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Oaktree Strategic Income: IIQ 20210 Results – First Look

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If NAV Per Share and NAV change is the only value worth caring about for BDC investors, then OCSI had a very good quarter. NAV Per Share increased 18% in the second quarter over the first quarter. That speaks mostly to the very high price volatility of the type of large cap borrower, liquid loans that OCSI invests in. In the IQ 2020 OCSI’s NAV Per Share dropped by (26%) ! Other metrics, though, were less spectacular. Like most every other BDC, investment income dropped in the period as did Net Investment Income Per Share (NIIPS), principally driven by LIBOR’s new lows in the period. Investment Income and NIIPS were both down (30%). LIBOR is to blame but also the BDC’s decision to de-leverage the balance sheet in the face of Covid-19 and as net debt to equity reached 1.4x in March, but has dropped back to 1.1x as the number of companies in the portfolio dropped from 88 to 76. Already NIIPS at $0.110 for the quarter is  (just) below the $0.125 just-reduced quarterly dividend. Take out the BDC’s PIK income from the numbers and OCSI is some way from “covering” its dividend on a cash basis and still leveraged higher than pre-Covid. See page 7 of the Investor Presentation.

Finally, the non-accrual numbers have not materially improved:

“As of June 30, 2020, non-accruals represented 12.4% of the debt portfolio at cost and 9.5% at fair value. For the quarter ended June 30, 2020, the Company placed one new investment on non-accrual status, which represented 0.5% and 0.4% of the debt portfolio at cost and fair value, respectively”.

Still weighing OCSI down is the default that has occurred on its joint venture with GF Equity (“Glick”). For two quarters now the JV has not been able to dividend up any monies to the partners as the structure gets restructured. Glick has only 2 non-accruals but credit problems are serious enough to have caused a default and repositioning. We’ll get further details in the 10-Q and conference call.

Finally, there’s the issue of liquidity, which we rated as only FAIR through the IQ 2020. Judging by page 12 of the Investor Presentation, the situation has only gotten marginally better with “adjusted liquidity” increasing from $94mn in the first quarter to $105mn in the second, but way below the $143mn at 2019 year-end. Compared to some of its peers, OCSI has offsetting commitments to portfolio companies, as spelled out in the press release:

“Unfunded investment commitments were $31.6 million, or $17.6 million when excluding unfunded investment commitments to the OCSI Glick JV, with approximately $9.1 million that can be drawn immediately. The remaining $8.5 million is subject to certain milestones that must be met by one of the Company’s portfolio companies”.

We’re sticking with the FAIR rating for Liquidity in the BDC Data Table, FAIR for IIQ 2020 results and FAIR for the Long Term Outlook. We’re waiting till we undertake a Credit Review to opine anew about the BDC’s credit profile but – as of the IQ 2020 numbers – the rating was POOR given that more than half all assets were marked as underperforming. We expect that metric to improve in the IIQ 2020, but will underperforming assets drop underneath the 30% level, the dividing line in our idiosyncratic system between FAIR and POOR ?

For all the First Look reviews of IIQ 2020 BDC results, check out the BDC Data Table. We are constantly adding new updates as results come in and we undertake an initial survey. Besides these reports, we are also filling in NAV Per Share and investment portfolio size data to compare with prior periods; adding company or BDC Credit Reporter generated data on underperforming companies and assets and affirming or amending our earlier assessments of every BDC’s Liquidity, Credit, Dividend and Long Term Outlook

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