Oaktree Specialty Lending Corporation Stock

Thank you. Welcome and thank you for joining Oak Tree Specialty Lending Corporation's third fiscal quarter 2026 conference call. Today's conference call has been recorded. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. withdraw your question, press star 1 again. I'll now turn the call to Alison Murmy, OCSL's Head of Investor Relations. Please go ahead.

Thank you, operator. Our third quarter 2026 earnings release, which we issued this morning, along with the accompanying slide presentation. accessed on the investor section of our website, oaktruespecialtylending.com. Before we begin, I want to remind you that the comments on today's call include forward-looking statements reflecting current views with respect to, among other things, future operating results and financial performance. Actual results could differ materially from those implied or expressed in the forward-looking statement. Please refer to the relevant SEC filing for a discussion of these factors in further detail. Oak Tree undertakes no duty to update or revise any forward-looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in an Oak Tree Fund. Investors and others should note that OCSL uses the investor section of its corporate website to announce material information.

The company encourages investors, the media, and others to review information that it shares on its website. On today's call, Matt Pendo, President of OCSL, will begin with a progress report on objectives we set out for fiscal 2026. an overview of our third quarter results. Armin Panossian, our CEO and Co-Chief Investment Officer, will then provide a market update. Raghav Khanna, our Co-Chief Investment Officer, will cover portfolio activity. And Chris McCown, our CFO and Treasurer, will close with a review of our financial results before we open the call for questions. Now I'll turn the call over to Matt Penda, President of OCSL. Matt.

Thank you, Allison, and good morning, everyone. With three quarters of fiscal 2026 complete, we want to assess our progress against two of our primary objectives. First, reducing non-accruals through exits and monetization events, and second, maintaining a flexible balance sheet. Starting with the first objective, reducing non-accruals. As of June 30, 2026, non-accruals were approximately 1.8% of the total debt portfolio at fair value, down 80 basis points sequentially, and down 140 basis points year over year. In the last two quarters alone, we exited five non-accrual positions, leaving six investments on non-accrual. More than 85% of the decline in non-accrual dollars over the past year is due to proceeds received and investments returning to accrual status.

The most significant portfolio development this quarter was Thrasio. Through a series of asset sales, Thrasio repaid approximately $25 million, or a little over 80% of our loans, including paying off the entire first out-term loan and about 75% of the second out-term loan. The remaining second out-term position was returned to accrual status and we expect it to be repaid in the next few months. Raghav will discuss Thrasio in more detail in his remarks. Turning to the second objective, maintaining a flexible balance sheet, we ended the quarter with net leverage of approximately 1.02 times compared to 1.04 times at the end of March and below the midpoint of our 0.9 times to 1.25 times target range. Available liquidity was nearly $700 million a quarter in, of about $30 million from last quarter. We believe this combination of conservative leverage and ample liquidity positions us well to invest into an evolving private credit market.

Furthermore, we plan to address the $350 million of unsecured notes that mature in January 2027 over the next several quarters. Turning to our third fiscal quarter financial highlights. Adjusted net investment income was $32.2 million or approximately 37 cents per share down slightly from $33.7 million or 38 cents per share in the prior quarter. slight decrease primarily reflected our lower use of leverage, the lighter than average quarter of non-recurring income, and the payment of a partial income-based incentive fee, which Chris will walk through in more detail. For the quarter, our board declared a total cash dividend of $0.33 per share. The dividend is composed of a base cash dividend of $0.30 per share and a supplemental dividend of $0.03 per share. This is consistent with our policy of paying a supplemental dividend equal to 50% of adjusted net investment income in excess of the base dividend. The dividends are payable in cash on September 30, 2026.

The stock goes a record on September 15, 2026. With that, I'll turn the call over to Armin to discuss the market environment. Thank you, Matt.

On our last call, I described the volatility in direct lending as more a period of recalibration than a systemic issue. I also walked through specific investor concerns around direct lending, including rising impairments, the use of leverage, liquidity mismatches, software exposure in an AI driven world, and refinancing risk. On today's call, I want to provide a brief market update, take stock of how these concerns are evolving, and explain how they inform our approach at Oak Tree. First, the market backdrop. The June quarter was less volatile than the March quarter. Credit and equity markets stabilized, and the general tone was less bearish, although dispersion continued to be a dominant factor. theme. For example, the broadly syndicated loans market showed a bifurcated recovery. Spreads for Single B and Single B Plus loans retraced most of the widening experience during the March quarter and ended June close to December 2025 levels.

New issuance in the broadly syndicated loan market also resumed, and many transactions priced at or through the tight end of initial price talk. However, the recovery has not been uniform. The spread on traded B- credits remain wider than they were in late 2025, and new issuance among lower rated borrowers remains limited. The direct lending market was also more subdued. Spreads remain wider than 2025 levels, while direct lending deal value declined to a two and a half year low. The decline in deal flow largely reflected the slowdown in private equity activity, with quarterly deal value also declining to a multi-year low. Sponsors continue to face a difficult and environment amid a wide bid-ask spread between sellers and buyers, geopolitical uncertainty, a less predictable macroeconomic outlook, and the possibility of slower growth alongside persistent inflation.

In this environment, the balance between private credit borrowers and lenders has improved. Competition has generally been more rational and underwriting standards have strengthened. On average, loans issued in calendar 2026 offer more attractive terms than transactions completed in 2024 and 2025. During the June quarter, new sponsor-backed first lien direct loans were pricing in the range of SOFR plus 500 to 550 basis points, consistent with the March quarter and above the 2025 tights of SOFR plus 450 to 475. However, competition for new deals, especially in middle market first lien direct lending, increased towards the end of June and compressed average spreads closer to 500 basis points. Now I'll turn to the specific concerns we highlighted last quarter, beginning with impairment risk. Across the direct lending industry, credit issues have continued to arise.

While industry data for non-recruits has been mixed in recent quarters, OCSL's non-recruits are down approximately 280 basis points from its peak in March of 2025. Our work is not complete, yet our progress reflects an active, hands-on approach to challenged credits. We have successfully pursued modernizations, restructured investments, and when necessary, made difficult decisions to exit positions to avoid tying up capital and to minimize losses. The second concern is the use of leverage. The statutory debt to equity limit for BDCs is two to one. And essentially all BDCs operate under that limit today. Our concern is not the level of leverage at EDCs, which by historical standards and compared to other levered vehicles is relatively modest, but how leverage is used.

At Oaktree, we view leverage as an output of the investment environment, not as a way to achieve a particular earnings or dividend target. When we find compelling investments with appropriate downside protection, we are prepared to deploy capital and allow leverage to increase. When the opportunity set is less attractive, we are comfortable maintaining greater liquidity and operating at lower leverage. At quarter end, OCSL's net leverage was 1.02 times. positioning us below the midpoint of our target range and preserving capacity to invest as opportunities emerge. The next risk and the source of continued headlines this quarter is liquidity or asset liability mismatches in non-traded ADCs. Redemption requests that several large non-traded vehicles remain elevated during the June quarter, in some cases reaching the mid to high teens as a percentage of equity. This highlights the potential mismatch between the liquidity expectations of investors in non-traded VDCs and the less liquid profiles of the underlying private credit assets.

We expect it may take several quarters for existing redemption cues to normalize and for net flows in non-traded BDCs to inflect positive. As a reminder, OCSL is a permanent capital vehicle and does not face redemption risk. Against this backdrop, we view headwinds the non-traded BDC market as and a net positive for permanent capital public BDCs with dry powder. Net outflows from non-traded VDCs reduce competition for new investments, and it may create opportunities in the form of secondary portfolio purchases and industry consolidation, which we are positioned to evaluate. The final and perhaps most debated risk is software exposure and related refinancing risk. Investors across credit and equity markets have spent considerable time analyzing software and potential AI disruption. As investors dig in, they're beginning to discern between the riskiest businesses and those with more defensible business models.

Software is not a monolithic category, and AI exposure is not evenly distributed. The greatest risk is likely concentrated where business model disruption intersects with high leverage, limited free cash flow, and a near or medium-term refinancing need. Many loans originated in 2020 and 2021 were underwritten when base rates were near zero. Valuation multiples were at peak levels, and the implications of AI were not yet apparent. A meaningful portion of that cohort, especially ARR-based loans, will mature in 2027 and 2028. Refinancing those investments will be an important test for the market. The outcomes will be issuer specific and active portfolio management will remain essential.

These direct lending issues will take multiple quarters and in some cases years to play out. No one could predict precisely how they will materialize. Our focus remains on the factors we can control. discipline underwriting, portfolio management, and balance sheet flexibility. A current risk environment does not mean that investors should avoid private credit. Rather, it means lenders should be discerning and demand greater downside protection. There are several ways the market could evolve from here. If geopolitical uncertainty diminishes or the macroeconomic outlook improves, sponsors may become more willing to transact.

A recovery in M&A and private equity exit could increase demand for financing at a time when the supply of direct lending capital has become more disciplined. That would be a positive outcome for direct lending deal flow and spreads. On the other hand, if transaction activity remains limited, while capital continues to flow into private credit, even if at a slower pace, we may see further spread tightening. The outlook for interest rates has also evolved over the year. Persistent inflation has reduced confidence in the pace of future rate cuts and increased the possibility that base rates will remain higher for longer. While higher rates support higher income from floating rate loans, they also increase interest burdens for borrowers. Interest coverage continues to be a metric we monitor closely.

This uncertainty is why we are focused on what we can control, especially maintaining a nimble balance sheet. It also brings us back to the importance of the broader Oaktree and Brookfield platform. In an environment where traditional sponsor-backed middle market activity remains subdued, the ability to source beyond US sponsor-backed direct lending becomes increasingly valuable. Across the combined platform, we are evaluating opportunities in direct lending, asset-backed finance, liquid credit, situational lending, non-U.S. direct lending, and secondary transactions. we can compare relative value across those markets and allocate capital where we believe the risk adjusted return is compelling. With that, I'll turn the call over to Raghav for a review of our portfolio and investment activity.

Thanks, Armin. I'll start with our progress on non-accruals, then discuss new originations and our pipeline before closing with portfolio metrics. beginning with Prazio, which, as Matt mentioned, was the most significant portfolio development of the quarter. Trazio is an Amazon aggregator that has been on non-accrual since December 2023 due to an overly aggressive growth strategy after COVID. Over the last two years, the company reduced its cost infrastructure and streamlined its operations to focus on its strongest brands. During the June quarter, Frazio sold several of its largest brands, including stain remover, hate stains to Church and Dwight. a $325 million gross purchase price. Proceeds from these asset sales were used to repay 100 percent of the first out term loan, and the majority of the second out. We mark the remaining second on position up from 80 in the prior quarter to 99. return it to accrual status, and expect the remaining second out loan to be fully repaid over the next few months from additional asset sale proceeds. We believe Trazio illustrates the value of our workout expertise and cooperative efforts with other creditor owners to reposition a company through restructuring and maximize recoveries in a relatively short timeframe.

Throughout the workout process, we were actively engaged with the company and other stakeholders to realize a return of our capital. The result was a conversion of a non-equal position into cash proceeds and the remaining piece into an income-producing loan that should be paid off in the near term. Next, Avery, our investment in a condominium project that we have discussed on prior calls also continues to perform ahead of our underwriting expectations. THROUGH JUNE 30, 12 UNITS CLOSED YEAR-TO-DATE, COMPARED WITH OUR FULL YEAR 2026 BUDGET OF SIX UNITS. Since quarter end, additional units have been sold and others are under contract. Our June 30 blended mark of 79 up from 65 at March 31st reflects only the units closed to the end of the quarter. At quarter end, six investments were on non-accrual, representing approximately 1.8% of the total debt portfolio at fair value, down from 2.6% last quarter and 3.2% one year ago.

Importantly, 97% of the sequential decline in non-accruals was a result of proceeds received to pay down debt. Turning to investment activity and the pipeline. New investment commitments totaled $2 or $6 million in the quarter. compared to $204 million in the prior quarter. Proceeds from prepayments, exits, other paydowns and sales were 263 million down from 334 million last quarter. The weighted average yield on new debt investments was 10.0%, up from 9.2% in the prior quarter. reflecting higher spreads on new private originations. Oak Tree's capabilities around sourcing, underwriting, and structuring bespoke deals helps us achieve a healthy yield on new originations. As Armand mentioned, the investment opportunities we are reviewing today are generally more attractive than what we saw over the past two years.

Transactions under review often feature more lender-friendly terms, including stronger documentation and structural protections, lower leverage, and lower loan-to-value. The median spread on opportunities in our pipeline has ranged from SOFR plus 550 to 575 basis points above broader market averages, which we believe reflects our differentiated sourcing capabilities. While activity in middle market direct lending remains measured, our opportunity set is supplemented by transactions sourced across the broader Oak Tree and Brookfield private credit ecosystem. One new origination that demonstrates our unique capabilities is ZeoGroup, a fiber infrastructure company. Commercial fiber infrastructure products provide high-speed data broadband connectivity, which means business locations, data centers, cloud provider networks, and the global internet. In May, OCSL, alongside other Oaktree funds, funded approximately 60% of a private junior warehouse securitization facility to support the financing for Xeo's acquisition of Crown Castle's fiber infrastructure network. This facility is priced at super plus 675 basis points, but junior lean supported by Crown Castle's fiber network assets and carries a corporate guarantee from a parent entity that provides support to our facility ahead of the sponsor equity and features other lender friendly terms uncommon in traditional public ABS deals.

This was not a forced involvement with ZAIL. Prior to this transaction, OCSL purchased Zayo's first lean first out, post-LME broadly syndicated term loan at a discounted par. That loan has since been partially repaid with proceeds from ABS issuance, and the remaining position has appreciated to approximately par. We believe our investments in Zale highlight several of Oak Tree's strengths. Consideration of relative value across the company's capital structure. identifying mispriced public credit, structuring complex private transactions supported by strong documentation, and collaborating across Oak Tree's investment teams to source differentiated opportunities beyond just traditional sponsored direct lending. Looking at total portfolio metrics as of June 30th. 82% of the portfolio at their value was first lien senior secured debt. And the weighted average yield on debt investments was 9.3%.

The portfolio remains well diversified with the average debt position representing approximately 65 basis points of the total portfolio at fair value. in no single position exceeding 2.1% of fair value. The immediate EBITDA of our portfolio companies was approximately $189 million, up about 4% sequentially. Portfolio Company weighted average leverage was 5.1 times, slightly better than 5.2 times last quarter, and interest coverage improved to 2.4 times from 2.1 times. And now turning to an update on software exposure. Based on GIC's industry group classification, Software represents 20% of the portfolio at fair value, down slightly from the prior quarter. Our high AI risk stopper exposure remains unchanged at approximately 3% of the performing debt portfolio at fair value. And with that, I'll turn the call over to Chris to review our financial results.

Thank you, Raghav. In our third fiscal quarter ended June 30, 2026, adjusted total investment income was $69.2 million, down slightly compared to $69.7 million in the prior quarter. The modest change primarily reflected a smaller average portfolio balance from operating with lower leverage and a decrease in non-recurring income, partially offset by placing the Thrasio second out loan back onto accrual status. The average non-recurring income for the trailing eight quarters has been about $3.8 million, while this quarter came in slightly below $2 million. This was not unexpected. Although non-recurring income is inherently episodic, it can skew directionally lower during and after a period of intense market volatility. We delivered adjusted net investment income of $32.2 million, or approximately 37 cents per share, compared to $33.7 million, or 38 cents per share, in the prior quarter. The slight quarter-over-quarter decline was driven by lower total investment income and higher income-based or Part I incentive fees, partially offset by lower interest expense. To spend a moment on the incentive fee, last quarter we paid no Part 1 incentive fee as a result of our total return hurdle.

This quarter we paid $2.4 million, or approximately 3 cents per share. In context, a full incentive fee would have been approximately $6 million or about 7 cents per share. In other words, the incentive fee this quarter was roughly half of what it would have otherwise have been, reflecting our progress in reducing honor cool, but partially offset by the continuing overhang from prior quarters losses under the total return hurdle. We believe this mechanism is working as designed, aligning the fees Ocree earns with the total returns shareholders receive. NAV per share was $15.70 as of June 30th, 2026, stable compared to $15.69 as of March 31st, 2026. PIC income represented approximately 7.8% of adjusted total investment income during the quarter compared to 5.5% last quarter. Increased PIC was largely driven by two names that were underwritten with PIC optionality to support the issuers growth and strategic initiatives.

Importantly, the EBITDA, leverage, and interest coverage of our portfolio companies electing to pick are roughly in line with the metrics for our overall portfolio. And consistent with last quarter, approximately two-thirds of our PIC income relates to investments that were structured with the option to PIC at origination. Our net leverage ratio at quarter end was approximately 1.02 times. slightly from 1.04 times last quarter and total debt outstanding was $1.45 billion. our long-term target leverage range of 0.9 times to 1.25 times remains unchanged. As of June 30th, the weighted average interest rate on debt outstanding was 5.9%, unchanged from the prior quarter. Unsecured debt represented 65% of total debt at quarter end. We have a healthy level of dry powder with liquidity of approximately $699 million, including $40 million of cash and $659 million of undrawn capacity under our credit facilities. unfunded commitments excluding those related to joint ventures were approximately 208 million Turning to our joint ventures, together the JVs held approximately $524 million of investments across 135 portfolio companies and generated aggregate returns on equity of approximately 11.3% during the quarter. Leverage at the JVs was 2.1 times compared to 1.9 times last quarter.

During the quarter, we converted approximately 25% of the Kemper JV's subordinated note into equity. This did not have a material impact on the total earnings recognized from the JV, but the income came in the form of a combination of interest income and dividend income instead of exclusively interest income.

With that, I'll turn the call back to the operator for Q&A. We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw a question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your first question comes from the line of Rick Shane with JP Morgan.

My line is open. Please go ahead. Hey, guys. Thanks for taking my questions. Look, I think you've highlighted the benefits of a more constrained supply of capital and competition. At the same time, arguably there are macro headwinds facing portfolio companies, whether it's elevated energy prices, higher labor costs, higher interest rates. When you think about the risks associated with the macro factors, and you talk about the opportunity for better structure related to more muted competition. Do you think, where do you sort of put yourself in the cycle of returns? is just sort of net out and it gives you mid-cycle returns? Are you at a point now where you actually think you can extract higher above cycle returns, realizing that returns aren't static across a 10 year period?.

Thanks Rick, it's Armin. Look, I don't think we're at mid-cycle returns. I think we are seeing some spread widening caused by the outflows. from the semi-liquid or semi-traded, sorry, untraded BDCs. It, you know, just given the maturity profile of the 2021, 2022 LBOs that were done that still have maturities, you know, coming in 2027 through 29, we think that there's still going to be greater volatility ahead of us, greater opportunity to deploy with wider spread, better return, tighter terms. So we are, I would say at this point, kind of conserving our capital. maintaining ourselves in a more defensive and risk averse posture. We really want to be able to lean into the market on the back of what we think will be more volatility. SO IT'S NOT I WOULDN'T CHARACTERIZE IT AS MID-CYCLE. I WOULD SAY WE'RE SORT OF 75, MAYBE 50 TO 75 BASIS POINTS WIDE OF WHERE WE WERE SIX MONTHS AGO.

I JUST DON'T THINK THAT THAT'S FULL fully baking in the inflation that we would expect in a continued conflict with Iran. I don't think that's reflective of the full extent of disruption in software driven by AI. and there's a whole host of other kind of macro indicators that are beneath the surface, but are indicating some way The overall economic picture, if you just kind of step out, you know, step back to the 50,000 foot level, on average, things look okay. It looks like we're, it looks like the economy is handling things okay. But beneath the surface, there's costs we're concerned and I don't think we're seeing the maximum opportunity set at this time.

Got it. Yes, look, I really appreciate the thoughtfulness of that answer. I think we're sort of wrestling with the same things as we look at the world across a pretty wide coverage universe. things seem to be holding up pretty well, but at the same time that you see these sort of little, spots on the mosaic that make you wonder a little bit. So I appreciate the answer and it's consistent with how we see the world too. Thank you.

Thanks, Luke. Just a reminder, if you would like to ask a question, please press star 1 to raise your hand. Your next question comes from the line of Finian O'Shea with Wells Fargo Securities. Your line is open. Please go ahead.

Hey, good morning. So Armin just picking up on that dialogue with Rick. And some of your opening remarks seemed a little more constructive on the spread widening. Although those have come in a little bit, but I think you were, you know, constructive on that and you have ample leverage. So seeing your overall posture in terms of leaning in and then maybe, um, how attractive you view sponsor versus other more more sets or liquid type exposures that tend to come in the book here and there.

Yes, thanks, Finn. Look, I would say that the market is better today than what it was six months ago in terms of deployment. The volatility in fund flows has created that opportunity. The pace of deal flow is slower. It's just, there's not as much deal volume, whether it's for non-sponsored or for sponsored backed transactions. It just seems that with the base rate picture remaining elevated, spreads widening a little bit, uncertainty in, the broader economy, the war with Iran, there's reasons why the deal volume is a little slower. If deal volume was at a normal pace, I think we would see even more spread widening than we have seen. So look, it's better than six months ago.

Is it as good as it could be or we would expect it to become? No. in terms of comparing public versus private credit and maybe a couple other asset classes, everything is tightened, other than sponsor first lien lending and some other forms of private credit, which I'll touch on. If you look at the high quality part of the broadly syndicated loan market or the high yield market, and you looked at the double B's and single B plus types of credits, they are at their all time tights in high yield bonds. And they're near their tights, even in broadly syndicated loans. It's really in triple C's or stressed near defaulted SECURITIES WHERE YOU REALLY HAVE NO BID IN THE MARKET FOR THOSE PUBLIC SECURITIES. So achieving the average spread in the broadly syndicated loan index or the high yield index is not very easy to do because it's sort of a bifurcated market. The high quality is trading super tight. The low quality is trading super wide and there's very little in between.

So with that tightening on a like for like basis, where you look at high quality credit and private credit, high quality credit and public credit, The public credit side, I would say, has tightened over the last 12 to 24 months. On the private side, it was tight until about six months ago and it's widened. So on a relative value basis, in terms of just purely return per unit of risk, I would say private credit looks better today relative to public credit than it did. Now, stepping away from that for a moment, I think where there is a meaningful opportunity that is unmet by capital is in the asset-backed finance space. So providing capital to specialty lenders that are developing portfolios, diversified portfolios of contractual cash flow streams. It's a pretty bespoke market. There is not a standard under which lenders and borrowers interact or transact, and that inefficiency creates pretty nice opportunities. So when possible, as I said, firm we are leaning into that area.

It is not a great fit for BDCs as it is not a qualified asset. So we have to be mindful of how much of it that we do, but we do see that flow. It helps them form our relative value perspective on sponsor lending, non-sponsor lending, public credit and then more specialty areas of lending. So it rounds out the picture and we'll selectively invest in those areas in the BDC when possible.

Great. That's helpful and sort of a touch on the in there also in the remarks you flagged consolidation in the industry, does that Is that driven by, are you seeing more of it, or are you more front footed or maybe expected to come on the go forward or anything we could.

Anything to help us learn of your thinking there? I might make a quick comment. I'll throw it over to Matt Pendo. He might have a more refined view on this, but look, I mean, there is some consolidation happening. There are portfolios of loans for sale as well. I wouldn't say that we as a firm are looking to do anything that is material in that space. We're always looking for opportunities to expand our reach and our sourcing capabilities. And sometimes that means partnering with, or potentially even buying a product a platform that could help on that front.

But that isn't something that is super important critical it is not something that we're actively working on now but we're certainly open-minded and a participant in the markets but you shouldn't expect for us to be a meaningful um participant in M&A, at least based on the information at hand at this time. Matt, do you have anything to add to that?.

I think that's a good summary. As Armand said, we'll continue to look at things and be smart and aware of things, but There's nothing really close now and it's not a critical priority for us.

Great. All for me. Thanks, everybody. Thanks, son. Your next question comes from the line of Peter Troisi with Barclays.

Your line is open. You may now go ahead. Hi, good morning. Thanks for taking the question. You know, good to see the non-accruals decline in the quarter. But, you know, as was noted in the prepared remarks, that did come with some hard decisions in the portfolio and, you know, that flowed through the P&L. There was about $50 million of realized losses this quarter. quarter. So I guess the question is, you know, how do you think the rating agencies will view the trade-off of lower non-accruals versus higher realized credit losses?.

Yes, appreciate the question. This is Chris. I'll take a first go at that and maybe pass it over to Matt as well for some additional comments. But yes, I think the realized losses, well, we never like to take realized losses. Those were names that had been marked down. and several years ago, in some cases, in the case of the Dominion, which was the largest realized loss, that was an asset that came over in connection with the BDC acquisition back in 2017. So, you know, I think, you know, Well, again, we don't like to realize losses. I think we do appreciate and I think written agencies appreciate that our NAV was flat, you know, quarter to quarter, and really just seeing a crystallization of some of those losses that have been longstanding. I don't know Matt, anything to add there? Yes, Peter, good question.

I mean, I think as Chris said, it's really just kind of the geography. So I don't think that's really, you know,.

I don't want to speak for the rating agencies, but not troubling to them. The things that we've been focused on with them is non-accruals, so reducing the non-accruals, which you've seen good progress there. stabilization the nav so we sell that this quarter and then you know our leverage and we've continued to run leverage around one time so you know, very, very modern, prudent at the lower end of our target range. So those are the kind of the three things we've been focused on with the rating agencies.

Thank you. There are no further questions at this time. I will now turn the call back to Allison for closing remarks.

Thank you everyone for joining us on today's call. Please feel free to reach out to me and the team with any questions. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Welcome, and thank you for joining Oaktree Specialty Lending Corporation's Second Fiscal Quarter 2026 Conference Call. [Operator Instructions] Today's conference call is being recorded.

I'll now turn the call over to Alison Mermey, OCSL's Head of Investor Relations.

Thank you, operator. Our second quarter 2026 earnings release, which we issued this morning, along with the accompanying slide presentation, can be accessed on the Investors section of our website, oaktreespecialtylending.com.

Before we begin, I want to remind you that the comments on today's call include forward-looking statements reflecting current views with respect to, among other things, future operating results and financial performance. Actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to the relevant SEC filings for a discussion of these factors in further detail. Oaktree undertakes no duty to update or revise any forward-looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in an Oaktree fund. Investors and others should note that OCSL uses the Investors section of its corporate website to announce material information. The company encourages investors, the media and others to review information that it shares on its website.

Now I'll turn the call over to Matt Pendo, President of OCSL. Matt?

Thank you, Alison, and good morning, everyone. I will begin with an overview of our second quarter fiscal 2026 results, after which Armen Panossian, our CEO and Co-Chief Investment Officer, will share his perspective on the market environment. Raghav Khanna, our Co-Chief Investment Officer, will then cover portfolio activity; and Chris McKown, our CFO and Treasurer, will close with a review of our financial results before we open the call for questions.

Despite external noise around private credit and BDCs, our team remained focused on reducing nonaccruals and positioning our balance sheet for flexibility. As of March 31, 2026, nonaccruals were 2.6% of the total debt portfolio measured at fair value, down from 3.1% last quarter and 4.6% 1 year ago. As an update post quarter, in April, we sold 2 legacy nonaccrual positions, Dominion Diagnostics and All Web Leads. We expect to make further progress reducing nonaccruals and realizing cash proceeds that we can deploy into performing assets over the coming months.

Managing our balance sheet is a high priority as we position OCSL for a more attractive investment environment. During the quarter, we sold a portion of our liquid credit positions at cost, a strategic decision to build dry powder, maintain leverage below the midpoint of our target range and rotate out of lower-yielding public credit. We ended the second quarter with available liquidity of $671 million, up $100 million from last quarter and net leverage of 1.04x, down from 1.07x last quarter.

Turning to financial highlights. Net asset value per share was $15.69 as of March 31, 2026, compared to $16.30 as of December 31, 2025. The decline was driven primarily by unrealized mark-to-market write-downs of software loans during the quarter. The fair value of our performing software loans declined by approximately 310 basis points, largely consistent with movements in broadly syndicated software loans. Importantly, we believe that these markdowns generally are not indications of deteriorating fundamentals in the underlying portfolio companies, but rather reflecting the repricing of risk in the broader markets.

Adjusted net investment income for the quarter was $33.7 million or $0.38 per share as compared with $36.1 million or $0.41 per share in the prior quarter. The decrease reflected lower reference rates, lower nonrecurring income and ending leverage below the midpoint of our target range.

For the quarter, our Board declared a total cash dividend of $0.34 per share. Due to our conservative use of leverage, we have adjusted our base dividend to $0.30 per share while maintaining our supplemental dividend at 50% of excess adjusted net investment income above our base dividend. The dividends are payable on June 30, 2026, to stockholders of record as of June 15, 2026.

With that, I'll turn the call over to Armen to share his perspective on the market environment and what we see ahead.

Thank you, Matt. It was an eventful quarter for private credit. We believe the volatility that we are seeing reflects a period of recalibration rather than a systemic issue. Rising impairments, questions surrounding valuations, the use of leverage, liquidity mismatches, software exposure in an AI-driven world and refinancing risks are all part of the current dialogue surrounding private credit. This may help explain -- at least in part -- why market sentiment may appear more negative than borrower performance alone would suggest as the confluence of concerns weigh on investor confidence.

The current debate around private credit risks may conflate a range of distinct factors and lead to overly broad conclusions. It is important to differentiate between the fundamentally sound concept of private credit, namely tailored nonbank lending from specific challenges affecting certain segments of the market. Direct lending or making private loans to finance midsized buyouts isn't inherently flawed. The question for any manager is whether their portfolio assets and liabilities were built to handle a market correction.

At Oaktree, we have more than 3 decades of experience investing in sub-investment-grade credit and navigating market cycles. This moment is familiar to us. For example, in 2020, OCSL's positioning was the result of deliberate choices we made well before the COVID-related market dislocation arrived. By late 2019, we had cleaned up the legacy portfolio that was acquired from the prior adviser, reduced leverage and built liquidity in the fund. When dislocation arrived in March 2020, we had the dry powder and the conviction to go on offense.

In 2020, we deployed nearly $1 billion of capital and produced nearly an 11% total economic return in a year when many managers retrenched. Today, OCSL is executing with a similar mindset. We continue to make progress toward turning around underperforming assets, operating below the midpoint of our leverage target, remaining disciplined in deployment and maintaining strong liquidity.

We did not predict the current environment, but we are prepared to invest into it. Market volatility increased this quarter and AI-related concerns and geopolitical unrest resulted in wider spreads across public liquid credit markets. At the same time, elevated net redemptions in nontraded BDCs prompted many managers to reassess their cost of capital and liquidity positions, pushing private credit into a phase of price discovery.

Towards quarter end, market conditions stabilized and the private credit deal pipeline began to rebuild. We are encouraged that spreads on new private credit investments have widened to SOFR plus 500 to 550 basis points, approximately 50 to 100 basis points above the 2025 tights, and supports improved forward returns. We are also seeing modest improvements in documentation and more lender-friendly structures.

While markets have rebounded from their lows, we expect continued volatility and increasing dispersion over the coming quarters. Our view is that secondary private transactions, whether through partial or full portfolio sales, will reshape the private credit landscape as certain market participants look to optimize their asset portfolio or satisfy liquidity demands. We believe Oaktree is well positioned to evaluate and potentially capitalize on all opportunities.

Our global platform is a meaningful advantage in this environment. We evaluate private credit alongside liquid credit, distressed debt, asset-backed finance and -- increasingly -- the Brookfield ecosystem. That ability to compare relative value across credit and now equity informs both our risk management and deployment decisions in ways a single strategy manager can't replicate. Together, we will have a fully integrated information network across asset classes, industries, geographies and public and private markets.

We are already tracking dozens of emerging opportunities in real time, sharing notes across teams and identifying dislocations. The breadth of our combined relationships with sponsors, companies and advisers will give us access to deal flow that many lenders do not see and allows us to be selective. Disciplined underwriting, selectivity and active portfolio management will remain the critical drivers of long-term performance.

Now I will turn the call over to Raghav, for a detailed review of our portfolio and investment activity.

Thanks, Armen. As Matt and Armen mentioned, investment activity was measured in the second quarter as we kept our focus on controlling risk and maintaining balance sheet flexibility.

During the quarter, we sold certain liquid credit positions at cost to build dry powder. We also saw a healthy pace of private portfolio prepayments. Proceeds from prepayments, exits and other paydowns and sales were $334 million, up from $179 million in the previous quarter and $279 million last year. A notable prepayment was Mindbody, and ARR software loan. Despite the challenging market backdrop for software, we exited Mindbody at par through a refinancing to a competitor.

This leaves us with only 1 ARR loan in the portfolio, representing 76 basis points of fair value, down from total ARR exposure of 214 basis points last quarter. Our limited exposure to ARR structures is an example of how we deliberately stayed underinvested in an area of private credit where we believed stress could emerge.

New investment commitments in the quarter totaled $204 million, down 36% from the prior quarter. Deal activity slowed due to software sector volatility and escalating geopolitical tensions. As Armen mentioned, our deal pipeline began to rebuild towards the end of March and into early April. We are encouraged that new private credit deals are pricing with wider spreads and structured with better lender protections. The weighted average yield on new debt investments was 9.2%, 50 basis points higher than the December quarter.

An example of a new private deal from the second quarter is Jonah Energy, a highly structured loan to a heavy asset, low obsolescence or Halo company. The company is a Denver-based independent oil and gas developer with producing assets in 6 states. In January, Jonah signed a purchase agreement to acquire Grit Oil & Gas, an upstream oil and gas operator located in the Eagle Ford Basin in Texas. While the deal was originally contemplated by the asset-backed finance market, Jonah prioritized speed of execution to capitalize on oil price appreciation driven by the conflict in Iran. As a result, the company shifted to direct lending and partnered with Oaktree to leverage our flexibility and ability to move quickly. Oaktree funds participated in approximately $200 million or 1/3 of the first lien term loan to support the acquisition. The first lien term loan was priced at SOFR plus 600 with mandatory amortization, favorable excess cash flow sweeps and multiple maintenance covenants. This transaction reflects the strength of Oaktree's broader platform, deep adviser relationships, the ability to partner across strategy and to be opportunistic in a volatile market environment.

Turning to our software exposure. Based on GIC Industry Group classification, software represents 21% of the portfolio at fair value across 29 issuers. That is down approximately 140 basis points from last quarter, primarily reflecting the exit of Mindbody. Taking a broad and conservative classification for software and technology, we estimate exposure is approximately 26% of the portfolio, including certain investments in health care technology, interactive media and services.

As outlined on Page 8 of the earnings presentation, we apply a 7-factor business resilience framework supplemented by operating KPIs and financial metrics. Each investment is scored and categorized into high, medium and low AI risk buckets.

Within our performing debt portfolio, 2 investments representing 2.9% of fair value are classified as having high AI risk. These companies have a weighted average LTM EBITDA of approximately $96 million, which was generally stable from the prior quarter. LTVs increased to high 50%, up from low 40% last quarter, reflecting multiple compression in public market comparables. For issuers in the medium and low AI risk categories, weighted average LTM EBITDA is approximately $385 million. LTVs are around high 40s to low 50s percentage, which we view as reasonable despite recent multiple compression.

For many of these companies, we see AI as a potential tailwind with management teams and sponsors actively exploring ways to leverage the technology to enhance margins and strengthen competitive positioning. Excluding nonaccruals, the weighted average mark on our software portfolio was 96% as of March 31, 2026, down approximately 310 basis points from last quarter. These markdowns largely reflect the repricing of risk and corresponding spread widening across liquid credit. Our private credit software marks were consistent with levels seen in the broadly syndicated loan market. In most cases, these markdowns do not suggest deterioration in underlying company performance.

Moving to our nonaccruals. At quarter end, 10 investments were on nonaccrual, representing 2.6% of the total debt portfolio at fair value, down 50 basis points from December 2025 and down 200 basis points from March 2025. In March, we restructured Astra after it emerged from Chapter 11 and exited the position shortly after quarter end, modestly below our mark. The decision was driven by our preference for reallocating our resources and capital towards better risk-adjusted opportunities. We also continue to make progress on Avery, where we have seen an uptick in condo sales and units under escrow.

During the quarter, 12 units were sold or placed under contract compared to our full year underwriting assumption of 6 unit sales. Avery's March 31 valuation assumes only a portion of the units under contract close, although we are cautiously optimistic that we will close more units in the future. After quarter end, we sold Dominion and All Web Leads, 2 legacy nonaccrual positions acquired from the prior BDC manager. On Dominion, we received $7 million of cash proceeds versus a mark of $5 million as of December 31. For the March quarter, we moved the first out to accrual status, marked the first out to par and wrote up the second out modestly.

All Web Leads sold to a strategic buyer with an AI-focused value creation angle at a price in line with our March 31 mark. We received approximately 20% of the March 31 mark in cash at close, with the remainder of the consideration coming via a seller note and equity, positioning us to potentially recover more than the March 31 mark over time. As legacy nonaccrual investments, Dominion and All Web Leads demonstrate our patient, disciplined and active approach to portfolio management. We continue to work on realizing proceeds from other nonaccruals and equity positions in a way that optimizes outcomes for OCSL shareholders.

Looking at total portfolio metrics as of March 31, 84% of total portfolio investments at fair value were first lien senior secured debt and the weighted average yield on debt investments was 9.3%, stable quarter-over-quarter. The portfolio remains well diversified with the average position representing 0.7% of our debt portfolio at fair value and no single position exceeding 2% of fair value. The median EBITDA of our portfolio companies was approximately $182 million, a slight decrease from the prior quarter due to exits on large cap deals. Portfolio company weighted average leverage and interest coverage ratios were 5.2x and 2.1x, respectively, consistent with the last quarter. We remain focused on managing our existing portfolio and resolving challenged credits while maintaining flexibility to capitalize on new investment opportunities ahead.

With that, I'll turn the call over to Chris, to review our financial results.

Thank you, Raghav. In our second fiscal quarter ended March 31, 2026, adjusted total investment income was $69.7 million, a decrease compared to $74.5 million in the prior quarter. The decrease was primarily due to lower reference rates and lower non-recurring income attributable to lower prepayment and exit fees. Net expenses decreased by 6% compared to the prior quarter, primarily reflecting a reduction in Part 1 incentive fees as a result of our total return hurdle.

We delivered adjusted net investment income of $33.7 million or $0.38 per share compared to $36.1 million or $0.41 per share in the prior quarter. These results reflected lower total investment income, partially offset by lower interest expense and lower Part 1 incentive fees. NAV per share was $15.69, down from $16.30 last quarter. The drivers of NAV were about evenly split between write-downs and certain nonaccruals, mark-to-market volatility in quoted names and spread widening on private credit marks.

OCSL continues to be prudent around the use of payment-in-kind income, with PIK representing approximately 5.5% of adjusted total investment income during the quarter. This is down from 6.3% last quarter due to the sale of athenahealth PIK preferred at our mark. Approximately 2/3 of our PIK income relates to investments that were structured with the option to PIK at origination.

Our net leverage ratio at quarter end was 1.04x, down from 1.07x last quarter, and total debt outstanding was $1.5 billion. The decreased leverage mirrors portfolio rotation and asset sales during the period. Our long-term target leverage ratio of 0.9x to 1.25x remains unchanged, although our plan is to run leverage towards the mid- to low end of that range. As of March 31, the weighted average interest rate on debt outstanding was 5.9%, down from 6.1% in the prior quarter, primarily driven by lower reference rates. Unsecured debt represented 64% of total debt at quarter end, up from the prior quarter.

We have ample dry powder to take advantage of market opportunities with liquidity of approximately $671 million, including $51 million of cash on hand and $620 million of undrawn capacity under our credit facility, up from $576 million of total liquidity at the end of December. Unfunded commitments, including those related to the joint ventures were approximately $250 million.

Turning to our joint ventures. Together, the JVs held approximately $521 million of investments across 130 portfolio companies and generated aggregate returns on equity of approximately 10% during the quarter. Leverage at the JVs was 1.9x, up modestly from last quarter.

With that, I'll turn the call back to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Rick Shane with JPMorgan.

Look, when we sort of calculate the implied return to the dividend of about 8.6% of book, that equates to about a 5% spread to 3-month base rates. As we think about your business model over the long term, where would you put that return -- base rate plus 5% in sort of your cycle? Is that a trough in the cycle? Is that a realistic long-term objective? Help us understand sort of what the return profile as a function of base rate should be.

It's Raghav. I can start and then Chris and Brett can chime in. So as I'm sure you know, there's really 2 levers that we're playing with.

The first is what is the unlevered asset yield. Again, probably no surprise given the enormous amount of capital that's been raised in direct lending, in perpetual BDC vehicles, in particular, I would say that market direct lending spreads probably troughed out in December at in the mid- to maybe high 400s. Since then, we have seen -- I wouldn't call it a dramatic yet repricing, but certainly a significant enough repricing of risk where regular way direct lending deals, so probably the lowest returning deals that we see in our pipeline. These are first lien deals to private equity sponsors are in the low to mid-50s. So certainly have improved by 50 to 75 basis points.

I would say more on a forward basis, if you look at the SOFR curve -- thanks to the war in the Middle East and the ensuing inflation expectations going up -- the SOFR curve is probably 50 to 60 basis points higher than where it troughed out pre the Middle East situation. So that's number 2.

Away from sponsor deals, I would say we do a mix of, obviously, both sponsor and nonsponsor deals. We do corporate lending as well as asset-backed deals, U.S., Europe. On a blended basis, I would say that when you mix it all together, low 500s for sponsor deals, low 600 to 700 in some of the more interesting areas of lending that we're seeing, which are less commoditized. Our pipeline is in the high 500s on a spread basis and just under 600, call it, including OID. So you put it all together, on a forward basis, obviously, the portfolio on the ground will churn over time. But on a forward basis, I would say that spreads on new deals are far more attractive, at least 100 basis points more attractive than they were even 3 months ago.

Second, the SOFR curve is certainly helping on the asset side. And then the third piece is leverage. We took the decision to sell a number of names out of our public book. That has a near-term cost, obviously, as you can imagine, which is you have less income-producing assets, your ROE declines as a result. That's the cost. The benefit is that as we're seeing our private pipeline reprice higher, we actually have a lot of liquidity to invest in that pipeline.

So for us, the opportunity is not theoretical. And so over time, I do suspect that we will maybe gradually increase leverage if this pipeline opportunity continues and hopefully expand. So both on the unlevered asset yield side, I think that is getting better. And then second, to finance that pipeline, I do expect leverage will go up slowly, and both of those should help ROE.

One quick follow-up. There's been a lot of conversation about the markets improving since December. And the empirical thing that we all want to run through our model is the widening of spreads. But what's interesting is every time a company makes that comment, they follow it with better protections, better covenants. Obviously, that's not something that we can plug into a model. But it's also something I'm not necessarily sure we fully understand. Can you just give us a couple of examples of how deal protections are improving so we can think about that?

Yes. I mean, like the big picture technical in the market is if you look at just the unlisted and perpetual BDC space, that part of the asset class really became the marginal dollar of that was setting price and risk. That space raised $110 billion in 2025. And I'm not sure what the numbers are going to be, but they're more likely to be negative this year with net outflows than positive.

So that's a pretty -- it's not a huge part of the market, like BDCs together, public and private are about 25% of the private credit market, not huge. But from a stock perspective, they're not huge. From a flow perspective, they were very large. And we suspect that that's the one change that is driving both pricing improvements in new deals, but also the noneconomic terms you talked about.

So what are those improvements we're seeing? So one is pick requests on new deals have declined to -- I don't want to say 0, but let's say, close to 0. So that's just going -- is going away. Second is, again, you're right, hard to see, but I'm sure you're familiar with the concept of adjusted EBITDA, which I would say in the Gogo days leading up to 4Q 2025, adjusted EBITDA was getting more and more unrealistic versus what we call cash EBITDA and the true cash earnings profile of the borrowers. That is getting better now again. So that's two.

Three is LME protection, which is -- there's always been like a push and pull between borrowers and lenders. I would say, certainly, borrowers had probably more leverage in 2025 than lenders did. Those are also getting better. And then the fourth thing I would say is the -- I would say the maintenance covenant is coming back, especially for larger deals in any kind of a meaningful way. But the direction of travel is the right direction, which is even in some large cap deals that we have in our pipeline, which we describe as over $100 million of EBITDA, we are starting to see the maintenance covenant come back. So all of those are like marginal improvements, but they're all going in the right direction.

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to Alison Mermey for closing remarks.

Thank you all for joining us on today's call. Please feel free to reach out to me and the team with any questions you may have. Have a great day.

Ladies and gentlemen, this concludes today's call. You may now disconnect.

Welcome, and thank you for joining Oaktree Specialty Lending Corporation's First Fiscal Quarter 2026 Conference Call. Today's conference call is being recorded.

I'll now turn the call over to Alison Mermey, OCSL's Head of Investor Relations.

Our first quarter 2026 earnings release which we issued this morning along with the accompanying slide presentation can be accessed on the Investors section of our website, oaktreespecialtylending.com.

Before we begin, I want to remind you that the comments on today's call include forward-looking statements reflecting current views with respect to, among other things, future operating results and financial performance. Actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to the relevant SEC filings for a discussion of these factors in further detail. Oaktree undertakes no duty to update or revise any forward-looking statements.

I'd also like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in an Oaktree fund. Investors and others should note that OCSL uses the Investors section of its corporate website to announce material information. The company encourages investors, the media and others to review information that it shares on its website.

Now I'll turn the call over to Matt Pendo, President of OCSL. Matt?

Thanks, Alison, and good morning, everyone. I'll begin the call with an overview of our first quarter results. Armen Panossian, our CEO and Co-CIO, will then share some commentary on the current market environment and Raghav Khanna, our Co-CIO, who will provide details on our portfolio and investment activity. Our CFO and Treasurer, Chris McKown, will then review our financial performance before we open the call for questions.

This year is off to a good start, and we delivered solid results for the first fiscal quarter of 2026. Adjusted net investment income for the quarter was $36.1 million or $0.41 per share up modestly from the prior quarter. Once again, we fully covered our quarterly dividend with earnings. These results reflect our team's disciplined capital deployment into income-generating assets as well as the actions we took last year to optimize the liability side of our balance sheet.

Importantly, this was the first full quarter reflecting the impact of the September rate cut, and despite lower base rates, earnings remain stable.

Consistent with our dividend policy and first quarter earnings, our Board declared a quarterly cash dividend of $0.40 per share payable on March 31, 2026, to stockholders of record as of March 16, 2026. As discussed on our fiscal 2025 year end call, we have several levers to help offset lower base rates and support net investment income. One of the key levers is our ability to prudently deploy capital into attractive investment opportunities.

To that point, new fund investments, including drawdowns from existing commitments totaled $314 million, up from $220 million in the prior quarter. The average all-in spread and yield of new private investments was 525 basis points and 9%, respectively. We have ample financial flexibility to continue deploying capital as we ended the quarter with over $576 million of available liquidity. We are intensely focused on reducing nonaccruals and equity positions as another key lever for improving earnings power.

In the first quarter, nonaccruals relatively stable sequentially and down nearly 85 basis points year-over-year. At quarter end, nonaccruals represented 3.1% of the total debt portfolio measured at fair value. For several of our nonaccrual positions, we are optimistic about the potential outcomes and are actively working to maximize recovery value.

This quarter, we restructured our investment in Avery and put a portion of the loan back on accrual status, which is consistent with the broader objective of converting nonearning assets into income-producing assets. Avery continues to sell units and it appears to be happening at an increased pace. Any proceeds from monetization of nonaccruals or equity positions will be reinvested into income-generating investments. We will continue to evaluate these levers and their potential contribution to our earnings and dividends.

As always, we remain committed to strong alignment with our shareholders as we navigate an evolving credit landscape. Now I'll turn the call over to Armen for an update on the market environment.

Thanks, Matt. Current trends in private credit mirror the bifurcation we're seeing in the broader economy. Macro factors, including persistent inflation, tariffs and ongoing technology disruption are amplifying structural strength and weaknesses, creating a clear divide between the winners and losers. Companies with scale, profitability and financial stability of ample access to capital and those that are struggling have limited or no access at all.

Over the past 2 years, sponsors have favored recapitalizations over exits in a muted M&A environment, creating a backlog of transactions waiting to come to market. With the rate pressures easing, sponsors are increasingly turning to the M&A market to deliver much needed liquidity for their LPs. While large cap activity accelerated in the December quarter, middle market volumes were still below historical averages. That said, we are starting to feel more confident that middle market M&A activity will improve over the course of the year.

Since the Fed rate cut in September, we have seen greater price discipline in the market and believe that spreads in private credit have now bottomed out at SOFR plus 450 to 475 basis points. We think this may be supported by elevated redemptions in the perpetual BDC space, easing the demand for new paper. We are cautiously optimistic that spreads will remain stable in 2026 with the potential to widen.

Importantly, direct lending transactions continue to offer an approximate 150 basis point spread premium relative to broadly syndicated loans similar credit quality. PIK interest remains prevalent in direct lending transactions, underscoring sponsors preference for flexible capital structures. We continue to stay extremely disciplined in our use of PIK.

In the first quarter, PIK as a percentage of adjusted total investment income, was 6.3%, which is below the public BDC industry average. Even with tighter than normal spreads and looser terms, we are still seeing compelling investment opportunities as reflected in our strong level of originations this quarter. In the current market environment, we are prioritizing loans to businesses with resilient models, defensible market positions and durable long-term outlooks that align with our bottoms-up value-driven approach to underwriting.

One area we are monitoring closely is the impact of AI on private credit and the broader economy. Software and applications have consistently been the primary secular beneficiaries of major technology shifts. And we believe AI will increase the total addressable market for software. That said, we expect outcomes to be uneven with increasing dispersion between players as success depends heavily on execution and speed of adoption.

For 2026, we see an active backdrop supported by robust hyperscale investment and a more active software M&A environment as incumbents look to consolidate amid public valuation multiples that are at multiyear lows. At the same time, we are mindful that current levels of AI-related spending are a meaningful driver of broader economic growth and that disappointment in realized returns or adoption time line could result in a pullback in the AI investment.

Against this backdrop of increasing dispersion and uncertainty, we believe our scaled global investment platform positions us well. While U.S. middle market direct lending remains the foundation of Oaktree's global private credit platform, our expertise across multiple strategies and our ability to underwrite complex transactions, expand our opportunity set and allows us to be highly selective.

Specifically, the depth and breadth of our sponsor, corporate and adviser relationships provide access to proprietary deal flow across asset-backed finance, European direct lending, infrastructure lending and capital solutions. We remain constructive from a long-term outlook for private credit. In this environment, disciplined underwriting, selectivity and active portfolio management will remain critical drivers of long-term performance.

Raghav will now talk more about our portfolio and new investments. Raghav?

Thanks, Armen. Before turning to our standard discussion of portfolio activity, I want to build on Armen's comments on software and spend a few minutes outlining our approach to investing in the software sector. Our foundational approach to software investing has not changed in light of AI but we have become more selective in this sector. At its core, our framework focuses on software providers that are deeply embedded in customers' daily workflows and business processes require meaningful buying from multiple stakeholders and have high switching costs.

AI has raised the quality bar for software investments. And as a result, we have added incremental criteria to our underwriting for both new investments and existing portfolio companies. We prioritize software businesses with multiple control points, data gravity, business context, high mission criticality and a coherent and credible AI road map. This has contributed to a higher pass rate on new opportunities relative to prior years.

In addition, over the past 12 months, approximately 18% of our total software positions have been repaid, underscoring the quality of our underwriting decisions. Further details of the software portfolio are shown on Page 8 of the earnings presentation. As of December 31, software represented approximately 23% of investments at fair value, across 28 issuers, 94% of our software positions are first lien term loans, and we have only 2 ARR-based loans, representing approximately 2% of fair value.

Turning to the broader portfolio. As of December 31, 85% of the total portfolio was comprised of first lien senior secured debt and the weighted average yield on debt investments was 9.3%. We remain committed to a diversified portfolio. The average position makes up less than 1% and no position makes up more than 2% of our portfolio at fair value. Portfolio company weighted average leverage and interest coverage remained unchanged at 5.2x and 2.2x, respectively.

Our team delivered a meaningful increase in investment activity, which grew our portfolio size by approximately $100 million to $2.95 billion. Newly funded investment activity totaled $314 million, up 42% sequentially.

Paydowns and exits were stable at $179 million, resulting in $135 million of net new investments for the quarter. This increase in deal flow reflects the breadth of Oaktree's private credit platform, combined with recent targeted investments in global sourcing and origination and specialized investment talent, which have meaningfully expanded the top of our funnel despite the lower volume in U.S. middle market direct lending.

We continue to prioritize first lien senior secured investments in resilient market-leading businesses supported by disciplined underwriting. First lien loans represented 92% of our new originations and the all-in weighted average spread on new originations during the quarter was approximately 500 basis points.

One transaction I want to highlight this quarter is our investment in Premier Inc., a health care services company that operates a large national group purchasing organization for a network of hospitals and health care providers. The company also provides a range of complementary offerings such as health care software, supply chain management, data and analytics and consulting services.

In November, Patient Square Capital completed the Take-Private transaction of Premier at a total enterprise value of $2.6 billion. Oaktree has been growing its relationship with the sponsor and was deeply involved through the complex underwriting and negotiation process. Oaktree funds acted as joint lead arranger, providing nearly 40% of the first lien term loan and 30% of the revolving credit facility. The term loan carries an all-cash coupon of SOFR plus 650 and has 2 points of original issue discount. We were attracted to this transaction based on Premier's strong competitive positioning, secular tailwinds for health care spending and high customer switching costs.

During the quarter, there was 1 new addition to our nonaccrual list. We placed a second out term loan on Pluralsight on nonaccrual. Our prior position was restructured in August of 2024 and this quarter, we placed a restructured loan on nonaccrual due to the ongoing challenging industry dynamics and the company's softer-than-expected outlook.

At quarter end, there were 11 investments on nonaccrual, and as Matt noted, they represented 3.1% of the total debt portfolio measured at fair value. We continue to actively manage these positions with a goal of converting nonearning assets into income-producing investments over time.

I will now turn the call over to Chris to review our financial results.

Thank you, Raghav. In our first fiscal quarter ending December 31, 2025, we delivered adjusted net investment income of $36.1 million or $0.41 per share as compared to $35.4 million or $0.40 per share in the prior quarter. This increase reflects lower levels of Part I incentive fee expense which offset lower total investment income quarter-over-quarter.

NAV per share was $16.30 down from $16.64 in the fourth quarter due to unrealized depreciation on certain debt and equity investments. The largest detractor in our portfolio was Pluralsight, which Raghav discussed in his remarks. We marked the equity position down to 0 and marked down the second out term loan reflects this challenged position.

Adjusted total investment income decreased to $74.5 million. This compares to $76.9 million in the fourth quarter and was primarily driven by lower interest income due to lower reference rates and lower original issue discount acceleration which was partially offset by higher fee income, largely from higher prepayment and exit fees.

Net expenses declined modestly compared to the fourth quarter primarily reflecting a $4 million reduction in Part I incentive fees, primarily as a result of our total return hurdle. OCSL continues to be cautious around the usage of payment and guidance with PIK representing 6.3% of adjusted total investment income in the quarter. Approximately 2/3 of our PIK income is related to investments that had the ability to PIK at origination.

Our net leverage ratio at quarter end was 1.07x, up from 0.97x last quarter, and total debt outstanding was $1.6 billion. The increased leverage mirrored our strong deployments during the quarter, our long-term target leverage ratio of 0.9x to 1.25x remains unchanged. As of December 31, the weighted average interest rate on debt outstanding was 6.1%, down from 6.5% from the prior quarter, primarily driven by lower reference rates. Unsecured debt represented 59% of total debt at quarter end, down slightly from the prior quarter. We have ample dry powder to fund investment commitments with liquidity of approximately $576 million, including $81 million of cash and $495 million of undrawn capacity on our credit facility. Unfunded commitments excluding those related to the joint ventures were $247 million.

Turning to our 2 joint ventures. Together, the JVs currently hold $511 million of investments primarily in broadly syndicated loans spread across 135 portfolio companies. During the first fiscal quarter, the JVs generated ROEs of 12% in aggregate. Leverage at the JV was 1.7x, unchanged from last quarter. In addition, we received a $525,000 dividend from the Kemper JV.

With that, I'll turn the call back to the operator for Q&A.

[Operator Instructions]. Your first question comes from Finian O'Shea with Wells Fargo.

Hi, everyone. Good morning. On the portfolio, I'm not sure if you guys gave one of those performance 1 through 5 kind of category breakdowns. But in any case, can you give us the picture of the portion of the portfolio at this point that is sort of underperforming its current security or underwrite and where -- sort of where we are in migrating out of the legacy type issues?

Hi, Fin, it's Raghav. So I'd point you to Page 13 -- sorry, it's not in there. So the way we think about our underperforming assets are, you obviously have the nonaccruals, which you can see the restructured equities. And then the third thing we monitor are positions that are trading or have been marked well below par, and that's obviously an indicator of stress. And in that portion, most of the loans and positions we have that are under -- considerably below par are actually public positions, some of which we actually bought around in the high 80s to 90s and have traded down a few points below that. Most of them we expect to rebound. There are a couple of names which are in the technology space that are -- as I'm sure you can see in the market that are facing a little bit of pressure.

Just on that point, by the way, when we speak to our trading desk, a lot of those technology names are trading down on like $2 million and $3 million trades, mostly from CLO sellers who are trying to manage their WARF tests and rating tests. We're not seeing huge selling in those positions. So we're watching those names in particular, the technology names that are broadly syndicated loans and have freighted down. But there's not a lot of trading actually happening. There's not a lot of selling. It's mostly small selling from CLO sellers.

Okay. I guess, that's helpful. I guess, a follow-up, sticking with that topic. You gave some helpful views or color on AI risk to software. Are you, let's say, to the extent there is volume, are there interesting names on the screen. It looked like you had a good amount of liquid this quarter. Should we expect that to continue?

Yes. So one of the benefits we have is we obviously have a large public markets business in our high-yield business and in our senior notes business. So we're actually triaging all of the software names and technology in addition to obviously, very closely monitoring our private positions by developing AI scorecards and other types of scorecards to, again, triage. Because I think your sentiment is right that there is a bit of a baby out with the backwater situation, and that's something we are looking at.

Again, when we look at what is the right point to step in, it doesn't feel like that right now just because, again, the trading volume we've seen is either small ticket sales from CLOs or dealers trying to make a market. And these like $2 million, $3 million order trades are basically being used to mark positions down 2, 3 points. So it looks very attractive when you look on a screen, at least for some of these names where the AI risk is low, but there isn't enough volume to actually want to step in and try to be a buyer.

Your next question comes from Ethan Kaye with Lucid Capital Markets.

So you disclosed median portfolio EBITDA increasing from $150 million to $190 million sequentially. It feels like a pretty big change for 1 quarter. You did talk about there being maybe some more activity in the upper middle market as compared to the core middle market. But wondering really kind of what drove that? Was it a strategic result or more so a byproduct of the deal environment and company growth?

Yes. So it's -- you're right. So it was really driven by our new originations that we funded in the fourth quarter, which were pretty large companies. They were all large cap. Mostly on the sponsor side, mostly in the U.S., there were a couple of non-sponsor situations, a couple of non-U.S., really just European situations that we funded in the fourth quarter but they were typically much larger EBITDA. So most of the growth in the median EBITDA, I would say, was a mix shift from those originations in the fourth quarter. But the overall portfolio EBITDA has also been growing. That, I would say, was a smaller portion of the increase you're seeing in the median EBITDA.

Got it. Great. And then one other. So I'm hoping you can kind of walk through the $32 million or so of unrealized depreciation. We talked about Pluralsight, which appears to be about 1/3 of that net number, but can you kind of talk through whether there was maybe any other themes or drivers of kind of the markdowns in the quarter?

It's Chris. I'll make a few comments and add any color. So you're right, Pluralsight was the single largest driver, accounting for about 38% of the total mark. Beyond that, we did take some smaller marks and a few other private positions. And then we did see some of the quoted names trade down, which impacted some of the names we hold on balance sheet as well as some of the JVs.

Your next question comes from Paul Johnson with KBW.

I mean just a little bit more in terms of the -- your sort of perspective on software. I guess, how would you kind of characterize at this point, top line growth and EBITDA trends sort of broadly? Have you noticed any sort of change in the growth rates there, back up in any sort of new activity for deals? I mean, how has that impacted the market, I guess, beyond kind of the weakness in some of the secondary loan prices?

Thanks for the question. This is Armen. Look, I think big picture, I would say that it's too early to actually see performance degradation in any software name, and it's probably going to take a fair bit of time to actually see any sort of dispersion in performance due to AI or disruption in performance to AI. There have been a lot of splashy headlines, but it has not translated big picture into a widespread issue across the names. The reason for the concern isn't necessarily near-term weakness in performance.

It's more that the concern around the long run calls into question the refinanceability of these loans when they mature. And that's why everybody should be looking at their software exposure because to the extent that a subset of software names, whether they're in your private equity book or in your private credit book, to the extent some of them are more susceptible to long-term dislocation due to AI, the more likely it is that the private equity sponsor fails to support them when in maturity occurs even in advance of a real issue in performance.

The other thing I would say is if some number of these software businesses are eventually disrupted by AI, it may turn out to be that they are binary in their outcomes. What I mean by that is if the business appears to be at risk of an AI, a meaningful AI competitor, you could see, depending on the nature of the contracts and the nature of the business, you could see a pretty rapid degradation of performance in those businesses over time. And therefore, from an equity perspective and from a credit perspective, the recoveries could be quite problematic. So it is a significant reason to be concerned about in the medium to long term, but it's not going to really emerge in the short run.

And on this point, I think it's worth mentioning real quick, the concept of covenants in software deals. Covenants and software deals mirror the same sort of -- mirror the same sort of condition as just large cap versus core or small-cap private credit. And what I mean by that is this, there are software deals that have covenants, EBITDA covenants, and they tend to be smaller or midsized companies. But as businesses become large cap and as they are possibly financeable in the broadly syndicated loan market, those software loans do not have any covenants. So it's like cov-lite, as you'd imagine, in another industry outside of software in a large-cap deal, you don't see covenants in a small or midsized deal, you do see covenants typically.

And the covenants and software deals are usually 1 of 2 types. One is an EBITDA-based covenant, as you would see in a normal business that is financed off of a leverage multiple, and the other would be ARR or annual recurring revenue. And those transactions that are recurring revenue based, again, if they're middle market or lower middle market, they will have typically an ARR covenant whereby they have a total debt to ARR cap, and that covenant usually falls away in about 3 years, and it converts into a more traditional leverage-based covenant.

So the covenants are -- can become a problem for ARR deals as they approach that 3-year anniversary typically and those deals that have such a covenant again, large cap is less likely to have it than small cap. But it is yet sort of an additional factor that may ring the alarm bell a little bit sooner or earlier than the maturity.

And in our case, by the way, in terms of OCSL, we really only have 2 ARR deals in our portfolio period. And one of them is already free cash flow positive and expected to repay imminently. The other is a very large transaction, a very large company with a very large private equity sponsor. We think it's pretty well insulated from AI competition, but we think we've done -- we think we've been pretty forward-looking on the ARR side at least to avoid those situations that do not cash flow and therefore, need some sort of access to the public markets or some sort of availability in the financing markets. We wanted to avoid those situations now for several years. And so that's not really an issue in our portfolio.

I think, Paul, it's Matt. We put a new page in the deck, Page 8 that breaks out our software exposure in OCSL, which I think -- to give us any comments if you have on it. But when we lay out there kind of your question on kind of performing in the business. So if you look at kind of the EBITDA growth since we funded the deals, it's up about 20%. So it gives you a sense of -- we have growth there. The EBITDA margin is around 40%. So these are EBITDA positive companies. And about 18%, almost 20% of our software loans have repaid over the last 12 months. So a reflection of thoughtful and hopefully successful underwriting. But so we have those out on Page 8, which is -- in what we posted. Hopefully, that's helpful as well.

Yes. Thank you for that. It's very good color there, and Armen, I appreciate the helpful answer there as well. One more bigger question, bigger picture question, if I may, kind of on this topic. Sort of 2 part. But on that slide, you mentioned there's a 47% weighted average LTV ratio. I'm just curious, is that an LTV ratio and underwrite? Or is that more a current LTV ratio, obviously, based on valuations and leverage today. That's the first part of the question.

And then the other part of the question is bigger picture. How much of valuation sort of reset do you think that broadly the software space can absorb in the equity multiples before we do start to see widespread sort of restructurings and losses? And bigger trouble within the software industry, just given that, obviously, these are companies that are typically financed with lower LTV ratios underwrite, and I'll hand it off there.

This is Armen. I'll answer that, Paul. I mean -- so first of all, on that slide, that is the LTV at underwrite, not a current estimate.

It's 12/31, it's the current one.

It's the current one at 12/31?

Yes.

Okay. So at 12/31, it would -- so that is our estimate of the LTV as of 12/31. And then in terms of the amount of degradation in the equity multiple that it could sustain. I would say, generally speaking, if you do see LTVs rise to 60%. That's getting to the point where they -- it calls into question the refinanceability of the loan.

Generally speaking, today, outside of software when there is an LBO, you're seeing something like 50% to 55% LTV at the max. You're not seeing 70% or 65% LTV deals generally. So what would happen, theoretically, assuming these businesses aren't burning a terrible amount of cash and they get to within a reasonable time frame of maturity, once the sponsor calls up the market and says, hey, I want to refinance. And the response is going to be, well, you're going to need to put in more equity to kind of make this closer to a 50-50 LTV again.

And the sponsors will then have to judge whether it makes sense to do that or not based on the future sort of risk factors and earnings potential of the business, but also the stage of deployment of the fund that those investments are in. If a fund cannot call capital, well, then that sponsor can't support the business. If the fund is already a winner and has already returned a lot of capital, then it's more likely to let go of those straggler businesses that need additional capital to kind of punch through a refinancing or a maturity. And so there -- the sponsor is less likely to support the business in that event. So there's a lot of economic and noneconomic factors that come into play to judge the sponsor's willingness to support a business, if and when the LTV of the loan exceeds again, probably that 55% or 60% LTV threshold level.

Appreciate it. That's all for me. Thank you very much, guys.

[Operator Instructions]. There are no further questions at this time. I'll now turn the call back over to Alison Mermey for any closing remarks.

Thank you all for joining us on today's call. Please feel free to reach out to me and the team with any questions you may have. Have a great day.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Welcome, and thank you for joining Oaktree Specialty Lending Corporation's First Fiscal Quarter and Full Year 2025 Conference Call. Today's conference call is being recorded. I'll now turn the call to Clark Koury, OCSL's Head of Investor Relations.

Thank you, operator. Our fourth quarter and full year 2025 earnings release, which we issued this morning, along with the accompanying slide presentation can be accessed on the Investors section of our website, oaktreespecialtylending.com.

Before we begin, I want to remind you that the comments on today's call include forward-looking statements reflecting current views with respect to, among other things, future operating results and financial performance. Actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to the relevant SED filings for a discussion of these factors in further detail.

Oaktree undertakes no duty to update or revise any forward-looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in Oaktree Fund. Investors and others should note that OCSL uses the Investors section of its corporate website to announce material for me. The company encourages investors, the media and others to review information that it shares on its website.

Now I will turn the call over to Matt Pendo, President of OCSL. Matt?

Thank you, Clark, and thank you all for joining our call today. I'll begin the call with an overview of our results for the fiscal year and fourth quarter. Armen Panossian, our CEO and Co-CIO will then share commentary on the current market environment. And Raghav Khanna, our co-CIO, will provide details on our portfolio and investment activity. Chris McKown, our CFO and Treasurer, will then review our financial results before we open the call for questions.

The fourth quarter and second half of fiscal 2025 reflected steady improvement for OCSL even as the macro environment remains choppy. As we will discuss in more detail, our team worked hard to turn around non-income-producing physicians, find interesting investment opportunities and reduce our cost of capital.

In the fourth quarter, we achieved adjusted net investment income of $0.40 per share, up from $0.37 in the prior quarter. This sequential improvement reflects the return to more normalized prepayment fees, higher dividend income and lower interest expense from our refinancing earlier this year and lower base rates. Additionally, we continue to make progress reducing our nonaccruals, a key strategic focus. At year-end, nonaccruals were 2.8% of the portfolio measured at fair value, down 20 basis points from the third quarter and down 100 basis points from last year.

Last week, the Board approved a dividend of $0.40 per share for the quarter, consistent with our dividend policy and fourth quarter earnings. While the Federal Reserve September rate cut did not affect fourth quarter earnings, lower base rates will impact net investment income in the December quarter.

As we've said before, we have several levers at both the corporate and JV levels to help offset lower base rates and support net investment income. First, we can prudently increase balance sheet leverage to enhance earnings power and deploy capital into interesting investment opportunities. Our balance sheet is conservatively levered at 0.97x and provides us with ample financial flexibility.

Second, we can continue to optimize our JVs. Finally, reducing nonaccruals and equity positions will improve our earnings power. We have line of sight into one, putting a portion of our previously nonaccruing loans on to accrual status two, monetizing a portion of our nonaccrual and three, monetizing equity positions. Any proceeds we received from realizations of nonaccruals and equity will be reinvested into income-generating assets.

On an ongoing basis, we will continue to evaluate these levers and their potential contributions to earnings and our dividend.

Now I will pass the call over to Armen for an update on the market environment.

Thanks, Matt. Turning to the current market environment, we see many conflicting themes.Private credit deal flows showed modest improvement during the quarter, although the overall quality of deals was mixed. We continue to see a steady supply of high-quality opportunities alongside an increasing number of lower quality deals coming to market. Sponsors are pursuing dividend recapitalizations more often as exit activity remains subdued compared to historical levels.

Momentum in Europe slowed relative to what we observed in our third quarter given ongoing political and economic uncertainty, but we still see some interesting deal from that region. Ample liquidity in the broadly syndicated loan and private net markets has driven sponsors to dual-track financing. We have seen an increasing share of $1 billion-plus LBOs, opting for the broadly syndicated market and the tightening of the illiquidity premium.

However, since the Fed rate cut in September, we have witnessed slightly more price discipline and are cautiously optimistic that private credit spreads have bottomed out at SOFR plus 450. Pick and looser covenants remain popular tools for private debt managers to win mandates and allocations, but we remain extremely disciplined in our credit documentation and acceptance of PIC.

As a percentage of total investment income, PIK was 6.4% at quarter end. We prefer to use PIK judiciously and in situations such as financing a high ROE project or carve-out acquisition that requires the PIK option only for a defined period, after which a project or acquisition generates the necessary cash flow to cover the debt full cash interest payment.

Despite a mixed environment, our long-term outlook on private credit remains bullish. Issuers continue to value the speed and assurance of deal execution with a sophisticated partner. For investors, we think private debt will continue to deliver a premium spread relative to other floating rate asset classes and with lower volatility. To talk more about our portfolio and new investments, I will turn it over to Raghav.

Thanks, Armen. I'll start with a review of our investment activity in the fourth quarter. Our pipeline improved during the quarter yet given heightened competition and tighter spreads, as Armen mentioned, we're taking a highly selective approach to new investments. We continue to prioritize senior secured loans to market-leading businesses with durable fundamentals, reliable cash flow and strong downside protection.

At the same time, we're focused on diversifying the portfolio, avoiding industry concentration risk and limiting exposure to more cyclical sectors. Turning to origination and repayment activity for the quarter. New funded investment commitments, including drawdowns from existing commitments amounted to $220 million up 54% from the prior quarter.

Prepayments from exits, other paydowns and sales were $177 million, and the weighted average spread on deployments during the quarter was approximately SOFR plus. First lien loans represented 88% of our new originations. One notable investment during the quarter was Walgreens Boots Alliance, an integrated health care, pharmacy and retailer with a 170-year heritage. The company was taken private by Sycamore Partners for over $20 billion and the sponsor subsequently split the conglomerate into 4 operating businesses.

This segment required its own bespoke lending solution and the sponsor but lenders who could move quickly to underwrite the distinct challenges and transformation opportunities of the retail and pharmaceutical businesses.

Oaktree strategies worked collaboratively to consider various cap capital structures. Ultimately, Oaktree funds acted as joint lead arranger for the $2.5 billion first in last out, first term loan to support the U.S. retail business. The file was priced at SOFR plus 700 with 2 to 5 points of OID, which is attractive for the industry risk and complexity of the deal.

Oaktree's deep expertise in inventory appraisal and long track record of investing in silos, made us comfortable with the collateral coverage of the loan. This transaction is a great example of how Oaktree is positioned to capitalize uncomplicated yet compelling investment opportunities.

Turning to our portfolio. Over 40% of our portfolio companies were marked up during the quarter by about 70 basis points on a weighted average basis, reflecting improving fundamentals in several portfolio companies. As of September 30, 83% of our portfolio was comprised of first lien senior secured debt and the weighted average yield on debt investments was 9.8%.

The median EBITDA of our portfolio companies was approximately $150 million, an $11 million decrease from the prior quarter. Portfolio company weighted average leverage increased slightly to 5.2x from 5.1x and weighted average interest coverage remained unchanged at 2.2x.

As Matt mentioned, we have made tangible progress reducing nonaccruals and resolving challenged investments, which contributed to a decline in nonaccruals this quarter. I'll cover those now starting with an update on Mosaic companies. We have been working closely with Mosaic to realize value for the separation of 3 business segments. Two of these segments were sold and the third is in a liquidation process.

As you may recall, these efforts resulted in a significant cash paydown during the June quarter, and we received additional cash paydowns in the September quarter and after quarter end. Inception to date, the paydowns we received amount to a little over 7% of our original invested cost. And when combined with coupon payments, have resulted in generating positive IRR over the life of this loan.

We believe the proactive actions we took following Mosaic's tariff-related headwinds earlier this year helped maximize our recovery in a challenging situation. We also made progress in monetizing our investment in Open Therapeutics, whose loan is secured by certain royalty rights and public shares of ADC Therapeutics.

Following an increase in ADC's share price, we sold a portion of our ADC shares and used the proceeds to reduce the outstanding loan amount. Our remaining position in Open Therapeutics continues to be marked at 99.5. We're selecting our view that we will continue monetizing the collateral, supporting this loan and recover substantially all of the remaining loan balance. While the issuer is not new to our nonaccrual list, we added Bay Mark's first lien loan to nonaccrual status.

The company's second lien loan was put on nonaccrual in the third quarter. We are working closely with other lenders and the company to maximize value. I'll now turn the call over to Chris to review our financial results.

Thank you, Raghav. In our fourth fiscal quarter ending September 30, 2025, we delivered adjusted net investment income of $35.4 million or $0.40 per share as compared to $32.5 million or $0.37 per share in the prior quarter. The increase for the quarter reflects the return to normalized levels of fee income and interest expense following the onetime items that impacted the results in the third quarter.

NAV per share was $16.64 down from $16.76 in the third quarter due to unrealized depreciation on certain debt and equity investments. Adjusted total investment income increased to $76.9 million compared to $74.3 million in the third quarter primarily driven by higher prepayment fees and dividend income. Net expenses declined modestly compared to the third quarter. Interest expense decreased due to the refinancing of our syndicated credit facility completed earlier this year and lower reference rates.

Additionally, as you may recall, our June quarter results were impacted by noncash and nonrecurring interest related to the acceleration of deferred financing costs, primarily in connection with the termination of the Citibank SPV facility. Our weighted average cost of borrowings was 6.5% at September 30 and down from 6.6% in the third quarter.

Further, we waived approximately $1.9 million in incentive fees as a result of our total return hurdle. Our leverage ratio at quarter end was 0.97x and up slightly from 0.93x last quarter, and total debt outstanding was $1.5 billion. Our target leverage range of 0.9x to 1.25x remains unchanged, and driven by our disciplined pace of capital deployment, we remain at the low end of the range.

Unsecured debt represented 64% of total debt at quarter end, down slightly from prior quarter. We have ample dry powder to fund investment commitments with liquidity of approximately $695 million, including $80 million of cash and $615 million of undrawn capacity on our credit facility. Unfunded commitments excluding those related to the joint ventures, were $258.9 million, approximately $246.9 million of which can be drawn immediately as the remaining amount is subject to portfolio companies meet certain milestones before the funds can be drawn.

Turning to our 2 joint ventures. Together, the JVs currently hold $513 million of investment primarily in broadly syndicated loans spread across 73 portfolio companies. During the fourth fiscal quarter, the JVs generated ROEs of 12.4% in aggregate. Leverage at the JV was 1.7x compared to 1.3x last quarter. In addition, we received a $525,000 dividend from the Kemper JV.

With that, I'll turn the call back to the operator to open the call for questions.

[Operator Instructions]

And our first question comes from the line of Melissa Wedel with JP Morgan.

Definitely noted that you're around in the level of new net funding activity this quarter. I know that typically, December is a seasonally busy quarter, but I'm just curious if you have any early insight into sort of expectations around investment activity in the December quarter this year. And any outsized repayments that we should be thinking about?

Melissa, it's Armen. In terms of outsized repayments, we don't expect any at this time for the quarter, end of December. As far as deployment, nothing really stands out either direction, either on the heavy side or the life side relative to past December quarters. We certainly have seen some tightening in the spreads. And so we're judicious about how we're deploying, but I don't see us materially deviating from past quarters in terms of deployment or leverage levels for the quarter.

Okay. I appreciate that. One of the other things related to your comment about spreads tightening, I did notice that the yield on new investments this quarter was a step higher, about 60 bps higher compared to last quarter. I'm assuming that relates to sort of the complexity of the Walgreens deal complexity and size of the Walgreens deal. I guess, one, is that right?

And then two, what's your view on sort of a pipeline for transactions like that where there might be more complexity and pricing involved?

Melissa, it's Chris. Thanks for the question. I'll start, and maybe Armen can add a little bit in terms of pipeline. Yes, in terms of the quarter-on-quarter change, I mean you're right in noting Walgreens. I think the other thing I would just note about the June quarter is that on balance, we had a little bit higher originations into Euribor indexed loans. So when you're looking at the absolute coupons, June was a little bit lower as a result of that. We do hedge all of that back to U.S. dollars. There is a little bit of a pickup when you take into account that hedging impact, but that does create a little bit of noise kind of quarter-to-quarter

Armen, do you going to add anything?

Yes. We do have a very active origination function in nonsponsored direct lending. I think Walgreens stands out as a pretty high spread loan. I don't see anything that we would be originating in the December quarter. That's quite that high in spread. But we do have a few things that we're working on that might be sort of higher than the 450 to 500 spread that's typical sponsor lending. But I think it's too early to, at this point, to provide forward guidance I just don't think that the Walgreens deal is not repeatable, I don't think, in the fourth quarter. Sorry, fourth calendar quarter.

And your next question comes from the line of Sean Paul Adams with B. Riley Securities.

On the nonaccruals still on the books, it seems like there's still a heavy skew towards health care and pharma. Can you just share a little bit more color about what's going on in those particular segments?

Sure. This is Armen. We have -- or we had a couple of sort of chunky visions in the life sciences space, it's not many in number, but it's -- there were unfortunately some larger positions that continue to be the subject of workouts, SiO2 being, I would say, the most material of them, which is a name that we've talked about on past calls but that's really what it is.

We continue to sort of work out situations that at this point, or several years have been in the portfolio for several years. They're all sort of stable to maybe slightly improving but still not at the position where we're either going to exit or whether we're going to move them into accrual status, unfortunately. -- we're not adding -- we haven't added other kind of life sciences or health care names that have created problems in the recent quarters.

But again, these there's a small handful of positions that were put on a few years ago continue to sort of weigh on the nonaccrual bucket.

Got it. And as a quick follow-up, is there any workout strategies going on with those long-standing accruals?

The more operational workouts. They're not -- they have already been, from a capital structure perspective, restructured. But operational improvements are being made. We're working closely with management teams to drive that performance. And when possible, we are working with the management to sell assets and either fund cash burn or repay or make distributions to our position. But there's nothing -- I wouldn't say that there's anything significant or monumental that would be happening in the near term with respect to those positions. It's just kind of blocking and tackling with an operational turnaround.

[Operator Instructions]

Thank you. I'm not showing any further questions in the queue. I would now like to turn it back to Clark Koury for closing remarks.

Great. Thank you, operator, and thanks to everybody for joining. Please reach out with any questions. We're happy to jump on the bump. Have a great day.

And this does conclude today's conference call. Thank you all for joining. You may now disconnect.