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

Thank you, operator, and welcome to Oaktree Specialty Lending Corporation’s third fiscal quarter conference call. Our earnings release, which we issued this morning, and the accompanying slide presentation can be accessed on the Investors section of our website at oaktreespecialtylending.com. Our speakers today are Armen Panossian, Chief Executive Officer and Chief Investment Officer; Matt Pendo, President and Chief Operating Officer; and Mel Carlisle, Chief Financial Officer and Treasurer. We will be happy to take your questions following their prepared remarks. Before we begin, I want to remind you that comments on today’s call include forward-looking statements reflecting our current views with respect to, among other things, our future operating results and financial performance. Our actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to our SEC filings for a discussion of these factors in further detail. We undertake no duty to update or revise any forward-looking statements. I’d also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any Oaktree funds. Investors and others should note that Oaktree Specialty Lending uses the Investors section of its corporate website to announce material information. The company encourages investors, the media and others to review the information that it shares on its website. With that, I would now like to turn the call over to Matt.

Thank you, Mike. And welcome, everyone, to our third quarter earnings conference call. We appreciate your interest in and support of OCSL. We hope everyone listening is well. The health and safety of our team and the continued management of our portfolio remain top priorities as we navigate to COVID-19 pandemic. We are capitalizing on Oaktree’s first rate technology platform and while the team continues to work remotely, we have been very successful to date as a virtual company and will remain fully operational for the duration of this public health crisis. OCSL delivered strong results for the quarter, highlighted by solid earnings, robust investment activity and good portfolio performance. We generated these results despite the ongoing uncertain economic environment due to the pandemic. Adjusted net investment income per share was $0.12. Earnings were supported by the larger overall size of our investment portfolio, higher yields on new investments, interest savings from our recent unsecured bond issuance, and realized gains from the exit of our debt investment in Sorrento Therapeutics, which Armen will discuss in a few moments. Adjusted NII was stable from the prior quarter, despite the decline in LIBOR, which has fallen by over 150 basis points this calendar year. Based on our third quarter performance, the Board increased our dividend for the September quarter by a 11%. While our portfolio was not immune to the extreme market disruption in March, valuations substantially improved during the June quarter, as market volatility subsided, and asset prices partially recovered from their lows in the first quarter. Third quarter NAV was up 14% from the prior quarter to $859 million, which represented a recovery of $170 million, or 60% of the March quarter NAV write-down. This rebound was due to increase in the prices of our liquid debt investments, and tighter…

Thanks, Matt. Good morning, everyone. After the March quarters, historic sell off and risk assets, credit and equity markets rebounded, following extraordinary fiscal and monetary stimulus, which boosted liquidity and the availability of credit, thereby supporting individuals, businesses and markets. In the credit markets, both high yield and leveraged loans rallied in their March lows. The Fed support allowed demand to return to corporate credit markets. Significant investor inflows into high yield funds led to record issuance, as companies opportunistically issued debt to bolster their balance sheets. New issue activity and the leveraged loan market however was light. Volumes fell to five year lows, as investors preferred the call protection and fixed rate offered by high yield. In the traditional direct lending market, new issue activity was slow, as M&A and other corporate activity came to a halt. The impact that the pandemic has had combined with its uncertain long term implication has made it difficult for potential buyers and lenders to value company. Rescue loans were more plentiful in March and April. But as markets have rallied, we have seen fewer of these opportunities. While lenders have generally been able to achieve more favorable terms in this environment, spreads and other economics are tighter now than they were just a few months ago. All of that noted, there seems to be a disconnect between the credit and equity markets and company fundamentals as the pandemic remains a highly fluid public health crisis in the US. Confirmed cases and hospitalizations have continued to rise across much of the country, halting or reversing re-openings. With an uncertain path to recovery companies may make temporary or permanent cuts to payroll or capital expenditures. We expect numerous industries to experience several years of stress and distress, as companies reassess their business models, including…

Thank you, Armen. For the third quarter of fiscal year 2020 we recorded adjusted net investment income of $16.8 million or $0.12 per share, up modestly from $16.2 million or $0.12 per share for the second quarter. The increase was the result of higher investment income and lower net expenses. As you may recall, our adjusted net investment income metric excludes the impact of Part 2 incentive fees. During the quarter total investment income was $34.4 million, up from $34.2 million in the previous quarter. The slight increase was due to higher interest income, resulting from a larger portfolio and higher yields on new investments. This was partially offset by downward pressure on the average yield of our floating rate debt investments due to the decreases in LIBOR and lower OID acceleration on loan payoff. Net expenses for the third quarter totaled $17.6 million, down from $17.9 million in the second quarter, excluding the impact of the Part 2 incentive fee reversal in the prior quarter. The modest decrease was mainly due to lower interest expense, as a result of a full quarter impact from both our 3.5% notes offering and lower LIBOR. Net expenses were partially offset by higher management and incentive fees in the quarter - in the current quarter due to the larger portfolio and improved performance. Turning to credit quality. During the quarter, all of our portfolio companies made their scheduled interest payments with the exception of one company that consistent with the prior quarter modified its interest payments to PIK. As of June 30th, non accruals represented point 2% of the total portfolio at fair value, down from 0.5% in the prior quarter. The decrease was primarily due to the exit of Covia, which was placed on non-accrual status last quarter. The decrease was partially…

Thank you, Mel. While the environment continues to be uncertain, we nonetheless generated solid operating results for the third quarter. We entered this crisis in very good financial shape. The defensive repositioning that we carried out over the last two and a half years has largely been completed, and therefore, we feel good about our current holdings. We continue to be very well capitalized, with strong liquidity. Our robust balance sheet and financial position has allowed OCSL to successfully navigate this challenging environment. Oaktree has the proven track record of investing in private credit across market cycles, and as a result, we believe OCSL is well positioned to participate in attractive transactions that ensure downside protection. As Armen noted, we have continued to invest throughout the pandemic and we expect to remain active going forward. 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 crisis persists. We believe that OCSL continues to be well positioned to increase return on equity going forward. We will continue to position the portfolio for improved yields by rotating out of liquid senior secured loans with yields below LIBOR plus 450 [ph] basis points. During the third quarter, we sold $37 million of these types of investments. As of quarter end, $219 million remained in the portfolio, which we plan to replace over time with higher yielding proprietary investments. In addition, we can increase returns by deploying more leverage at the portfolio level. As Mel mentioned, we are operating just below the low end of our long term target of 0.85 times to 1.0 times. So we have the ability to enhance returns as we continue to make investments and deploy higher leverage. However, we will only grow the portfolio as we find opportunities that are consistent with our investment approach that we believe offer an attractive risk reward. Finally, the Kemper JV continues to present an opportunity for us to improve returns. As of quarter end, the JV was levered 1.4 times and had more than $75 million of investment capacity. We believe that the prudent growth in the JV will be accretive to ROE over time. In conclusion, we are very pleased with our overall performance in the third quarter, given the ongoing uncertainty surrounding the pandemic. We remain confident that we will be able to manage through any challenges that may arise in our portfolio, as well as identify new attractive risk-adjusted investment opportunities, enabling us to deliver improved returns to our shareholders. Thank you for joining us on today's call and for your continued interest in OCSL. With that, we are happy to take your questions. Operator, please open the lines.

[Operator Instructions] And our first question comes from Kyle Joseph of Jeffries. Please go ahead.

Hey. Good morning, guys. Thanks very much for taking my questions and congrats on a very strong quarter, given everything going on. You know, I wanted to start on deal flow. Obviously, you guys had a lot of dry powder going into this, into the downturn and capitalize on it with some secondary transactions in April and May. I wanted to get your sense just over the near term, your outlook for deal flow, recognizing it's very fluid out there, would you guess that we see kind of more primary? Would it be - would you guess it's more distressed and has kind of the low hanging fruit in the secondary markets been picked?

Hey, Kyle, it's Armen. Thanks for the question. I would say that the market it has become very efficient in the secondary in terms of pricing risk, and in fact, it's probably gotten ahead of itself and is inappropriately pricing risk at this time, in our view. So your comment as to primary versus secondary? I would say it's pretty heavily focused on primary, secondary just right now given where prices are and how the market has been bolstered by stimulus and liquidity from various governmental agencies is – and globally is just not creating enough opportunity for us in the secondary generally.

Got it. That's helpful. And then, so in that context and given the rate environment, it sounds like you did a nice job of recycling some of the lower yielding investments in the quarter. Can you give us a sense for your outlook for yields from here? You know, obviously, rates have - can't go much lower, you guys have floors in place, as well. To me, it's kind of feels like the bottom for yields, and would you get that sense as well?

Yeah, I mean, I think generally speaking, we are - we're near the bottom, and I would hesitate to put timing on it, but it was - but it's probably in the - during the second calendar quarter that the impact of low LIBOR was most acute, and where we got below the floors on most of our debt and meanwhile our liabilities generally speaking continue to float lower. So, we've probably hit that bottom already. But I hesitate to give too much forward guidance on that point.

Understood. Last one for me. You know, in terms of credit performance, obviously your portfolio's hanging in there very well. Just want to get a sense for any sort of amendments or adjustments you made on portfolio companies in the quarter and how prevalent that was, if any?

Matt Pendo, do you wanted to take that?

Sure. Thanks, Kyle. Hope you and the baby is doing well. So we had that five companies that we did amendments to, and they include some combination of you know, covenant relief ability to turn a cash interest payment into PIK or partial PIK. Sometimes equity contribution from the sponsor, sometimes there was an amendment fee. Member fees were not a big number for the quarter. And usually when they say choose to PIK [ph] there's usually you know, a higher interest rate. So the - it was just under about 6% of the portfolio on a fair value basis. So just a handful and they had some kind of combination of the various adjustments, amendments that that I hit on. But it wasn't a huge factor in terms of kind of amendment fees to the quarter. And if you look at the PIK income, it was pretty consistent this quarter versus the March quarter, up a little bit, but not material.

Understood. Very helpful. Thanks for answering my questions and congratulations again on a strong quarter.

Thanks, Kyle.

Our next question comes from Finian O'Shea of Wells Fargo. Please go ahead.

Hi, good morning and thanks for taking my question. First, I guess a two part question. One you mentioned the new private credit group. Could you expand on you know, those kind of capabilities or what focus that will have and how that's augmentive to your strategy? And then another part to that question, just noticing the stream of life science deals that you've been doing since taking over? Is life science a capability within strategic credit or does Oaktree have a lending vertical there elsewhere?

Thanks, for the question. So, first on life sciences, I would say yes, the capability exists within strategic credit, in particular, we have personnel here that have scientific and medical backgrounds that are helping source and underwrite those positions. And we find that it's an area where it's not - it's a less efficient area because it's harder to underwrite those businesses. They're not - they're typically speaking not businesses that you could cleanly underwrite four times EBITDA or a certain free cash flow yield. So you really need to understand the value, the potential, the quality of the counterparties, the quality of the management team, et cetera. So we're finding attractive opportunities to invest there and especially with the backdrop of COVID, seeing that, you know, that particular area is at most neutral to impacts from COVID. And as we saw in the case of Sorrento, very positive - potentially very positively correlated with COVID. So it's something that we find quite interesting and differentiated. In terms of our new sourcing and origination efforts. You know, what we really did there is to elevate all of the various personnel that were outward facing in the organization cross Oaktree, to speak for the entirety of the firm rather than for their particular vertical. And so, the benefit that, that gives us is there are pockets of groups or capital at Oaktree that really did not have an organized sourcing and origination effort. But they really could benefit from one of these. These tend to be businesses that are higher risk and higher return than what we're looking to do in strategic credit or in the BDCs. And so what we found is if we were able to speak with one unified voice externally and to provide the entirety of the…

Got it. Thanks for all the color. Next question, can you talk about the credit facility waiver in the Kemper JV post quarter, were they, you know, did you have assets that were - you know, the bank's valuation was in disagreement with or tripping something else, any color you could add on that front?

Sure, Finian. It's Matt. The - well we basically - there wasn't anything specific to your point in terms of disagreements, but we’re just working with Deutsche thought it made sense to give us more flexibility and timing, just given the pandemic and the uncertainly around valuations, et cetera. So it was really just kind of an abundance of caution, given all the uncertainty, let's have a little – what’s going to give both of ourselves some more time to evaluate things.

Okay. And just last question on Edmentum. I know we've talked about this before, you've had a more measured or conservative view of that company. In your - as I'm sure you know, your peers marked it up this quarter. I guess just the question is understanding, you may have differing views, but why do you still have those unsecured PIK notes marked at zero, if they're still accruing interest? Correct me if I'm wrong on that, but just how do we think about how you would sort of harmonize those two elements of your valuation?

Its Matt. Armen, you want to take it?

No, no. Go ahead, Matt. So just…

They are not accrual interest by the way. It shows the revolver is non-accrual, but it shows the – doesn’t have that footnote for the other ones. I'm sure you're right. But if they are not non-accrual then I guess, scratch my question, sorry about that.

No problem, Finian. Yeah Finian, they're not non-accrual. And I think that, you know, we do you recognize that our - that other lenders that are publicly traded BDCs do have it marked materially higher. We do not have access to the information that they do, those individuals, those firms are on the board of the company and we're actively engaged with it. We based on the information we have and the assessment of the risks that we see, that's why our market what it is, you know, there, it's possible if you believe the marks of our competitors that we're wrong, but based on the information we have, that's the mark that we think is appropriate.

Okay, that's all for me. Thanks so much.

Our next question comes from Rick Shane of JPMorgan. Please go ahead.

Good morning, guys. It's Melissa on for Rick today. I wanted to explore the dividend and just make sure we're understanding that properly. Is this something that you're thinking of as sort of an ongoing longer term basis? Or is this something you're going to be thinking about quarter-by-quarter?

Sure, Melissa, it's Matt. So, the kind of the higher level, you know, the dividend is set by the Board and declared by the Board every quarter. So that's a kind of quarter-to-quarter thing. This - the way you should think about this dividend, it's not like a special dividend. Some BDCs have kind of a regular and special. This first quarter, this is the dividend, as based on the earnings power and the cash flow and income coming off the portfolio, less our expenses. So, you know, you should think of it as the dividends. That's helpful.

Sure. And I guess in the past we've thought about your dividend has been fairly stable over time. Is that - has there been any evolution and your willingness to let the dividend fluctuate a bit or status quo in terms of your approach to this?

No, I think we think it's important to have a stable dividend. So we're in the dividend that's supported by the earnings of the portfolio. So that hasn't changed. You know, if we raised up a penny for the quarter, just given the earnings again of the portfolio. So it's a same kind of same mindset and philosophy and we've always had with the - regarding the dividend.

Got it. Thank you.

Our next question comes from Ryan Lynch of KBW. Please go ahead.

Hey, good morning. Thanks for taking my questions and hope all is well. When I looked through your schedule investments and you mentioned this quarter, you know, the William Morris investment, but you guys also made a couple different other platform investments in Airbnb and NuStar, which you mentioned last call. There seems to be a little bit of you guys leaning into some of the more of COVID affected, you know, names or industries and structuring those deals with really good terms and structures versus moving away from some of the heavier COVID affected names, that they may still have really, really tight terms and structures in there. So can you just talk about that, is that a conscious strategy or just you know, moving into some these names that are more heavily affected by the COVID downturn? Or that just kind of seems to be where kind of your sourcing and origination deal [indiscernible] that kind of a little bit of a conscientious [ph] effort.

Yeah, thanks for the question, Ryan. So what I would say is we're looking at a variety of different opportunities, there are COVID impacted opportunities that we're looking at, there are life sciences opportunities, software, information technology. The opportunity set is quite large in terms of what we can look at. Our underwriting is very tight in terms of what we're willing to accept. And in those situations where we have invested in COVID sensitive situations or COVID sensitive names, we've been very focused on a couple things. One is as you mentioned, structure, downside protection through legal protections, as well as pricing. So in the case of Airbnb that was LIBOR plus 750, in the case of William Morris that was LIBOR plus 850, in the case of NuStar that was double digit coupon. And so we felt like we are getting compensated pretty well for taking the risk and by the way, in the case of William Morris and Airbnb, they came at several point, you know, discounts to par. However, I wouldn't say that there's a conscious effort into, you know, going into the teeth of the storm and what we're really focused on is investing in those businesses that have the levers that they could pull from a cash flow management perspective, to make it through to the other side of the, you know, the COVID storm and we need to feel comfortable that once we do make it to the other side that this business is going to be worth well in excess of the debt. So there's both a liquidity consideration, as well as a solvency consideration. And not all businesses check both of those boxes, as well as appropriate structuring and pricing. So we're saying no a whole lot more than we're saying yes. And we're seeing both private and syndicated opportunities in the market. And I would say on the syndicated side, generally speaking, the pricing is - have gotten tighter than we would like, and the terms less attractive than we would like. On the private side, we see a lot in the middle market. We're very, very cautious about that. Because a lot of the businesses that we see that need financing have an element of risk around them that could result in them not being worth their debt in a year or two from now. And so we're staying very cautious on our underwriting there. So, you know, I guess the net of it is, we're seeing a lot of deal flow because of our reach as a firm for sure and given the firm's DNA and opportunistic investments in distressed investing, the DNA of this particular teams, you know, or this team's background coming from our distress group. We're seeing a lot of opportunity there, but we're very focused on structure pricing and the underwriting both from a liquidity and solvency perspective.

With a name like, you know, William Morris, which you discussed on the call, and you just mentioned, you underwrite those to ensure that, that they can get to the other side and actually thrive on the other side, but just in such a dynamic economic environment that we're into right now, we don't know when we're going to want to get to that other side as an economy and we really don't know what that - the other side will look like going forward and the dramatic changes. So with those two [ph] great unknowns, you know, how can you get comfortable with an investment like this?

Well, I mean, look, it is a judgment call, I would say it's just as much art, as it is science. So in the case of William Morris, we spoke with management, we spoke with the sponsor, at length with both and do have a very good sense that the properties they own, the intellectual properties that they own are quite valuable and hard to replace. And, and therefore, we think that there is a significant amount of pent-up demand for the content that they own. You know, they obviously also have a very large representation business, where they represent athletes and stars and producers and screenwriters. So there's some pent-up demand there as well, but of a different type where those people want to get back to work. And so, the firm in addition to having - to owning those assets here, for example, the parent company of William Morris, which is the Endeavor Group, it's - they own assets like the UFC, they own media marketing rights and college sports. Obviously, they're impacted meaningfully right now. But they have the ability to manage cash flows and they are cutting costs to manage their way through to have a fairly long term runway on how long they could survive in the current environment. And - but with that said, it's very hard for that business to really go away or to be – be put back together because they've created an ecosystem with all of these different areas of talent, with all these different areas of media rights ownership that I think is very challenging to replicate. And we'll come back quite strong when it does. So we're supportive of it. We know that the sponsor is very supportive of it, we know, the management team is top notch and on the ball. And so it was frankly, a judgment call, if there easy, then I think everybody would be able to do it, but you know, it's case-by-case and we made the judgment call on that one.

Okay. That's - I really appreciate that color and commentary. That's really good insights in your thinking, upon making that investment. And then I just had one other question. I look like the investments in the Kemper JV from a par standpoint decreased about $30 million quarter-over-quarter. You guys had some nice growth on Oaktree’s, you know, balance sheet during the quarter. Can you just talk about why the JV had net repayments and then what's the potential outlook for growth in that vehicle versus the growth that you discussed, you know, potential on your balance sheet?

Matt Pendo, I mean, I'm happy to take a comment and then Matt Pendo, I don't know if you have anything to add, please do. But the Kemper, that portfolio is largely a publicly traded portfolio. We saw meaningful recovery in prices of the assets there. We thought that some of that price appreciation was inappropriate in terms of what we assessed to be the risk in a post-COVID world and we decided to sell those assets, many of them had a gain, but to essentially sell those assets, reduced the leverage in that vehicle and kind of just retain some dry powder there. Because we just thought the market got out of hand. We don't really have illiquid privates in that JV.

Okay. That's helpful commentary. I appreciate the time today and congrats on the really nice quarter, guys.

Thank you.

[Operator Instructions] We have no further questions at this time. Mr. Mosticchio?

Thank you again for joining us for our fiscal third quarter 2020 earnings conference call. A replay of this call will be available for 30 days on OCSLs website in the Investor section, or by dialing 877-344-7529 for US callers or 1-412-317-0088 for non US callers with the replay access code 10145873 beginning approximately 1 hour after this broadcast.

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.