Oaktree Specialty Lending Corp 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock Our common stock trades on the Nasdaq Global Select Market under the symbol "OCSL." The following table sets forth, for each fiscal quarter during the last two most recently completed fiscal years and for the current fiscal year, the range of high and low sales prices of our common stock as reported on the Nasdaq Global Select Market, the premium (discount) of sales price to our net asset value, or NAV, and the distributions declared by us for each fiscal quarter. Sale Price NAV (1) High Low Premium (Discount) of High Sales Price to NAV (2) Premium (Discount) of Low Sales Price to NAV (2) Cash Distribution per Share (3) Year ended September 30, 2019 First quarter $ 6.19 $ 5.01 $ 4.08 (19.1) % (34.1) % $ 0.095 Second quarter $ 6.55 $ 5.29 $ 4.20 (19.2) % (35.9) % $ 0.095 Third quarter $ 6.60 $ 5.75 $ 5.13 (12.9) % (22.3) % $ 0.095 Fourth quarter $ 6.60 $ 5.50 $ 5.01 (16.7) % (24.1) % $ 0.095 Year ended September 30, 2020 First quarter $ 6.61 $ 5.52 $ 5.00 (16.5) % (24.4) % $ 0.095 Second quarter $ 5.34 $ 5.65 $ 2.33 5.8 % (56.4) % $ 0.095 Third quarter $ 6.09 $ 4.90 $ 3.00 (19.5) % (50.7) % $ 0.095 Fourth quarter $ 6.49 $ 5.23 $ 4.29 (19.4) % (33.9) % $ 0.105 Year ending September 30, 2021 First quarter (through November 17, 2020) * $ 5.29 $ 4.52 * * $0.11(4) __________ * Not determinable at the time of filing. (1) NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period. (2) Calculated as the respective high or low sales price less NAV, divided by NAV. (3) Represents the distribution declared in the specified quarter. We have adopted an “opt out” dividend reinvestment plan for our common stockholders. Distributions by us are generally taxable to U.S. stockholders as ordinary income or capital gains. (4) On November 13, 2020, our Board of Directors declared a distribution of $0.11 per share payable on December 31, 2020 to stockholders of record on December 15, 2020. The last reported price for our common stock on November 17, 2020 was $5.20 per share, which represented a 19.9% discount to our NAV as of September 30, 2020. As of November 17, 2020, we had 61 stockholders of record, which did not include stockholders for whom shares are held in nominee or “street” name. Sales of Unregistered Securities We did not engage in any sales of unregistered securities during the fiscal year ended September 30, 2020. 48 Stock Performance Graph The following graph compares the cumulative 5-year total return provided to shareholders on Oaktree Specialty Lending Corporation’s common stock relative to the cumulative total returns of the Standard & Poor’s 500 Index, the Russell 2000 Financial Services Index and the Wells Fargo BDC Total Return Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on September 30, 2015 and its relative performance is tracked through September 30, 2020. The stock performance graph shows returns during management by the Former Adviser for the periods from September 30, 2015 through October 16, 2017 and during management by Oaktree and its affiliates for the period from October 17, 2017 through September 30, 2020. September 30, 2015 September 30, 2016 September 30, 2017 September 30, 2018 September 30, 2019 September 30, 2020 Oaktree Specialty Lending Corporation 100.00 107.43 110.46 108.94 122.66 124.64 S&P 500 100.00 115.43 136.91 161.43 168.30 193.80 Russell 2000 Financial Services 100.00 115.91 141.96 151.60 149.55 115.08 Wells Fargo BDC Total Return Index 100.00 121.53 133.53 137.98 148.03 114.90 49 Stock Repurchase Program We did not repurchase shares of our common stock during the years ended September 30, 2020 and 2019. Fee and Expenses The following table is intended to assist stockholders in understanding the costs and expenses that an investor in shares of our common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this Form 10-K contains a reference to fees or expenses paid by “you” or “us”, or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us. Such expenses also include those of our consolidated subsidiaries. Stockholder transaction expenses: Sales load (as a percentage of offering price) —% (1) Offering expenses (as a percentage of offering price) —% (2) Dividend reinvestment plan fees Up to $15 (3) Total stockholder transaction expenses (as a percentage of offering price) —% (4) Annual expenses (as a percentage of net assets attributable to common stock): Base management fees 2.63% (5) Incentive fees (17.5%) 1.66% (6) Interest payments on borrowed funds (including other costs of servicing and offering debt securities) 2.58% (7) Other expenses 0.78% (8) Acquired fund fees and expenses 0.96% (9) Total annual expenses 8.61% (10) __________ (1) If applicable, the prospectus or prospectus supplement relating to an offering of our common stock will disclose the applicable sales load. (2) In the event that we conduct an offering of our securities, a corresponding prospectus supplement will disclose the estimated offering expenses. (3) The expenses of administering our dividend reinvestment plan are included in “Other expenses.” The plan administrator’s fees under the plan are paid by us. If a participant elects by notice to the plan administrator in advance of termination to have the plan administrator sell part or all of the shares held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a transaction fee of up to $15 plus a $0.10 per share fee from the proceeds. (4) Total stockholder transaction expenses may include sales load and will be disclosed in a future prospectus supplement, if any. (5) Under the Investment Advisory Agreement, the base management fee is calculated at an annual rate of 1.50% of our total gross assets at the end of each quarter, including any investment made with borrowings, but excluding cash and cash equivalents; provided, however, the base management fee will be calculated at an annual rate of 1.00% of the value of our total gross assets, including any investments made with borrowings, but excluding cash and cash equivalents, that exceeds the product of (i) 200% (calculated in accordance with the Investment Company Act and giving effect to exemptive relief we have received with respect to debentures issued by a small business investment company subsidiary) and (ii) our net assets. For purposes of this table, we have assumed $1.6 billion of total gross assets (excluding cash and cash equivalents), which was the actual amount of our total gross assets as of September 30, 2020. See “Item 1. Business - Investment Advisory and Management Agreement - Management Fee” and “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Management Fee Waiver. ” (6) The incentive fee consists of two parts. Under the Investment Advisory Agreement, the incentive fee on income is calculated and payable quarterly in arrears based upon our pre-incentive fee net investment income for the immediately preceding quarter. The payment of the incentive fee on income is subject to payment of a preferred return to investors each quarter (i.e., a “hurdle rate”), expressed as a rate of return on the value of our net assets at the end of the most recently completed quarter, of 1.50%, subject to a “catch up” feature. See “Item 1. Business - Investment Advisory and Management Agreement - Management Fee” for additional information. Under the Investment Advisory Agreement, the second part of the incentive fee (the “capital gains incentive fee”) is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement, as of the termination date) commencing with the fiscal year ended September 30, 2019 and equals 17.5% of 50 our realized capital gains, if any, on a cumulative basis from the beginning of the fiscal year ended September 30, 2019 through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees under the Investment Advisory Agreement. Any realized capital gains or losses and unrealized capital depreciation with respect to our portfolio as of the end of the fiscal year ended September 30, 2018 are excluded from the calculations of the second part of the incentive fee. For the two-year period commencing on October 17, 2017, OCM agreed to waive, to the extent necessary, any management or incentive fees payable to OCM that exceed what would have been paid to the Former Adviser in the aggregate under the Former Investment Advisory Agreement. For illustrative purposes, however, the table above assumes that no management or incentive fees payable to OCM were waived by OCM pursuant to this waiver. The incentive fee referenced in the table above is based on actual amounts of the incentive fee on income incurred during the year ended September 30, 2020 and the capital gains incentive fee payable under the Investment Advisory Agreement as of September 30, 2020. (7) “Interest payments on borrowed funds (including other costs of servicing and offering debt securities)” is calculated as the weighted average interest rate in effect as of September 30, 2020 multiplied by the actual debt outstanding as of September 30, 2020 of $714.8 million. The weighted average interest rate for our borrowings as of September 30, 2020 was 2.7% (exclusive of deferred financing costs). The amount of leverage that we employ at any particular time will depend on, among other things, our Board of Directors’ assessment of market and other factors at the time of any proposed borrowing. (8) “Other expenses” are based on estimated amounts for the current fiscal year. These expenses include certain expenses allocated to us under the Investment Advisory Agreement, including travel expenses incurred by the Adviser’s personnel in connection with investigating and monitoring our investments, such as investment due diligence. (9) Our stockholders indirectly bear the expenses of underlying funds or other investment vehicles that would be an investment company under section 3(a) of the Investment Company Act but for the exceptions to that definition provided for in sections 3(c)(1) and 3(c)(7) of the Investment Company Act ("Acquired Funds") in which we invest. This amount includes the annual expenses of SLF JV I. There are no fees paid by SLF JV I to the Adviser. See "Management Discussion and Analysis - Senior Loan Fund I LLC" and Note 3 to our Consolidated Financial Statements in this Form 10-K for more information on SLF JV I. The annual expenses of SLF JV I include interest payments on the subordinated notes held by Kemper, which represented 13.0% of such expenses, and exclude interest payments on the subordinated notes held by us. (10) “Total annual expenses” is presented as a percentage of net assets attributable to common stockholders because our common stockholders bear all of our fees and expenses and includes all fees and expenses of our consolidated subsidiaries. “Total annual expenses” does not reflect any potential provision (benefit) for income taxes because of the uncertainties associated with determining such amounts in future periods. Example The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock assuming that we hold no cash or liabilities other than debt. In calculating the following expense amounts, we have assumed that our annual operating expenses remain at the levels set forth in the table above. The example does not include any sales load or offering expenses. An investor would pay the following expenses on a $1,000 investment 1 Year 3 Years 5 Years 10 Years Assuming a 5% annual return (assumes no return from net realized capital gains) $ 70 $ 211 $ 356 $ 729 Assuming a 5% annual return (assumes return entirely from net realized capital gains) $ 85 $ 255 $ 425 $ 853 The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee based on pre-incentive fee net investment income under the Investment Advisory Agreement, which, assuming a 5% annual return, would either not be payable or would have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger a greater incentive fee, our expenses, and returns to our investors, would be higher. For purposes of this example, we have assumed that as of October 1, 2020, the sum of our realized capital losses and unrealized capital depreciation on a cumulative basis since October 1, 2018 equaled zero. In addition, while the example assumes reinvestment of all distributions at NAV, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the 51 total dollar amount of the cash distribution payable to a participant by either (i) the greater of (a) the current NAV per share of our common stock and (b) 95% of the market price per share of our common stock at the close of trading on the payment date fixed by our Board of Directors in the event that we use newly issued shares to satisfy the share requirements of the dividend reinvestment plan or (ii) the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased by the administrator of the dividend reinvestment plan in the event that shares are purchased in the open market to satisfy the share requirements of the dividend reinvestment plan, which may be at, above or below NAV. Financial Highlights (Share amounts in thousands) Year ended September 30, 2020 Year ended September 30, 2019 Year ended September 30, 2018 (1) Year ended September 30, 2017 Year ended September 30, 2016 Net asset value per share at beginning of period $6.60 $6.09 $6.16 $7.97 $9.00 Net investment income (2) 0.51 0.48 0.43 0.51 0.72 Net unrealized appreciation (depreciation) (2) (0.14) 0.27 0.73 (0.69) (0.33) Net realized gains (losses) (2) (0.10) 0.14 (0.83) (1.21) (0.84) Provision for income tax (expense) benefit (2) 0.01 — — — — Distributions of net investment income to stockholders (0.39) (0.38) (0.27) (0.47) (0.67) Tax return of capital — — (0.13) — (0.05) Net issuance/repurchases of common stock — — — 0.05 0.14 Net asset value per share at end of period $6.49 $6.60 $6.09 $6.16 $7.97 Per share market value at beginning of period $5.18 $4.96 $5.47 $5.81 $6.17 Per share market value at end of period $4.84 $5.18 $4.96 $5.47 $5.81 Total return (3) 2.10% 12.56% (1.49)% 2.84% 7.02% Common shares outstanding at beginning of period 140,961 140,961 140,961 143,259 150,263 Common shares outstanding at end of period 140,961 140,961 140,961 140,961 143,259 Net assets at beginning of period $930,630 $858,035 $867,657 $1,142,288 $1,353,094 Net assets at end of period $914,879 $930,630 $858,035 $867,657 $1,142,288 Average net assets (4) $871,305 $909,264 $841,583 $1,018,498 $1,229,639 Ratio of net investment income to average net assets 8.26% 7.47% 7.13% 7.13% 8.68% Ratio of total expenses to average net assets 7.57% 9.65% 9.51% 10.49% 13.09% Ratio of net expenses to average net assets 8.16% 8.78% 9.35% 10.35% 11.48% Ratio of portfolio turnover to average investments at fair value 38.99% 32.50% 67.66% 39.06% 23.39% Weighted average outstanding debt (5) $647,080 $573,891 $608,553 $982,372 $1,190,105 Average debt per share (2) $4.59 $4.07 $4.32 $6.95 $8.07 Asset coverage ratio at end of period (6) 227.22% 294.91% 232.98% 227.40% 220.84% __________ (1) Beginning on October 17, 2017, the Company is externally managed by Oaktree or its affiliates. Prior to October 17, 2017, the Company was externally managed by the Former Adviser. (2) Calculated based upon weighted average shares outstanding for the period. (3) Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company's DRIP. Total return does not include sales load. (4) Calculated based upon the weighted average net assets for the period. (5) Calculated based upon the weighted average of debt outstanding for the period. (6) Based on outstanding senior securities of $714.8 million, $476.1 million, $643.4 million, $680.7 million and $946.5 million as of September 30, 2020, 2019, 2018, 2017 and 2016, respectively. 52 Year Ended September 30, 2015 Year Ended September 30, 2014 Year Ended September 30, 2013 Year Ended September 30, 2012 Year Ended September 30, 2011 Net asset value at beginning of period $9.64 $9.85 $9.92 $10.07 $10.43 Net investment income (4) 0.75 1.00 1.04 1.11 1.05 Net unrealized appreciation (depreciation) on investments and secured borrowings (4) (0.46) (0.23) 0.12 0.70 (0.10) Net realized gain (loss) on investments, interest rate swap and secured borrowings (4) (0.19) 0.02 (0.24) (0.81) (0.47) Distributions of net investment income to stockholders (4) (0.79) (0.94) (0.90) (1.04) (1.20) Tax return of capital (4) — (0.06) (0.25) (0.14) (0.06) Net issuance/repurchase of common stock (4) 0.05 — 0.16 0.03 0.42 Net asset value at end of period $9.00 $9.64 $9.85 $9.92 $10.07 Per share market value at beginning of period $9.18 $10.29 $10.98 $9.32 $11.14 Per share market value at end of period $6.17 $9.18 $10.29 $10.98 $9.32 Total return (1) (27.18)% (0.97)% 4.89% 32.59% (6.76)% Common shares outstanding at beginning of period 153,340 139,041 91,048 72,376 54,550 Common shares outstanding at end of period 150,263 153,340 139,041 91,048 72,376 Net assets at beginning of period $1,478,475 $1,368,872 $903,570 $728,627 $569,172 Net assets at end of period $1,353,094 $1,478,475 $1,368,872 $903,570 $728,627 Average net assets (2) $1,413,357 $1,393,635 $1,095,225 $790,921 $677,354 Ratio of net investment income to average net assets 8.13% 10.23% 10.50% 11.13% 9.91% Ratio of total expenses to average net assets (excluding base management fee waiver) 10.69% 10.91% 9.95% 9.95% 8.79% Base management fee waiver effect (0.04)% (0.05)% (0.21)% —% —% Ratio of net expenses to average net assets 10.65% 10.86% 9.74% 9.95% 8.79% Ratio of portfolio turnover to average investments at fair value 23.02% 25.50% 38.22% 29.74% 7.26% Weighted average outstanding debt (3) $1,228,413 $1,110,021 $597,596 $421,366 $247,549 Average debt per share (4) $8.02 $7.82 $5.42 $5.30 $3.86 Asset coverage ratio at end of period (5) 238.95% 259.50% 394.86% 385.71% 332.76% __________ (1) Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company's DRIP. (2) Calculated based upon the weighted average net assets for the period. (3) Calculated based upon the weighted average of loans payable for the period. (4) Calculated based upon weighted average shares outstanding for the period. (5) Based on outstanding senior securities of $975.3 million, $928.4 million, $464.3 million, $316.3 million and $313.0 million as of September 30, 2015, 2014, 2013, 2012 and 2011, respectively. 53 Item 6. Selected Financial Data The table below sets forth our selected historical financial data for the periods indicated. Our historical results are not necessarily indicative of future results. The selected financial data in this section is not intended to replace the financial statements and is qualified in its entirety by the financial statements and related notes included in this filing. The following selected financial data should be read together with the information contained in Part II, Item 7 of this Form 10-K, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” and the audited financial statements and the notes thereto in Part II, Item 8 of this Form 10-K, "Financial Statements and Supplementary Data." The financial information as of and for the fiscal years ended September 30, 2020, 2019, 2018, 2017 and 2016 set forth below was derived from our audited financial statements and related notes which are included in "Financial Statements and Supplementary Data" in Part II, Item 8 of this Form 10-K. As of and for the Years Ended (dollars in thousands, except per share amounts) September 30, 2020 September 30, 2019 September 30, 2018 September 30, 2017 September 30, 2016 Statement of Operations data: Total investment income $143,133 $147,702 $138,722 $177,964 $247,872 Base management fee 22,895 22,343 22,652 31,369 41,483 Part I incentive fee 15,194 14,873 10,485 10,713 22,091 Part II incentive fee (5,557) 10,194 — — — Fees waived 5,200 (7,990) (1,342) (240) (338) All other expenses 33,409 40,373 46,881 64,729 97,338 Insurance recoveries — — — (1,259) (19,429) Net investment income 71,992 67,909 60,046 72,652 106,727 Net unrealized appreciation (depreciation) (20,614) 38,457 102,605 (97,839) (48,000) Net realized gains (losses) (13,924) 20,805 (115,267) (171,782) (125,283) Provision for income tax (expense) benefit 1,770 (1,011) (622) — — Net increase (decrease) in net assets resulting from operations 39,224 126,160 46,762 (196,969) (66,556) Per share data: Net asset value per common share at period end $6.49 $6.60 $6.09 $6.16 $7.97 Market price at period end 4.84 5.18 4.96 5.47 5.81 Net investment income 0.51 0.48 0.43 0.51 0.72 Net realized and unrealized gains (losses), net of taxes (0.23) 0.41 (0.10) (1.90) (1.17) Net increase (decrease) in net assets resulting from operations 0.28 0.89 0.33 (1.39) (0.45) Distributions per common share 0.39 0.38 0.40 0.465 0.72 Balance Sheet data at period end: Total investments at fair value $1,573,851 $1,438,042 $1,491,201 $1,541,755 $2,165,491 Cash, cash equivalents and restricted cash 39,096 15,406 13,489 59,913 130,362 Other assets 27,765 27,590 46,768 14,380 47,432 Total assets 1,640,712 1,481,038 1,551,458 1,616,048 2,343,285 Total liabilities 725,833 550,408 693,423 748,391 1,200,997 Total net assets 914,879 930,630 858,035 867,657 1,142,288 Other data: Weighted average yield on debt investments (1) 8.3% 8.9% 8.4% 9.6% 10.4% Number of portfolio companies at period end 113 104 113 125 129 (1) Weighted average yield is calculated based upon our debt investments at fair value, including the return on the subordinated note investment in SLF JV I, at the end of the period. 54