Oaktree Specialty Lending NASDAQ: OCSL said its non-accrual investments declined during its fiscal third quarter as the business development company exited troubled positions, while management maintained a cautious stance on private-credit deployment amid continued macroeconomic and refinancing risks.
As of June 30, non-accruals represented approximately 1.8% of the debt portfolio at fair value, down from 2.6% in the prior quarter and 3.2% a year earlier. President Matt Pendo said the company exited five non-accrual positions over the past two quarters, leaving six investments on non-accrual.
More than 85% of the year-over-year decline in non-accrual dollars resulted from proceeds received and investments returning to accrual status, according to Pendo. The company’s net leverage was 1.02x at quarter-end, below the midpoint of its 0.9x to 1.25x target range, while available liquidity was nearly $700 million.
Thrasio repayment supports non-accrual reduction
The largest portfolio development during the quarter involved Thrasio, an Amazon aggregator that had been on non-accrual since December 2023. The company sold several brands during the quarter, including stain remover Miss Mouth’s Messy Eater to Church & Dwight for a gross purchase price of $325 million.
Raghav Khanna, Oaktree Specialty Lending’s co-chief investment officer, said the asset-sale proceeds repaid all of OCSL’s first-out term loan and most of its second-out loan. In total, Thrasio repaid approximately $25 million, or more than 80% of OCSL’s loans. OCSL marked its remaining second-out position up to 99 from 80 in the prior quarter, returned the investment to accrual status and expects repayment in the coming months.
Khanna also cited progress at Avery, a condominium-project investment. Twelve units closed through June 30, compared with OCSL’s full-year budget of six units. The investment’s blended mark rose to 79 from 65 at March 31.
Income declines modestly; dividend remains at $0.33
Adjusted net investment income totaled $32.2 million, or $0.37 per share, compared with $33.7 million, or $0.38 per share, in the prior quarter. Adjusted total investment income was $69.2 million, down slightly from $69.7 million.
Chief Financial Officer and Treasurer Chris McKown attributed the decrease primarily to a smaller average portfolio balance associated with lower leverage and reduced non-recurring income. Those factors were partially offset by the return of Thrasio’s second-out loan to accrual status.
The company recorded approximately $2 million of non-recurring income during the quarter, below its trailing eight-quarter average of about $3.8 million. McKown said non-recurring income can trend lower during and after periods of heightened market volatility.
OCSL’s board declared a total cash dividend of $0.33 per share, consisting of a $0.30 base dividend and a $0.03 supplemental dividend. The dividend is scheduled to be paid Sept. 30 to shareholders of record Sept. 15.
Net asset value per share was $15.70 at June 30, compared with $15.69 at March 31. The company paid a $2.4 million Part I income-based incentive fee, or about $0.03 per share. McKown said a full incentive fee would have been about $6 million, with the lower fee reflecting the company’s total-return hurdle and the impact of losses in previous quarters.
New investments yield 10%
New investment commitments totaled $206 million, roughly unchanged from $204 million in the preceding quarter. Prepayments, exits, other paydowns and sales were $263 million, compared with $334 million in the prior quarter.
The weighted-average yield on new debt investments rose to 10.0% from 9.2%, which Khanna said reflected higher spreads on new private originations. The weighted-average yield on the overall debt portfolio was 9.3% at June 30.
One new investment was Zayo Group, a fiber-infrastructure company. OCSL and other Oaktree funds funded about 60% of a private junior warehouse securitization facility supporting Zayo’s acquisition of Crown Castle’s fiber infrastructure network. The facility was priced at SOFR plus 675 basis points, according to Khanna.
- First-lien senior secured debt accounted for 82% of portfolio fair value.
- The average debt position represented about 65 basis points of portfolio fair value, with no position exceeding 2.1%.
- Portfolio-company weighted-average leverage improved to 5.1x from 5.2x.
- Interest coverage improved to 2.4x from 2.1x.
- Software represented 20% of the portfolio at fair value, while high-AI-risk software exposure was about 3% of performing debt investments.
Management remains defensive despite improved lending terms
CEO and Co-Chief Investment Officer Armen Panossian said direct-lending terms have improved compared with 2024 and 2025 as competition has become more rational. New sponsor-backed first-lien direct loans during the June quarter were generally priced at SOFR plus 500 to 550 basis points, above 2025 levels of SOFR plus 450 to 475 basis points.
Still, Panossian said management does not believe the market is offering its maximum opportunity set. He cited slower deal flow, elevated base rates, geopolitical uncertainty, potential inflation pressure and concerns surrounding AI-related disruption in software businesses.
“We are, I would say at this point, kind of conserving our capital, maintaining ourselves in a more defensive and risk-averse posture,” Panossian said in response to an analyst question. He said OCSL wants to retain capacity to invest if greater volatility creates wider spreads, stronger terms and better returns.
Management also said it expects elevated redemption requests at some non-traded BDCs to take several quarters to normalize. Panossian said OCSL’s permanent-capital structure avoids redemption risk and could benefit if outflows reduce competition for investments or create opportunities to purchase secondary portfolios.
During the question-and-answer session, McKown acknowledged that the quarter included about $50 million of realized losses, as raised by an analyst, but said the losses related to investments marked down over several years in some cases. Pendo said the company has focused its discussions with rating agencies on reducing non-accruals, stabilizing NAV and maintaining leverage near one times.
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.
This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.
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