This is a placeholder for the renamed Fifth Street Finance BDC, which will assume the name of Oaktree Specialty Lending Corp. (OCSL) after Oaktree closes on a deal to take over the management contract from Fifth Street Asset Management.
Big fee changes
Oaktree Capital Group proposed changing Fifth Street Finance’s fee agreement, reducing base management fees and incentive fees. Base management fees would be cut from 1.75% to 1.5%, and incentive fees will be reduced from 20% to 17.5%. The hurdle rate for incentive fees will also be cut from 7% to 6%, offsetting some of the reduction in fees.
Much more to come…
• As part of the transaction, the name of each BDC will change, with FSC becoming Oaktree Specialty Lending Corp. (OCSL) and FSFR becoming Oaktree Strategic Income Corp. (OCSI), although both will still be traded on NASDAQ.
• In terms of the fee structure, we and the BDC’s boards of directors believe that Oaktree has proposed a favorable fee structure:
o FSC – 1.5% base management fee, 6.0% hurdle, and 17.5% incentive fee with respect to both income and capital gains
o FSFR – 1.0% base management fee, 6.0% hurdle, and 17.5% incentive fee with respect to both income and capital gains
o No accumulation or payment of the incentive fee on capital gains until FY 2019
• Most importantly, these will be Oaktree vehicles managed by an Oaktree investment team, which means they will be managed consistent with Oaktree’s investment philosophy, in particular the primacy of risk control.
• Oaktree will implement its own underwriting criteria and investment process that has been proven throughout market cycles. The primary focus for both BDCs will be on fundamental credit analysis and downside protection.
• Oaktree has stated that they intend to keep FSC and FSFR separate with different risk profiles.
o They expect for OCSL (FSC) to have more flexibility to invest in junior and unsecured tranches and in dislocated credits. Compared to OSCI, Oaktree anticipates that a more meaningful portion of OCSL’s earnings may come from capital gains.
o They intend for OCSI (formerly FSFR) to be a stable source of current income for investors with the portfolio likely skewed towards the first lien, senior secured end of the capital structure. Over time, Oaktree intends to shift OCSI’s investment focus away from “senior” obligations to broaden its investment scope.
• We believe that Oaktree’s focus on seeking to minimize credit losses and protect principal by applying their conservative investment philosophy will deliver more consistent long-term results across economic cycles.
• We believe Oaktree’s experience will allow it to reposition the portfolios and enhance the value of FSC and FSFR over time.