Oaktree Specialty Lending Q3 2026 Earnings Report

Oaktree Specialty Lending EPS Results

• Actual EPS: $0.37
• Consensus EPS: $0.36
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: N/A

Oaktree Specialty Lending Revenue Results

• Actual Revenue: $69.15 million
• Expected Revenue: $69.40 million
• Beat/Miss: Missed by -$245.00 thousand
• YoY Revenue Growth: N/A

Oaktree Specialty Lending Announcement Details

• Quarter: Q3 2026
• Date: 8/4/2026
• Time: Before Market Opens
• Conference Call Date: Wednesday, August 5, 2026
• Conference Call Time: 11:00AM ET

Oaktree Specialty Lending (NASDAQ:OCSL) Corporation (NASDAQ: OCSL) is a business development company that provides financing to middle-market companies. The company seeks to generate current income and capital appreciation by investing in privately negotiated debt and equity securities, with an emphasis on credit opportunities that may be underserved by traditional lenders.

OCSL primarily invests in first-lien and second-lien loans, subordinated debt, and, to a lesser extent, equity investments. Its portfolio companies operate across a range of industries, and the company generally focuses on established businesses in the United States. OCSL may also participate in unitranche financings and other structured investments tailored to the needs of middle-market borrowers.

The company is externally managed by Oaktree Fund Advisors, an affiliate of global investment manager Oaktree Capital Management. OCSL was formerly known as Fifth Street Senior Loan Fund Corp. before adopting its current name following Oaktree’s management of the company. Armen Panossian, who leads Oaktree’s lending activities, serves as OCSL’s chief executive officer and chairman.

Oaktree Specialty Lending Q3 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Non-accruals declined significantly: Non-accrual investments fell to 1.8% of the debt portfolio at fair value, down from 2.6% sequentially and 3.2% a year earlier. The Thrasio workout generated approximately $25 million in repayments, with the remaining position returned to accrual status and expected to be repaid soon.
• Positive Sentiment: Balance sheet flexibility remains strong: Net leverage decreased to 1.02x and available liquidity was approximately $699 million. Management said this provides capacity to invest selectively while preparing to address $350 million of unsecured notes maturing in January 2027.
• Neutral Sentiment: Adjusted net investment income declined modestly to $32.2 million, or $0.37 per share, from $33.7 million, or $0.38 per share, primarily due to lower leverage and weaker non-recurring income. The board declared a total quarterly dividend of $0.33 per share, including a $0.03 supplemental dividend.
• Positive Sentiment: New investments offered better terms and yields: OCSL committed $206 million during the quarter, while new debt investments carried a weighted average yield of 10.0%, up from 9.2%. Management cited improved lender protections, lower leverage and differentiated opportunities such as the Zayo fiber-infrastructure financing.
• Negative Sentiment: Management remains cautious about the outlook, citing subdued private-equity activity, persistent inflation, elevated interest burdens and potential AI-driven disruption in software. It expects further volatility as loans originated in 2020–2021 approach refinancing in 2027–2029, although high-AI-risk software exposure is limited to about 3% of performing debt.

Presentation

[Operator]

Welcome, thank you for joining Oaktree Specialty Lending Corporation's third fiscal quarter 2026 conference call. Today's conference call has been recorded. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now turn the call to Alison Mermey, OCSL's Head of Investor Relations. Please go ahead.

[Alison Mermey, Head of Investor Relations at Oaktree Specialty Lending Corporation]

Thank you, operator. Our third quarter 2026 earnings release, which we issued this morning, along with the accompanying slide presentation, can be accessed on the investor section of our website, oaktreespecialtylending.com. Before we begin, I want to remind you that the comments on today's call include forward-looking statements reflecting current views with respect to, among other things, future operating results and financial performance. Actual results could differ materially from those implied or expressed in the forward-looking statement.

[Alison Mermey, Head of Investor Relations at Oaktree Specialty Lending Corporation]

Please refer to the relevant SEC filing for a discussion of these factors in further detail. Oaktree undertakes no duty to update or revise any forward-looking statement. 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 an Oaktree fund. Investors and others should note that OCSL uses the investor section of its corporate website to announce material information. The company encourages investors, the media, and others to review information that it shares on its website.

[Alison Mermey, Head of Investor Relations at Oaktree Specialty Lending Corporation]

On today's call, Matt Pendo, President of OCSL, will begin with a progress report on objectives we set out for fiscal 2026 and an overview of our third quarter results. Armen Panossian, our CEO and Co-Chief Investment Officer, will then provide a market update. Raghav Khanna, our Co-Chief Investment Officer, will cover portfolio activity, and Chris McKown, our CFO and Treasurer, will close with a review of our financial results before we open the call for questions. I will turn the call over to Matt Pendo, President of OCSL. Matt?

[Matt Pendo, President at Oaktree Specialty Lending Corporation]

Thank you, Alison, good morning, everyone. With three quarters of fiscal 2026 complete, we want to assess our progress against two of our primary objectives. First, reducing non-accruals through exits and monetization events, and second, maintaining a flexible balance sheet. Starting with the first objective, reducing non-accruals. As of June 30th, 2026, non-accruals were approximately 1.8% of the total debt portfolio at fair value, down 80 basis points sequentially and down 140 basis points year-over-year.

[Matt Pendo, President at Oaktree Specialty Lending Corporation]

In the last two quarters alone, we exited five non-accrual positions, leaving six investments on non-accrual. More than 85% of the decline in non-accrual dollars over the past year is due to proceeds received and investments returning to accrual status. The most significant portfolio development this quarter was Thrasio. Through a series of asset sales, Thrasio repaid approximately $25 million, or a little over 80% of our loans, including paying off the entire first out-term loan and about 75% of the second out-term loan.

[Matt Pendo, President at Oaktree Specialty Lending Corporation]

The remaining second out position was returned to accrual status, and we expect it to be repaid in the next few months. Raghav will discuss Thrasio in more detail in his remarks. Turning to the second objective, maintaining a flexible balance sheet. We ended the quarter with net leverage of approximately 1.02x, compared to 1.04x at the end of March, and below the midpoint of our 0.9x-1.25x target range. Available liquidity was nearly $700 million at quarter end, up about $30 million from last quarter.

[Matt Pendo, President at Oaktree Specialty Lending Corporation]

We believe this combination of conservative leverage and ample liquidity positions us well to invest into an evolving private credit market. Furthermore, we plan to address the $350 million of unsecured notes that mature in January 2027 over the next several quarters. Turning to our third fiscal quarter financial highlights. Adjusted net investment income was $32.2 million, or approximately $0.37 per share, down slightly from $33.7 million, or $0.38 per share in the prior quarter.

[Matt Pendo, President at Oaktree Specialty Lending Corporation]

This slight decrease primarily reflected our lower use of leverage, the lighter than average quarter of non-recurring income, and the payment of a partial income-based incentive fee, which Chris will walk through in more detail. For the quarter, our board declared a total cash dividend of $0.33 per share. The dividend is composed of a base cash dividend of $0.30 per share and a supplemental dividend of $0.03 per share. This is consistent with our policy of paying a supplemental dividend equal to 50% of adjusted net investment income in excess of the base dividend.

[Matt Pendo, President at Oaktree Specialty Lending Corporation]

The dividends are payable in cash on September 30th, 2026. The stock goes of record on September 15, 2026. With that, I'll turn the call over to Armen to discuss the market environment.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Thank you, Matt. On our last call, I described the volatility in direct lending as more a period of recalibration than a systemic issue. I also walked through specific investor concerns around direct lending, including rising impairments, the use of leverage, liquidity mismatches, software exposure in an AI-driven world, and refinancing risk. On today's call, I want to provide a brief market update, take stock of how these concerns are evolving, and explain how they inform our approach at Oaktree. First, the market backdrop.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

The June quarter was less volatile than the March quarter. Credit and equity markets stabilized, and the general tone was less bearish, although dispersion continued to be a dominant theme. For example, the broadly syndicated loans market showed a bifurcated recovery. Spreads for B and B+ loans retraced most of the widening experience during the March quarter, and ended June close to December 2025 levels. New issuance in the broadly syndicated loan market also resumed, and many transactions priced at or through the tight end of initial price talk.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

However, the recovery has not been uniform. Spreads on traded B- credits remain wider than they were in late 2025, and new issuance among lower-rated borrowers remains limited. The direct lending market was also more subdued. Spreads remained wider than 2025 levels, while direct lending deal value declined to a 2.5 year low. The decline in deal flow largely reflected the slowdown in private equity activity, with quarterly deal value also declining to a multi-year low.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Sponsors continue to face a difficult exit environment amid a wide bid-ask spread between sellers and buyers, geopolitical uncertainty, a less predictable macroeconomic outlook, and the possibility of slower growth alongside persistent inflation. In this environment, the balance between private credit borrowers and lenders has improved. Competition has generally been more rational, and underwriting standards have strengthened. On average, loans issued in calendar 2026 offer more attractive terms than transactions completed in 2024 and 2025.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

During the June quarter, new sponsor-backed first-lien direct loans were pricing in the range of SOFR+ 500-550 basis points, consistent with the March quarter and above the 2025 types of SOFR+ 450-475. However, competition for new deals, especially in middle-market first-lien direct lending, increased towards the end of June and compressed average spreads closer to 500 basis points. Now I'll turn to the specific concerns we highlighted last quarter, beginning with impairment risk. Across the direct lending industry, credit issues have continued to arise.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

While industry data for non-accruals has been mixed in recent quarters, OCSL's non-accruals are down approximately 280 basis points from its peak in March of 2025. Our work is not complete, yet our progress reflects an active, hands-on approach to challenged credits. We have successfully pursued monetizations, restructured investments, and, when necessary, made difficult decisions to exit positions to avoid tying up capital and to minimize losses. The second concern is the use of leverage.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

The statutory debt-to-equity limit for BDCs is 2-to-1, and essentially, all BDCs operate under that limit today. Our concern is not the level of leverage at BDCs, which by historical standards and compared to other levered vehicles is relatively modest, but how leverage is used. At Oaktree, we view leverage as an output of the investment environment, not as a way to achieve a particular earnings or dividend target. When we find compelling investments with appropriate downside protection, we are prepared to deploy capital and allow leverage to increase.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

When the opportunity set is less attractive, we are comfortable maintaining greater liquidity and operating at lower leverage. At quarter end, OCSL's net leverage was 1.02x, positioning us below the midpoint of our target range and preserving capacity to invest as opportunities emerge. The next risk, and the source of continued headlines this quarter, is liquidity or asset-liability mismatches in non-traded BDCs. Redemption requests of several large non-traded vehicles remained elevated during the June quarter, in some cases reaching the mid-to-high teens as a percentage of equity.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

This highlights the potential mismatch between the liquidity expectations of investors in non-traded BDCs and the less liquid profiles of the underlying private credit assets. We expect it may take several quarters for existing redemption queues to normalize and for net flows in non-traded BDCs to inflect positive. As a reminder, OCSL is a permanent capital vehicle and does not face redemption risk. Against this backdrop, we view headwinds to the non-traded BDC market as a net positive for permanent capital public BDCs with dry powder.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Net outflows from non-traded BDCs reduce competition for new investments, and it may create opportunities in the form of secondary portfolio purchases and industry consolidation, which we are positioned to evaluate. The final, and perhaps most debated risk, is software exposure and related refinancing risk. Investors across credit and equity markets have spent considerable time analyzing software and potential AI disruption. As investors dig in, they are beginning to discern between the riskiest businesses and those with more defensible business models.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Software is not a monolithic category, and AI exposure is not evenly distributed. The greatest risk is likely concentrated where business model disruption intersects with high leverage, limited free cash flow, and a near or medium-term refinancing need. Many loans originated in 2020 and 2021 were underwritten when base rates were near zero, valuation multiples were at peak levels, and the implications of AI were not yet apparent. A meaningful portion of that cohort, especially ARR-based loans, will mature in 2027 and 2028.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Refinancing those investments will be an important test for the market. The outcomes will be issuer-specific, and active portfolio management will remain essential. These direct lending issues will take multiple quarters, and in some cases, years to play out. No one can predict precisely how they will materialize. Our focus remains on the factors we can control: disciplined underwriting, portfolio management, and balance sheet flexibility. The current risk environment does not mean that investors should avoid private credit.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Rather, it means lenders should be discerning and demand greater downside protection. There are several ways the market could evolve from here. If geopolitical uncertainty diminishes or the macroeconomic outlook improves, sponsors may become more willing to transact. A recovery in M&A and private equity exits could increase demand for financing at a time when the supply of direct lending capital has become more disciplined. That would be a positive outcome for direct lending deal flow and spreads.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

On the other hand, if transaction activity remains limited while capital continues to flow into private credit, even if at a slower pace, we may see further spread tightening. The outlook for interest rates has also evolved over the year. Persistent inflation has reduced confidence in the pace of future rate cuts and increased the possibility that base rates will remain higher for longer. While higher rates support higher income from floating rate loans, they also increase interest burdens for borrowers. Interest coverage continues to be a metric we monitor closely.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

This uncertainty is why we are focused on what we can control, especially maintaining a nimble balance sheet. It also brings us back to the importance of the broader Oaktree and Brookfield platform. In an environment where traditional sponsor-backed middle market activity remains subdued, the ability to source beyond U.S. sponsor-backed direct lending becomes increasingly valuable. Across the combined platforms, we are evaluating opportunities in direct lending, asset-backed finance, liquid credit, situational lending, non-U.S. direct lending, and secondary transactions.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

We can compare relative value across those markets and allocate capital where we believe the risk-adjusted return is compelling. With that, I'll turn the call over to Raghav for a review of our portfolio and investment activity.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Thanks, Armen. I'll start with our progress on non-accruals, then discuss new originations in our pipeline before closing with portfolio metrics. Beginning with Thrasio, which as Matt mentioned, was the most significant portfolio development of the quarter. Thrasio is an Amazon aggregator that has been on non-accrual since December 2023 due to an overly aggressive growth strategy after COVID. Over the last two years, the company reduced its cost infrastructure and streamlined its operations to focus on its strongest brands.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

During the June quarter, Thrasio sold several of its largest brands, including stain remover Miss Mouth's Messy Eater, to Church & Dwight for a $325 million gross purchase price. Proceeds from these asset sales were used to repay 100% of the first out term loan and the majority of the second out. We marked the remaining second out position up from 80 in the prior quarter to 99, returned it to accrual status, and expect the remaining second out loan to be fully repaid over the next few months from additional asset sale proceeds.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

We believe Thrasio illustrates the value of our workout expertise and cooperative efforts with other creditor owners to reposition a company through a restructuring and maximize recoveries in a relatively short timeframe. Throughout the workout process, we were actively engaged with the company and other stakeholders to realize a return of our capital. The result was a conversion of a non-accrual position into cash proceeds and the remaining piece into an income-producing loan that should be paid off in the near term.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Next, Avery, our investment in a condominium project that we have discussed on prior calls, also continues to perform ahead of our underwriting expectations. Through June 30th, 12 units closed year to date, compared with our full year 2026 budget of six units. Since quarter end, additional units have been sold and others are under contract. Our June 30th blended mark of 79, up from 65 at March 31st, reflects only the units closed through the end of the quarter.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

At quarter end, six investments were on non-accrual, representing approximately 1.8% of the total debt portfolio at fair value, down from 2.6% last quarter and 3.2% one year ago. Importantly, 97% of the sequential decline in non-accruals was a result of proceeds received to pay down debt. Turning to investment activity and the pipeline. New investment commitments totaled $206 million in the quarter, stable compared to $204 million in the prior quarter. Proceeds from prepayments, exits, other paydowns, and sales were $263 million, down from $334 million last quarter.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

The weighted average yield on new debt investments was 10.0%, up from 9.2% in the prior quarter, reflecting higher spreads on new private originations. Oaktree's capabilities around sourcing, underwriting, and structuring bespoke deals helps us achieve a healthy yield on new originations. As Armen mentioned, the investment opportunities we are reviewing today are generally more attractive than what we saw over the past two years. Transactions under review often feature more lender-friendly terms, including stronger documentation and structural protections, lower leverage, and lower loan-to-value.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

The median spread on opportunities in our pipeline has ranged from SOFR+ 550-575 basis points above broader market averages, which we believe reflects our differentiated sourcing capabilities. While activity in middle market direct lending remains measured, our opportunity set is supplemented by transactions sourced across the broader Oaktree and Brookfield private credit ecosystem. One new origination that demonstrates our unique capabilities is Zayo Group, a fiber infrastructure company.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Commercial fiber infrastructure products provide high-speed data broadband connectivity between business locations, data centers, cloud provider networks, and the global internet. In May, OCSL, alongside other Oaktree funds, funded approximately 60% of a private junior warehouse securitization facility to support the financing for Zayo's acquisition of Crown Castle's fiber infrastructure network.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

This facility is priced at SOF+ 675 basis points, with junior liens supported by Crown Castle's fiber network assets, and carries a corporate guarantee from a parent entity that provides support to our facility ahead of the sponsor equity and features other lender-friendly terms uncommon in traditional public ABS deals. This was not our first involvement with Zayo. Prior to this transaction, OCSL purchased Zayo's first-lien, first-out post LME broadly syndicated term loan at a discount to par.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

That loan has since been partially repaid with proceeds from ABS issuance, and the remaining position has appreciated to approximately par. We believe our investments in Zayo highlight several of Oaktree's strengths: consideration of relative value across a company's capital structure, identifying mispriced public credit, structuring complex private transactions supported by strong documentation, and collaborating across Oaktree's investment teams to source differentiated opportunities beyond just traditional sponsor-backed direct lending.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Looking at total portfolio metrics as of June 30th. 82% of the portfolio at fair value was first lien senior secured debt, and the weighted average yield on debt investments was 9.3%. The portfolio remains well-diversified, with the average debt position representing approximately 65 basis points of the total portfolio at fair value, and no single position exceeding 2.1% of fair value. The median EBITDA of our portfolio companies was approximately $189 million, up about 4% sequentially.

[Raghav Khanna, Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Portfolio company weighted average leverage was 5.1x, slightly better than 5.2x last quarter, interest coverage improved to 2.4x from 2.1x. Now turning to an update on software exposure. Based on GICS industry group classification, software represents 20% of the portfolio at fair value, down slightly from the prior quarter. Our high AI risk software exposure remains unchanged at approximately 3% of the performing debt portfolio at fair value. With that, I'll turn the call over to Chris to review our financial results.

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

Thank you, Raghav. In our third fiscal quarter ended June 30th, 2026, adjusted total investment income was $69.2 million, down slightly compared to $69.7 million in the prior quarter. The modest change primarily reflected a smaller average portfolio balance from operating with lower leverage and a decrease in non-recurring income, partially offset by placing the Thrasio second out loan back onto accrual status. The average non-recurring income for the trailing eight quarters has been about $3.8 million, while this quarter came in slightly below $2 million. This was not unexpected.

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

Although non-recurring income is inherently episodic, it can skew directionally lower during and after a period of intense market volatility. We delivered adjusted net investment income of $32.2 million, or approximately $0.37 per share, compared to $33.7 million or $0.38 per share in the prior quarter. The slight quarter-over-quarter decline was driven by lower total investment income and higher income-based for Part I incentive fees, partially offset by lower interest expense. Let's spend a moment on the incentive fee.

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

Last quarter, we paid no Part I incentive fee as a result of our total return hurdle. This quarter, we paid $2.4 million, or approximately $0.03 per share. For context, a full incentive fee would have been approximately $6 million, or about $0.07 per share. In other words, the incentive fee this quarter was roughly half of what it would have otherwise have been, reflecting our progress in reducing non-accruals, but partially offset by the continuing overhang from prior quarters' losses under the total return hurdle.

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

We believe this mechanism is working as designed, aligning the fees Oaktree earns with the total returns shareholders receive. NAV per share was $15.70 as of June 30th, 2026, stable compared to $15.69 as of March 31st, 2026. PIK income represented approximately 7.8% of adjusted total investment income during the quarter, compared to 5.5% last quarter. Increased PIK was largely driven by two names that were underwritten with PIK optionality to support the issuer's growth and strategic initiatives.

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

Importantly, the EBITDA leverage and interest coverage of our portfolio companies electing to PIK are roughly in line with the metrics for our overall portfolio. Consistent with last quarter, approximately two-thirds of our PIK income relates to investments that were structured with the option to PIK at origination. Our net leverage ratio at quarter end was approximately 1.02x, down slightly from 1.04x last quarter, and total debt outstanding was $1.45 billion. Our long-term target leverage range of 0.9x-1.25x remains unchanged.

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

As of June 30th, the weighted average interest rate on debt outstanding was 5.9%, unchanged from the prior quarter. Unsecured debt represented 65% of total debt at quarter end. We have a healthy level of dry powder with liquidity of approximately $699 million, including $40 million of cash and $659 million of undrawn capacity under our credit facilities. Unfunded commitments, excluding those related to the joint ventures, were approximately $208 million. Turning to our joint ventures.

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

Together, the JVs held approximately $524 million of investments across 135 portfolio companies and generated aggregate returns on equity of approximately 11.3% during the quarter. Leverage at the JVs was 2.1x, compared to 1.9x last quarter. During the quarter, we converted approximately 25% of the Kemper JV's subordinated note into equity. This did not have a material impact on the total earnings recognized from the JV, the income came in the form of a combination of interest income and dividend income instead of exclusively interest income. With that, I'll turn the call back to the operator for Q&A.

[Operator]

We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw a question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Rick Shane with JPMorgan. Your line is open. Please go ahead.

[Rick Shane, Analyst at JPMorgan]

Hey, guys. Thanks for taking my questions. Look, I think you've highlighted the benefits of a more constrained supply of capital and competition. At the same time, arguably, there are macro headwinds facing portfolio companies, whether it's elevated energy prices, higher labor costs, higher interest rates. When you think about the risks associated with the macro factors, and you talk about the opportunity for better structure related to more muted competition, where do you sort of put yourself in the cycle of returns?

[Rick Shane, Analyst at JPMorgan]

Does sort of net out, it gives you mid-cycle returns? Are you at a point now where you actually think you can extract higher above cycle returns, realizing that returns aren't static across a 10-year period?

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Thanks, Rick. It's Armen. Look, I don't think we're at mid-cycle returns. I think we are seeing some spread widening caused by the outflows from the semi-liquid or semi-traded, or, sorry, untraded BDCs. Just given the maturity profile of the 2021, 2022 LBOs that were done that still have maturities coming in 2027 through 2029, we think that there's still going to be greater volatility ahead of us, greater opportunity to deploy with wider spread, better return, tighter terms.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

We are, I would say at this point, kind of conserving our capital, maintaining ourselves in a more defensive and risk-averse posture. We really want to be able to lean into the market on the back of what we think will be more volatility. I wouldn't characterize it as mid-cycle. I would say we're sort of 75, maybe 50-75 basis points wide of where we were six months ago. I just don't think that that's fully baking in the inflation that we would expect in a continued conflict with Iran. I don't think that's reflective of the full extent of disruption in software driven by AI.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

There's a whole host of other kind of macro indicators that are beneath the surface but are indicating some weakness. The overall economic picture, if you just kind of step back to the 50,000 ft level, on average, things look okay. It looks like the economy is handling things okay. Beneath the surface, there's cause for concern. I don't think we're seeing the maximum opportunity set at this time.

[Rick Shane, Analyst at JPMorgan]

Got it. Yeah. Look, I really appreciate the thoughtfulness of that answer. I think we're sort of wrestling with the same things as we look at the world across a pretty wide coverage universe. Things seem to be holding up pretty well, but at the same time, you see these sort of little spots on the mosaic that make you wonder a little bit. I appreciate the answer, and it's consistent, I think, with how we see the world, too. Thank you.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Thanks, Rick.

[Operator]

Just a reminder, if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Finian O'Shea with Wells Fargo Securities. Your line is open. Please go ahead.

[Finian O'Shea, Analyst at Wells Fargo Securities]

Hey, good morning. Armen, just picking up on that dialogue with Rick, some of your opening remarks seemed a little more constructive on the spread widening, although those have come in a little bit. I think you were constructive on that, and you have ample leverage. Seeing your overall posture in terms of leaning in, and then maybe how attractive you view sponsor versus other more public or liquid type exposures that tend to come in the book here and there.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Yeah. Thanks, Fin. Look, I would say that the market is better today than what it was six months ago in terms of deployment. The volatility in fund flows has created that opportunity. The pace of deal flow is slower. There's not as much deal volume, whether it's for non-sponsored or for sponsored backed transactions. It just seems that with the base rate picture remaining elevated, spreads widening a little bit, uncertainty in the broader economy, the war with Iran. There's reasons why just the deal volume is a little slower.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

If deal volume was at a normal pace, I think we would see even more spread widening than we have seen. Look, it's better than six months ago. Is it as good as it could be, or we would expect it to become? No. In terms of comparing public versus private credit and maybe a couple of other asset classes, everything has tightened. Other than sponsor first lien lending and some other forms of private credit, which I'll touch on. If you look at the high quality part of the broadly syndicated loan market or the high yield market.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

You looked at the BBs and B+ types of credits, they're at their all-time tights in high yield bonds, and they're near their tights even in broadly syndicated loans. It's really in CCCs or stressed near defaulted securities where you really have no bid in the market for those public securities. Achieving the average spread in the broadly syndicated loan index or the high yield index is not very easy to do because it's sort of a bifurcated market. The high quality is trading super tight. The low quality is trading super wide, and there's very little in between.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

With that tightening on a like-for-like basis where you look at high quality credit and private credit, high quality credit and public credit. The public credit side, I would say, has tightened over the last 12-24 months. On the private side, it was tight until about six months ago, and it's widened. On a relative value basis, in terms of just purely return per unit of risk, I would say private credit looks better today relative to public credit than it did. Stepping away from that for a moment, I think where there is a meaningful opportunity that is unmet by capital is in the asset-backed finance space.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Providing capital to specialty lenders that are developing diversified portfolios of contractual cash flow streams. It's a pretty bespoke market. There is not a standard under which lenders and borrowers interact or transact, and that inefficiency creates pretty nice opportunities. When possible, as a firm, we are leaning into that area. It is not a great fit for BDCs as it is not a qualified asset. We have to be mindful of how much of it that we do. We do see that flow.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

It helps inform our relative value perspective on sponsor lending, non-sponsor lending, public credit, and then more specialty areas of lending. It rounds out the picture, and we'll selectively invest in those areas in the BDC when possible.

[Finian O'Shea, Analyst at Wells Fargo Securities]

Great. That's helpful and sort of a tie in there. In the remarks, you flagged consolidation in the industry. Are you seeing more of it, or are you more front-footed? Maybe expected to come on the go forward, anything to help us learn of your thinking there.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Yeah. I might make a quick comment. I'll throw it over to Matt Pendo. He might have a more refined view on this. Look, there is some consolidation happening. There are portfolios of loans for sale as well. I wouldn't say that we, as a firm, are looking to do anything that is material in that space. We're always looking for opportunities to expand our reach and our sourcing capabilities. Sometimes that means partnering with or potentially even buying a platform that could help on that front. That isn't something that is super critical.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

It is not something that we're actively working on now. We're certainly open-minded and a participant in the markets. You shouldn't expect for us to be a meaningful participant in M&A, at least based on the information at hand at this time. Matt, do you have anything to add to that?

[Matt Pendo, President at Oaktree Specialty Lending Corporation]

I think that's a good summary. As Armen said, we'll continue to look at things and be smart and aware of things. There's nothing really close now, and it's not a critical priority for us.

[Finian O'Shea, Analyst at Wells Fargo Securities]

Great. All from me. Thanks, everybody.

[Armen Panossian, CEO and Co-Chief Investment Officer at Oaktree Specialty Lending Corporation]

Thanks, Fin.

[Operator]

Your next question comes from the line of Peter Troisi with Barclays. Your line is open. You may now go ahead.

[Peter Troisi, Analyst at Barclays]

Hi. Good morning. Thanks for taking the question. Good to see the non-accruals decline in the quarter. As was noted in the prepared remarks, that did come with some hard decisions in the portfolio, and that flowed through the P&L. There was about $50 million of realized losses this quarter. I guess the question is, how do you think the rating agencies will view the trade-off of lower non-accruals versus higher realized credit losses?

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

Appreciate the question. This is Chris. I will take a first go at that and maybe pass it over to Matt as well for some additional comments. I think the realized losses, well, we never like to take realized losses. Those were in names that had been marked down several years ago, in some cases. In the case of the Dominion, which was the largest realized loss, that was an asset that came over in connection with the BDC acquisition back in 2017. I think while again, we do not like to see the realized losses.

[Chris McKown, CFO and Treasurer at Oaktree Specialty Lending Corporation]

I think we do appreciate, and I think rating agencies appreciate that our NAV was flat quarter to quarter and really just seeing the crystallization of some of those losses that have been longstanding. I do not know, Matt, anything to add there?

[Matt Pendo, President at Oaktree Specialty Lending Corporation]

Peter, good question. I think as Chris said, it is really just kind of the geography. I do not want to speak for the rating agencies, but not troubling to them. The things that we have been focused on with them is non-accruals, so reducing the non-accruals, which you have seen good progress there. Stabilization of NAV. Certainly saw that this quarter. Then our leverage, and we have continued to run leverage around one time, so very modern, prudent at the lower end of our target range. Those are the kind of the three things we have been focused on with the rating agencies.

[Peter Troisi, Analyst at Barclays]

Thank you.

[Operator]

There are no further questions at this time. I will now turn the call back to Alison for closing remarks.

[Alison Mermey, Head of Investor Relations at Oaktree Specialty Lending Corporation]

Thank you everyone for joining us on today's call. Please feel free to reach out to me and the team with any questions. Have a great day.

[Operator]

This concludes today's call. Thank you for attending. You may now disconnect.

Participants

Executives

• Alison Mermey, Head of Investor Relations
• Matt Pendo, President
• Armen Panossian, CEO and Co-Chief Investment Officer
• Raghav Khanna, Co-Chief Investment Officer
• Chris McKown, CFO and Treasurer

Analysts

• Rick Shane, Analyst at JPMorgan
• Finian O'Shea, Analyst at Wells Fargo Securities
• Peter Troisi, Analyst at Barclays