Q2 2023 OFS Capital Corporation Earnings Call

Good morning, everyone and welcome to the <unk> Capital Corporation second quarter 'twenty to 'twenty three earnings conference call. After today's prepared remarks, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw. Your question you May Press Star then two.

Please also note today's call is being recorded.

At this time I would like to hand, the call over to Steve Auto Brian Doyle, Vice President of capital markets. Please go ahead.

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.

Statements reflect various assumptions expectations and opinions by Oss capital management concerning anticipated results are not guarantees of future performance and are subject to known and unknown risks uncertainties and other factors that cause 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.

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 or best 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.

Thank you Steve good morning.

We are pleased to report another increase in our quarterly net investment income.

Which rose to 38 cents per share up by one cents per share from the previous quarter.

We expect to continue to see the benefits of our balance sheet positioning and the current interest rate environment.

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

As a result of this continued net investment income improvement.

Our board increased the distribution for the third quarter to 34 cents per share.

Which is a 3% increase over the prior quarter.

This is our 10th quarterly distribution increase over the last 12 quarters.

Our net asset value declined three 6% to $12.94 per share.

Mainly due to net unrealized depreciation on our equity and structured finance investments.

The overall credit quality of our portfolio remain materially stable.

And we had no new non accruals.

In the quarter.

We continue to believe that the cost of borrowing remains manageable.

Our portfolio companies.

Yields on the portfolio continued to increase compared to the last quarter.

In line with observed increases in benchmark rates.

As part of our long standing investment discipline.

We generally avoid investing in highly cyclical industries.

We believe that our well diversified portfolio is defensively positioned with our largest sector exposures in manufacturing healthcare business services and technology.

So far this year M&A activity continues to be subdued.

With the expectation that we will see some pick up in the second half of the year.

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

On financing continues to provide us with operational flexibility.

At the end of the second quarter, approximately 86% of our outstanding debt matures in 2026 or later.

And more than half of our outstanding debt is unsecured.

$150 million senior loan facility with BNP Paribas, which is non recourse to the BDC matures in June 2027.

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

As we have discussed before two years ago, we locked in $180 million of fixed rate unsecured debt with a weighted average coupon of four 8%, which is notably lower than current market pricing.

The majority of our loan portfolio is senior secured and we believe this will continue to benefit us in this uncertain economic environment.

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

Which manages approximately $4 $3 billion across alone in structured credit markets as 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 up 38 cents per share for the quarter.

This compares favorably to our prior quarter's net investment income of 37 cents per share.

We also announced a quarterly distribution of 34 cents per share for the third quarter, which is a one cent or 3% increase over the prior quarter.

Quarter over quarter, our net investment income increased three 5%.

The increase was primarily due to higher interest income driven by higher yields.

Partially offset by lower dividend income and slightly higher interest expense.

Our net asset value per share decreased by three 6% to $12.94 per share.

The decline this quarter was primarily due to net unrealized appreciation on our equity and structured credit investments.

The credit quality of our portfolio remained relatively stable we had no new non accruals this quarter at fair value. We currently have just 2.1% of our total investments on non accrual status.

Turning to the income statement total investment income was up approximately 2% to $14 $5 million.

As I previously mentioned.

This was primarily due to an increase in interest income driven by higher yields.

Total expenses of $9 $4 million were up slightly primarily due to an increase in the variable interest rate on our BNP credit facility.

Net investment income was 38 cents per share for the second quarter.

This is a one cent increase compared to last quarter, which continues the trend of quarterly increases over the past year. We continue to believe that net investment income will remain solid given that the vast majority of our loan portfolio is floating rate, while 69% of our outstanding debt is fixed rate.

It is also worth noting that at quarter end, approximately 86% of our outstanding debt matures in 2026, or later and approximately 55% of outstanding debt was unsecured.

Excluding the S. P I see that a regulatory debt to equity ratio was relatively stable quarter over quarter at approximately 1.62 times.

Our regulatory asset coverage ratio was 162%.

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

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

We remain cautious with regard to new originations.

However, several of our portfolio companies continue to identify add on opportunities for growth for which we either funded this quarter or are evaluating incremental funding in the third quarter.

The majority of our investments or loans and as of June 30th nearly 100% of the loan portfolio at fair value was senior secured.

In addition at quarter's end, 95% of the loan portfolio is floating rate, which is naturally advantageous in the current interest rate environment.

While the pace of interest rate increases has slowed the elevated interest rates continue to help our overall performance.

As a percentage of cost our overall investment portfolio includes approximately 72% senior secured loans.

1% subordinated debt two.

92% structured finance notes and 5% equity securities.

Our portfolio remains diversified at the end of the quarter, we had investments in 78 unique issuers totaling approximately $495 million on a fair value basis.

For the quarter ended June 30th the weighted average performing investment income yield on the interest bearing portion of the portfolio, which includes all interest prepayment fees and amortization of deferred loan fees was up 80 basis points to 13.8%.

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

Thank you Jeff.

To wrap up our call today, we are happy to report continued growth in net investment income this quarter.

In part due to our strong balance sheet positioning.

The vast majority of our loan portfolio is comprised of floating rate investments and 16, 9% of our outstanding debt is fixed rate.

Our focus remains on capital preservation with 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 86% of our outstanding debt.

During in 2026 and beyond.

We have relied on our long standing experience and investment discipline, which has served us well.

Since the beginning of 2011, the BDC has invested more than $1.9 billion.

The cumulative net realized loss of just two 5%.

Over the last 12 and a half 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 adviser.

With a $4 3 billion corporate credit platform affiliated with a more than $30 billion asset management group, our adviser 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 has also strongly aligned with shareholders.

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 the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Yeah.

Today's first question comes from Mitchel Penn with Oppenheimer. Please go ahead.

Hey, guys can you give us the percentage of the portfolio and second liens.

Good morning Mitchell Yeah. Thanks for the more she had 18.

18% of the loan portfolio.

As in second lien credits and as you know we've said before those tend to be the larger more liquid names.

Yep.

And.

Is it is it possible.

Sort of the portfolios weighted average interest coverage ratio do you have that.

Okay.

It is something that we look at we don't Ah.

Typically publish that statistic.

But I can tell you that the obviously.

We.

We do model downside, which includes sensitivity of interest rates.

With the portfolio generally being first lien.

Coverage ratio, while they've tightened there's still there's still manageable in light of the current environment.

Got it alright.

The percentage of your portfolio and sell a loan to value greater than 50%.

How much is that.

Yeah.

Yeah.

Loan to value loan to enterprise value greater than 50%.

Yeah, Yeah that's.

It's not a statistic that I have but I have my fingertips right now.

Okay. That's all for me. Thank you guys.

Okay. Thank.

Thank you.

This concludes our question and answer session and the call has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Yeah.

Yeah.

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