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    OCSL
    Earnings call· Jun 2026(Q3 FY26)

    Oaktree Specialty Lending Q3 FY26 earnings call OCSL

    Aug 5, 2026 Source

    Executive summary

    OCSL Q3 FY26 — Non-Accruals Decline, Balance Sheet Flexibility Maintained

    Oaktree Specialty Lending reported a stable quarter, successfully reducing non-accruals and maintaining a flexible balance sheet with ample liquidity. While adjusted net investment income saw a slight dip and realized losses were noted, the company emphasized its defensive posture and selective deployment strategy amid ongoing market volatility and a bifurcated credit environment. Management highlighted opportunities in asset-backed finance and secondary portfolio purchases, leveraging the broader Oaktree and Brookfield platform.

    Highlights

    5

    • Non-accruals reduced to 1.8% of the total debt portfolio at fair value, down 80 basis points sequentially and 140 basis points year over year.

    • Exited five non-accrual positions in the last two quarters, with over 85% of the decline due to proceeds received and investments returning to accrual status.

    • Net leverage at 1.02x, below the midpoint of the 0.9x to 1.25x target range, with nearly $700 million in available liquidity.

    • Weighted average yield on new debt investments was 10.0%, up from 9.2% in the prior quarter.

    • NAV per share remained stable at $15.70 as of June 30, 2026.

    Concerns

    4

    • Adjusted net investment income was $32.2 million or $0.37 per share, down slightly from $33.7 million or $0.38 per share in the prior quarter.

    • Realized losses of approximately $50 million were recorded this quarter, primarily from long-standing positions.

    • Non-recurring income came in slightly below $2 million, below the trailing eight-quarter average of $3.8 million.

    • Competition for new deals in middle market first lien direct lending increased towards the end of June, compressing average spreads closer to SOFR plus 500 basis points.

    Guidance & targets

    2
    CategoryTargetConfidence
    Unsecured notes maturity
    Address $350 million
    medium materiality
    High
    Supplemental dividend policy
    50% of adjusted net investment income in excess of the base dividend
    low materiality
    High

    Operational metrics

    38
    Non-accruals as % of total debt portfolio
    1.8%down 80 bps sequentially, down 140 bps YoY
    Q3 FY26

    At fair value. 97% of sequential decline due to proceeds received to pay down debt.

    Non-accrual positions exited
    5
    Last two quarters

    Leaving six investments on non-accrual.

    Non-accrual dollar decline attribution
    >85%
    Past year

    Due to proceeds received and investments returning to accrual status.

    Net leverage ratio
    1.02xdown from 1.04x last quarter
    Q3 FY26

    Below midpoint of 0.9x to 1.25x target range.

    Available liquidity
    $699Mup $30M from last quarter
    Q3 FY26
    Adjusted net investment income
    $32.2Mdown slightly from $33.7M in prior quarter
    Q3 FY26
    Adjusted net investment income per share
    $0.37down from $0.38 in prior quarter
    Q3 FY26
    Base cash dividend per share
    $0.30
    Q3 FY26
    Supplemental dividend per share
    $0.03
    Q3 FY26
    Total cash dividend per share
    $0.33
    Q3 FY26
    Non-accruals from peak
    down 280 bpsfrom peak in March 2025
    Q3 FY26
    New sponsor-backed first lien direct loans pricing
    SOFR + 500 to 550 bpsconsistent with March quarter, above 2025 tights of SOFR + 450 to 475 bps
    June quarter

    Compressed to SOFR + 500 bps towards end of June.

    Weighted average yield on new debt investments
    10.0%up from 9.2% in prior quarter
    Q3 FY26
    Median spread on pipeline opportunities
    SOFR + 550 to 575 bps
    Q3 FY26

    Above broader market averages.

    First lien senior secured debt as % of portfolio
    82%
    Q3 FY26

    At fair value.

    Weighted average yield on debt investments
    9.3%
    Q3 FY26
    Average debt position as % of total portfolio
    65 bps
    Q3 FY26

    At fair value.

    Largest single position as % of fair value
    2.1%
    Q3 FY26
    Median EBITDA of portfolio companies
    $189Mup about 4% sequentially
    Q3 FY26
    Portfolio Company weighted average leverage
    5.1xslightly better than 5.2x last quarter
    Q3 FY26
    Interest coverage
    2.4xup from 2.1x
    Q3 FY26
    Software exposure
    20%down slightly from prior quarter
    Q3 FY26

    Based on GICS industry group classification, at fair value.

    High AI risk software exposure
    3%unchanged
    Q3 FY26

    Of the performing debt portfolio at fair value.

    Adjusted total investment income
    $69.2Mdown slightly compared to $69.7M in prior quarter
    Q3 FY26
    Average non-recurring income
    $3.8M
    Trailing 8 quarters
    Non-recurring income
    < $2Mbelow average
    Q3 FY26
    Part 1 incentive fee
    $2.4M
    Q3 FY26

    Full incentive fee would have been $6M or $0.07 per share.

    NAV per share
    $15.70stable compared to $15.69 as of March 31, 2026
    Q3 FY26
    PIC income as % of adjusted total investment income
    7.8%compared to 5.5% last quarter
    Q3 FY26
    PIC income from optionality at origination
    ~2/3
    Q3 FY26
    Total debt outstanding
    $1.45B
    Q3 FY26
    Weighted average interest rate on debt outstanding
    5.9%unchanged from prior quarter
    Q3 FY26
    Unsecured debt as % of total debt
    65%
    Q3 FY26
    Unfunded commitments
    $208M
    Q3 FY26

    Excluding those related to joint ventures.

    JV investments
    $524M
    Q3 FY26
    JV aggregate returns on equity
    11.3%
    Q3 FY26
    JV leverage
    2.1xcompared to 1.9x last quarter
    Q3 FY26
    Realized losses
    ~$50M
    Q3 FY26

    Primarily from long-standing positions, with the largest from an asset acquired in 2017.

    Industry KPIs

    1
    MetricValueDetails
    Deployment realizations$206M new investment commitments; $263M proceeds from prepayments, exits, other paydowns and salesUSD

    Deals & partnerships

    2
    ThrasioAsset sales by Thrasio, including several of its largest brands, to repay OCSL's loans.$325M gross purchase price (for Church and Dwight deal)

    Thrasio sold several of its largest brands, including stain remover, hate stains to Church and Dwight. Proceeds from these asset sales were used to repay OCSL's loans.

    ZayoGroupOCSL, alongside other Oaktree funds, funded a private junior warehouse securitization facility to support Zayo's acquisition of Crown Castle's fiber infrastructure network.

    OCSL funded approximately 60% of the facility. This demonstrates Oaktree's capabilities in structuring complex private transactions and collaborating across investment teams. OCSL previously purchased Zayo's first lien first out term loan at a discount.

    Risks & headwinds

    5
    Refinancing risk for 2020-2021 vintage loans2027 and 2028

    A meaningful portion of ARR-based loans originated in 2020 and 2021 will mature in 2027 and 2028.

    Mitigation: Active portfolio management will remain essential; outcomes will be issuer specific.

    Liquidity mismatches in non-traded BDCsSeveral quarters for existing redemption queues to normalize

    Redemption requests at several large non-traded vehicles remain elevated, in some cases reaching the mid to high teens as a percentage of equity.

    Mitigation: OCSL is a permanent capital vehicle and does not face redemption risk; views this as a net positive for public BDCs with dry powder, potentially creating opportunities in secondary portfolio purchases and industry consolidation.

    Competition for new dealsEnd of June quarter

    Competition for new deals in middle market first lien direct lending increased towards the end of June and compressed average spreads closer to SOFR plus 500 basis points.

    Mitigation: OCSL's differentiated sourcing capabilities (median pipeline spread SOFR + 550 to 575 bps) and broader Oaktree/Brookfield platform.

    Macroeconomic uncertainty and persistent inflationOngoing

    Not explicitly quantified, but noted as reducing confidence in the pace of future rate cuts and increasing interest burdens for borrowers.

    Mitigation: Focus on disciplined underwriting, portfolio management, balance sheet flexibility, and maintaining a nimble balance sheet.

    Lower non-recurring incomeQ3 FY26

    Non-recurring income came in slightly below $2 million this quarter, compared to the trailing 8-quarter average of $3.8 million.

    Mitigation: Acknowledged as inherently episodic, but can skew lower during and after a period of intense market volatility.

    What to watch in Q4 FY26

    5

    Non-accruals as % of total debt portfolio

    Next quarter
    Current1.8%
    TargetFurther reduction

    Why it matters

    Continued reduction of non-accruals is a primary objective and key indicator of portfolio health and management's workout expertise.

    As of June 30, 2026, non-accruals were approximately 1.8% of the total debt portfolio at fair value, down 80 basis points sequentially, and down 140 basis points year over year.

    Q&A highlights

    4

    Is the current environment leading to mid-cycle returns, or can OCSL extract higher above-cycle returns due to improved deal structure, considering macro headwinds?

    Armin Panossian stated that OCSL is not at mid-cycle returns, but sees wider spreads (50-75 bps wider than six months ago) due to outflows from non-traded BDCs. He expects greater volatility and opportunity ahead, maintaining a defensive posture to lean into the market. He noted that while the overall economy looks okay, underlying costs and disruptions (e.g., AI in software, geopolitical uncertainty) suggest maximum opportunity is yet to come.

    “I don't think we're at mid-cycle returns. I think we are seeing some spread widening caused by the outflows from the semi-liquid or semi-traded, sorry, untraded BDCs.”

    asked by Rick Shane · answered by Armen Panossian

    2 min read5 chapters

    Detailed Narrative

    01

    Non-Accrual Reduction Strategy

    OCSL made significant progress in reducing non-accruals, bringing them down to 1.8% of the debt portfolio at fair value. This was achieved through active management, including exits and monetizations, with over 85% of the decline attributed to proceeds received or investments returning to accrual status. The successful resolution of the Thrasio investment, which repaid over 80% of OCSL's loans and returned to accrual status, exemplifies this strategy.

    02

    Market Environment and Investment Strategy

    The market backdrop in Q3 FY26 was characterized by stabilization in credit and equity markets but continued dispersion. While spreads for single B and B+ loans retraced widening, lower-rated credits remained wider. The direct lending market saw wider spreads than 2025 levels, with deal value declining to a two-and-a-half-year low due to reduced private equity activity. OCSL maintains a defensive and risk-averse posture, conserving capital to lean into future volatility for better terms and returns.

    03

    Leverage and Liquidity Management

    OCSL ended the quarter with a net leverage of 1.02 times, positioning it below the midpoint of its target range of 0.9x to 1.25x. Available liquidity stood at nearly $700 million, including $40 million in cash and $659 million in undrawn credit facilities. This conservative leverage and ample liquidity provide flexibility to invest as opportunities arise, particularly in an evolving private credit market.

    04

    Software Exposure and Refinancing Risk

    The company noted that software exposure, based on GICS classification, represents 20% of the portfolio at fair value, with high AI risk software exposure remaining at approximately 3% of the performing debt portfolio. Management highlighted the potential refinancing risk for ARR-based loans originated in 2020-2021, maturing in 2027-2028, which were underwritten with near-zero base rates and peak valuations. Active portfolio management will be crucial for these issuer-specific outcomes.

    05

    Oaktree and Brookfield Platform Advantage

    In a subdued traditional sponsor-backed middle market, OCSL leverages the broader Oaktree and Brookfield platform to source opportunities beyond US sponsor-backed direct lending. This includes evaluating direct lending, asset-backed finance, liquid credit, situational lending, non-U.S. direct lending, and secondary transactions, allowing for capital allocation to compelling risk-adjusted returns. The ZayoGroup investment was cited as an example of this capability.

    AI-generated summary of the company’s earnings call. Not investment advice.