Q3 2023 OFS Capital Corp Earnings Call

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Good morning, and welcome to the O F. S Capital Corporation third quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity.

To ask questions.

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Please note this event is being recorded.

I would now like to turn the conference over to Steve at the Brando, 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 such 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 first 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.

This quarter, we are pleased to report a fourth consecutive increase in our net investment income.

Which rose to 40 cents per share up by 5% from the second 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 one 5%.

So $12 74 per share primarily due to unrealized depreciation on a few assets.

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 remained solid in this uncertain macroeconomic environment.

In our view the vast majority of our portfolio companies remained well positioned to manage the.

The increased cost of borrowing.

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 have historically avoided 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.

99% of our loan portfolio at fair value is senior secured.

We believe that being at the top of the capital structure will continue to benefit us in this uncertain economic environment.

In terms of new originations.

We continue to see subdued M&A activity compared to historical levels due to interest rate and macroeconomic uncertainty.

Like many market participants.

We are optimistic that we will see increased activity in the first half of next year.

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

Our financing continues to benefit our company at the end of the third quarter, approximately 89% of our outstanding debt matures in 2026 on leader and 59% of our outstanding debt is unsecured.

Our non recourse $150 million 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 million of fixed rate unsecured debt two years ago and that has a weighted average coupon of four 8%, which is notably lower than current market pricing.

We also anticipate that we will continue to benefit from the experience of our adviser, which manages approximately $4 $2 billion across the loan and structured credit markets.

His 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 <unk> 40 per share for the third quarter.

This compares favorably to our prior quarter's net investment income of 38 cents per share.

We also announced that our quarterly distribution remains at 34 cents per share for the fourth quarter, representing a 12, 1% annualized yield per share as of the close on September 30th.

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

The increase was primarily due to nonrecurring interest income driven by one of our CLO warehouse investments that was repaid near the end of the quarter.

Our net asset.

The value per share decreased by <unk> 20 per share or approximately one 5% 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 $4 million on non accrual status.

As of September 30th three.

Three 7% of our total investments at fair value were on nonaccrual status, even though a couple of them remain current on their cash interest payments.

Turning to the income statement total investment income was up approximately 1% to $14 $7 million 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 $3 million were down slightly during the period, primarily due to a decrease in our average debt balance and correspondingly our interest expense.

As I mentioned net investment income was <unk> 40 per share for the third quarter. This is a two 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 benefit from our balance sheet positioning given that 94% of 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 SP I see that our regulatory debt to equity ratio was relatively stable quarter over quarter at approximately $1 five nine 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 we are committed to being senior in the capital structure and selective in our underwriting.

We remain cautious with regard to new originations and have continued to see slow M&A activity. During the third quarter. We continued to support our portfolio companies as they identify add on opportunities for growth for which we either funded this quarter or are evaluating incremental funding in the fourth quarter.

As of September 30th we had commitments to fund investments under various credit facilities to our portfolio companies totaling $14 $1 million.

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% subordinated debt, 23% structured finance securities and 5% equity securities as a percentage of cost.

At the end of the quarter, we had investments in 77 unique issuers totaling approximately $457 million on a fair value basis.

For the quarter ended September 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 14, 6%.

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

Thank you Jeff to wrap up our call today. We are pleased to report continued growth in net investment income this quarter, which we attribute in large part to our strong balance sheet positioning.

The vast majority of our loan portfolio is comprised of floating rate investments and 70% 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 substantially long term with approximately 89% of our outstanding debt maturing in 2026 and beyond.

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

Since the beginning of 'twenty 11, the BDC has invested more than $1.9 billion with a cumulative net realized loss of just two 5% 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 an adviser.

The $4 2 billion corporate credit platform affiliated with more than $30 billion asset management group.

The 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 adviser is also strongly aligned with shareholders as it maintains an approximately 22% ownership stake in the BDC.

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

We will now begin the question and answer session.

Ask a question you May press Star then one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys. If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

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

The first question comes from Mitchel Penn with Oppenheimer. Please go ahead.

Good morning, guys, Hey, a couple of quick questions.

The percent of second liens in the portfolio.

Okay.

Hey, good morning Mitchell.

The second lien is 20% of the loan portfolio.

As I typically mentioned.

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 well.

It really just a portfolio size, but it's a really havent been increasing in the second lien arena.

Got it and in terms of the.

Portfolio.

What percentage of the portfolio.

Interest coverage below one times.

Mitch I don't have that statistic handy I will say that.

So far based on current interest interest rates, we had been able to maintain our covenant coverage ratios and we.

We have seen some tightening in coverage ratios, but.

So very manageable given kind of the initial low leverage levels.

And you know with a primarily first lien portfolio I think the U.

The interest rate risk is lessened, but I don't I don't have that statistic again.

Got it and last question.

Are you guys. You know we had dollop did its middle market report this quarter and showed.

Strong growth in EBITDA and revenue in their portfolio and.

T S L Ax actually talked on their call about seeing similar kind of numbers.

What are you guys seeing in your portfolio in terms of growth in EBITDA and revenue on a trailing 12 month basis.

Yes, I would say more than a majority of our portfolio has seen growth on both revenues.

And EBITDA I would say that.

We had seen some margin compression, but that has certainly lessons so yeah.

More than a majority of <unk>.

Definitely continuing to see growth in both revenues and EBITDA.

Got it thanks, so much guys for attack.

Absolutely. Thanks Mitchell.

This concludes our question and answer session and the <unk> Capital Corporation third quarter 2023 earnings Conference call.

Thank you for attending today's presentation you may now disconnect.

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