OFS Capital Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 2, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the OFS Capital Corporation Second Quarter 2024 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 Altobrondo for opening remarks.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us. Also on the call today are Bilal Rashid, 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. Earlier this morning, we announced our 2nd quarter earnings. Our net asset value per share increased by 3.9% to $11.51 up $0.43 from the prior quarter. While the current interest rate environment remains uncertain, we believe that we continue to benefit from our balance sheet positioning, with 72% of our debt being fixed rate and 92% of our loan portfolio at fair value being floating rate. Our net investment income for the quarter decreased from $0.42 per share in the Q1 to $0.26 per share this quarter.

Speaker 2

As you recall, the net investment income from last quarter reflected certain non recurring items, including significant non recurring dividends from 2 of our equity investments. This quarter's net investment income primarily reflects the impact of our delevered balance sheet, which Jeff will discuss in more detail. That being said, we are focused on increasing our net investment income, primarily by converting certain non interest earning equity positions into interest earning assets, as we mentioned on our last call. In that regard, we are continuing to explore alternatives for our minority equity investment in Fan Steel, our largest equity position. The fair value of the position rebounded this quarter, appreciating by $7,800,000 to $70,800,000 at quarter end.

Speaker 2

The improvement in value is in part attributed to an upswing in fundamental performance following a recent trough. As a reminder, this is a position we invested in more than 10 years ago at a modest cost of only $200,000 To date, we have received approximately $3,400,000 in distributions or approximately 16 times our cost. Turning to our portfolio, we believe it is well positioned for the current macroeconomic environment. As part of our long standing investment discipline, we remain committed to avoiding highly cyclical industries. We believe that our loan portfolio remains well diversified and defensively positioned.

Speaker 2

At quarter end, our largest sector exposures at fair value are in manufacturing, healthcare, wholesale trade and business services. Another key part of our investment discipline is investing higher in the capital structure, with approximately 100% of our loan portfolio at fair value and 1st lien and second lien senior secured loans. In terms of new originations, M and A activity remains subdued, though we anticipate an increase in activity later in the year as we get more clarity on interest rates. In the meantime, we remain active in supporting our existing portfolio companies. In our view, our financing continues to benefit our company.

Speaker 2

At the end of the Q2, 100 percent of our outstanding debt matures in 2026 or later and 72% of our outstanding debt is unsecured. 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 in 2021 bearing a weighted average coupon of 4.8%, which is notably lower than current market pricing. As we navigate this market environment, we have confidence in the experience of our advisor, which manages approximately $4,000,000,000 across the known and structured credit markets, has expertise in multiple asset classes and industries, and has a more than 25 year track record through multiple credit cycles.

Speaker 2

At this point, I'll turn the call over to Jeff Cerny, our Chief Financial Officer, to give you more details and color for the quarter.

Speaker 3

Thanks, Bilal. Good morning, everyone. As Bilal mentioned, we posted net investment income of $0.26 per share for the 2nd quarter, which was down from the Q1 primarily due to 2 factors: first, we received certain non recurring dividends in the Q1 from a couple of equity investments and second, we continued to delever our balance sheet resulting in a smaller asset base. Our ratio has decreased from 1.87 times at December 31 to 1.62 times at June 30. Our current distribution rate represents a 15.3% annualized yield based on the price of our common stock at quarter end.

Speaker 3

We also announced that our quarterly distribution will remain at $0.34 per share for the Q3. We are keenly focused on improving net investment income and once again exceeding our distribution rate. As Bilal discussed, we are actively exploring alternatives to monetize some non interest bearing investments, specifically our minority equity stake in Fansteel to increase our net investment income. Our net asset value per share increased by approximately $0.43 this quarter. This increase was primarily due to unrealized depreciation in certain segments of our investment portfolio, most notably our minority equity position in Fan Steel Holdings and certain CLO equity positions.

Speaker 3

We had no new non accruals this quarter and we believe the overall quality of the portfolio remains stable. 4.6% of our total investments at fair value were on non accrual status at quarter's end. Turning to the income statement, total investment income was down approximately $3,100,000 to $11,200,000 this quarter. This was largely due to the factors I previously mentioned, including the non recurring dividends of approximately $2,400,000 received in the Q1, as well as the smaller asset base driven by repayments as we delevered the balance sheet. Our regulatory asset coverage ratio stands at 100 and 62% at quarter end.

Speaker 3

Total expenses were down 10.5% during the period to $7,700,000 primarily due to a decrease in interest expense related to our lower average outstanding debt balances from delevering activities I just mentioned, as well as the resulting lower base management and incentive fees. As I mentioned, net investment income was 0.26 dollars per share for the Q2. In addition to our intentions to increase net investment income, we believe that our balance sheet positioning was beneficial this quarter, given that 92% of our loan portfolio at fair value is floating rate, while approximately 72% of our outstanding debt is fixed rate. It is also worth noting that at quarter end, all of our outstanding debt matures in 2026 or later and approximately 72% of our outstanding debt was unsecured. Turning to our investments, we believe the overall performance of our portfolio companies remains relatively stable compared to last quarter, despite this uncertain macroeconomic environment.

Speaker 3

We are committed to being senior in the capital structure and selective in our underwriting. We remain cautious about new originations and M and A activity remains slow. We continue to work with our portfolio companies as they identify add on opportunities for growth. As of June 30, we had $8,900,000 in commitments under various credit facilities to fund investments to our portfolio companies. The majority of our investments are in loans and approximately 100% of our loan portfolio at fair value was senior secured as of June 30th.

Speaker 3

Based on amortized cost as of quarter end, our investment portfolio was comprised of approximately 69% senior secured loans, 1% subordinated debt, 23% structured finance securities, and 7% equity securities. At the end of the quarter, we had investments in 68 unique issuers totaling $398,200,000 on a fair value basis. The weighted average performing investment income yield on the interest bearing portion of the portfolio improved slightly to 13.4%, which is up about 0.4% quarter over quarter. This includes all interest prepayment fees and amortization of deferred loan fees. With that, I'll turn the call back over to Bilal.

Speaker 2

Thank you, Jeff. In closing, we believe our portfolio remains solid with no new non accruals in the quarter. We are focused on increasing net investment income in the coming quarters, specifically by pursuing the sale of certain non interest earning equity positions and redeploying the proceeds into interest earning assets. Our focus remains on capital preservation 100% of our loan portfolio at fair value being senior secured and we remain confident in the overall quality and fundamentals of our portfolio. We have relied on our long standing experience and investment discipline, which we believe has served us well.

Speaker 2

Since the beginning of 2011, the BDC has invested more than $1,900,000,000 with a cumulative net realized loss of just 2.7% over the past 13 years, while generating attractive risk adjusted returns on our portfolio. We believe our business is especially equipped to navigate this market successfully due to the size, experience, and reputation of our advisor. With a $4,000,000,000 corporate credit platform affiliated with a $29,000,000,000 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 and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the company.

Speaker 2

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

Operator

At this time, the conference has concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
OFS Capital Q2 2024
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