Oaktree Specialty Lending Corp 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in connection with our Consolidated Financial Statements and the notes thereto included elsewhere in this annual report on Form 10-K. Some of the statements in this annual report on Form 10-K constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K may include statements as to: • the ability of the parties to consummate the Mergers on the expected timeline, or at all; • the expected synergies and savings associated with the Mergers; • the ability to realize the anticipated benefits of the Mergers including the expected elimination of certain expenses and costs due to the Mergers; • the percentage of our stockholders and OSI 2’s stockholders voting in favor of the proposals submitted for their approval; • the possibility that competing offers or acquisition proposals will be made; • the possibility that any or all of the various conditions to the consummation of the Mergers may not be satisfied or waived; • risks related to diverting management’s attention from ongoing business operations; • the combined company’s plans, expectations, objectives and intentions, as a result of the Mergers; • any potential termination of the Merger Agreement; • the actions of our stockholders or OSI 2’s stockholders with respect to any of the proposals submitted for their approval; • our future operating results and distribution projections; • the ability of Oaktree to reposition our portfolio and to implement Oaktree's future plans with respect to our business; • the ability of Oaktree and its affiliates to attract and retain highly talented professionals; • our business prospects and the prospects of our portfolio companies; • the impact of the investments that we expect to make; • the ability of our portfolio companies to achieve their objectives; • our expected financings and investments and additional leverage we may seek to incur in the future; • the adequacy of our cash resources and working capital; • the timing of cash flows, if any, from the operations of our portfolio companies; and • the cost or potential outcome of any litigation to which we may be a party. In addition, words such as “anticipate,” “believe,” “expect,” “seek,” “plan,” “should,” “estimate,” “project” and “intend” indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “ Item 1A. Risk Factors ” in this annual report on Form 10-K. Other factors that could cause actual results to differ materially include: • changes or potential disruptions in our operations, the economy, financial markets or political environment, including the impacts of inflation and rising interest rates; • risks associated with possible disruption in our operations or the economy generally due to terrorism, war or other geopolitical conflict (including the current conflict between Russia and Ukraine), natural disasters or pandemics; • future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to Business Development Companies or RICs; and • other considerations that may be disclosed from time to time in our publicly disseminated documents and filings. We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission, or the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. All dollar amounts in tables are in thousands, except share and per share amounts and as otherwise indicated. 57 Business Overview We are a specialty finance company dedicated to providing customized, one-stop credit solutions to companies with limited access to public or syndicated capital markets. We are a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a Business Development Company under the Investment Company Act. In addition, we have qualified and elected to be treated as a RIC under the Code, for U.S. federal income tax purposes. We are externally managed by Oaktree pursuant to the Investment Advisory Agreement. Oaktree Administrator, an affiliate of Oaktree, provides certain administrative and other services necessary for us to operate pursuant to the Administration Agreement. Our investment objective is to generate current income and capital appreciation by providing companies with flexible and innovative financing solutions, including first and second lien loans, unsecured and mezzanine loans, bonds, preferred equity and certain equity co-investments. We may also seek to generate capital appreciation and income through secondary investments at discounts to par in either private or syndicated transactions. Our portfolio may also include certain structured finance and other non-traditional structures. We invest in companies that typically possess resilient business models with strong underlying fundamentals. We intend to deploy capital across credit and economic cycles with a focus on long-term results, which we believe will enable us to build lasting partnerships with financial sponsors and management teams, and we may seek to opportunistically take advantage of dislocations in the financial markets and other situations that may benefit from Oaktree’s credit and structuring expertise. Sponsors may include financial sponsors, such as an institutional investor or a private equity firm, or a strategic entity seeking to invest in a portfolio company. Oaktree is generally focused on middle-market companies, which we define as companies with enterprise values of between $100 million and $750 million. We generally invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “high yield” and “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In the current market environment, Oaktree intends to focus on the following area, in which Oaktree believes there is less competition and thus potential for greater returns, for our new investment opportunities: (1) situational lending, which we define to include directly originated loans to non-sponsor companies that are hard to understand and value using traditional underwriting techniques, (2) select sponsor lending, which we define to include financing to support leveraged buyouts of companies with specialized sponsors that have expertise in certain industries, and (3) stressed sector and rescue lending, which we define to include opportunistic private loans in industries experiencing stress or limited access to capital. Oaktree intends to continue to rotate our portfolio into investments that are better aligned with Oaktree's overall approach to credit investing and that it believes have the potential to generate attractive returns across market cycles (which we call "core investments"). Oaktree has performed a comprehensive review of our portfolio and categorized our portfolio into core investments, non-core performing investments and underperforming investments. Certain additional information on such categorization and our portfolio composition is included in investor presentations that we file with the SEC. Since an Oaktree affiliate became our investment adviser in October 2017, Oaktree and its affiliates have reduced the investments identified as non-core by approximately $800 million at fair value. Over time, Oaktree intends to rotate us out of the remaining non-core investments, which were approximately $71 million at fair value as of September 30, 2022. Oaktree periodically reviews designations of investments as core and non-core and may change such designations over time. On March 19, 2021, we acquired Oaktree Strategic Income Corporation, or OCSI, pursuant to the OCSI Merger Agreement, dated as of October 28, 2020, by and among OCSI, us, Lion Merger Sub, Inc., our wholly-owned subsidiary, and, solely for the limited purposes set forth therein, Oaktree. As a result of the OCSI Merger, we issued an aggregate of 39,400,011 shares of our common stock to former OCSI stockholders. Merger Agreement On September 14, 2022, we entered into the Merger Agreement, which provides that, subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into OSI 2, with OSI 2 continuing as the surviving company and as our wholly-owned subsidiary and, immediately thereafter, OSI 2 will merge with and into us, with us continuing as the surviving company. Both our Board of Directors and the Board of Directors of OSI 2, in each case, on the recommendation of a special committee comprised solely of certain independent directors of us or OSI 2, as applicable, have approved the Merger Agreement and the transactions contemplated thereby. At the Effective Time, each share of OSI 2 Common Stock issued and outstanding immediately prior to the Effective Time (other than Cancelled Shares) will be converted into the right to receive a number of shares of our common stock equal to the Exchange Ratio (as defined below), plus any cash (without interest) in lieu of fractional shares. 58 As of a mutually agreed date no earlier than 48 hours (excluding Sundays and holidays) prior to the Effective Time, which we refer as the “Determination Date”, each of us and OSI 2 will deliver to the other a calculation of its net asset value as of such date, in each case using a pre-agreed set of assumptions, methodologies and adjustments. We refer to such calculation with respect to OSI 2 as the “Closing OSI 2 Net Asset Value” and with respect to us as the “Closing OCSL Net Asset Value”. Based on such calculations, the parties will calculate the “OSI 2 Per Share NAV”, which will be equal to (i) the Closing OSI 2 Net Asset Value divided by (ii) the number of shares of OSI 2 Common Stock issued and outstanding as of the Determination Date (excluding any Cancelled Shares), and the “OCSL Per Share NAV”, which will be equal to (A) the Closing OCSL Net Asset Value divided by (B) the number of shares of our common stock issued and outstanding as of the Determination Date. The “Exchange Ratio” will be equal to the quotient (rounded to four decimal places) of (i) the OSI 2 Per Share NAV divided by (ii) the OCSL Per Share NAV. We and OSI 2 will update and redeliver the Closing OCSL Net Asset Value or the Closing OSI 2 Net Asset Value, respectively, in the event of a material change to such calculation between the Determination Date and the closing of the Mergers and if needed to ensure that the calculation is determined within 48 hours (excluding Sundays and holidays) prior to the Effective Time. The Merger Agreement contains customary representations and warranties by each of us, OSI 2 and Oaktree. The Merger Agreement also contains customary covenants, including, among others, covenants relating to the operation of each of our and OSI 2’s businesses during the period prior to the closing of the Mergers. Consummation of the Mergers, which is currently anticipated to occur during the second fiscal quarter of 2023, is subject to certain closing conditions, including requisite approvals of our and OSI 2’s stockholders and certain other closing conditions. The Merger Agreement also contains certain termination rights in favor of us and OSI 2, including if the Mergers are not completed on or before June 30, 2023 or if the requisite approvals of our or OSI 2’s stockholders are not obtained. The Merger Agreement provides that, upon the termination of the Merger Agreement under certain circumstances, a third party acquiring OSI 2 may be required to pay us a termination fee of approximately $9.8 million. The Merger Agreement provides that, upon the termination of the Merger Agreement under certain circumstances, a third party acquiring us may be required to pay OSI 2 a termination fee of approximately $37.9 million. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement. The representations, warranties, covenants and agreements contained in the Merger Agreement were made only for purposes of the Merger Agreement and as of specific dates; were solely for the benefit of the parties to the Merger Agreement (except as may be expressly set forth in the Merger Agreement); may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts; and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors and security holders should not rely on such representations, warranties, covenants or agreements, or any descriptions thereof, as characterizations of the actual state of facts or condition of any of the parties to the Merger Agreement or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties, covenants and agreements may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in public disclosures by the parties to the Merger Agreement. Management Fee Waiver In connection with entry into the Merger Agreement and subject to completion of the transactions contemplated thereby, Oaktree has agreed to waive $9.0 million of base management fees payable to it under the Investment Advisory Agreement as follows: $6.0 million at a rate of $1.5 million per quarter (with such amount appropriately prorated for any partial quarter) in the first year following closing of the Mergers and $3.0 million at a rate of $750,000 per quarter (with such amount appropriately prorated for any partial quarter) in the second year following closing of the Mergers. Business Environment and Developments Global financial markets have experienced an increase in volatility as concerns about the impact of higher inflation, rising interest rates, a potential recession and the current conflict in Ukraine have weighed on market participants. These factors have created disruptions in supply chains and economic activity and have had a particularly adverse impact on certain companies in the energy, raw materials and transportation sectors, among others. These uncertainties can ultimately impact the overall supply and demand of the market through changing spreads, deal terms and structures and equity purchase price multiples. We are unable to predict the full effects of these macroeconomic events or how long any further market disruptions or volatility might last. We continue to closely monitor the impact these events have on our business, industry and portfolio companies and will provide constructive solutions where necessary. 59 Against this uncertain macroeconomic backdrop, we believe attractive risk-adjusted returns can be achieved by making loans to middle market companies that typically possess resilient business models with strong underlying fundamentals. Given the breadth of the investment platform and decades of credit investing experience of Oaktree and its affiliates, we believe that we have the resources and experience to source, diligence and structure investments in these companies and are well placed to generate attractive returns for investors. As of September 30, 2022, 86.5% of our debt investment portfolio (at fair value) and 86.3% of our debt investment portfolio (at cost) bore interest at floating rates. Most of our floating rate loans are indexed to the LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly or monthly at the borrower’s option. Certain loans may also be indexed to SOFR or SONIA. Most U.S. dollar LIBOR rates will continue to be published through June 30, 2023. The FCA no longer compels panel banks to continue to contribute to LIBOR and the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have encouraged banks to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, supports replacing U.S.-dollar LIBOR with SOFR. Although there are an increasing number of issuances utilizing SOFR or SONIA, these alternative reference rates may not attain market acceptance as replacements for LIBOR. In anticipation of the cessation of LIBOR, we may need to renegotiate any credit agreements extending beyond the applicable phase out date with our prospective portfolio companies that utilize LIBOR as a factor in determining the interest rate. Certain of the loan agreements with our portfolio companies have included fallback language in the event that LIBOR becomes unavailable. This language generally provides that the administrative agent may identify a replacement reference rate, typically with the consent of (or prior consultation with) the borrower. In certain cases, the administrative agent will be required to obtain the consent of either a majority of the lenders under the facility, or the consent of each lender, prior to identifying a replacement reference rate. Certain of the loan agreements with our portfolio companies do not include any fallback language providing a mechanism for the parties to negotiate a new reference interest rate and will instead revert to the base rate in the event LIBOR ceases to exist. Critical Accounting Estimates Investment Valuation We value our investments in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures , or ASC 820, which defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. ASC 820 prioritizes the use of observable market prices over entity-specific inputs. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: • Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date. • Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities. • Level 3 — Unobservable inputs that reflect Oaktree’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. If inputs used to measure fair value fall into different levels of the fair value hierarchy, an investment's level is based on the lowest level of input that is significant to the fair value measurement. Oaktree's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. This includes investment securities that are valued using "bid" and "ask" prices obtained from independent third party pricing services or directly from brokers. These investments may be classified as Level 3 because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities or may require adjustments for investment-specific factors or restrictions. Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value. As such, Oaktree obtains and analyzes readily available market quotations provided by pricing vendors and brokers for all of our investments for which quotations are 60 available. In determining the fair value of a particular investment, pricing vendors and brokers use observable market information, including both binding and non-binding indicative quotations. Oaktree seeks to obtain at least two quotations for the subject or similar securities, typically from pricing vendors. If Oaktree is unable to obtain two quotes from pricing vendors, or if the prices obtained from pricing vendors are not within our set threshold, Oaktree seeks to obtain a quote directly from a broker making a market for the asset. Oaktree evaluates the quotations provided by pricing vendors and brokers based on available market information, including trading activity of the subject or similar securities, or by performing a comparable security analysis to ensure that fair values are reasonably estimated. Oaktree also performs back-testing of valuation information obtained from pricing vendors and brokers against actual prices received in transactions. In addition to ongoing monitoring and back-testing, Oaktree performs due diligence procedures over pricing vendors to understand their methodology and controls to support their use in the valuation process. Generally, Oaktree does not adjust any of the prices received from these sources. If the quotations obtained from pricing vendors or brokers are determined to not be reliable or are not readily available, Oaktree values such investments using any of three different valuation techniques. The first valuation technique is the transaction precedent technique, which utilizes recent or expected future transactions of the investment to determine fair value, to the extent applicable. The second valuation technique is an analysis of the enterprise value, or EV, of the portfolio company. EV means the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The EV analysis is typically performed to determine (i) the value of equity investments, (ii) whether there is credit impairment for debt investments and (iii) the value for debt investments that we are deemed to control under the Investment Company Act. To estimate the EV of a portfolio company, Oaktree analyzes various factors, including the portfolio company’s historical and projected financial results, macroeconomic impacts on the company and competitive dynamics in the company’s industry. Oaktree also utilizes some or all of the following information based on the individual circumstances of the portfolio company: (i) valuations of comparable public companies, (ii) recent sales of private and public comparable companies in similar industries or having similar business or earnings characteristics, (iii) purchase prices as a multiple of their earnings or cash flow, (iv) the portfolio company’s ability to meet its forecasts and its business prospects, (v) a discounted cash flow analysis, (vi) estimated liquidation or collateral value of the portfolio company’s assets and (vii) offers from third parties to buy the portfolio company. Oaktree may probability weight potential sale outcomes with respect to a portfolio company when uncertainty exists as of the valuation date. Under the EV technique, the significant unobservable input used in the fair value measurement of our investments in debt or equity securities is the EBITDA, revenue or asset multiple, as applicable. Increases or decreases in the valuation multiples in isolation may result in a higher or lower fair value measurement, respectively. The third valuation technique is a market yield technique, which is typically performed for non-credit impaired debt investments. In the market yield technique, a current price is imputed for the investment based upon an assessment of the expected market yield for a similarly structured investment with a similar level of risk, and we consider the current contractual interest rate, the capital structure and other terms of the investment relative to risk of the company and the specific investment. A key determinant of risk, among other things, is the leverage through the investment relative to the EV of the portfolio company. As debt investments held by us are substantially illiquid with no active transaction market, Oaktree depends on primary market data, including newly funded transactions and industry-specific market movements, as well as secondary market data with respect to high yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable. Under the market yield technique, the significant unobservable input used in the fair value measurement of our investments in debt securities is the market yield. Increases or decreases in the market yield may result in a lower or higher fair value measurement, respectively. In accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946 may be valued using net asset value as a practical expedient for fair value. Consistent with FASB guidance under ASC 820, these investments are excluded from the hierarchical levels. These investments are generally not redeemable. Oaktree estimates the fair value of certain privately held warrants using a Black Scholes pricing model, which includes an analysis of various factors and subjective assumptions, including the current stock price (by using an EV analysis as described above), the expected period until exercise, expected volatility of the underlying stock price, expected dividends and the risk-free rate. Changes in the subjective input assumptions can materially affect the fair value estimates. The fair value of our investments as of September 30, 2022 was determined by our Adviser, as our valuation designee, and the fair value of our investments as of September 30, 2021 was determined in good faith by our Board of Directors. We have and will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of a portion of our portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter. As of September 30, 2022, 93.2% of our portfolio at fair value was valued either based on market quotations, the transactions precedent approach or corroborated by independent valuation firms. Certain factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and 61 other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to these uncertainties, Oaktree's fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale of one or more of our investments. As of September 30, 2022, we held $2,494.1 million of investments at fair value, down from $2,556.6 million held at September 30, 2021, primarily driven by unrealized losses related to credit spread widening and partially offset by new originations. As of September 30, 2022 and September 30, 2021, approximately 94.2% and 97.0%, respectively, of our total assets represented investments at fair value. Revenue Recognition Interest Income Interest income, adjusted for accretion of OID is recorded on an accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments when it is determined that interest is no longer collectible. Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when there is reasonable doubt that principal or interest cash payments will be collected. Cash interest payments received on investments may be recognized as income or a return of capital depending upon management’s judgment. A non-accrual investment is restored to accrual status if past due principal and interest are paid in cash, and the portfolio company, in management’s judgment, is likely to continue timely payment of its remaining obligations. As of each of September 30, 2022 and September 30, 2021, there were no investments on non-accrual status. In connection with our investment in a portfolio company, we sometimes receive nominal cost equity that is valued as part of the negotiation process with the portfolio company. When we receive nominal cost equity, we allocate our cost basis in the investment between debt securities and the nominal cost equity at the time of origination. Any resulting discount from recording the loan, or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan. PIK Interest Income Our investments in debt securities may contain PIK interest provisions. PIK interest, which typically represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest on a loan or debt security involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; financial statements and financial projections for the portfolio company; our assessment of the portfolio company's business development success; information obtained by us in connection with periodic formal update interviews with the portfolio company's management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Our determination to cease accruing PIK interest is generally made well before our full write-down of a loan or debt security. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of the loans or debt securities would be reduced by the amount of such previously accrued, but uncollectible, PIK interest. The accrual of PIK interest on our debt investments increases the recorded cost bases of these investments in our Consolidated Financial Statements including for purposes of computing the capital gains incentive fee payable by us to Oaktree. To maintain our status as a RIC, certain income from PIK interest may be required to be distributed to our stockholders, even though we have not yet collected the cash and may never do so. Portfolio Composition Our investments principally consist of loans, common and preferred equity and warrants in privately-held companies, SLF JV I and Glick JV. Our loans are typically secured by a first, second or subordinated lien on the assets of the portfolio company and generally have terms of up to ten years (but an expected average life of between three and four years). During the fiscal year ended September 30, 2022, we originated $756.7 million of investment commitments in 46 new and 39 existing portfolio companies and funded $691.5 million of investments. During the fiscal year ended September 30, 2022, we received $691.1 million of proceeds from prepayments, exits, other paydowns and sales and exited 35 portfolio companies. 62 A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables: September 30, 2022 September 30, 2021 Cost: Senior secured debt 85.08 % 85.85 % Debt investments in the JVs 5.59 5.79 Preferred equity 3.26 2.60 Subordinated debt 2.57 1.67 LLC equity interests of the JVs 1.88 1.94 Common equity and warrants 1.62 2.15 Total 100.00 % 100.00 % September 30, 2022 September 30, 2021 Fair value: Senior secured debt 86.86 % 86.72 % Debt investments in the JVs 5.88 5.94 Preferred equity 3.19 2.49 Subordinated debt 2.28 1.67 Common equity and warrants 0.96 1.71 LLC equity interests of the JVs 0.83 1.47 Total 100.00 % 100.00 % 63 The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows: September 30, 2022 September 30, 2021 Cost: Application Software 14.98 % 14.49 % Multi-Sector Holdings (1) 7.48 7.73 Pharmaceuticals 4.83 5.44 Data Processing & Outsourced Services 4.60 4.74 Biotechnology 4.20 4.41 Health Care Technology 3.82 0.55 Industrial Machinery 3.12 3.47 Specialized Finance 3.09 2.70 Internet & Direct Marketing Retail 2.59 2.45 Aerospace & Defense 2.37 2.66 Construction & Engineering 2.33 2.44 Automotive Retail 2.26 1.65 Health Care Services 2.24 3.34 Health Care Distributors 2.18 0.78 Internet Services & Infrastructure 2.07 1.85 Personal Products 2.03 4.08 Fertilizers & Agricultural Chemicals 1.88 2.63 Metal & Glass Containers 1.82 0.69 Real Estate Operating Companies 1.82 1.08 Home Improvement Retail 1.75 1.83 Airport Services 1.65 1.64 Real Estate Services 1.54 1.59 Leisure Facilities 1.52 0.99 Diversified Support Services 1.45 1.60 Specialty Chemicals 1.43 1.84 Health Care Supplies 1.39 1.17 Insurance Brokers 1.36 1.00 Integrated Telecommunication Services 1.32 1.85 Soft Drinks 1.31 1.32 Electrical Components & Equipment 1.29 1.27 Other Diversified Financial Services 1.12 0.63 Advertising 1.08 1.13 Movies & Entertainment 1.00 1.02 Distributors 0.97 — Health Care Equipment 0.93 0.93 Oil & Gas Storage & Transportation 0.85 1.44 Environmental & Facilities Services 0.80 — Cable & Satellite 0.79 1.05 Home Furnishings 0.75 0.77 Systems Software 0.57 0.26 Consumer Finance 0.55 — Hotels, Resorts & Cruise Lines 0.53 — Auto Parts & Equipment 0.48 0.49 IT Consulting & Other Services 0.45 0.30 Restaurants 0.36 0.37 Research & Consulting Services 0.35 0.29 Education Services 0.35 0.04 Oil & Gas Refining & Marketing 0.33 1.42 Trading Companies & Distributors 0.29 — Air Freight & Logistics 0.28 0.19 Apparel Retail 0.20 — Apparel, Accessories & Luxury Goods 0.20 0.20 Integrated Oil & Gas 0.19 0.19 Food Distributors 0.18 0.18 Specialized REITs 0.16 — Diversified Banks 0.13 0.14 Technology Distributors 0.12 0.12 Construction Materials 0.09 0.09 Housewares & Specialties 0.09 0.07 Electronic Components 0.08 0.40 Alternative Carriers 0.01 0.26 Independent Power Producers & Energy Traders — 0.92 Airlines — 0.88 Commercial Printing — 0.78 Managed Health Care — 0.73 Thrifts & Mortgage Finance — 0.63 Property & Casualty Insurance — 0.39 Leisure Products — 0.26 Food Retail — 0.15 Total 100.00 % 100.00 % 64 September 30, 2022 September 30, 2021 Fair value: Application Software 15.43 % 14.58 % Multi-Sector Holdings (1) 6.71 7.41 Pharmaceuticals 4.79 5.56 Data Processing & Outsourced Services 4.46 4.46 Biotechnology 4.35 4.44 Health Care Technology 3.90 0.55 Industrial Machinery 3.25 3.53 Specialized Finance 2.93 2.69 Internet & Direct Marketing Retail 2.82 2.68 Aerospace & Defense 2.48 2.72 Construction & Engineering 2.45 2.47 Automotive Retail 2.31 1.65 Health Care Distributors 2.19 0.77 Internet Services & Infrastructure 2.16 1.87 Fertilizers & Agricultural Chemicals 2.08 2.64 Personal Products 2.01 4.13 Real Estate Operating Companies 1.93 1.11 Metal & Glass Containers 1.91 0.68 Health Care Services 1.84 3.31 Home Improvement Retail 1.82 1.82 Airport Services 1.72 1.59 Real Estate Services 1.59 1.61 Leisure Facilities 1.57 0.90 Diversified Support Services 1.47 1.60 Health Care Supplies 1.47 1.18 Specialty Chemicals 1.36 1.82 Soft Drinks 1.35 1.31 Insurance Brokers 1.33 1.08 Electrical Components & Equipment 1.32 1.26 Integrated Telecommunication Services 1.29 1.94 Advertising 1.08 1.19 Movies & Entertainment 1.07 1.06 Distributors 0.98 — Other Diversified Financial Services 0.98 0.62 Health Care Equipment 0.97 0.93 Oil & Gas Storage & Transportation 0.84 1.35 Environmental & Facilities Services 0.83 — Cable & Satellite 0.78 1.06 Home Furnishings 0.73 0.77 Hotels, Resorts & Cruise Lines 0.56 — Consumer Finance 0.53 — Systems Software 0.51 0.26 Auto Parts & Equipment 0.46 0.48 Restaurants 0.35 0.37 Oil & Gas Refining & Marketing 0.34 1.43 IT Consulting & Other Services 0.34 0.29 Education Services 0.34 0.04 Research & Consulting Services 0.34 0.30 Air Freight & Logistics 0.26 0.19 Trading Companies & Distributors 0.22 — Apparel Retail 0.21 — Integrated Oil & Gas 0.20 0.19 Diversified Banks 0.14 0.14 Food Distributors 0.13 0.18 Specialized REITs 0.13 — Technology Distributors 0.12 0.12 Housewares & Specialties 0.10 0.08 Construction Materials 0.08 0.09 Electronic Components 0.08 0.40 Alternative Carriers 0.01 0.27 Airlines — 0.96 Independent Power Producers & Energy Traders — 0.92 Commercial Printing — 0.79 Managed Health Care — 0.74 Thrifts & Mortgage Finance — 0.62 Property & Casualty Insurance — 0.39 Leisure Products — 0.26 Food Retail — 0.15 Total 100.00 % 100.00 % ___________________ (1) This industry includes our investments in the JVs and certain limited partnership interests. 65 The Joint Ventures Senior Loan Fund JV I, LLC In May 2014, we entered into an LLC agreement with Kemper to form SLF JV I. We co-invest in senior secured loans of middle-market companies and other corporate debt securities with Kemper through our investment in SLF JV I. SLF JV I is managed by a four person Board of Directors, two of whom are selected by us and two of whom are selected by Kemper. All portfolio decisions and investment decisions in respect of SLF JV I must be approved by the SLF JV I investment committee, which consists of one representative selected by us and one representative selected by Kemper (with approval from a representative of each required). Since we do not have a controlling financial interest in SLF JV I, we do not consolidate SLF JV I. SLF JV I is not an "eligible portfolio company" as defined in section 2(a)(46) of the Investment Company Act. SLF JV I is capitalized pro rata with LLC equity interests as transactions are completed and may be capitalized with additional SLF JV I Notes issued to us and Kemper by SLF JV I. The SLF JV I Notes are senior in right of payment to SLF JV I LLC equity interests and subordinated in right of payment to SLF JV I’s secured debt. As of September 30, 2022 and September 30, 2021, we and Kemper owned, in the aggregate, 87.5% and 12.5%, respectively, of the LLC equity interests of SLF JV I and the outstanding SLF JV I Notes. As of each of September 30, 2022 and September 30, 2021, we and Kemper had funded approximately $165.5 million to SLF JV I, of which $144.8 million was from us. As of each of September 30, 2022 and September 30, 2021, we had aggregate commitments to fund SLF JV I of $35.0 million, of which approximately $26.2 million was to fund additional SLF JV I Notes and approximately $8.8 million was to fund LLC equity interests in SLF JV I. Both the cost and fair value of our SLF JV I Notes were $96.3 million as of each of September 30, 2022 and September 30, 2021. We earned interest income of $8.0 million, $7.4 million and $8.1 million on the SLF JV I Notes for the years ended September 30, 2022, 2021 and 2020, respectively. As of September 30, 2022, the SLF JV I Notes bore interest at a rate of one-month LIBOR plus 7.00% per annum with a LIBOR floor of 1.00% and will mature on December 29, 2028. The cost and fair value of the LLC equity interests in SLF JV I held by us was $49.3 million and $20.7 million, respectively, as of September 30, 2022, and $49.3 million and $37.7 million, respectively, as of September 30, 2021. We earned $2.9 million and $0.9 million in dividend income for the years ended September 30, 2022 and September 30, 2021, respectively, with respect to our investment in the LLC equity interests of SLF JV I. We did not earn dividend income for the year ended September 30, 2020 with respect to our investment in the LLC equity interests of SLF JV I. Below is a summary of SLF JV I's portfolio as of September 30, 2022 and September 30, 2021: September 30, 2022 September 30, 2021 Senior secured loans (1) $383,194 $344,196 Weighted average interest rate on senior secured loans (2) 8.33% 5.60% Number of borrowers in SLF JV I 60 55 Largest exposure to a single borrower (1) $10,093 $9,875 Total of five largest loan exposures to borrowers (1) $48,139 $46,984 __________________ (1) At principal amount. (2) Computed using the weighted average annual interest rate on accruing senior secured loans at fair value. See " Note 3. Portfolio Investments" in the notes to the accompanying financial statements for more information on SLF JV I and its portfolio. 66 OCSI Glick JV LLC On March 19, 2021, we became party to the LLC agreement of the Glick JV. The Glick JV invests primarily in senior secured loans of middle-market companies. We co-invest in these securities with GF Equity Funding through the Glick JV. The Glick JV is managed by a four person Board of Directors, two of whom are selected by us and two of whom are selected by GF Equity Funding. All portfolio decisions and investment decisions in respect of the Glick JV must be approved by the Glick JV investment committee, consisting of one representative selected by us and one representative selected by GF Equity Funding (with approval from a representative of each required). Since we do not have a controlling financial interest in the Glick JV, we do not consolidate the Glick JV. The Glick JV is not an "eligible portfolio company" as defined in section 2(a)(46) of the Investment Company Act. The Glick JV is capitalized as transactions are completed. The members provide capital to the Glick JV in exchange for LLC equity interests, and we and GF Debt Funding, an entity advised by affiliates of GF Equity Funding, provide capital to the Glick JV in exchange for Glick JV Notes. The Glick JV Notes are junior in right of payment to the repayment of temporary contributions made by us to fund investments of the Glick JV that are repaid when GF Equity Funding and GF Debt Funding make their capital contributions and fund their Glick JV Notes, respectively. As of September 30, 2022 and September 30, 2021, we and GF Equity Funding owned 87.5% and 12.5%, respectively, of the outstanding LLC equity interests, and we and GF Debt Funding owned 87.5% and 12.5%, respectively, of the Glick JV Notes. Approximately $84.0 million in aggregate commitments was funded as of each of September 30, 2022 and September 30, 2021, of which $73.5 million was from us. As of September 30, 2022 and September 30, 2021, we had commitments to fund Glick JV Notes of $78.8 million, of which $12.4 million was unfunded. As of each of September 30, 2022 and September 30, 2021, we had commitments to fund LLC equity interests in the Glick JV of $8.7 million, of which $1.6 million was unfunded. The cost and fair value of our aggregate investment in the Glick JV was $50.2 million and $50.3 million, respectively, as of September 30, 2022 . The cost and fair value of our aggregate investment in the Glick JV was $50.7 million and $55.6 million, respectively, as of September 30, 2021 . For the year ended September 30, 2022 and for the period from March 19, 2021 to September 30, 2021, our investment in the Glick JV Notes earned interest income of $4.7 million and $2.4 million, respectively. We did not earn any dividend income for the year ended September 30, 2022 and for the period from March 19, 2021 to September 30, 2021 with respect to our investment in the LLC equity interests of the Glick JV. Below is a summary of the Glick JV's portfolio as of September 30, 2022 and September 30, 2021: September 30, 2022 September 30, 2021 Senior secured loans (1) $143,225 $126,512 Weighted average current interest rate on senior secured loans (2) 8.52% 5.86% Number of borrowers in the Glick JV 43 37 Largest loan exposure to a single borrower (1) $6,562 $6,907 Total of five largest loan exposures to borrowers (1) $28,973 $28,324 __________ (1) At principal amount. (2) Computed using the weighted average annual interest rate on accruing senior secured loans at fair value. See " Note 3. Portfolio Investments" in the notes to the accompanying financial statements for more information on the Glick JV and its portfolio. 67 Discussion and Analysis of Results and Operations Results of Operations Net increase (decrease) in net assets resulting from operations includes net investment income, net realized gains (losses) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends and fees and net expenses. Net realized gains (losses) is the difference between the proceeds received from dispositions of investment related assets and liabilities and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment related assets and liabilities carried at fair value during the reporting period, including the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized. Comparison of Years ended September 30, 2022 and September 30, 2021 Total Investment Income Total investment income includes interest on our investments, fee income and dividend income. Total investment income for the years ended September 30, 2022 and 2021 was $262.5 million and $209.4 million, respectively. For the year ended September 30, 2022, this amount consisted of $249.4 million of interest income from portfolio investments (which included $20.5 million of PIK interest), $6.6 million of fee income and $6.4 million of dividend income. For the year ended September 30, 2021, this amount consisted of $190.8 million of interest income from portfolio investments (which included $16.4 million of PIK interest), $14.1 million of fee income and $4.5 million of dividend income. The increase of $53.1 million, or 25.4%, in our total investment income for the year ended September 30, 2022, as compared to the year ended September 30, 2021, was due primarily to (1) a $58.6 million increase in interest income, which was primarily driven by the impact of rising reference rates on interest income and a larger average investment portfolio as a result of the increase in assets resulting from the OCSI Merger and new originations and (2) a $2.0 million increase in dividend income mainly driven by larger dividends received from our equity investment in the SLF JV I. This was partially offset by a $7.5 million decrease in fee income primarily due to lower prepayment and amendment fees. Expenses Net expenses (expenses net of fee waivers) for the years ended September 30, 2022 and 2021 were $110.6 million and $109.5 million, respectively. Net expenses increased for the year ended September 30, 2022, as compared to the year ended September 30, 2021, by $1.1 million, or 1.0%, primarily due to (1) a $16.4 million increase in interest expense due to higher borrowings outstanding and the impact of rising reference rates, (2) a $5.0 million increase in Part I incentive fees mainly due to higher total investment income, partially offset by higher interest expense and management fees and (3) a $5.9 million increase in base management fees (net of management fee waivers) primarily as a result of a larger average investment portfolio. These were partially offset by $26.4 million of lower accrued Part II incentive fees as a result of a reversal of previously accrued capital gains incentive fees driven by unrealized losses during the current period. Net Investment Income Primarily as a result of the $53.1 million increase in total investment income, the $1.1 million increase in net expenses and a $0.5 million increase in the provision for taxes on net investment income, net investment income for the year ended September 30, 2022 increased by $51.5 million compared to the year ended September 30, 2021. Realized Gain (Loss) Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of investments and foreign currency and the cost basis without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules. During the years ended September 30, 2022, 2021 and 2020, we recorded aggregate net realized gains (losses) of $17.2 million, $26.4 million and $(13.9) million, respectively, in connection with the exits of various investments and foreign currency forward contracts. See “ Note 8. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation ” in the notes to the accompanying Consolidated Financial Statements for more details regarding investment realization events for the years ended September 30, 2022, 2021 and 2020. 68 Net Unrealized Appreciation (Depreciation) Net unrealized appreciation or depreciation is the net change in the fair value of our investments and foreign currency during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. During the years ended September 30, 2022, 2021 and 2020, we recorded net unrealized appreciation (depreciation) of $(136.2) million, $114.5 million and $(20.6) million, respectively. For the year ended September 30, 2022, this consisted of $94.1 million of net unrealized depreciation on debt investments, $35.4 million of net unrealized depreciation on equity investments and $11.7 million of net unrealized depreciation related to exited investments (a portion of which resulted in a reclassification to realized gains), partially offset by $4.9 million of net unrealized appreciation of foreign currency forward contracts. For the year ended September 30, 2021, this consisted of $70.0 million of net unrealized appreciation on debt investments, $36.3 million of net unrealized appreciation on equity investments, $6.6 million of net unrealized appreciation related to exited investments (a portion of which resulted in a reclassification to realized losses) and $1.7 million of net unrealized appreciation of foreign currency forward contracts. For the year ended September 30, 2020, this consisted of $35.3 million of net unrealized depreciation on equity investments, $12.0 million of net unrealized depreciation on debt investments and $0.3 million of net unrealized depreciation of foreign currency forward contracts, partially offset by $26.9 million of net unrealized appreciation related to exited investments (a portion of which resulted in a reclassification to realized losses). For the year ended September 30, 2021, there were $22.8 million of net realized and unrealized gains (losses) that resulted solely from accounting adjustments related to the OCSI Merger. Comparison of Years ended September 30, 2021 and September 30, 2020 The comparison of the fiscal years ended September 30, 2021 and 2020 can be found within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our annual report on Form 10-K for the fiscal year ended September 30, 2021. Financial Condition, Liquidity and Capital Resources We have a number of alternatives available to fund our investment portfolio and our operations, including raising equity, increasing or refinancing debt and funding from operational cash flow. We generally expect to fund the growth of our investment portfolio through additional debt and equity capital, which may include securitizing a portion of our investments. We cannot assure you, however, that our efforts to grow our portfolio will be successful. For example, our common stock has generally traded at prices below net asset value for the past several years, and we may not be able to raise additional equity at prices below the then-current net asset value per share. We intend to continue to generate cash primarily from cash flows from operations, including interest earned, and future borrowings or equity offerings. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity and debt offerings or credit facilities, as we deem appropriate. Our primary uses of funds are investments in our targeted asset classes and cash distributions to holders of our common stock. We may also from time to time repurchase or redeem some or all of our outstanding notes. At a special meeting of our stockholders held on June 28, 2019, our stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act to us effective as of June 29, 2019. As a result of the reduced asset coverage requirement, we can incur $2 of debt for each $1 of equity as compared to $1 of debt for each $1 of equity. As of September 30, 2022, we had $1,350.0 million in senior securities and our asset coverage ratio was 188.6%. During the year, we increased our target debt to equity ratio from 0.85x to 1.0x to 0.90x to 1.25x (i.e., one dollar of equity for each $0.90 to $1.25 of debt outstanding) to provide us with increased capacity to opportunistically deploy capital into the markets. As of September 30, 2022, our debt to equity ratio was 1.08x. For the year ended September 30, 2022, we experienced a net decrease in cash and cash equivalents (including restricted cash) of $5.3 million. During that period, net cash provided by operating activities was $22.4 million, primarily from $693.7 million of principal payments and sale proceeds received, $22.4 million of net increase in payables from unsettled transactions and the cash activities related to $148.6 million of net investment income, partially offset by funding $702.1 million of investments, $43.9 million of increase in due from broker (cash held at a broker to cover collateral obligations under the interest swap agreement) and $20.5 million increase in due from portfolio companies. During the same period, net cash used in financing activities was $26.8 million, primarily consisting of $115.2 million of cash distributions paid to our stockholders, $1.9 million of repurchases of common stock under our dividend reinvestment plan, DRIP, and $0.3 million of deferred financing costs paid, partially offset by $70.0 million of net borrowings under the credit facilities and $20.6 million of proceeds (net of offering costs) from shares issued under the "at the market" offering. 69 For the year ended September 30, 2021, we experienced a net decrease in cash and cash equivalents (including restricted cash) of $7.5 million. During that period, we used $230.5 million of net cash from operating activities, primarily from funding $1,120.2 million of investments, partially offset by $792.2 million of principal payments and sale proceeds received, $20.9 million of cash acquired in the OCSI Merger, the cash activities related to $97.1 million of net investment income and $10.1 million of net increases in payables and net decreases in receivables from unsettled transactions. During the same period, net cash provided by financing activities was $224.2 million, primarily consisting of $349.0 million of borrowings of unsecured notes (net of OID), partially offset by $24.6 million of net repayments under the credit facilities, $79.9 million of cash distributions paid to our stockholders, $9.3 million of repayments of secured borrowings, $2.2 million of repurchases of common stock under our DRIP and $8.9 million of deferred financing costs paid. For the year ended September 30, 2020, we experienced a net increase in cash and cash equivalents of $23.7 million. During that period, we used $152.9 million of net cash from operating activities, primarily from funding $727.2 million of investments, a $63.7 million of net decrease in payables from unsettled transactions, partially offset by $579.6 million of principal payments and sale proceeds received and the cash activities related to $72.0 million of net investment income. During the same period, net cash provided by financing activities was $176.3 million, primarily consisting of $100.0 million of net borrowings under the Credit Facility (as defined below) and $136.2 million net incurrence of unsecured notes, partially offset by $53.1 million of cash distributions paid to our stockholders, $4.8 million of deferred financing costs paid and $1.9 million of repurchases of common stock under our DRIP. As of September 30, 2022, we had $26.4 million in cash and cash equivalents (including $2.8 million of restricted cash), portfolio investments (at fair value) of $2.5 billion, $35.6 million of interest, dividends and fees receivable, $22.5 million of due from portfolio companies, $500.0 million of undrawn capacity on our credit facilities (subject to borrowing base and other limitations), $22.3 million of net payables from unsettled transactions, $700.0 million of borrowings outstanding under our credit facilities and $601.0 million of unsecured notes payable (net of unamortized financing costs, unaccreted discount and interest rate swap fair value adjustment). As of September 30, 2021, we had $31.6 million in cash and cash equivalents (including $2.3 million of restricted cash), portfolio investments (at fair value) of $2.6 billion, $22.1 million of interest, dividends and fees receivable, $470.0 million of undrawn capacity on our credit facilities (subject to borrowing base and other limitations), $0.1 million of net receivables from unsettled transactions, $630.0 million of borrowings outstanding under our credit facilities and $638.7 million of unsecured notes payable (net of unamortized financing costs, unaccreted discount and interest rate swap fair value adjustment). We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of September 30, 2022, our only off-balance sheet arrangements consisted of $224.2 million of unfunded commitments, which was comprised of $175.2 million to provide debt and equity financing to certain of our portfolio companies and $49.0 million to provide financing to the JVs. As of September 30, 2021, our only off-balance sheet arrangements consisted of $264.9 million of unfunded commitments, which was comprised of $212.4 million to provide debt and equity financing to certain of our portfolio companies, $49.0 million to provide financing to the JVs and $3.5 million related to unfunded limited partnership interests. Such commitments are subject to our portfolio companies' satisfaction 70 of certain financial and nonfinancial covenants and may involve, to varying degrees, elements of credit risk in excess of the amount recognized in our Consolidated Statements of Assets and Liabilities. As of September 30, 2022, we have analyzed cash and cash equivalents, availability under our credit facilities, the ability to rotate out of certain assets and amounts of unfunded commitments that could be drawn and believe our liquidity and capital resources are sufficient to take advantage of market opportunities in the current economic climate. Contractual Obligations The following table reflects information pertaining to our principal debt outstanding under the Syndicated Facility (as defined below), Citibank Facility (as defined below), the 2025 Notes and the 2027 Notes: Debt Outstanding as of September 30, 2021 Debt Outstanding as of September 30, 2022 Weighted average debt outstanding for the year ended September 30, 2022 Maximum debt outstanding for the year ended September 30, 2022 Syndicated Facility $ 495,000 $ 540,000 $ 550,165 $ 620,000 Citibank Facility 135,000 160,000 160,986 185,000 2025 Notes 300,000 300,000 300,000 300,000 2027 Notes 350,000 350,000 350,000 350,000 Total debt $ 1,280,000 $ 1,350,000 $ 1,361,151 The following table reflects our contractual obligations arising from the Syndicated Facility, Citibank Facility, 2025 Notes and 2027 Notes: Payments due by period as of September 30, 2022 Contractual Obligations Total Less than 1 year 1-3 years 3-5 years Syndicated Facility $ 540,000 $ — $ — $ 540,000 Interest due on Syndicated Facility 90,986 25,313 50,626 15,047 Citibank Facility 160,000 — 160,000 — Interest due on Citibank Facility 19,225 8,996 10,229 — 2025 Notes 300,000 — 300,000 — Interest due on 2025 Notes 25,286 10,500 14,786 — 2027 Notes 350,000 — — 350,000 Interest due on 2027 Notes (a) 62,699 14,595 29,190 18,914 Total $ 1,548,196 $ 59,404 $ 564,831 $ 923,961 __________ (a) The interest due on the 2027 Notes was calculated net of the interest rate swap. Equity Issuances During the year ended September 30, 2022, we issued an aggregate of 212,382 shares of common stock as part of the DRIP. On February 7, 2022, we entered into an equity distribution agreement by and among us, Oaktree, Oaktree Administrator and Keefe, Bruyette & Woods, Inc., JMP Securities LLC, Raymond James & Associates, Inc. and SMBC Nikko Securities America, Inc., as placement agents, in connection with the issuance and sale by us of shares of common stock, having an aggregate offering price of up to $125.0 million. Sales of the common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the Nasdaq Global Select Market or similar securities exchanges or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. 71 In connection with the "at the market" offering, we issued and sold the following shares of common stock during the year ended September 30, 2022: Number of Shares Issued Gross Proceeds Placement Agent Fees Net Proceeds (1) Average Sales Price per Share (2) "At the market" offering 2,801,206 $ 21,049 $ 210 $ 20,839 $ 7.51 __________ (1) Net proceeds excludes offering costs of $0.2 million. (2) Represents the gross sales price before deducting placement agent fees and estimated offering expenses. On March 19, 2021, in connection with the OCSI Merger, we issued an aggregate of 39,400,011 shares of common stock to former OCSI stockholders. There were no other common stock issuances during the year ended September 30, 2021. Distributions The following table reflects the distributions per share that we have paid, including shares issued under our DRIP, on our common stock since October 1, 2020: Date Declared Record Date Payment Date Amount per Share Cash Distribution DRIP Shares Issued (1) DRIP Shares Value November 13, 2020 December 15, 2020 December 31, 2020 $ 0.11 $ 15.0 million 93,964 $ 0.5 million January 29, 2021 March 15, 2021 March 31, 2021 0.12 16.4 million 81,702 0.5 million April 30, 2021 June 15, 2021 June 30, 2021 0.13 22.9 million 76,979 0.5 million July 30, 2021 September 15, 2021 September 30, 2021 0.145 25.5 million 85,075 0.6 million October 13, 2021 December 15, 2021 December 31, 2021 0.155 27.2 million 107,971 0.8 million January 28, 2022 March 15, 2022 March 31, 2022 0.16 28.5 million 104,411 0.8 million April 29, 2022 June 15, 2022 June 30, 2022 0.165 29.4 million 131,028 0.9 million July 29, 2022 September 15, 2022 September 30, 2022 0.17 30.2 million 153,544 1.0 million ______________ (1) Shares were purchased on the open market and distributed other than with respect to the distributions paid on December 31, 2021 and March 31, 2022. New shares were issued and distributed during the quarters ended December 31, 2021 and March 31, 2022. Indebtedness See “ Note 6. Borrowings ” in the Consolidated Financial Statements for more details regarding our indebtedness. Syndicated Facility As of September 30, 2022, (i) the size of the Syndicated Facility was $1.0 billion (with an “accordion” feature that permits us, under certain circumstances, to increase the size of the facility to up to the greater of $1.25 billion and our net worth (as defined in the Syndicated Facility) on the date of such increase), (ii) the period during which we may make drawings will expire on May 4, 2025 and the maturity date was May 4, 2026 and (iii) the interest rate margin for (a) LIBOR loans (which may be 1-, 2-, 3- or 6-month, at our option) was 2.00% and (b) alternate base rate loans was 1.00%. Each loan or letter of credit originated or assumed under the Syndicated Facility is subject to the satisfaction of certain conditions. Borrowings under the Syndicated Facility are subject to the facility’s various covenants and the leverage restrictions contained in the Investment Company Act. We cannot assure you that we will be able to borrow funds under the Syndicated Facility at any particular time or at all. 72 The following table describes significant financial covenants, as of September 30, 2022, with which we must comply under the Syndicated Facility on a quarterly basis: Financial Covenant Description Target Value June 30, 2022 Reported Value (1) Minimum shareholders' equity Net assets shall not be less than the sum of (x) $600 million, plus (y) 50% of the aggregate net proceeds of all sales of equity interests after May 6, 2020 $610 million $1,264 million Asset coverage ratio Asset coverage ratio shall not be less than the greater of 1.50:1 and the statutory test applicable to us 1.50:1 1.88:1 Interest coverage ratio Interest coverage ratio shall not be less than 2.25:1 2.25:1 4.55:1 Minimum net worth Net worth shall not be less than $550 million $550 million $1,075 million ___________ (1) As contractually required, we report financial covenants based on the last filed quarterly or annual report, in this case our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. We were in compliance with all financial covenants under the Syndicated Facility based on the financial information contained in this Annual Report on Form 10-K. As of September 30, 2022 and September 30, 2021, we had $540.0 million and $495.0 million of borrowings outstanding under the Syndicated Facility, respectively, which had a fair value of $540.0 million and $495.0 million, respectively. Our borrowings under the Syndicated Facility bore interest at a weighted average interest rate of 2.876%, 2.197% and 3.028% for the years ended September 30, 2022, 2021 and 2020, respectively. For the years ended September 30, 2022, 2021 and 2020, we recorded interest expense (inclusive of fees) of $19.5 million, $13.8 million and $14.9 million, respectively, related to the Syndicated Facility. Citibank Facility On March 19, 2021, we became party to the Citibank Facility. As of September 30, 2022, we were able to borrow up to $200 million under the Citibank Facility (subject to borrowing base and other limitations). As of September 30, 2022, the reinvestment period under the Citibank Facility was scheduled to expire on November 18, 2023 and the maturity date for the Citibank Facility was November 18, 2024. As of September 30, 2022, borrowings under the Citibank Facility are subject to certain customary advance rates and accrue interest at a rate equal to LIBOR plus between 1.25% and 2.20% per annum on broadly syndicated loans, subject to observable market depth and pricing, and LIBOR plus 2.25% per annum on all other eligible loans during the reinvestment period. In addition, as of September 30, 2022, for the duration of the reinvestment period there is a non-usage fee payable of 0.50% per annum on the undrawn amount under the Citibank Facility. The minimum asset coverage ratio applicable to us under the Citibank Facility is 150% as determined in accordance with the requirements of the Investment Company Act. Borrowings under the Citibank Facility are secured by all of the assets of OCSL Senior Funding II LLC and all of our equity interests in OCSL Senior Funding II LLC. We may use the Citibank Facility to fund a portion of our loan origination activities and for general corporate purposes. Each loan origination under the Citibank Facility is subject to the satisfaction of certain conditions. As of September 30, 2022 and September 30, 2021, we had $160.0 million and $135.0 million outstanding under the Citibank Facility, respectively, which had a fair value of $160.0 million and $135.0 million, respectively. Our borrowings under the Citibank Facility bore interest at a weighted average interest rate of 3.179% and 2.086% for the year ended September 30, 2022 and the period from March 19, 2021 to September 30, 2021, respectively. For the year ended September 30, 2022 and the period from March 19, 2021 to September 30, 2021, we recorded interest expense (inclusive of fees) of $5.8 million and $1.9 million, respectively, related to the Citibank Facility. 2025 Notes On February 25, 2020, we issued $300.0 million in aggregate principal amount of the 2025 Notes for net proceeds of $293.8 million after deducting OID of $2.5 million, underwriting commissions and discounts of $3.0 million and offering costs of $0.7 million. The OID on the 2025 Notes is amortized based on the effective interest method over the term of the notes. 2027 Notes On May 18, 2021, we issued $350.0 million in aggregate principal amount of the 2027 Notes for net proceeds of $344.8 million after deducting OID of $1.0 million, underwriting commissions and discounts of $3.5 million and offering costs of $0.7 million. The OID on the 2027 Notes is amortized based on the effective interest method over the term of the notes. In connection with the 2027 Notes, we entered into an interest rate swap to more closely align the interest rates of our liabilities with our investment portfolio, which consists of predominately floating rate loans. Under the interest rate swap agreement, we receive a fixed interest rate of 2.700% and pay a floating interest rate of the three-month LIBOR plus 1.658% on 73 a notional amount of $350 million. We designated the interest rate swap as the hedging instrument in an effective hedge accounting relationship. The below table presents the components of the carrying value of the 2025 Notes and the 2027 Notes as of September 30, 2022 and September 30, 2021: As of September 30, 2022 As of September 30, 2021 ($ in millions) 2025 Notes 2027 Notes 2025 Notes 2027 Notes Principal $ 300.0 $ 350.0 $ 300.0 $ 350.0 Unamortized financing costs (1.8) (3.2) (2.6) (4.0) Unaccreted discount (1.2) (0.7) (1.7) (0.9) Interest rate swap fair value adjustment — (42.0) — (2.1) Net carrying value $ 297.0 $ 304.1 $ 295.7 $ 343.0 Fair Value $ 283.1 $ 294.0 $ 314.5 $ 351.1 The below table presents the components of interest and other debt expenses related to the 2025 Notes and the 2027 Notes for the year ended September 30, 2022: ($ in millions) 2025 Notes 2027 Notes Coupon interest $ 10.5 $ 9.5 Amortization of financing costs and discount 1.3 0.9 Effect of interest rate swap — (0.4) Total interest expense $ 11.8 $ 10.0 Coupon interest rate (net of effect of interest rate swap for 2027 Notes) 3.500 % 2.585 % The below table presents the components of interest and other debt expenses related to the 2025 Notes and the 2027 Notes for the year ended September 30, 2021: ($ in millions) 2025 Notes 2027 Notes Coupon interest $ 10.5 $ 3.5 Amortization of financing costs and discount 1.3 0.3 Effect of interest rate swap — (1.1) Total interest expense $ 11.8 $ 2.7 Coupon interest rate (net of effect of interest rate swap for 2027 Notes) 3.500 % 1.813 % The below table presents the components of interest and other debt expenses related to the 2025 Notes for the year ended September 30, 2020: ($ in millions) 2025 Notes Coupon interest $ 6.3 Amortization of financing costs and discount 0.7 Total interest expense $ 7.0 Coupon interest rate 3.500 % Regulated Investment Company Status and Distributions We have qualified and elected to be treated as a RIC under Subchapter M of the Code for U.S. federal income tax purposes. As long as we continue to qualify as a RIC, we will not be subject to tax on our investment company taxable income (determined without regard to any deduction for dividends paid) or realized net capital gains, to the extent that such taxable income or gains is distributed, or deemed to be distributed as dividends, to stockholders on a timely basis. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation. Distributions declared and paid by us in a taxable year may differ from taxable income for that taxable year as such distributions may include the distribution of taxable income derived from the current taxable year or the distribution of taxable 74 income derived from the prior taxable year carried forward into and distributed in the current taxable year. Distributions also may include returns of capital. To maintain RIC tax treatment, we must, among other things, distribute dividends, with respect to each taxable year, of an amount at least equal to 90% of our investment company taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any), determined without regard to any deduction for dividends paid. As a RIC, we are also subject to a federal excise tax, based on distribution requirements of our taxable income on a calendar year basis. We anticipate timely distribution of our taxable income in accordance with tax rules. We did not incur a U.S. federal excise tax for calendar years 2020 and 2021 and do not expect to incur a U.S. federal excise tax for calendar year 2022. We may incur a federal excise tax in future years. We intend to distribute at least 90% of our annual taxable income (which includes our taxable interest and fee income) to our stockholders. The covenants contained in our credit facilities may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement associated with our ability to be subject to tax as a RIC. In addition, we may retain for investment some or all of our net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal and taxable year fall below the total amount of our dividend distributions for that fiscal and taxable year, a portion of those distributions may be deemed a return of capital to our stockholders. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a Business Development Company under the Investment Company Act and due to provisions in our credit facilities and debt instruments. If we do not distribute a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level. A RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder elects to receive his or her entire distribution in either cash or stock of the RIC, subject to certain limitations regarding the aggregate amount of cash to be distributed to all stockholders. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We may generate qualified net interest income or qualified net short-term capital gains that may be exempt from U.S. withholding tax when distributed to foreign stockholders. A RIC is permitted to designate distributions of qualified net interest income and qualified short-term capital gains as exempt from U.S. withholding tax when paid to non-U.S. shareholders with proper documentation. The following table, which may be subject to change as we finalize our annual tax filings, lists the percentage of qualified net interest income and qualified short-term capital gains for the year ended September 30, 2022. Year Ended Qualified Net Interest Income Qualified Short-Term Capital Gains September 30, 2022 80.8 % — We have adopted a DRIP that provides for the reinvestment of any distributions that we declare in cash on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors declares a cash distribution, then our stockholders who have not “opted out” of the DRIP will have their cash distributions automatically reinvested in additional shares of our common stock, rather than receiving a cash distribution. If our shares are trading at a premium to net asset value, we typically issue new shares to implement the DRIP, with such shares issued at the greater of the most recently computed net asset value per share of our common stock or 95% of the current market value per share of our common stock on the payment date for such distribution. If our shares are trading at a discount to net asset value, we typically purchase shares in the open market in connection with our obligations under the DRIP. Related Party Transactions We have entered into the Investment Advisory Agreement with Oaktree and the Administration Agreement with Oaktree Administrator, an affiliate of Oaktree. Mr. John B. Frank, an interested member of our Board of Directors, has an indirect pecuniary interest in Oaktree. Oaktree is a registered investment adviser under the Investment Advisers Act of 1940, as amended, that is partially and indirectly owned by Oaktree Capital Group, LLC. See “ Note 10. Related Party Transactions – 75 Investment Advisory Agreement ” and “ – Administrative Services ” in the notes to the accompanying Consolidated Financial Statements. Recent Developments Distribution Declaration On November 10, 2022, our Board of Directors declared a quarterly distribution of $0.18 per share, payable in cash on December 30, 2022 to stockholders of record on December 15, 2022. On November 10, 2022, our Board of Directors also declared a special distribution of $0.14 per share payable on December 30, 2022 to stockholders of record on December 15, 2022. 76