Oaktree Specialty Lending Corp
NASDAQ:OCSL
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Oaktree Specialty Lending Corp
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Welcome and thank you for joining Oaktree Specialty Lending Corporation’s Second 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 be hosting today’s conference call. Mr. Mosticchio, you may begin.
Thank you, operator, and welcome to Oaktree Specialty Lending Corporation’s second fiscal quarter conference call. 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 corporate website.
With that, I would now like to turn the call over to Matt.
Thank you, Mike, and welcome, everyone, to our second quarter earnings conference call. We appreciate your interest in and support of OCSL. We hope everyone listening is safe and well. The health and safety of our team and the continued effective management of our portfolio remains a top priority, as we work with our borrowers, shareholders, credit providers and all stakeholders to navigate the difficult challenges imposed by the pandemic.
Oaktree has implemented a firm-wide business continuity plan, operating successfully as a virtual company, after seamlessly transitioning to a remote working environment in mid-March. We are capitalizing on Oaktree’s [first rate] [ph] technology platform, and are fully operational and well-positioned to safely and effectively manage the portfolio for the duration of this public health crisis.
As we have discussed many times, we have defensively positioned OCSL for an environment in which we now find ourselves. We have been rotating out of non-core investments and redeploying capital into larger companies that operate in less cyclical, defensive or structurally growing industries.
We have been running leveraged below our 0.60 times debt to equity, maintaining significant dry powder. And we believe the size and scale of Oaktree’s investment platform positions us well for this kind of market.
Financially, OCSL entered this period in a strong position. And while the environment clearly grew challenging in March, we generated solid operating results for the full quarter. Adjusted net investment income was $0.12 cents per share for the second quarter, up 15% from the prior quarter, and driven by robust origination activity, opportunistic loan purchases in March and higher investment income.
Our earnings strength and ample liquidity support both continued investment and our current dividend level. Our Board declared a $0.095 cash dividend that is consistent with our prior 8 distributions. However, our portfolio wasn’t immune to the extreme market disruption and volatility in March as risk assets saw their valuations deteriorate with historic speed.
We reported second quarter NAV per share of $5.34, down from $6.61 in the previous quarter. I’d like to take a moment to discuss this write-down in more detail.
As part of our late-cycle investment approach, we have focused on lending to larger more defensible businesses that we believe will be more resilient in an economic downturn. Over the past 2.5 years that we have been managing OCSL, we’ve also found attractive relative value opportunities in publicly traded liquid debt securities.
And as a result, our exposure to these types of investments has been higher than that of a typical BDC. While we generally invest with expectation that our investments will be held to maturity, one of the benefits of having liquid debt investments is that allows us to actively manage risk in the portfolio and move in and out of positions when we believe it is optimal.
One drawback to this active management approach is that our portfolio is notably impacted by mark-to-market volatility, as we experienced in the March quarter. Following the sharp price declines in the leveraged loan and bond markets resulting from the pandemic, the prices of our liquid debt investments declined 13% during the March quarter, which impacted NAV by $114 million or $0.81.
Another driver of the decline in NAV during the quarter was OCSL’s investments in the Kemper JV. As a reminder, the joint venture primarily invests in liquid first lien loans and it utilizes leverage to increase its investment capacity. The JV’s underlying portfolio experience unlevered mark-to-market price declines of 13% in March. And when factoring leverage, which was 1.3 times at December 31, OCSL’s investment in the JV declined by $36 million or 28% during the March quarter.
And finally, NAV was adversely impacted by a write-down in some of our non-core equity investments, which include businesses with higher risk profiles. As a result of these headwinds, we wrote down the value of these investments by approximately $20 million.
Following the broader credit market in rally, we have experienced some recovery in the prices of our quoted debt investments, which rebounded by approximately 3% during April. We remained very well capitalized with ample liquidity. In February, we capped the capital markets and priced our inaugural $300 million public note offering that was attractively priced at a coupon of 3.50%. The proceeds of the note offering were used to redeem our higher coupon bonds, as well as reduce our revolver borrowings.
Our old bonds totaled approximately $160 million and had a blended interest rate of around 6%. So this transaction significantly reduced our cost of funding. As a result of the senior note financing, we closed the quarter with a very strong liquidity position, totaling approximately $385 million, including $90 million in cash.
We were active on the investment front during the quarter, particularly in March, when the markets dislocated. We originated $273 million of new investment commitments in the quarter, of which 77% were first lien loans, nearly 8% were second lien, and the remainder consisted of subordinated debt investments.
In March, we made $64 million of opportunistic secondary market purchases, at an average purchase price of 82%. Page 8 of the earnings presentation provides more detail on our originations activity by month.
Although we received $154 million from the pre-payments, pay-downs and other exits, our portfolio grew during the quarter. And our leverage expanded to 0.82 times net of cash, up from 0.56 times at December 31. We have continued to find compelling investment opportunities in this environment and originated $132 million in April, including a co-investment with our flagship opportunities funds.
Armen will discuss this transaction and others in a few moments. With that, I will now turn the call over to Armen.
Thanks, Matt, and good morning, everyone. Before I share our view on the overall market environment, I’d like to amplify Matt’s opening message. We hope everyone listening is healthy and managing well through this challenging period. Individuals, businesses and markets experienced a number of unprecedented events in the first quarter of 2020.
More than a quarter of the national economy went idle amid the pandemic due to government imposed lockdowns. Investor sentiment soured as macroeconomic conditions grew weaker. Amid business closures, spiking unemployment and forecasts for GDP contraction, risk assets in both equity and fixed income markets sold off with speed and severity in March.
The liquid credit markets sold off dramatically, as the high-yield bond and leveraged loan markets were down over 12% for the quarter, as measured by their most widely followed indices. As Matt noted, this weighed on our portfolio and put downward pressure on NAV. However, extensive fiscal stimulus and monetary policy action have lifted equities and some credit sectors from their lowest points, and we have experienced some recovery in prices of our debt investments as well.
That said, the pandemic had not run its course, and the timing of recovery remains unknown. The sustained volatility in the liquid credit market has also impacted private credit and direct lending. And we’re seeing a decline in deal flow. M&A activity has come to a halt. M&A activity has come to a halt. We believe the most – that most of the investment opportunity in the segment of the market will be highly structured financing involving businesses that are in need of liquidity, or are seeking to bolster their balance sheets. This is especially apparent in the non-sponsored space, where traditional capital market avenues may not be available to certain borrowers. We have already participated in a few financings, where we have found attractive risk adjusted returns.
Now turning to the overall portfolio, generally, we feel good about the quality of our portfolio and the health of our borrowers. Over the past 2-plus years, we have defensively positioned the portfolio by lending the larger businesses that operate in less cyclical, defensive or structurally growing industries that we believe will be resilient through a down cycle. That said our portfolio is not immune to market pressures, and we are closely monitoring all the positions in the portfolio. Our analysts are staying on top of each credit, speaking with management teams, private equity sponsors, industry experts and advisors.
Fortunately, we have largely avoided significant levels of exposure to challenge industries. Energy was limited to 4.6% of the portfolio at fair value at quarter end in 4 portfolio companies. The bulk of our current energy holdings are in large diversified businesses operating in the midstream and refinery sectors, which we believe have limited downside due to strong structural protection, significant asset coverage and generally low commodity risk. In fact, this is an area of the market that we are finding some interesting opportunities and attractive risk reward profiles, which I will discuss in a few moments.
Hotels, restaurants, leisure and entertainment positions collectively accounted for approximately 1.4% of the total portfolio at fair value at March 31. I also want to update you on our non-core portfolio. We continued to make progress reducing exposure to non-core investments in the second quarter, as we monetize $17 million of non-core positions in the quarter, and non-core investments represented $142 million, or 11% of the portfolio at fair value. The reduction in the quarter was driven by the sale of our common stock in Yeti, which accounted for $14 million of proceeds. We also received $5 million in proceeds from our exit of Lytx.
In addition, we restructured our position in Dominion Diagnostics. As you may recall, Dominion is a specialty toxicology laboratory that faced headwinds following Medicare reimbursement rate changes in 2015, resulting in the previous manager placing the subordinated term loan on nonaccrual in March 2016.
During the quarter, we closed on a restructuring that converted our existing senior and subordinated debt investments to a mix of secured debt and equity. We believe this restructuring puts us in the best position to maximize recovery in the long-term.
Turning now to investment activity. As I suggested earlier, we believe this is one of the most interesting markets for investing that we have seen in recent history. The March quarter was strong overall with the $273 million of new investment commitments that Matt noted, and we continue to see opportunities in this new market environment. Since the volatility took hold in March, we have been active in the public markets via our trading desk and have been investing in businesses that operate in defensive industries, such as in healthcare, pharma, infrastructure and telecom.
The pace of originations remained steady in April, while we are maintaining modest overall exposure to energy and other virus impacted sectors. We have identified some unique opportunities in these industries with very attractive risk reward profiles. Our recent investment in NuStar Energy fits this bill. We participated alongside our flagship opportunities fund, and several other Oaktree strategies, and a $750 million unsecured term loan.
NuStar is one of the largest independent liquid, pipeline and storage operators in the U.S. that primarily transports and stores, crude oil, refined products and specialty liquids. The company needed to manage its capital structure to the near-term maturities, creating an opportunity for Oaktree can provide a capital solution. The deal is attractively priced with a 12% coupon and the structure provides us with significant downside protection, including strong covenants, a short duration of 3 years and a priority position for our debt in the event of asset sales.
In another deal, OCSL was allocated $16 million of a $120 million Oaktree investment in a $1 billion first lien club transaction to Airbnb. The platform that connects travelers with property owners for booking, the company decided to bolster liquidity to provide a cushion as a result of COVID. The transaction priced at 97.5% with a LIBOR plus 750 coupon has a very good structure, including 2 years of call protection.
While this business is of course under near-term pressure, we believe the company’s best-in-class platform popularity and strong growth profile prior to the pandemic provided a solid foundation for recovery when travel resumes.
And lastly, we were allocated $34 million of a $90 million Oaktree investment in a term-loan to [Owen] [ph] a private equity fund that owns a portfolio of therapeutic drugs and has several prominent life sciences investments. The loan is very well structured with loan to value just 10% with our upfront investment, along with tight covenants. This 12% loan is secured by all of the assets of the fund.
We believe the coming weeks and months will provide OCSL with substantial opportunities in both public and private investments. But the duration of the shutdown, the nature of the recovery uncertain, we have focused on a few investment themes that we believe should succeed in this environment. In particular, we have been looking at companies that were on a solid footing prior to the pandemic, and are well positioned to manage through the pandemic. Those are the replaceable assets, whose values should be unaffected by widespread shutdowns. Businesses, particularly in life sciences than they turn to credit markets, given their desire to avoid equity linked financing.
I want to emphasize again that we had defensively positioned OCSL for an environment such as this, and we believe that our ample liquidity along with the scale and resources of Oaktree positioned us well to take advantage of attractive opportunities in this new market.
Now, I will turn the call over to Mel to discuss our financial results in more detail.
Thank you, Armen. For the second quarter of fiscal 2020, we reported net investment income of $22.8 million, or $0.16 per share, up from $7.8 million or $0.06 per share for the first quarter. The increase was the result of higher investment income and lower net expenses. The lower expenses were mainly due to the reversal of accrued Part II incentive fees in the quarter due to unrealized appreciation on investments. As you may recall, gap requires us to take unrealized gains and losses into account, when accruing or in this quarter’s case, reducing the accrual of Part II incentive fees.
We had a significant amount of unrealized losses in our portfolio this quarter. All Part II incentive fees, which were previously accrued on a GAAP basis have been reversed, adjusted net investment income, which excludes the impact of Part II incentive fees with $16.2 million, or $0.12 per share for the quarter, up from $14.1 million or $0.10 per share from the prior quarter. The increase was primarily due to higher investment income was partially offset by higher interest expense.
During the quarter, total investment income was $34.2 million, up from $31 million in the previous quarter. The increase was due to several factors including higher interest income resulting from a larger portfolio, higher prepayment fees and OID acceleration on payoffs and higher origination fees on new investments, partially offsetting these increases with downward pressure on the average yield of our floating rate debt investments, mainly due to continued decreases in LIBOR.
Net expenses excluding Part II incentive fees totaled $17.9 million in the second quarter, up $1.1 million sequentially. The increase was mainly driven by higher interest expense due to increased borrowings as a result of our larger portfolio.
Turning to credit quality. During the quarter, all of our portfolio companies made their scheduled interest payments, with the exception of one company that modified its interest payment to pick in order to reserve liquidity. As of March 31, non-accruals represented 0.5% of the total portfolio at fair value, up from 0.1% in the prior quarter. The increase was due to 2 liquid debt investments totaling $5 million of fair value that were added to non-accrual after experiencing price deterioration in the quarter.
Moving to the balance sheet, as Matt noted, our leverage ratio increased to 0.94 times from 0.58 times at December 31, reflecting growth in the portfolio during the quarter, as well as the decline in NAV. Additionally, we held nearly $90 million in cash on our balance sheet at quarter end. So our net leverage ratio was 0.82 times. We funded $252 million in investments, which was greater than the $154 million in payoffs and exits.
As of March 31, total debt outstanding was $699 million and had a weighted average interest rate of 3.1%. The weighted average interest rate was down from 4.5% at December 31, in part due to the successful financing that we completed in the quarter, issuing $300 million of senior notes at a 3.5% coupon, and using part of the proceeds to retire all $161 million of our unsecured bonds, which had an average rate of around 6%. In addition, Moody’s and Fitch affirmed our investment grade credit ratings reflect in our strong liquidity position and lower leverage.
At quarter end, we had total liquidity of approximately $385 million, including $90 million of cash, $295 million of undrawn capacity on our revolving credit facility. Unfunded commitments were $92 million although we know that approximately $60 million of this amount is eligible to be drawn, our liquidity position remains solid through the end of April. As of April 30, we had $328 million of liquidity to support our funding needs, broken down by $68 million of cash and $260 million of available capacity under the credit facility. Unfunded commitments eligible to be drawn as of April 30 were $75 million.
Shifting now to the Kemper joint venture. Our investments in the JV totaled $92 million at March 31, down from $128 million last quarter. As Matt touched on earlier, the levered nature of the JV coupled with unrealized price declines in the underlying investment portfolio, resulting from the broader market volatility contributed to the decline in the value of our investments in the vehicle. Excluding the impact of leverage, the JVs underlying investment portfolio at fair value declined 13% during the quarter and has recovered by approximately 4% in April.
As of quarter end, the JV had $330 million of assets invested in senior secured loans to 53 companies. This compared to $352 million of total assets invested in 51 companies last quarter. Leverage at the JV was 1.8 times at March 31, up from 1.3 times last quarter, and its $250 million credit facility had $56 million of undrawn capacity at quarter end.
Now I’ll turn the call over to Matt.
Thank you, Mel. While the environment has certainly become more challenging for many of our portfolio companies, we nonetheless generated solid operating results for the second quarter. We entered this crisis in very good financial shape. The defensive repositioning that we carried out over the last 2.5 years has largely been completed. We have been running leverage low and keeping a lot of dry powder. As a result, we are very well capitalized with strong liquidity. Given the significant size and scale of Oaktree’s investment platform, we’re well positioned to invest in this market environment as opportunistic special situation credit lending is a hallmark of Oaktree’s investment approach.
As Armen noted, we have already invested in a few of these opportunities since quarter end and expect to be active going forward. However, we will remain patient and disciplined in our deployment of capital, as we believe there will be an increasing number of opportunities that will arise over time as the crisis persists and the economic fallout continues. As a result, we are adjusting our leverage target higher to a range of 0.85 times to 1.0 times. We believe that this range is reasonable, given our near-term outlook and the increased investment opportunities that we are seeing.
In addition, we have placed a renewed emphasis on further positioning the portfolio for improved yields by rotating out of quoted senior secured loans, with yields at or below LIBOR plus 450 basis points.
In April, we sold $18 million of these lower yielding broadly syndicated loans. Pro forma for these exits, approximately $230 million of these investments remain in the portfolio at fair value as of April 30, which we plan to replace over time with higher yielding proprietary investments that we expect to make given current market conditions.
In conclusion, we are generally pleased with our overall performance for the second quarter, given the extreme circumstances. 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’re happy to take your questions. Operator, please open the lines.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Rick Shane with J.P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions this morning. And, look, you guys had positioned yourselves well for this environment. I am curious as you sort of move through things, both from an origination and from a portfolio management perspective, how you look at the syndicated loans versus the private loans.
One of the things that we’re starting to believe is that sponsors are going to be a very significant buffer over the next 6 to 9 months related to transactions. And I’m curious if you think that in your syndicated deals you have as much influence with – or contact or influence with the sponsors, and if that’s a risk that we should be considering within the portfolio.
Thanks for the question, Rick. This is Armen. So we’re looking at both public and private situations. We are considering the relative value between the 2. And obviously, on the public side, prices are moving every day, and we found some good opportunities in March, some opportunities in April, and frankly, exited some situations that had moved up.
We are engaged with sponsors, both companies – both for companies that have publicly traded debt as well as privately placed loans. We are not sure right now in terms of, A, the depth of the of the challenges around coronavirus and how long they may last; and, B, I don’t think that sponsors, by and large, have a lot of clarity on how deep of a pocket they’re willing to dig into to help out these businesses.
So I think it’s in a state of flux. We have very close relationships with a lot of sponsors. And we do think that we have a good call into them for rescue finance. As our comments indicated, we are already engaged – we have already engaged in several rescue finances. So I think it’s too early to make too much of a statement around where the opportunities may lie or where the risk may lie. But we do have a very active trading desk. We are looking at opportunities all of the time and working with other strategies at Oaktree to gauge the attractiveness of those opportunities.
And meanwhile, through our sourcing engine are working closely with companies and sponsors for – to provide liquidity to businesses that we think – that we would like to lend to at a certain cash flow point.
Got it. Okay. That makes sense. You made the comment that some of the value within the JV has rebounded as we move through April. I’m curious how to think about that in the context of the secondary market prices that you show on Slide 8, which were 82% in March and 72% in April. Is that just because the 82% pricing was sort of your acquisition costs as you move through the month and it might have been cheaper at the end of the month, and we’ve seen a rebound since then?
Yeah. So what this shows is, in terms of the far right column on Page 8, our secondary purchase prices of securities. In March, as the markets did dislocate, we began buying in the middle of March. Obviously, the market was quite volatile. We did see a little bit of a rebound by the end of March.
In April, our buying activity was in a variety of different types of securities. We were looking for those opportunities that were – that continued to be dislocated that we thought had assets and other value that would support the recovery on our position. Meanwhile, as the rest of the market moved up, we did take some chips off the table and sold a little bit.
So it was more portfolio management and looking for discounted, but good upside opportunities. And that’s kind of the reason the numbers look the way they do. So it was just looking for opportunities that we thought had better upside in April as the markets kind of rallied.
Terrific. Yeah, I think…
And clearly, there are a lot of moving parts right now. Hey, Rick, it’s Matt. Hope you can hear me. As it relates to the JV, the way I’d think about the assets there, those aren’t on this Page 8, but as we said on prepared marks, in April, our liquid kind of quoted assets were up 3% at the asset level. So you can use that to kind of get a sense of how that translates into the JV.
Got it. Thank you very much, guys.
Thank you.
Now our next question will come from Kyle Joseph with Jefferies. Please go ahead.
Hey, good morning, guys. Thanks very much for having me on and taking my questions. In terms – I just wanted to get a sense for your outlook for yields here. Obviously, rates came down in the quarter. Can you remind us your portfolio exposure or what percentage your portfolio has LIBOR floors or have those been engaged?
And then, given some of the opportunistic secondary transactions you’ve been able to add it to your books, kind of your overall outlook for the yield, for the portfolio going forward from here?
Sure. This is Armen. So, first of all, about 90% of our portfolio is floating rate. I don’t have the numbers right in front of me in terms LIBOR floors. I don’t know if Matt, Stewart…
Yeah. It’s about 60%, about 60% have 1% floors.
There you go.
Okay, that’s helpful. Thanks. And then…
So, and I do – I mean, I do look at LIBOR side. If you look at where we see an opportunity to invest, it’s obviously at relative – significantly higher yields than the existing portfolio even with LIBOR going down.
Yeah, that’s helpful. And then, we’ve seen a number of other BDCs’ report. Can you give us a sense for competitive dynamics within the industry? Obviously, you guys have been active in terms of originations on the secondary side. And your outlook for the BDC industry and any potential consolidation opportunities?
This is Armen. I don’t think we could comment on our strategic initiatives vis-à -vis M&A and certainly would be a forward-looking statement. In terms of the competitive dynamics in the BDCs, I think the only comment that I can make is that OCSL came in this period pretty defensively positioned and pretty lightly levered.
We were – I don’t think anybody anticipated coronavirus being what it is. But we being part of Oaktree and with that DNA of the firm running through this BDC, I think it’s created an opportunity for us to be patiently invest and look for pretty nice discounted opportunities and rescue lending opportunities in the market.
And I think we’re pretty differentiated in that way. And that’s kind of all I would say about the competitive dynamic.
Yeah. And, Kyle, it’s Matt, just to add on to that. If you – in Page 8 of our deck, I think as we discussed earlier in a question, it lays out I think pretty well the activity in both March and April and you could see the volume and the price.
And then, on Page 7, if you could look at our April analysis, it’s – we originated some assets, in $95 million north of 10%. So that gives you a sense to kind of what we’re doing in the scene.
Yeah, that’s great color. Thanks a lot, guys.
Thank you.
Our next question will come from Chris York with JMP Securities. Please go ahead.
Good morning, guys, and thanks for taking my questions. So I think some investors may be pleased to see that you’re quite active in the secondary markets for leveraged loans and bonds in March and then in April as credit spreads have not tightened. But why should we expect the longer term outcomes of these investments will be different than previous liquid purchases like CPK and Covia, which are now marked debt losses?
Sure. This is Armen. CPK is a non-core asset. But you do bring up a good point that like investing broadly, both in public and private markets, there’s risk. You can make mistakes in private loans or public investments. I can’t – make promises that mistakes won’t be made. But with the benefit of the broader Oaktree platform, our trading desk or various different groups here, as well as the strategic credit group that is day-in, day-out managing this portfolio. We are looking for very attractive investments.
In the case of Covia, that was an energy oriented investment that was not something that we done a lot of, we have not – we don’t have a significant amount of energy exposure in the portfolio in this particular period of time, energy obviously has been ground zero for what we’ve seen in the market. And so, where we are looking for opportunities or where companies have hard to replace assets that we can structure around or can attach to, whether it’s a private loan or a publicly traded loan. We’re looking for a diversified portfolio that is outside of the riskiest sectors, which would be energy as kind of point number one.
And in the case of restaurants, we’re really not doing much in terms of restaurants either. As I mentioned, CPK was non-core, but we’re really not looking to add in the restaurant space right now.
Okay, helpful. And then just clarifying something in the non-core comment, just could you remind us what that non-core definition is? And then was non – so was CPK, a Fifth Street investment? Or was it an Oaktree investment?
It was a Fifth Street investment. And the definition of non-core is essentially, if we were a legacy position from Fifth Street that we ourselves would not have put all in. And it was defined, 2-plus years ago. It was differentiated 2-plus years ago.
Okay. And then following up, investors are likely to appreciate the ability to co-invest with other Oaktree funds in this environment, and it’s a big strategic advantage. But some curiosity, how is the fee structure for your opportunities fund compared to the BDCs fee structure?
Yeah. It’s not meaningfully different. I would say it’s within the same zip code. I want to be mindful of certain regulatory reasons not to discuss fees of other funds in Oaktree. But I’m happy to refer you to our marketing group to find out more, but it’s not too different. And we have a very – built our compliance framework here to make sure that co-investment are shown to the BDCs. And the team that was responsible for investing the BDCs at the independent judgment to participate in that.
Okay.
Those processes are monitored and approved by the board on a regular basis.
Yeah. Moving just to leverage, if you think the investment opportunity set has improved, and then expected to rise over time from further dislocations, what is holding you back from increasing your target leverage above one times?
Hey, Chris, it’s Matt. I think the – at this point, we’ve taken it to 0.85 to 1, which is up from 0.7 to 0.85, so up meaningfully. A lot of uncertainty regarding the virus pandemic how long it lasts, so it – and again based on the assets we’re seeing, and also our ability given, kind of the good news, bad news, the liquid nature of our book creates more volatility have you seen, but it also creates liquidity. So we do have the ability to rotate, a meaningful part of the book from lower yielding to higher yielding opportunities that we see those. So it’s – we’re not totally dependent upon leverage to buy new assets.
So at this point, again, just given the uncertainty, we thought, this is the right level, the agencies are comfortable with it, our banks are comfortable with it, we’re comfortable with it. And we also have the ability given the liquid nature of our portfolios, if we see lots and lots of great opportunities. We can use that to create liquidity as well.
That helps. Last question, presumably you’ve been hoping that the markets would soften and create opportunities for more strategic initiatives and to grow the BDC. This environment should create those opportunities. So what was the thought process and not asking shareholders to issue stock below NAV to allow you to finance a potential transaction?
Well, I – that assumes, we have to one issue shares to do see the transaction, which may or may not be necessary to, if there was a strategic transaction, we could go to the shareholders and ask for approval to do it. So we just don’t view that right now is kind of a key – the ability to share below NAV as kind of something we need to do for strategic purposes or others, knowing that we always could. So, we’ll – we have that in, if we need to go to shareholders. And if we did some sort of stock based merger, there’d be most likely to be a shareholder vote required on one, one or both sides. So I’m not sure that the timing would say many things.
Okay. Just to clarify. You would ask for a special meeting if the opportunity set created something where you want it to be strategic to allow you to potentially issue equity. If that – all hypothetical.
Well, I’m just saying – yeah, I’m just saying, we could like if – we could do that, if we needed – if there was an opportunity – if there was a situation opportunity where we had to issue shares below NAV for an acquisition. We could go to the shareholders and ask for approval, do that as approval to do the transaction depending if that’s required, et cetera. So my point is, we can always call a special meeting to issues shares below NAV, if we need to.
Okay, interesting. That’s it for me. Thank you, Matt. Thanks, Armen.
Thank you.
[Operator Instructions] Our next question will come from Ryan Lynch with KBW. Please go ahead.
Hey, good morning, guys, and thanks for taking my questions. Hope you guys are all doing well? My first question, I have a couple of questions regarding Slide #8. In March out of the – in the March and April months out of the $118 million and $132 million you got support some of those are secondary market purchases a decent amount. But what are the non-secondary market purchases? Do you have a rough dollar amount of deployments of those 2 months that were either revolver drawdowns from existing commitments or delay draw term loans from your existing borrowers?
And also on that, how do you guys first see that how the trends been in that, as we kind of look forward, you expect those, the revolver, obviously, delay draws typically have some are subject to some, some provisions in there. But what is kind of your outlook for people’s moderations or the cadence of people pulling down those delay draw down loans going forward – excuse me, the revolver is going forward?
Sure. So this is Armen. Page 8 does not include revolver draws or delay draw a term loan request. So it’s really new investments that we made not to follow on existing commitments. Now for – we did get hit on some revolvers, but for us undrawn revolvers are not a material portion of our book so about $18 million – of our revolvers about $18 million. I’m trying to go through my notes here…
Yes, Matt, $18 million. We funded $18 million of revolver draws in March.
Here we go. Okay.
[indiscernible] April, definitely, this is only tiny.
Yeah, in April, as I said in my prepared remarks, there was $75 million eligible to be drawn of unfunded commitments on revolvers.
How about that ones are actually exploring down? You see that from $18 million of fund in March as they’re been less funded in April. I’m just trying to get…
Yeah. It’s only a couple of million. It’s only a couple of million. Yeah.
Only $2 million. Yeah.
Okay. Perfect. And then again as I look at Slide #8, as far as the secondary market purchases $64 million in March and as $16 million in April. Obviously, every loan is going to be different, but it’s the general sense that, that you’re not planning on holding those loans to maturity and those are more kind of relative value trades and you guys are planning on exiting throughout 2020, obviously, depending on the price you can exit out or those sort of opportunistic purchases that you really kind of like the long-term prospects and planner are holding them yield to maturity. You’re comfortable with and playing your whole new maturity. Just in general sense, I know every loan is probably different.
Sure. So it’s a combination of both. It is – everything we buy is with a view that we’re happy to hold that maturity. But we also recognize them when things move up and the prospective returns are unattractive relative to the other opportunities out there, especially in opportunistic, private loans, rescue loans, that’s when we would look to monetize those positions and redeploy into something that has a better prospective return. But we don’t buy anything with the view that is just a market timing event. We buy it with the view that we’re happy to own it at that creation value. And if it moves up and moves up, it will try to find something else to do that has a better return – better risk adjusted return at that point.
Okay. Makes sense. Kind of a higher level question on your platform, regarding the deal sourcing and originations, obviously, Oaktree has a platform has a huge broad reach into the credit markets. You guys made a lot of secondary market purchases this quarter, and quarter to date, Airbnb is an interesting loan you made a sizable loan to NuStar public traded company, those are obviously a lot of different sort of investments and strategies. You also have mentioned your trading desk. I would assume that that doesn’t fit under the strategic credit group, I would assume that there’s a different – that’s a different part of Oaktree that the strategic credit group is working with, but correct me if I’m wrong on that.
So I’m just trying to get a sense of there are a lot of different things going on Oaktree. There are a lot of different kind of investments that are going into OCSL, which I think is a good thing speaks to your platform. Can you kind of just pull back the current and kind of give us some information on how you guys are kind of viewing everything and how the different teams are working together particularly with like the trading desk on the liquid loans versus private transactions like that the Airbnb or even the public traded company like NuStar.
Sure. I appreciate the question. So first of all, so our traders are organized by product specialty so we have dedicated traders in loans, dedicated traders in bonds. We have distressed debt dedicated traders that work with special situations oriented parts of the banks. So we cover every trading desk on Wall Street, a multiple different ways, it’s not a small operation. Those traders are, obviously, they face off with similarly oriented folks on the other side. They are – they work for all groups that Oaktree, they work for a distress group or high yield group, loans group, strategic credit, emerging markets, et cetera. So there’s a lot of information flow from the traders to every strategy at Oaktree. There’s a lot of information flow across strategies at Oaktree. And that’s part of my role as Head of Performing Credit at Oaktree. I actually sit on top of what we do in our performing credit strategies both on a liquid and illiquid basis.
On the liquid side, that’s high-yield bonds, that’s loans, convertibles globally. And so, we have a lot of information-sharing tools that help transfer information from one group to another to understand what risks they may see in a particular industry or in a particular credit. We will have often two or three sets of eyes or groups looking at the same credit or the same industry from a different risk tolerance perspective, because we have a lot of stressed analysts in healthcare, performing credit analysts, and healthcare and senior loans and in high yield. We’ll have an analyst in strategic credit as well, so looking at healthcare in that example.
And so, it is on all of us and it is a very important part of my role at Oaktree to make sure that that information is being very fluidly shared. The analysis is being shared. When we do interface with companies, sponsors, banks, intermediaries, advisors, it is very important that each strategy includes the others, so long as we don’t have information walls that restrict our ability to do so.
And so, I could tell you there is – there are a lot of eyes looking at credit at Oaktree at all times. And we do a very good job of sharing those ideas and thoughts. It is not uncommon, and it was not uncommon in March, especially, as our senior loan and high-yield bond funds look at credits and industries as those traded off and babies were being thrown out with the bathwater.
There were a lot of e-mails flying around to the strategic credit teams, the teams that manages the BDCs, saying, hey, this doesn’t make any sense, you ought to take a look, here’s what I’ve done on it. And the reverse would also take place, where our strategic credit team would identify certain price movements. We would flag it for our high-yield and senior loan team just in case they owned it.
If they did own it, they would share the information. If they didn’t own it, they too would take a look. And there is a lot of cross-group collaboration, which is especially powerful during periods of dislocation.
On the private side, we have a variety of different teams at Oaktree that work on privately negotiated transactions. They might be equity. They might be structured equity. They might be debt. As you know, we have a middle market direct lending and mezzanine team. That is got a very long track record in investing in sponsor-backed deals, both on a senior secured and on a subordinated basis.
Their relationships have – they’ve contacted them about potential deal flow. We’ve seen some potential opportunities from them. And frankly, it helps them understand what else we’re seeing on the more opportunistic side, both in public and private markets. And so, there too on the private side, there’s information sharing.
In the case of NuStar Energy, we have an infrastructure private equity team at Oaktree that we also have a power opportunities private equity team at Oaktree. In the case of NuStar, it was a relationship from that strategy, because they invested in energy infrastructure, which is really what NuStar is. I wouldn’t say that it’s really an energy business. It’s a company that owns pipeline and storage attached to very important refineries in the U.S.
And it was through that relationship that we sourced that transaction. And Oaktree as a whole took down $750 million in a private deal. And so, we were only able to do that, because of the breadth of our platform, but also within each strategy, the depth of experience that resides there. So I think we do a pretty good job of making sure we see a lot of deal flow.
We do a pretty good job of making sure everybody at Oaktree knows the various risk-adjusted return profile of the strategies that participate at Oaktree, whether it’s our distressed debt business or special situations or private equity businesses, or in the case of our BDCs as well. So that’s kind of the, I don’t know, multivariant nature of the way we go about sourcing both in public and privates.
And we have dedicated resources as well attached to BDCs that are looking for sourcing all day long, in addition to the other strategies at the firm. So it’s an exercise in collaboration every day. And it becomes more active for sure during times of dislocation, given Oaktree’s orientation in the market.
That’s really helpful color and great detail broadly across the Oaktree platform. And I think it definitely shows some of the benefits, that you guys can access. And the BDC has the ability to access.
Just one quick follow-up on that point in that question, just because in your prepared comments you mentioned, potentially being in contact, we’re doing some rescue financing. I would think in a normal environment over the last several years, you guys probably wouldn’t partner too much with any of your distress funds. Given just the environment that we’re in, given that the change that we’re in today with a lot of companies quickly dramatically becoming distressed, do you guys have the ability and willingness to start partnering with any of your distressed funds for some opportunities going forward in this environment?
Well, I mean, absolutely the NuStar deal is in partnership with our distressed funds. So the end, the other area of potential partnership is with Brookfield Asset Management, which is a majority investor in Oaktree now. So we have through Brookfield meaningful touch-points in the market. I mean, they are behemoths in real estate, in private equity, infrastructure and renewables.
And as you can imagine, with the reach and collective AUM that they have, there’s a lot that they see that may not fit their world, but does did ours. So I do expect that we will see more in partnership with our distressed funds. And I think you’re right that, historically, given the market environment, we did a little bit less, because their investments were of a nature that were far more distressed, opportunistic, had risk of restructuring that we were not willing to take on for the BDCs.
We really want to stick to performing credit for the BDCs. And we’re finding performing credit that is dislocated and priced attractively in this market, so we’ll take that opportunity. But at times when that opportunity doesn’t exist, we’re not going to stretch on risk, just to do stuff with our distressed team.
Okay. That makes sense. Those are all my questions. I appreciate the time today and hope you guys all stay well.
Thank you, likewise.
Thanks, Ryan.
This will conclude today’s question-and-answer session, as we are out of questions. I would like to turn the conference back over to Mr. Mosticchio.
Thank you again for joining us for our second quarter earnings conference call. A replay of this call will be available for 30 days on OCSL’s website in the Investors section or by dialing 877-344-7529 for U.S. callers or 412-317-0088 for non-U.S. callers, with the replay access code 10141939, beginning approximately 1 hour after this broadcast.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.