Why is that? No matter the source, excess income or expenses at the company level flows to NAV per share. Clearly, some items, like realized gains, are less reliable long-term and we shouldn’t assume they’ll always be around.
As shown above, NAV per share was $5.81 as of the end of 2017 and climbed to $6.61 within two years or healthy 14.0% growth. The pandemic-panic of Q1 2020 caused the NAV per find fast money New Hampshire share to fall to $5.34, but as we discussed many, many times, the bulk of this drawdown was due to accounting requirements to reduce the portfolio value not realized losses.
Many investors and analysts did not understand this and panic sold BDCs (and mortgage REITs) at the exact time a deeper understanding would have led them to buy (as we did).
In terms of liquidity, this modestly sized BDC ended Q3 with $470 million in capacity on its credit lines
This is exactly what occurred starting in Q2 2020 and continued to occur every quarter since with OCSL’s NAV reaching a new high of $6.85 in Q4 of 2020.
Changes in NAV are mathematically linked to investor returns through the simple equation (change in NAV per share) X (premium/discount to NAV).
20%, each 1.0% increase in NAV generates a 1.2% increase in the share price for investors, all other things equal. It doesn’t require a scientific calculator to compute what 3-5% NAV growth plus a 7-9% annual distribution generates for shareholders long-term.
To reiterate, OCSL not only recovered all NAV losses but achieved a new high in NAV per share a mere two quarters after experiencing the sharp drawdown in Q1 of 2020. Since Oaktree took over, OCSL generated an 11.8% return on equity. This impressive ROE was also achieved with below average leverage.
OCSL targets 0.85x to 1.00x debt to equity but was under that level in Q2 of 2021. Like most BDCs in 2021, OCSL has recently ramped up leverage and ended the last reporting period at 0.95x, up from 0.79x in the previous quarter.
For context, that’s 34.6% of OCSL’s entire market capitalization and excludes the $29 million in cash on the balance sheet.
OCSL has moderately higher than average PIK income and that’s a risk factor we’ll continue to monitor. Non-accruals dropped to zero some time ago (they were 4.7% at the time Oaktree took over), however, and that’s a plus versus the sector average of 1.5%-2.0% of the portfolio by fair value.
OCSL is one of few BDCs that obtained both record new originations ($385 million last quarter) and superior weighted average yields (8.7% in the highest in many quarters) on those originations.
OCSL’s weighted average interest rate of 2.4% is in the same ballpark as heavyweights like Ares Capital Corp and Owl Rock Capital Corp, and that’s likely due to the fact it sports an investment grade credit rating as well. There is another element of OCSL’s funding strategy that makes it somewhat special.
Knowing BDC mechanics allowed us to anticipate a rapid rise in BDC NAVs in the quarters immediately following the crash of early 2020
Note that only one financing source, the 2025 notes, are fixed rate. As we’ve mentioned before, matching the term structure of assets and liabilities is a wise strategy long-term and has benefits versus locking in cheap fixed rate debt. Given most of OCSL’s investments are floating rate, it makes sense that OCSL has chosen to duplicate the interest rate sensitivity on the liabilities side of the balance sheet.