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News Release

Oaktree Specialty Lending Corporation Announces Fourth Fiscal Quarter 2018 Financial Results and Declares Distribution of $0.095 Per Share

LOS ANGELES, CA, Nov. 29, 2018 (GLOBE NEWSWIRE) -- Oaktree Specialty Lending Corporation (NASDAQ: OCSL) (“Oaktree Specialty Lending” or the “Company”), a specialty finance company, today announced its unaudited financial results for the fiscal quarter ended September 30, 2018.

Fourth Fiscal Quarter 2018 Highlights

  • Total investment income of $38.2 million ($0.27 per share), up from $31.8 million ($0.23 per share) for the third fiscal quarter of 2018;

  • Net investment income of $17.0 million ($0.12 per share), up from $14.4 million ($0.10 per share) for the third fiscal quarter of 2018;

  • Net asset value ("NAV") per share of $6.09, up from $5.95 for the third fiscal quarter of 2018;

  • Originated $228.4 million of new investment commitments and received $267.5 million of proceeds from prepayments, exits, other paydowns and sales; and

  • A quarterly dividend was declared of $0.095 per share, payable on December 28, 2018 to stockholders of record on December 17, 2018.

Management Commentary

Edgar Lee, Chief Executive Officer and Chief Investment Officer of Oaktree Specialty Lending said, “The fourth quarter completed a strong year for OCSL, highlighted by solid earnings growth and improved credit performance, including delivering the third consecutive quarter of increased NAV per share. Since we began managing OCSL a year ago, we have made significant progress in reducing credit risk in the portfolio and stabilizing NAV.  During the fiscal year, we reduced non-core investments by $569 million while adding over $1.0 billion of new investments that are consistent with Oaktree’s investment philosophy. Core investments now represent 76 percent of our portfolio, up from 37 percent as of September 30, 2017. Given our substantial progress to date, we believe we are well positioned to further enhance our return on equity and deliver value to our shareholders in 2019.”

Portfolio and Investment Activity

As of September 30, 2018, the fair value of the Company's investment portfolio was $1.5 billion and was comprised of investments in 113 companies. These included debt investments in 86 companies, the investments in Senior Loan Fund JV I, LLC (“SLF JV I”) and equity investments in 40 companies, including in SLF JV I and 2 private equity funds. Fourteen of the equity investments were in companies in which Oaktree Specialty Lending also had a debt investment.

At fair value, 95.0% of the Company's portfolio as of September 30, 2018 consisted of debt investments, including 48.4% of first lien loans, 27.0% of second lien loans and 19.6% of unsecured debt investments, including the debt investments in SLF JV I.

As of September 30, 2018, SLF JV I had $314.2 million in assets, including senior secured loans to 40 portfolio companies.  The joint venture generated income of $3.1 million for Oaktree Specialty Lending during the quarter ended September 30, 2018.

The weighted average yield on the Company's debt investments as of September 30, 2018, including the return on the Company's mezzanine note investments in SLF JV I, was 8.4%.

As of September 30, 2018, $1.2 billion of the Company's debt investments, or 83.2% of the total debt portfolio, at fair value, had floating interest rates.

During the quarter ended September 30, 2018, the Company originated $228.4 million of investment commitments, including investments in 13 new and three existing portfolio companies, and funded $218.4 million of investments across new and existing portfolio companies.

During the quarter, the Company received $267.5 million of proceeds from various prepayments, exits, other paydowns and sales and exited 18 investments.

Results of Operations

Total investment income for the quarter ended September 30, 2018 was $38.2 million, including $35.3 million of cash interest income from portfolio investments, $0.5 million of payment-in-kind ("PIK") interest income, $2.0 million of fee income and $0.4 million of dividend income.  PIK interest income, net of PIK collected in cash, represented 1.1% of total investment income for the quarter ended September 30, 2018. Total investment income increased $6.4 million from the quarter ended June 30, 2018, which was primarily attributable to the acceleration of interest income and prepayments fees earned in connection with the exit of a certain investment.

Net expenses for the quarter were $21.2 million, an increase of $3.8 million from the quarter ended June 30, 2018. The increase in net expenses was due primarily to an increase in Part I incentive fees (net of fees waived) resulting from higher investment earnings during the quarter, and an increase in interest expense, which was attributable to higher levels of outstanding debt during the quarter.

Net realized and unrealized gain before taxes on the Company's investment portfolio for the quarter ended September 30, 2018 was $16.9 million.

Liquidity and Capital Resources

As of September 30, 2018, the Company had $13.5 million of cash and cash equivalents (including restricted cash), total principal value of debt outstanding of $643.4 million and $359.0 million of undrawn capacity on its credit facility, subject to borrowing base and other limitations. The weighted average interest rate on debt outstanding was 5.1% as of September 30, 2018.

As of September 30, 2018, the Company’s total leverage ratio was 0.75x debt-to-equity.

Distribution Declaration

The Company's Board of Directors declared a quarterly distribution of $0.095 per share, payable on December 28, 2018 to stockholders of record on December 17, 2018.

Distributions are paid primarily from distributable (taxable) income. To the extent taxable earnings for a fiscal taxable year fall below the total amount of dividend distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to the Company’s stockholders.

Portfolio Asset Quality

As of September 30, 2018, there were eight investments on which the Company had stopped accruing cash and/or PIK interest or original issue discount ("OID") income that, in the aggregate, represented 14.5% of the Company's debt portfolio at cost and 7.0% at fair value.

($ in thousands)
 
Non-Accrual - Debt Investments As of September 30, 2018
  As of September 30, 2017
 
Non-Accrual Investments at Fair Value $ 98,760   $ 67,015  
Non-Accrual Investments/Total Debt Investments at Fair Value 7.0 % 4.7 %
         

Oaktree Specialty Lending Corporation
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)

  September 30,
2018
  June 30, 2018
(unaudited)
  September 30,
 2017
ASSETS          
Investments at fair value:          
Control investments (cost September 30, 2018: $213,470; cost June 30, 2018: $266,097; cost September 30, 2017: $444,826) $ 196,874     $ 223,421     $ 305,271  
Affiliate investments (cost September 30, 2018: $1,080; cost June 30, 2018: $1,080; cost September 30, 2017: $33,743) 2,161     2,161     36,983  
Non-control/Non-affiliate investments (cost September 30, 2018: $1,392,383; cost June 30, 2018: $1,416,632; cost September 30, 2017: $1,279,096) 1,292,166     1,294,936     1,199,501  
Total investments at fair value (cost September 30, 2018: $1,606,933; cost June 30, 2018: $1,683,809; cost September 30, 2017: $1,757,665) 1,491,201     1,520,518     1,541,755  
Cash and cash equivalents 13,380     56,615     53,018  
Restricted cash 109     499     6,895  
Interest, dividends and fees receivable 10,272     8,102     6,892  
Due from portfolio companies 1,357     15,757     5,670  
Receivables from unsettled transactions 26,760     22,538      
Deferred financing costs 5,209     5,620     1,304  
Derivative asset at fair value 162          
Other assets 3,008     3,108     514  
Total assets $ 1,551,458     $ 1,632,757     $ 1,616,048  
           
LIABILITIES AND NET ASSETS          
Liabilities:          
Accounts payable, accrued expenses and other liabilities $ 3,581     $ 2,714     $ 2,417  
Base management fee and Part I incentive fee payable 8,223     7,094     6,750  
Due to affiliate 3,274     4,230     1,815  
Interest payable 3,365     6,338     3,167  
Amounts payable to syndication partners 109     301     1  
Director fees payable         184  
Payables from unsettled transactions 37,236     166,903     58,691  
Deferred tax liability 422          
Credit facilities payable 241,000     211,000     255,995  
Unsecured notes payable (net of $3,483, $3,851 and $4,737 of unamortized financing costs as of September 30, 2018, June 30, 2018  and September 30, 2017, respectively) 386,485     386,132     406,115  
Secured borrowings at fair value (proceeds September 30, 2018: $12,314; proceeds June 30, 2018: $12,623; proceeds September 30, 2017: $13,489) 9,728     9,950     13,256  
Total liabilities 693,423     794,662     748,391  
Commitments and contingencies          
Net assets:          
Common stock, $0.01 par value, 250,000 shares authorized; 140,961 shares issued and outstanding as of September 30, 2018, June 30, 2018 and September 30, 2017 1,409     1,409     1,409  
Additional paid-in-capital 1,492,739     1,579,278     1,579,278  
Accumulated overdistributed earnings (636,113 )   (742,592 )   (713,030 )
Total net assets (equivalent to $6.09, $5.95 and $6.16 per common share as of September 30, 2018, June 30, 2018 and September 30, 2017, respectively) 858,035     838,095     867,657  
Total liabilities and net assets $ 1,551,458     $ 1,632,757     $ 1,616,048  
                       

Oaktree Specialty Lending Corporation
Consolidated Statements of Operations
(in thousands, except per share amounts)

    Three months ended
September 30, 2018
(unaudited)
  Three months ended
June 30, 2018
(unaudited)
  Three months ended
September 30, 2017
(unaudited)
  Year ended
September 30, 2018
  Year ended
September 30, 2017
Interest income:                    
Control investments   $ 3,687     $ 2,737     $ 3,126     $ 12,698     $ 14,230  
Affiliate investments       161     978     2,027     3,939  
Non-control/Non-affiliate investments   31,496     23,629     26,935     103,223     133,344  
Interest on cash and cash equivalents   123     107     313     563     810  
Total interest income   35,306     26,634     31,352     118,511     152,323  
PIK interest income:                    
Control investments       1,045     1,186     3,446     6,631  
Affiliate investments       52     196     416     788  
Non-control/Non-affiliate investments   499     360     746     1,907     3,674  
Total PIK interest income   499     1,457     2,128     5,769     11,093  
Fee income:                    
Control investments   6     697     315     951     1,244  
Affiliate investments           12     48     753  
Non-control/Non-affiliate investments   2,028     1,728     1,355     8,433     8,510  
Total fee income   2,034     2,425     1,682     9,432     10,507  
Dividend and other income:                    
Control investments   381     1,331     570     5,010     3,954  
Non-control/Non-affiliate investments                   87  
Total dividend and other income   381     1,331     570     5,010     4,041  
Total investment income   38,220     31,847     35,732     138,722     177,964  
Expenses:                    
Base management fee   5,767     5,909     6,808     22,652     31,369  
Part I incentive fee   3,675     2,733         10,485     10,713  
Professional fees   859     924     1,964     5,696     5,703  
Directors fees   143     154     277     650     872  
Interest expense   9,323     8,291     12,772     35,728     49,935  
Administrator expense   336     466     660     1,687     2,217  
General and administrative expenses   794     488     1,845     3,120     5,999  
Loss on legal settlements                   3  
Total expenses   20,897     18,965     24,326     80,018     106,811  
Fees waived   292     (1,548 )   (58 )   (1,342 )   (240 )
Insurance recoveries                   (1,259 )
Net expenses   21,189     17,417     24,268     78,676     105,312  
Net investment income   17,031     14,430     11,464     60,046     72,652  
Unrealized appreciation (depreciation) on investments and foreign currency:                    
Control investments   26,081     97,000     (83,359 )   115,906     (71,329 )
Affiliate investments       72     (73 )   (2,159 )   (1,574 )
Non-control/Non-affiliate investments   21,039     1,810     (33,008 )   (13,657 )   (24,640 )
Foreign currency forward contracts   162             162      
Net unrealized appreciation (depreciation) on investments and foreign currency   47,282     98,882     (116,440 )   100,252     (97,543 )
Net unrealized (appreciation) depreciation on secured borrowings   (87 )   377         2,353     (296 )
Realized gain (loss) on investments, secured borrowings and foreign currency:                    
Control investments   (31,331 )   (91,470 )   (728 )   (122,801 )   (59,722 )
Affiliate investments               2,048      
Non-control/Non-affiliate investments   1,494     2,033     (19,765 )   6,042     (112,060 )
Foreign currency forward contracts   (436 )           (436 )    
Net realized losses on investments, secured borrowings and foreign currency   (30,273 )   (89,437 )   (20,493 )   (115,147 )   (171,782 )
Redemption premium on unsecured notes payable               (120 )    
Provision for income taxes   (622 )           (622 )    
Net increase (decrease) in net assets resulting from operations   $ 33,331     $ 24,252     $ (125,469 )   $ 46,762     $ (196,969 )
Net investment income per common share — basic and diluted   $ 0.12     $ 0.10     $ 0.08     $ 0.43     $ 0.51  
Earnings (loss) per common share — basic and diluted   $ 0.24     $ 0.17     $ (0.89 )   $ 0.33     $ (1.39 )
Weighted average common shares outstanding — basic and diluted   140,961     140,961     140,961     140,961     141,438  
                               

Conference Call Information

Oaktree Specialty Lending will host a conference call to discuss its fourth fiscal quarter 2018 results at 11:00 a.m. Eastern Time / 8:00 a.m. Pacific Time on November 29, 2018. The conference call may be accessed by dialing (877) 507-3275 (U.S. callers) or +1 (412) 317-5238 (non-U.S. callers), participant password “Oaktree Specialty Lending.” During the earnings conference call, Oaktree Specialty Lending intends to refer to an investor presentation that will be available on the Investors section of the Oaktree Specialty Lending website, www.oaktreespecialtylending.com. Alternatively, a live webcast of the conference call can be accessed on Oaktree Specialty Lending’s website.

For those individuals unable to listen to the live broadcast of the conference call, a replay will be available on Oaktree Specialty Lending’s website, or by dialing (877) 344-7529 (U.S. callers) or +1 (412) 317-0088 (non-U.S. callers), access code 10125435, beginning approximately one hour after the broadcast.

About Oaktree Specialty Lending Corporation

Oaktree Specialty Lending Corporation (NASDAQ:OCSL) is a specialty finance company dedicated to providing customized one-stop credit solutions to companies with limited access to public or syndicated capital markets. The firm seeks to generate current income and capital appreciation by providing companies with flexible and innovative financing solutions including first and second lien loans, unsecured and mezzanine loans, and preferred equity. The company is regulated as a business development company under the Investment Company Act of 1940, as amended. Oaktree Specialty Lending is managed by Oaktree Capital Management, L.P. For additional information, please visit Oaktree Specialty Lending's website at www.oaktreespecialtylending.com.

Forward-Looking Statements

Some of the statements in this press release constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements may include statements as to: our future operating results and distribution projections; our business prospects and the prospects of our portfolio companies; and the impact of the investments that we expect to make. In addition, words such as “anticipate,” “believe,” “expect,” “seek,” “plan,” “should,” “estimate,” “project” and “intend” indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this press release involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and elsewhere in our annual report on Form 10-K. Other factors that could cause actual results to differ materially include: changes in the economy, financial markets and political environment; risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies or regulated investment companies; and other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.

We have based the forward-looking statements included in this presentation on information available to us on the date of this presentation, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Contacts

Investor Relations:
Oaktree Specialty Lending Corporation
Michael Mosticchio
(212) 284-1900
ocsl-ir@oaktreecapital.com

Media Relations:
Financial Profiles, Inc.
Moira Conlon
(310) 478-2700
mediainquiries@oaktreecapital.com

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Oaktree Specialty Lending Corporation

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