OFS Capital Q3 2023 Earnings Report

OFS Capital EPS Results

• Actual EPS: $0.40
• Consensus EPS: $0.37
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: N/A

OFS Capital Revenue Results

• Actual Revenue: $14.65 million
• Expected Revenue: $14.55 million
• Beat/Miss: Beat by +$100.00 thousand
• YoY Revenue Growth: N/A

OFS Capital Announcement Details

• Quarter: Q3 2023
• Date: 11/2/2023
• Time: N/A
• Conference Call Date: Friday, November 3, 2023
• Conference Call Time: 10:00AM ET

OFS Capital (NASDAQ:OFS) is a business development company specializing in direct and fund investments as well as add-on acquisitions. It provides flexible capital solutions primarily through debt capital and to a lesser extent, minority equity investments serving the needs of U.S.-based middle-market companies across a broad array of industries. It does not invest in operational turnarounds or start-up businesses. For direct, it specializes in debt and structured equity investments, recapitalizations and refinancing, management and leveraged buyouts, acquisition financings, ownership transition, shareholder liquidity events, growth capital, independent sponsor transactions, ESOPs, and minority investments in the lower middle market companies. It invests in the aerospace and defense, business services, consumer products and services, construction & building, durable goods, capital equipment, automotive, food and beverage, healthcare & pharmaceutical, specialty chemicals, transportation cargo and logistics, value added distribution, franchising, and industrial and niche manufacturing sectors. The firm invests in companies based in United States. It seeks to invest between $3 million and $35 million, revenues between $15 million and $300 million, annual EBITDA between $5 million and $50 million, and Enterprise value between $10 million and $500 million. The firm seeks to invest in companies with debt investment values between $5 million and $25 million. The fund uses senior secured, unitranche loans, first-lien, second lien, subordinated/ mezzanine loans, warrants, and preferred equity securities and common equity securities. It prefers to take a minority as well as majority stake in the investments made. It also co-invests with its partners for additional capital.

OFS Capital Q3 2023 Earnings Call Transcript

[Operator]

Good morning, and welcome to the OFS Capital Corporation Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Steve Altobrando, Vice President of Capital Markets.

[Operator]

Please go ahead.

[Speaker 1]

Good morning, everyone, and thank you for joining us. Also on the call today are Bilal Rahid, our Chairman and Chief Executive Officer and Jeff Cerny, the Company's Chief Financial Officer and Treasurer. Before we begin, please note that the statements made on this call and webcast may constitute forward looking statements as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital Management concerning anticipated results, Are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from such statements. The uncertainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the SEC.

[Speaker 1]

Although we believe these assumptions are reasonable, any of those assumptions could prove inaccurate and as a result, the forward looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward looking statements. OFS Capital undertakes no duty to update any forward looking statements made herein, and all forward looking statements speak only as of the date of this call. With that, I'll turn the call over to Chairman and Chief Executive Officer, Bilal Rashid.

[Speaker 2]

Thank you, Steve. Good morning. This quarter, we are pleased to report a 4th consecutive increase in our net investment income, which rose to $0.40 per share, up by 5% from the 2nd quarter. We believe this increase was a result in part of our balance sheet positioning with the majority of our debt being fixed rate And the vast majority of our loan portfolio being floating rate. Our net asset value declined slightly by 1.5% assets.

[Speaker 2]

This was partially offset by broader net unrealized appreciation across the remainder of the investment portfolio, particularly in our structured finance investments. The overall performance of our portfolio companies remain solid in this uncertain macroeconomic environment. In our view, the vast majority of our portfolio companies As part of our long standing investment discipline, we have historically avoided investing in highly 9% of our loan portfolio at fair value is senior secured. We believe that being at the top of the capital structure M and A activity compared to historical levels due to interest rate and macroeconomic uncertainty. Like many market Our financing continues to benefit our company.

[Speaker 2]

At the end of the Q3, approximately 89% of Our non recourse $150,000,000 senior loan facility with BNP Paribas matures In June 2027, our corporate line of credit is flexible with no mark to market provisions. As we have discussed before, we locked in $180,000,000 of fixed rate unsecured debt 2 from the experience of our advisor, which manages approximately $4,200,000,000 across the loan and structured credit markets, Has expertise in multiple asset classes and industries and has a more than 25 year track record

[Speaker 3]

As Bilal mentioned, we posted net investment income of $0.40 per share for the 3rd quarter. This compares favorably to our prior quarter's net investment income of $0.38 per share. We also announced that our quarterly distribution remains at $0.34 per share for the 4th quarter, representing a 12 1% annualized yield per share as of the close on September 30. Quarter over quarter, our net Investment income increased approximately 5%. The increase was primarily due to non recurring interest income driven by 1 of CLO warehouse investments that was repaid near the end of the quarter.

[Speaker 3]

Our net asset value per share decreased by $0.20 per share or approximately 1.5 percent to $12.74 per share. As Bilal mentioned, This decline was primarily related to a few downward valuation marks for the quarter and was partially offset by broader unrealized appreciation across the remainder of the investment portfolio, particularly in our structured finance investments. During the quarter, we placed loans with an aggregate fair value of $6,400,000 on non accrual status. As of September 30, 3.7 percent of our total investments at fair value were on non accrual status, even though a couple to $14,700,000 As I previously mentioned, this was primarily due to an increase in interest income driven by a CLO warehouse investment upon repayment near the end of the quarter. Total expenses of $9,300,000 were down slightly during the period, primarily due to a decrease in our average debt balance and correspondingly our interest expense.

[Speaker 3]

As I mentioned, net investment income was $0.40 per share for the 3rd quarter. This is a $0.02 increase compared to last quarter, which continues the trend of quarterly increases over the past We continue to believe that net investment income will benefit from our balance sheet positioning given that 94% Our loan portfolio at fair value is floating rate, while 70% of outstanding debt is fixed rate. It is also worth noting that at quarter end, 89% of our outstanding debt matures in 2026 or later And 59% of our outstanding debt was unsecured. Excluding the SBIC debt, our regulatory debt to equity ratio was relatively Stable quarter over quarter at approximately 1.59 times and our regulatory asset coverage ratio was 163 Turning to our investments. The overall performance of our portfolio companies remains solid in this uncertain macroeconomic environment despite weakness in a few of our investments.

[Speaker 3]

We are committed to being senior in the capital structure and selective in our underwriting. We remain cautious with Add on opportunities for growth for which we either funded this quarter or are evaluating incremental funding in the 4th quarter. As of September 30, we had commitments to fund investments under various credit facilities to our portfolio companies totaling $14,100,000 The majority of our investments are in loans, and 99% of our loan portfolio at fair value was senior secured at September 30th. As far as our overall investment portfolio, it includes approximately 71% senior secured loans, 1% At the end of the quarter, we had investments in 77 unique issuers totaling approximately $457,000,000 on a fair value basis. For the quarter ended September 30, the weighted average performing investment income yield on the interest bearing The portfolio, which includes all interest, prepayment fees and amortization of deferred loan fees, was up 80 basis points to 14 With that, I'll turn the call back over to Bilal.

[Speaker 2]

Thank you, Jeff. To wrap up our call today, we are pleased to report continued growth in net investment income this quarter, on capital preservation with nearly 100 percent of our loan portfolio at fair value being senior secured And we remain confident in the overall quality and fundamentals of our portfolio. Beginning of 2011, the BDC has invested more than $1,900,000,000 with a cumulative Debt realized loss of just 2.5% over the past 13 years, while generating to navigate this market successfully due to the size, experience and Reputation of our advisor with a $4,200,000,000 corporate credit platform affiliated with a more than $30,000,000,000 asset management group, our advisor has broad expertise including long standing banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the last 25 plus years. Our Advisor is also strongly aligned with shareholders as it maintains an approximately 22% ownership stake in the BDC.

[Speaker 2]

With that, operator, please open up the call for questions.

[Operator]

We will now begin the question and answer The first question comes from Mitchell Penn with Oppenheimer. Please go ahead.

[Speaker 4]

Good morning, guys. Hey, a couple of quick questions. What's the percent of second liens in the portfolio?

[Speaker 5]

Good morning, Mitchell. Yes, the second lien is 20% of the loan portfolio. As I typically mentioned, this is they do tend to be the larger, more liquid loans. We've seen a very modest increase since last quarter and just due to the really just the portfolio size, but it's really haven't been increasing in the 2nd lien arena.

[Speaker 4]

Got it. And in terms of the portfolio, what Percentage of the portfolio has interest coverage below one times.

[Speaker 5]

Mitch, I don't have that statistic handy. I will say that So far based on current interest rates, we have been able to maintain our covenant coverage ratios and We have seen some tightening in coverage ratios, but still very manageable given kind of the initial low leverage levels. And with the primarily first lien portfolio, I think the interest rate Risk is a bit lessened, but I don't have that statistic handy.

[Speaker 4]

Got it. And last question, Are you guys we had Golub did its middle market report this quarter and showed Strong growth in EBITDA and revenue in their portfolio. And TSLX actually talked on their call About seeing similar kinds of numbers, what are you guys seeing in your portfolio in terms I

[Speaker 5]

would say more than a majority of our portfolio Has seen growth on both revenues and EBITDA. I would say that we We had seen some margin compression, but that has certainly lessened. So yes, more than a majority is definitely Continuing to see growth in both revenues and EBITDA.

[Speaker 4]

Got it. Thanks so much guys for your time.

[Speaker 5]

Absolutely. Thanks, Mitchell.

[Operator]

This concludes our question and answer session and the OFS Capital Corporation Third Quarter 2023 Earnings Conference Call. Thank you for attending today's presentation.