Oaktree Specialty Lending Q2 Earnings Call Highlights

Key Points

• Non-accruals and balance sheet: Management reduced non-accruals to 2.6% of the debt portfolio, sold two legacy non-accruals post-quarter, boosted available liquidity to $671 million and lowered net leverage to 1.04x after selling some liquid credit to build dry powder.
• NAV decline driven by software marks and spread widening: NAV fell to $15.69 from $16.30 mainly due to ~310 bps mark-to-market write-downs on performing software loans and broader spread widening, which management says largely reflects market repricing rather than deteriorating fundamentals.
• New-deal economics improving but activity measured; dividend adjusted: Spreads on new private-credit investments widened to about SOFR+500–550 bps (with some deals ~SOFR+600) and terms have become more lender-friendly, yet new commitments slowed and the board set a $0.34 quarterly dividend while lowering the base to $0.30 and keeping a supplemental payout tied to excess adjusted NII.

Oaktree Specialty Lending NASDAQ: OCSL reported fiscal second-quarter 2026 results that management said reflected an emphasis on reducing non-accruals and maintaining balance sheet flexibility amid a volatile private credit backdrop. Executives also pointed to improving conditions for new originations, including wider spreads and what they described as more lender-friendly deal terms.

Non-accrual reduction and balance sheet positioning

President Matt Pendo said the company remained focused on “reducing non-accruals and positioning our balance sheet for flexibility” despite what he called “external noise around private credit and BDCs.” As of March 31, 2026, non-accruals were 2.6% of the total debt portfolio at fair value, down from 3.1% in the prior quarter and 4.6% a year earlier.

After quarter-end, Pendo said OCSL sold two legacy non-accrual positions, Dominion Diagnostics and All Web Leads, and that the company expects “to make further progress reducing non-accruals and realizing cash proceeds” that can be redeployed into performing assets.

During the quarter, OCSL sold a portion of its liquid credit positions at cost. Pendo described the move as a strategic decision intended to build dry powder, keep leverage below the midpoint of the company’s target range, and rotate out of lower-yielding public credit. The company ended the quarter with $671 million of available liquidity, up $100 million sequentially, and net leverage of 1.04x, down from 1.07x.

NAV decline tied to software marks and broader spread widening

Net asset value per share was $15.69 at March 31, 2026, compared with $16.30 at Dec. 31, 2025. Pendo said the decline was driven primarily by “unrealized mark-to-market write-downs of software loans during the quarter,” noting that the fair value of performing software loans declined by about 310 basis points. He added that the move was “largely consistent with movements in broadly syndicated software loans” and said the markdowns were “generally not indications of deteriorating fundamentals,” but rather reflected broader market repricing of risk.

Chief Financial Officer Chris McKown said the drivers of NAV were “about evenly split between write-downs and certain non-accruals, mark-to-market volatility in quoted names, and spread widening on private credit marks.”

Earnings and dividend update

Adjusted net investment income (NII) was $33.7 million, or $0.38 per share, compared with $36.1 million, or $0.41 per share, in the prior quarter. Pendo attributed the decline to lower reference rates, lower non-recurring income, and leverage ending below the midpoint of the target range.

McKown said adjusted total investment income was $69.7 million, down from $74.5 million in the prior quarter, primarily due to lower reference rates and lower non-recurring income tied to fewer prepayments and exit fees. Net expenses fell 6% quarter-over-quarter, which he said was driven mainly by lower Part I incentive fees due to the total return hurdle.

The board declared a total cash dividend of $0.34 per share for the quarter. Pendo said the company adjusted its base dividend to $0.30 per share “due to our conservative use of leverage,” while maintaining the supplemental dividend at 50% of excess adjusted NII above the base dividend. The dividend is payable June 30, 2026, with a record date of June 15, 2026.

Private credit volatility and improving new-deal economics

CEO and Co-Chief Investment Officer Armen Panossian described the quarter as “eventful” for private credit and said Oaktree views current volatility as “a period of recalibration rather than a systemic issue.” He cited ongoing market debate around impairments, valuations, leverage, liquidity mismatches, software exposure in an AI-driven environment, and refinancing risks.

Panossian said increased volatility during the quarter, along with AI-related concerns and geopolitical unrest, widened spreads in public liquid credit markets. He also pointed to “elevated net redemptions in non-traded BDCs” as a factor driving a phase of price discovery in private credit. Toward quarter end, he said conditions stabilized and the private credit pipeline began to rebuild.

Panossian said OCSL was encouraged that spreads on new private credit investments had widened to SOFR plus 500-550 basis points, about 50-100 basis points above “the 2025 tights,” and that the company was seeing modest improvements in documentation and structures that are more favorable to lenders. He added that the firm expects continued volatility and dispersion and is monitoring potential opportunities in secondary private transactions, including partial or full portfolio sales.

Portfolio activity, software exposure, and selected credit updates

Co-Chief Investment Officer Raghav Khanna said investment activity was “measured” in the quarter as the firm prioritized risk control and balance sheet flexibility. Proceeds from prepayments, exits, paydowns, and sales totaled $334 million, up from $179 million in the prior quarter. New investment commitments were $204 million, down 36% sequentially, as deal activity slowed amid software volatility and geopolitical tensions, though Khanna said the pipeline began to rebuild in late March and early April.

Khanna highlighted the prepayment and exit of Mindbody, an ARR software loan, which he said was exited at par via refinancing. He said that left OCSL with one ARR loan, representing 76 basis points of fair value, down from 214 basis points the prior quarter.

The weighted average yield on new debt investments was 9.2%, about 50 basis points higher than the December quarter, according to Khanna. He also described a new private deal: Jonah Energy, which he said was a highly structured first lien term loan priced at SOFR plus 600 with mandatory amortization, excess cash flow sweeps, and multiple maintenance covenants. Oaktree funds participated in approximately $200 million, or about one-third, of the first lien term loan supporting Jonah’s acquisition of Grit Oil & Gas, Khanna said.

On sector exposure, Khanna said software represented 21% of the portfolio at fair value across 29 issuers, down about 140 basis points sequentially due primarily to the Mindbody exit. Using what he called a broader and conservative classification of software and technology, he estimated exposure at about 26% when including certain healthcare technology, interactive media, and services.

Khanna said that within the performing debt portfolio, two investments representing 2.9% of fair value were classified as having high AI risk under OCSL’s seven-factor resilience framework. Excluding non-accruals, the weighted average mark on the software portfolio was 96 at March 31, down about 310 basis points from the prior quarter, which he said largely reflected spread widening and risk repricing in liquid credit markets.

On non-accruals, Khanna said there were 10 investments on non-accrual at quarter-end. He noted that Astra was restructured after emerging from Chapter 11 and was exited shortly after quarter-end “modestly below our mark.” He also said the company made progress on Avery, citing increased condo sales activity versus underwriting assumptions.

After quarter-end, Khanna said Dominion sold with $7 million of cash proceeds versus a $5 million mark as of Dec. 31, and All Web Leads was sold at a price in line with the March 31 mark, with approximately 20% of the consideration received in cash at close and the remainder via a seller note and equity.

During the Q&A, JPMorgan analyst Rick Shane asked about the return profile implied by the dividend level and about improving covenant packages. Khanna said new deal spreads had improved, citing sponsor-backed first lien deals in the low-to-mid 500s and higher spreads in less commoditized areas. On terms, he said OCSL is seeing fewer PIK requests in new deals, more realistic adjusted EBITDA, better liability management exercise (LME) protections, and early signs that maintenance covenants are returning in some larger deals.

About Oaktree Specialty Lending NASDAQ: OCSL

Oaktree Specialty Lending Corporation NASDAQ: OCSL is a closed-end, externally managed specialty finance company structured as a business development company (BDC). Launched in 2014, Oaktree Specialty Lending provides customized debt solutions to U.S. middle-market companies, with a focus on senior secured loans, second-lien financings, mezzanine debt and select equity co-investments. The company’s investment strategy centers on floating-rate instruments designed to offer downside protection and income potential in varying interest rate environments.

The firm’s portfolio spans a diverse array of industries, including healthcare, technology, energy, business services and consumer products.

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