OFS Capital Corporation Q1 2023 Earnings Call

Okay.

Good morning, and welcome to the <unk> Capital Corporation first quarter 2023 earnings Conference call.

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I would now like to turn the conference over to Steve Ultra Brando. Please go ahead.

Good morning, everyone and thank you for joining us.

So 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 <unk> 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 and 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.

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 <unk> 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 Al Al Rashid.

Thank you Steve good morning.

Since our last call just two months ago. We are pleased to report another increase.

Our quarterly net investment income.

We continue to see the benefits of our balance sheet positioning and the rising interest rate environment, but the vast majority of our loan portfolio being floating rate and the majority of our debt being fixed rate.

Earlier this morning, we announced a quarterly distribution of 33 cents per share.

Our net investment income increased to 37 cents per share in the first quarter.

From 35 cents per share in the fourth quarter of last year.

This increase was largely due to a dividend payment from our investment in France team.

Such statements are at the discretion of the company and are not expected to be received on a recurring quarterly basis.

Our net asset value remained relatively flat decreasing by less than half a percent to $13.42 per share.

This slight decline from last quarter was primarily due to unrealized depreciation on investments.

We believe that the overall credit quality of our portfolio companies remained solid.

As you would expect we maintain regular contact with our portfolio companies.

And we continue to believe that the cost of borrowing remains manageable.

The slow growth and rising interest rate environment.

As part of our long standing investment discipline, we limit investing in highly cyclical industries.

Our well diversified portfolio is defensively positioned with our largest sector exposures.

In manufacturing.

Thank you.

Business services and technology.

Although M&A activity remained subdued.

We expect it to pick up in the second half of the year.

In the meantime, we remain deliberate in putting capital to work.

Our financing continues to provide us with operational flexibility and the.

The end of the first quarter.

Roxanne lately, 85% of our outstanding debt matures in 2026, or later and more than half of our debt is unsecured.

In 2022.

150 million senior loan facility with BNP body, Bob was extended by three years to June 2027.

This facility is nonrecourse to the BDC.

Our corporate line of credit is flexible with no mark to market provisions.

And in 2020, one we locked in $180 million of fixed rate unsecured debt at rates that are notably lower than current market pricing.

Carrying a weighted average coupon.

4.8%.

This combination of financings.

Enabled us to benefit from rising interest rates.

Shortly after our call in March the banking industry began experiencing a period of turmoil.

With the collapse of certain banks.

As you know we have no direct exposure to venture debt or commercial real estate.

In fact, we believe that the weakness in the banking sector will help strengthen our competitive positioning as a lender.

As it relates to the impact of rising interest rates and inflation, we believe that being at the top of the capital structure.

But the majority of our loan portfolio being senior secured.

It's us in this uncertain economic environment.

We also anticipate that we will continue to benefit from the experience of our adviser.

<unk> manages approximately $4.1 billion across the known in structured credit markets.

<unk> expertise in multiple asset classes and industries.

And has a more than 25 year track record through multiple credit cycles.

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.

Thanks, Paul Good morning, everyone.

As Bilal mentioned, we posted net investment income of 37 cents per share for the quarter.

This compares favorably to our prior quarter's net investment income of 35 cents per share.

We also announced a quarterly distribution of 33 cents per share.

Comparing net investment income quarter over quarter, we are up almost 6% with stable interest income and higher dividend income.

This increase was largely due to a $546000 dividend payment from our investment in advance deal.

As Bilal noted such payments are at the discretion of the company and are not expected to be received on a recurring quarterly basis.

Our net asset value per share decreased by less than half of a percent or $13 42 says.

Despite the modest decline our March 31st net asset value remains approximately 8% above its pre pandemic level at the end of 2019.

The decline this quarter was primarily due to some unrealized depreciation on our investment portfolio.

Credit trends in our portfolio remained relatively stable at fair value. We currently have just two 3% of our total investments on nonaccrual status.

Turning to the income statement total investment income was up 2% to $14 $3 million does.

As I previously mentioned this was primarily due to an increase in dividend income.

Total expenses of $9 $3 million were up slightly primarily due to an increase in the variable interest rate on our BNP correct facility.

As I mentioned earlier net investment income was 37 cents per share for the first quarter.

This is a meaningful increase compared to last quarter's net investment income of 35 cents per share.

The increase was largely related to a dividend payment from fans. We continue to believe that that investment income will remain solid given the vast majority of our loan portfolio is floating rate.

While 68% of our liabilities are fixed rate.

Rates lower than current market levels for some more debt.

It is also worth noting that at quarter end, approximately 85% of our outstanding debt matures in 2026 or later at approximately 54% of our outstanding debt was unsecured.

Excluding Spi see dead, a regulatory debt to equity ratio was relatively stable quarter over quarter at approximately 1.59 times and our regulatory asset coverage ratio remained stable at 163%.

Turning to our investments we are pleased by the continued performance of our portfolio of companies in this uncertain macroeconomic environment.

We remain committed to being senior in the capital structure and selective in our underwriting.

While we remain cautious with regard to new originations.

Several of our portfolio of companies continuing to identify add on opportunities for growth for which we either funded in the first quarter or are evaluating incremental funding in the second quarter.

The majority of our investments on loans as of March 31st nearly 100% of the loan portfolio at fair value was senior secured.

In addition at quarters at 94% of the loan portfolio was floating rate.

As naturally advantageous in a rising rate environment. However, we are now seeing a slowing in the increase in benchmark interest rates.

For instance, during the fourth quarter three month LIBOR increased by approximately 100 basis points compared to 42 basis points in the first quarter and 11 basis points for the month of April .

As a percentage of cost our overall investment portfolio includes approximately 70% senior secured loans.

3% subordinated debt, 22% structured finance notes and 5% equity securities.

Our portfolio remains diversified at the end of the quarter, we had 87 portfolio companies totaling approximately $500 million on a fair value basis.

For the quarter that ended March 31st the performing investment income and yield on interest bearing portion of the portfolio, which includes all interest prepayment fees and amortization of deferred loan fees was up 30 basis points to 13%.

This reflects the benefits of the floating rate nature of our portfolio in this rising rate environment.

We should note that this 30 basis point increase is lower than the 110 basis point increase reported in the fourth quarter as a result of the deceleration of rate increases.

With that I'll turn the call back over to Paul.

Thank you Jim in closing we are proud to have continued to grow net investment income once again this quarter.

Our balance sheet positioning as served us win the.

But the vast majority of our loan portfolio being floating rate and 68% of our outstanding debt being fixed rate.

We believe we will continue to benefit from our focus on capital preservation.

Nearly 100% of our loan portfolio at fair value being senior secured.

And we remain confident in the overall quality and fundamentals of our portfolio.

Our financing is primarily long term with approximately 85% of our outstanding debt maturing in 2026 and beyond.

We will continue to rely upon our longstanding experience and investment discipline to guide us through this period of economic uncertainty.

Track record illustrates that since the beginning of 2011, who have pets has invested more than one $9 billion.

With a cumulative net realized loss of just one 9% over the last 12 years.

While generating attractive risk adjusted returns on our portfolio.

Lastly, we believe our business is especially equipped to navigate this market successfully due to the site experience and reputation I'll find adviser.

With a $4 1 billion corporate credit platform.

The affiliated with a more than $30 billion asset management group.

The adviser has broad expertise, including long standing banking and capital markets relationships.

Corporate credit platform has gone through multiple credit cycles over the last 25 plus years.

Our adviser is also strongly aligned with shareholders as it maintains a 22% ownership stake in the BDC.

With that operator.

Please open up the call for questions.

Thank you we will now begin our question and answer session.

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Ladies and gentlemen, as I'm showing no questions. At this time. This concludes our question and answer session and thus concludes today's call.

Thank you for joining Oh Oh.

<unk> capital Corporation's first quarter 2023 earnings call and at this time you may now disconnect take care.

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