thanks, Marlise, 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-four twelve 3,170,088 for non U. S.

Speaker 1

Callers with the replay access code 1,9,58, 224 beginning approximately 1 hour after this broadcast.

Speaker 8

We hope you enjoy the

Speaker 1

rest of the summer. Thank you.

Operator

And this concludes this conference. Thank you for attending today's presentation. You may now disconnect.

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