Oaktree Speciality: A BDC For Contrarian Income

Business development companies (BDCs) are under-followed and under-owned. BDCs are tax-privileged in that they were created by Congress in 1980 to spur growth in small and midsized businesses, which often struggled to secure financing from actual banks.

That’s where BDCs step in: They provide debt, equity, and other financing to these companies, and the repayments serve as a steady stream of cash flow.

These cash flows end up investors’ pockets because, well, they have to by law. Like real estate investment trusts, BDCs largely get a pass on taxes, on the condition that they return at least 90% of their taxable profits to shareholders as dividends.

Oaktree Specialty Lending Corporation (OCSL) is a lesson in the importance of capable management. OCSL boasts a $1.6 billion portfolio spread across 119 companies in a wide range of industries. And while it also offers a number of financing options — including unsecured and mezzanine loans, as well as preferred equity — it primarily deals in first and second lien loans, which make up roughly 80% of the portfolio.

OCSL has played the name-change game in recent years. It picked up the moniker in 2017 after Fifth Street Finance Corporation picked up a new adviser: Oaktree Capital Management. Oaktree emphasizes consistency and risk control: a message retirees can get behind. “A superior record is best built on a high batting average rather than a mix of brilliant successes and dismal failures,” the company says — and so far, it shows.

Management and incentive fees were lowered. The team went to work on cutting down non-core assets, which were reduced from 63% as of September 30, 2017, to just 9% as of 2020’s second quarter. Perhaps best of all: Whereas most BDCs are keeping their payouts level or cutting them, OCSL has raised its payout not once, but twice, since 2018, including a 10.5% upgrade starting this month.

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