Oaktree Specialty Lending: Another Quarter, Another Dividend Hike For This 10.9%-Yielding BDC

Darren415

This article was first released to Systematic Income subscribers and free tests connected Feb. 14.

In this article, we drawback up connected nan Q4 results of Oaktree Specialty Lending Corp (NASDAQ:OCSL). The institution continues to present nett income gains and dividend hikes while keeping portfolio value stable. OCSL trades astatine a 10.9% output and a 2% premium to book. OCSL remains an charismatic higher-quality BDC successful our High Income Portfolio.

OCSL is chiefly focused connected secured loans pinch a debased allocation to equity securities. Its assemblage overweights are package and healthcare - a reasonably communal operation successful nan BDC space.

OCSL

Quarter Update

Adjusted nett income roseate 11% to $0.61, chiefly arsenic a consequence of higher guidelines rates.

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OCSL increased nan dividend by a penny to $0.55, which was nan 11th consecutive raise. Overall, nan dividend was raised by 18% complete 2022. OCSL make a large opus and creation astir their dividend being up much than 90% from its pre-pandemic level astatine nan adjacent of fiscal 2019, however, that's mostly because of a precocious starting sum level of 127%. Net income grew by half that magnitude since past - still very bully but obscurity adjacent nan 90% figure.

With nan caller dividend, coverage falls to a still-high 111%, which leaves OCSL plentifulness of room to hike further, peculiarly arsenic nett income is expected to emergence successful Q1.

The NAV fell by 3.7%, however, 2% of that number was owed to a typical distribution, leaving adjacent to 2% successful unrealized depreciation.

OCSL

As we highlighted before, OCSL has a comparatively precocious NAV volatility for a credit-focused BDC for 2 reasons - its nationalist indebtedness holdings and what appears to beryllium a much blimpish mark-to-market attack of its backstage indebtedness book. Over nan past quarter, guidance said that nan driblet successful nationalist indebtedness holdings was mostly responsible for nan NAV drag. Separately, guidance said that, complete Q1, nan NAV has already recovered by astir 1% fixed nan broad-based rally successful nan indebtedness market.

The NAV has fallen for nan 4th consecutive 4th and has underperformed nan sector. We expect nan emblematic move to outperformance if markets proceed to heal.

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Income Dynamics

The weighted mean yield connected caller indebtedness investments successful Q4 was 13.1%, good supra nan 9.9% output connected caller investments achieved successful Q3. This looks to beryllium a usability of 3 things: a emergence successful guidelines rates, a emergence successful in installments spreads arsenic good arsenic a attraction connected higher yielding assets by nan company.

This fig is besides good supra nan 11.6% weighted-average yield, which itself roseate by a afloat percent constituent complete nan 4th arsenic a consequence of a emergence successful guidelines rates.

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Interest disbursal roseate by much than 1% to 5.6%. This is simply a important jump and is good supra higher-quality peers for illustration ARCC and GBDC whose liking disbursal is 4.2% and 4.4%, respectively. This higher level of liking disbursal for OCSL is mostly a usability of nan debased level of fixed-rate debt, making up only 20% versus astir 50% for nan mean BDC. This structural characteristic keeps OCSL nett income beta to rising short-term rates reasonably debased astatine 7% versus a 10.4% assemblage average.

Q4 was a large 4th for net caller investments pinch a 6% rise.

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As a result, leverage increased, now being good supra nan 1.14x assemblage average. This is astatine nan precocious extremity of nan target scope of 0.9 - 1.25x, however, erstwhile nan OSI 2 merger is through, leverage will displacement little to 1.16x.

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The merger will beryllium a flimsy tailwind to nett income. While wide portfolio output will stay beautiful akin (due to nan 97% overlap betwixt nan 2 portfolios), nan mixed institution will bask an estimated $1.6m successful costs and operational synergies (~30% of full existent wide / administrative expenses) arsenic good arsenic a waiver of $9m successful guidelines guidance fees crossed 2 years (equivalent to astir 75% of nan mixed quarterly guidelines guidance fees).

Portfolio Quality

Non-accruals remained astatine zero.

There was a 2nd 4th of mini net realized losses, however, that compares favorably pinch a drawstring of nett realized gains complete nan erstwhile mates of years. OCSL added astir $21m of publically traded CLO and ABS indebtedness astatine an mean value of 87 cents connected nan dollar. If these accrete backmost to par, it will supply a measurement of realized gains to nan portfolio. This expertise to allocate to nationalist assemblage securities is simply a reasonably unsocial characteristic of nan institution successful nan sector.

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The portfolio's weighted mean interest coverage declined somewhat to 2.5x. This compares favorably to nan anecdotal information from nan remainder of nan BDC sector.

Management person indicated that legal position and protections person improved successful nan 2nd half of past twelvemonth and loan-to-values person fallen, indicating a amended underwriting environment.

Overall, portfolio value remained unchangeable and is, arguably, astatine nan apical extremity of nan broader BDC sector.

Points Of Differentiation

In this section, we item nan cardinal "tilts" aliases structural features of OCSL and really they comparison to nan broader sector.

Oaktree is focused chiefly connected nan precocious middle-market area pinch a weighted-average EBITDA of $128m. This is successful opposition to nan mostly of nan assemblage and peculiarly BDCs for illustration CSWC aliases FDUS that attraction connected nan little middle-market segment.

Second, Oaktree is 1 of nan fewer BDCs that allocate to nationalist indebtedness arsenic an finance strategy, including slope loans, CLOs and ABS. Oaktree has a broader in installments umbrella which gives it nan correct know-how successful allocating to these areas of in installments markets. It besides allows OCSL to beryllium much tactical successful sourcing charismatic opportunities alternatively than having to hold for a caller woody to travel on which would return a important magnitude of clip to discuss and close.

Third, Oaktree has a debased equity allocation. This apt caps nan magnitude of upside nan institution tin execute from exits of its holdings dissimilar a institution for illustration ARCC which has been capable to extract further gains connected apical of its in installments portfolio. At nan aforesaid time, it keeps downside constricted arsenic well.

Takeaways

OCSL delivered a decent 4th pinch a affirmative full NAV return and different dividend hike. The portfolio should make a further emergence successful nett income complete nan coming 4th which, alongside its precocious coverage, is apt to present different dividend hike.

We precocious rotated backmost to OCSL from ARCC successful our High Income Portfolio. At nan clip of nan original OCSL to ARCC switch, OCSL was trading astatine a 5% premium to ARCC which looked expensive. Now that OCSL is trading astatine a 5% discount to ARCC (102% OCSL valuation vs. 107% ARCC valuation), we make nan move backmost to OCSL. At nan existent valuation, OCSL remains attractive.

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