OCSL: 8.42% Yielding BDC Looks Undervalued

OCSL delivered OK Q3 results. GAAP and adjusted NII (adjusted for part of the incentive fees and merger accounting) were $0.18 and $0.16 respectively – a drop for both metrics from the previous quarter. The QoQ NII fall is largely due to lower prepayment fees and original issue discounts. A drop in prepayments, however, is not all bad as a drop in prepayments also mitigates cash drag in the company’s portfolio since there is less need to recycle returned capital into new investments. 

NAV rose 0.8% which underperformed the broader sector NAV gain of close to 2% though it was not far off the median NAV change. 

Source: Systematic Income 

In its earnings release OCSL also increased its dividend by 7% to $0.155 per share – the 6th consecutive quarterly increase. OCSL has been rising dividends for a year-and-a-half which we can see in the left-hand chart. It compares very favorably to the broader BDC sector which is running pretty flat in aggregate on a normalized trailing-twelve month basis (red line, right-hand chart). 

Source: Systematic Income BDC Investor Tool

OCSL has put up very strong returns in the broader sector context – 3Y total NAV returns are beating the sector average by 3.36% per annum. We don’t track returns prior to Oaktree management taking over since prior returns from Fifth Street Finance are not representative of current management.

Source: Systematic Income BDC Investor Tool

The other key favorable income dynamic for OCSL is a fairly unusual divergence between its asset-side and liability yields. The weighted-average yield on its debt investments has risen since 2000 from 8% to 8.7% while its debt expense has fallen from 3.1% to 2.4%. This is a Goldilocks scenario for OCSL investors, as it increases NII from both sides of the balance sheet. One question is whether an increase in asset-side yields also comes with an increase in risk. 

Source: Systematic Income BDC Investor Tool

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