Clarification on Armin's opening remarks regarding constructive market conditions and OCSL's willingness to deploy capital, especially comparing sponsored vs. asset-backed finance opportunities.

Armin confirmed the market is better than six months ago for deployment due to fund flow volatility, but deal volume is slower. He noted public credit (high-quality BSL/HY) has tightened, while private credit has widened, making private credit more attractive on a relative value basis. He highlighted asset-backed finance as a meaningful unmet opportunity due to its bespoke nature and inefficiency, which OCSL selectively invests in despite BDC qualification constraints. “On a relative value basis, in terms of just purely return per unit of risk, I would say private credit looks better today relative to public credit than it did.”

Is OCSL seeing more industry consolidation, or is it an expected future trend, and what is OCSL's stance on M&A?

Armin acknowledged some consolidation and loan portfolio sales but stated OCSL is not actively pursuing material M&A. While open-minded to opportunities that expand reach or sourcing, it's not a critical priority. Matt Pendo concurred, stating nothing is close now. “I wouldn't say that we as a firm are looking to do anything that is material in that space. We're always looking for opportunities to expand our reach and our sourcing capabilities.”

How do rating agencies perceive the trade-off between lower non-accruals and higher realized credit losses (approximately $50 million this quarter)?

Chris McKown explained that the realized losses were from names marked down years ago, with the largest being an asset from a 2017 acquisition. He believes rating agencies appreciate that NAV was flat and that these were crystallizations of long-standing losses. Matt Pendo added that rating agencies focus on reducing non-accruals, NAV stabilization, and prudent leverage, all of which OCSL has demonstrated. “I think we do appreciate and I think written agencies appreciate that our NAV was flat, you know, quarter to quarter, and really just seeing a crystallization of some of those losses that have been longstanding.”

OCSL

Oaktree Specialty Lending (OCSL) Q3 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q3 FY26)· Financials· Aug 5, 2026

Source: earnings call transcript

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

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

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

Category	Target	Timeline	Confidence
Unsecured notes maturity	Address $350 million medium materiality	Next several quarters	High
Supplemental dividend policy	50% of adjusted net investment income in excess of the base dividend low materiality	Ongoing	High

Deals & partnerships

Thrasio Asset 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.

ZayoGroup OCSL, 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

Refinancing risk for 2020-2021 vintage loans 2027 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 BDCs Several 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 deals End 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 inflation Ongoing

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 income Q3 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

Non-accruals as % of total debt portfolio

Next quarter

Current 1.8%

Target Further 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.

Find out whether OCSL delivers this. Inve re-checks your case every morning.

Q&A highlights

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 read 5 chapters

Detailed narrative

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.

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.

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.

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.

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.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.