Oaktree Specialty Lending

OCSL

Market cap $1.16B

The BDC sector has been hammered—but opportunity may finally be knocking. Two high-yield giants now trade at big discounts to NAV. I compare them side by side and share the scenarios in which I think each makes sense to buy.

Oaktree Specialty Lending (OCSL) has become technically an oversold stock now, which implies exhaustion of the heavy selling pressure on it. This, combined with strong agreement among Wall Street analysts in revising earnings estimates higher, indicates a potential trend reversal for the stock in the near term.

LOS ANGELES--(BUSINESS WIRE)--Oaktree Specialty Lending Corporation Schedules Fourth Fiscal Quarter and Full Year 2025 Earnings Conference Call for November 18, 2025.

Blackstone Secured Lending and Morgan Stanley Direct Lending are high-quality BDCs facing potential dividend cuts due to falling coverage ratios. BXSL's fundamentals remain strong, but tight dividend coverage, high floating-rate exposure, and significant upcoming debt maturities raise concerns about a near-term cut. MSDL, despite robust liquidity and investment-grade ratings, has seen declining earnings, rising non-performing loans, and high floating-rate exposure, signaling possible dividend reduction.

BDCs have already experienced a notable correction. The sector median P/NAV metric indicates ~12% discount to NAV. Many players are priced even below that.

14 BDCs have base dividend coverage levels between 100% and 105%. 16 BDCs have them already below 100%. Given the unfavorable future earnings outlook, a system-wide BDC dividend cutting process is very likely to start quite soon.

Wall Street suits tend to avoid business development companies (BDCs). That's a mistake.

Oaktree Specialty Lending's weak net investment income coverage raises concerns about portfolio quality and future payouts. Non-accruals remain elevated, though slightly improved Q/Q in Q3'25, driving a persistent discount to net asset value and reflecting investor caution. Despite a material discount to NAV, weak dividend coverage and continual credit issues justify a downgrade from 'Strong Buy' to 'Hold'.

The BDC sector faces mounting risks from a weakening economy, high consumer debt, and the potential for further dividend cuts as interest rates decline. Recent dividend cuts by several BDCs highlight the sector's vulnerability, despite some names maintaining resilience and attractive valuations. Spillover income offers only limited protection; tight dividend coverage and rising non-accruals signal caution for income-focused investors.

Q2 earnings confirmed my call for a market rotation in BDCs; quality bias and selectivity remain critical for outperformance. Structural headwinds—spread compression, falling base rates, and thin dividend coverage—signal elevated risk of further dividend cuts across the sector. Current sector repricing is insufficient for broad new BDC allocations; most remain unattractive except for select names with strong fundamentals.