Let’s evaluate how the well-structured portfolio has performed from a cash flow and dividend perspective
100% allocated to first and second lien loans only, history has proven that intelligently managed equity sleeves are potentially beneficial for BDCs long-term.
Main Street Capital (MAIN) is the most obvious example of transforming equity exposure into net asset value (“NAV”) per share growth over time but it’s not alone (e.g. Newtek Business Services (NEWT).
In aggregate, 87% of the portfolio is senior secured debt investments and it is spread across 138 portfolio companies with an average median debt portfolio company EBITDA of $106 million. Total investments are $2.6 billion as of the end of Q3.
To make sense of those statistics, the percentage of senior secured debt is about average for the sector while portfolio company diversification and portfolio company EBTIDA are moderately above average (better). As an interesting side note, the portfolio’s median debt portfolio company EBTIDA was $50 million as of or less than half the current figure.
The portfolio size of $2.6 billion is large enough to qualify for an investment grade credit rating (typically a $1.0-$1.5 billion portfolio is needed), which is arguably most important, but is much smaller than the likes of Ares Capital Corporation (ARCC), Owl Rock Capital Corp, and FS KKR Capital Corp (FSK).
As we note in every BDC analysis, industry exposures are paramount and are usually the determining factor when it comes to resiliency during a crisis. OCSL is well positioned with 14.6%, 5.6%, 4.5%, and 4.4% in payday loans California application software, pharmaceuticals, data processing & outsourced services, and biotechnology, respectively.
Those four largest exposures add up to just under 30% of the portfolio by fair value and we didn’t note any industry representing over 2.5% as problematic.
The legacy/non-core portfolio that Oaktree took over roughly four years ago has been reduced to four loans totaling $134 million and are comprised of mostly non-core debt investments ($74 million) with the remaining mostly equity investments ($52 million)
In line with the other portfolio characteristics, diversification by investment number and size is excellent. 91.5% of the portfolio by fair value is invested in floating-rate loans compared to 88.3% at the same time in 2020.
Oaktree Specialty Cash Flow & Dividend
Since Q3 of 2020, OCSL’s common dividend has grown from $0.11 to $0.155 quarterly or an eye-opening 41% increase. This makes it one of the fastest growing common dividends of any BDC or REIT. This brings up two key questions, and we’ll start with distribution coverage.
Adjusted net investment income (“ANII”) per share is a good approximation of cash flow before capital gains/losses. This has ranged from $0.14 to $0.17 quarterly since Q3 of 2020 compared to the current annual dividend rate of $0.62.
Annualizing last quarter’s $0.16 equates to $0.64 or 103.2% dividend coverage before capital gains/losses. This compares well to 2020’s $0.51 and helps explain the rapid rise in the distribution rate.
Adjusted net realized and unrealized gains/losses are the second primary component of cash flow and has consistently been positive. In the last five quarters, net realized gains have totaled $1.11 per share or more than double the current common stock annual dividend.
That’s worth repeating net realized capital gains alone over the past five quarters is approximately double the annual common dividend. Part of that is due to non-recurring events of 2020.
Adjusted total investment income, which adds interest income to paid-in-kind (“PIK”) interest income, fee income, and dividend income, jumped from $35.7 million in Q1 2021 to $63.8 million in the last reporting period. Total expenses also rose over the period by $5.1 million but that’s less than one third of the $16.9 million gain in adjusted total investment income.