Oaktree Specialty Lending (NASDAQ:OCSL) reported what management described as a solid start to fiscal 2026, with adjusted net investment income (NII) rising modestly from the prior quarter and earnings continuing to cover the company’s dividend. Executives also spent significant time discussing market conditions in private credit, portfolio credit trends, and how the firm is underwriting software-related risk amid growing attention on artificial intelligence (AI).
Quarterly results and dividend
For the fiscal first quarter ended Dec. 31, 2025, OCSL posted adjusted NII of $36.1 million, or $0.41 per share, compared with $35.4 million, or $0.40 per share, in the prior quarter. President Matt Pendo said the quarter was “the first full quarter reflecting the impact of the September rate cut,” and despite lower base rates, earnings “remained stable.”
Chief Financial Officer and Treasurer Chris McKown said adjusted total investment income declined to $74.5 million from $76.9 million in the fourth quarter, primarily due to lower interest income from lower reference rates and lower original issue discount acceleration. He added that higher fee income, “largely from higher prepayment and exit fees,” partially offset the decline. McKown also noted net expenses decreased modestly, driven in part by a $4 million reduction in Part I incentive fees, “primarily as a result of our total return hurdle.”
Portfolio growth, yields, and investment activity
OCSL increased capital deployment during the quarter. Pendo said new funded investments, including drawdowns from existing commitments, totaled $314 million, up from $220 million in the prior quarter. He cited an average all-in spread and yield on new private investments of 525 basis points and 9%, respectively.
Co-Chief Investment Officer Raghav Khanna said the company’s portfolio size grew by about $100 million to $2.95 billion. Newly funded investment activity totaled $314 million, while paydowns and exits were $179 million, resulting in $135 million of net new investments.
As of Dec. 31, Khanna said 85% of the total portfolio was first lien senior secured debt, and the weighted average yield on debt investments was 9.3%. OCSL also emphasized diversification, with the average position representing less than 1% of the portfolio at fair value and no single position exceeding 2%.
On portfolio metrics, Khanna said weighted average leverage and interest coverage of portfolio companies were unchanged at 5.2x and 2.2x, respectively. In response to an analyst question, he said the sequential increase in median portfolio EBITDA (from $150 million to $190 million) was largely driven by a mix shift tied to larger-company originations funded in the fourth quarter, with some additional contribution from growth in overall portfolio EBITDA.
Credit quality, non-accruals, and portfolio marks
Pendo said OCSL remained focused on “reducing non-accruals and equity positions” as a lever to improve earnings power. Non-accruals were “relatively stable sequentially” and down nearly 85 basis points year-over-year, he said. At quarter end, non-accruals represented 3.1% of the total debt portfolio at fair value.
Pendo highlighted a restructuring of OCSL’s investment in Avery, which put a portion of the loan back on accrual status. He said Avery continues to sell units and that monetization proceeds from non-accruals or equity positions would be reinvested into income-generating assets.
Khanna said the company added one new non-accrual during the quarter, placing a second-out term loan in Pluralsight on non-accrual. He noted OCSL’s prior position in the company had been restructured in August 2024, and the restructured loan was moved to non-accrual due to “ongoing challenging industry dynamics and the company’s softer than expected outlook.” At quarter end, OCSL had 11 investments on non-accrual.
Net asset value (NAV) per share ended the quarter at $16.30, down from $16.64 in the fourth quarter. McKown attributed the decline to unrealized depreciation on certain debt and equity investments, with Pluralsight as the largest detractor. He said OCSL marked the Pluralsight equity position down to zero and also marked down the second-lien term loan. In Q&A, McKown said Pluralsight accounted for about 38% of the total mark, with additional smaller markdowns in other private positions and declines in some quoted names that also affected positions held on balance sheet and in the joint ventures.
Market backdrop: spreads, M&A, and PIK discipline
Chief Executive Officer and Co-Chief Investment Officer Armen Panossian said private credit conditions reflect a broader economic bifurcation, with strong companies retaining access to capital while weaker companies have “limited or no access at all.” He said sponsors have favored recapitalizations over exits in a muted M&A environment, creating a backlog of transactions. With rate pressures easing, he said sponsors are increasingly turning to M&A to provide liquidity, and management expressed increased confidence that middle-market activity could improve during the year.
Panossian said that since the Federal Reserve’s September rate cut, OCSL has seen “greater price discipline” and believes spreads in private credit have bottomed at SOFR plus 450 to 475 basis points, with potential for stability in 2026 and the possibility of widening. He also said direct lending continues to offer an approximate 150-basis-point spread premium versus broadly syndicated loans with similar credit quality.
Management also discussed the prevalence of payment-in-kind (PIK) interest in direct lending. Panossian said PIK remains prevalent, reflecting sponsors’ preference for flexible structures, but OCSL remains disciplined. McKown said PIK represented 6.3% of adjusted total investment income in the quarter, and approximately two-thirds of PIK income came from investments that had the ability to PIK at origination.
Software and AI: underwriting focus and portfolio positioning
Panossian and Khanna provided detailed commentary on software exposure and AI-related risk. Khanna said Oaktree’s software underwriting framework has not changed, but the firm has become more selective, emphasizing software providers with high switching costs and deep integration into customer workflows. He said the firm has added criteria including “multiple control points, data gravity, business context, high mission criticality, and a coherent and credible AI roadmap.”
As of Dec. 31, software represented approximately 23% of investments at fair value across 28 issuers, according to Khanna. He said 94% of software positions were first-lien term loans, and OCSL had two ARR-based loans representing about 2% of fair value. Khanna also said that over the past 12 months, approximately 18% of OCSL’s total software positions had been repaid.
In Q&A, Panossian said it was “too early” to see AI-driven performance degradation across software names, arguing the more immediate risk is refinancing ability as maturities approach if long-term disruption concerns raise required equity support. He also discussed covenant dynamics, noting that larger-cap software loans are typically covenant-lite, while smaller and mid-sized deals are more likely to have EBITDA or ARR-based covenants.
On liquidity and leverage, McKown said OCSL ended the quarter with approximately $576 million of liquidity, including $81 million of cash and $495 million of undrawn revolving credit capacity. Net leverage increased to 1.07x from 0.97x in the prior quarter, reflecting higher deployment, while the company’s long-term target leverage range remained 0.9x to 1.25x.
McKown also provided an update on OCSL’s two joint ventures, which held $511 million of investments across 135 portfolio companies, primarily in broadly syndicated loans. During the quarter, the joint ventures generated aggregate ROEs of 12%, with leverage of 1.7x, and OCSL received a $525,000 dividend from the Kemper JV.
About Oaktree Specialty Lending (NASDAQ:OCSL)
Oaktree Specialty Lending Corporation (NASDAQ: OCSL) is a closed-end, externally managed specialty finance company structured as a business development company (BDC). Launched in 2014, Oaktree Specialty Lending provides customized debt solutions to U.S. middle-market companies, with a focus on senior secured loans, second-lien financings, mezzanine debt and select equity co-investments. The company’s investment strategy centers on floating-rate instruments designed to offer downside protection and income potential in varying interest rate environments.
The firm’s portfolio spans a diverse array of industries, including healthcare, technology, energy, business services and consumer products.
