Oaktree Strategic Income Corporation
Q4 2020 Earnings Call Transcript

Published: 19 Nov 2020

[Operator:]

Welcome, and thank you for joining Oaktree Strategic Income Corporation's Fiscal Fourth Quarter and Full Year 2020 Conference Call. Today's conference call is being recorded. At this time, all participants are in listen-only mode, but will be prompted for a question-and-answer session following the prepared remarks. Now, I'd like to introduce Michael Mosticchio of Investor Relations, who will host today's conference call. Mr. Mosticchio, you may begin.

[Michael Mosticchio:]

Thank you, operator, and welcome to Oaktree Strategic Income Corporation's fourth fiscal quarter and full year conference call. Our earnings release, issued this morning and the slide presentation that accompanies this call can be accessed on the Investors section of our website at oaktreestrategicincome.com.

[Matt Pendo:]

Thank you, Mike and welcome everyone to our fiscal fourth quarter earnings conference call. We appreciate your ongoing interest in OCSI and we hope everyone listening is well. OCSI generated strong results for the quarter highlighted by solid earnings, origination activity and credit quality. Risk sentiment further improved during the quarter and credit markets largely continued to rebound from the lows last March when the pandemic took hold. Higher credit spreads in the liquid loan market drove higher valuations in our portfolio in the September quarter, boosting NAV share by 7% to $9.05 per share, approximately 93% of its pre-pandemic level. Net invested income for the fourth quarter was $0.13 per share up 18% from the prior quarter driven by higher yield on new originations as well as higher make-whole interest and prepayment fees. Based on the strength of OCSI's earnings, our Board of Directors declared a cash dividend of per share an increase of 16% from the prior quarter's distribution. This distribution represents approximately 100% of OCSI's taxable income in the quarter. Given our focus on larger and more resilient companies, credit quality remains strong. Importantly, we remain well capitalized and have ample liquidity to continue to invest and to meet our funding needs. At September 30 liquidity included $25 million of cash and $83 million of undrawn capacity on our credit facility. While we were mindful of pandemic and the economic uncertainty it created, we continue to identify attractive investment opportunities with favorable yields in the fourth quarter.

[Armen Panossian:]

Thanks Matt. After the March quarter's historic selloff in risk assets, credit and equity markets bounced back in the June quarter and the recovery continued into our fiscal fourth quarter. Improving economic conditions and consumer sentiment reports of progress on COVID-19 vaccines and extraordinary fiscal and monetary stimulus fueled the rebound. These catalyst also boosted investor confidence, liquidity and the availability of credit.

[Mel Carlisle:]

Thank you, Armen. OCSI delivered other quarter of strong financial performance, which also contributed to solid full-year results. For the fourth quarter of fiscal year 2020, we reported net investment income of $3.7 million or $0.13 per share up from $3.2 million or $0.11 per share for the third quarter. The increase was a result of higher investment income and slightly lower net expenses. During the quarter, total investment income was $9 million up from $8.6 million in the June quarter. The increase was mainly due to higher interest income resulting from higher yields on new origination and higher make-whole interest and prepayment fees. Net expenses for the quarter totaled $5.2 million down $300,000 from the previous quarter. The decline was mainly due to lower interest expense resulting from lower average borrowings combined with lower LIBOR. This was partially offset by slightly higher professional fees. Turning to credit quality, which remains excellent. As of September 30, excluding the Glick JV, we had no investments on nonaccrual down from one in the prior quarter. Moving to the balance sheet, during the quarter we funded $52 million in investments, which was less than the $72 million in payoffs and exits. As a result, our net leverage ratio decreased to 0.9 times from 1.1 time at June 30, reflecting the smaller portfolio as well as the increase in NAV. We've adjusted our target leverage range lower as a result of the current market environment. We've been very selective on deploying capital due to what we believe to be a disconnect between market valuations and the underlying fundamentals. Our new leverage targets range is 1.0 times to 1.4 times and we are presently just below the low end of that range. As of September 30, total debt outstanding was $268 million and had a weighted average interest rate of 2.6% down from 3% at June 30, primarily due to the decline in LIBOR during the quarter. At fiscal year end, we had total liquidity of approximately $108 million including $25 million of cash and $83 million of undrawn capacity on our revolving credit facilities. Unfunded commitments were $34 million although only approximately $14 million of this amount is eligible to be drawn immediately. The remaining amount is subject to certain milestones that must be met by portfolio companies. During the fourth quarter we reduced our borrowing cost by repaying and terminating our $25 million credit facility with East West Bank. As this had a moderately higher cost relative to our other facilities. In addition, we extend our Deutsche Bank facility, pushing the maturity date out by one year and reducing our total commitment to $160 million from $200 million.

[Matt Pendo:]

Thank you, Mel. We are pleased with the solid operating results that we generated in the fourth quarter and full-year, despite ongoing uncertain environment. We have essentially completed the defensive repositioning that we launched in 2017 and we feel very good about our current holdings. As Armen noted, our overall pipeline of potential transaction remained strong and we expect to continue to identify compelling investment opportunities in fiscal 2021. However, we will remain patient and disciplined as we believe there will be an increasing number of opportunities that will arise over time as the pandemic persists. We'll also continue to position the portfolio for improved yield by rotating out of lower yielding investments priced at LIBOR plus 400 or lower. During the fourth quarter, we opportunistically sold $14 million of these types of investment. At yearend, we had $52 million of these lower yielding loans, which we plan to replace over time with higher yielding proprietary investments. In conclusion, we are proud of our strong fourth quarter and full year results as well as the continued progress we made towards our ongoing strategic initiative in fiscal 2020. We're also looking forward to the pending merger without OCSL as we believe that this combination benefits folks and shareholders through scale, portfolio diversity and expected earnings accretion. We're excited about the future for the combined company and remain confident that we will continue to identify new attractive risk-adjusted investment opportunities that are consistent with Oaktree's discipline, risk-controlled approach leading us to deliver improved returns to our shareholders. Thank you for joining us on today's call and for your continued interest in OCSI. With that, we're happy to take your question. Operator, please open the line.

[Michael Mosticchio:]

Great. Thank you for joining us for our fourth quarter 2020 earnings conference call. A replay of this call will be available for 30 days on Oaktree's strategic income's website in the Investor section or by dialing 877-344-7529 for US dollars or 1-412-317-0088 for non-US callers with the replay access code 10148615 beginning approximately one hour after this broadcast.

[Operator:]

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.