With a credit-focused portfolio, a small equity footprint, modest leverage, and no non-accruals, Oaktree Specialty Lending (OCSL) is an attractive BDC hold given the elevated level of uncertainty over the market and macro environment in the near term. Its historic sector outperformance in total NAV terms and below-sector valuation is another attractive feature. We would consider adding at a sub-96% valuation level (i.e., below ~$7) given the NAV is likely down another 1% since the start of Q2 due to a further rise in credit spreads.
Q1 GAAP net income jumped 23%, driven primarily by a sharp drop in incentive fees while adjusted net income rose by 6%. Adjusted net income strips out the effect of the OCSI merger accounting as well as some of the incentive fees which is something you tend to see quite often. For this reason, it is arguably more useful than GAAP net income, particularly from the perspective of dividend coverage and overall income trend.
The company also increased the dividend by 3% to $0.165 – the 8th straight quarter this has happened. The company’s normalized dividend trend compares favorably to the broader sector.
The overall weighted-average portfolio yield at fair value ticked up to 8.8% from 8.7% in the prior quarter. It’s important to highlight that OCSL has managed to actually increase its portfolio yield in a period where most BDCs have seen a drop in their portfolio yields. This is likely as much a function of conservative marks as opportunistic reinvestments at higher yields. It is also due to the fact that the company’s prepayments have been in lower-yielding assets.
OCSL put in a good Q1 with a continued rise in income, zero non-accruals, and positive net investments. OCSL will continue to benefit from further rises in short-term rates which we expect to feed through into income over the coming quarters. This, plus the fact that coverage remains well above 100% suggests that further dividend hikes are not out of the question.
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