Q1 2024 OFS Capital Corp Earnings Call
Good day and welcome to the O F. S Capital Corporation first quarter 'twenty 'twenty four earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing to Starkey followed by zero after today's presentation.
Operator: Good day, and welcome to the OFS Capital Corporation first quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. If you would like to withdraw your question, please press star and then turn off your phone. Please note this event is being recorded. I would like now to turn the conference over to Steve Altebrando, Vice President of Capital Markets. Please go ahead.
Speaker Change: There will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Steve Ultra Brando, Vice President of capital markets. Please go ahead.
Speaker Change: 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.
Stephen Altebrando: 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 guaranteed, and are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from such statements.
Stephen Altebrando: 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. 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 Change: 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.
Speaker Change: 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.
Bilal Rashid: Thank you Steve earlier.
Bilal Rashid: Earlier this morning, we announced our first quarter results. Our net investment income in the first quarter was $0.42 per share, representing a 20% increase over the prior quarter. This increase is primarily due to certain non-recurring items.
Earlier this morning, we announced our first quarter results.
Our net investment income in the first quarter was 42 cents per share representing a 20% increase over the prior quarter.
This increase is primarily due to certain nonrecurring items.
Bilal Rashid: We continue to cover our distribution of 34 cents per share.
Bilal Rashid: We continue to cover our distribution of $0.34 per share. As we discussed recently on our prior call, we believe the overall health of the portfolio remains solid. We placed one borrower on non-accrual status this quarter, representing approximately 2% of the portfolio at fair value. We believe that we continue to benefit from our balance sheet positioning, with the majority of our debt being fixed rate, and the vast majority of our loan portfolio being floating rate. The net asset value in the first quarter declined to $11.08 per share from $12.09 at year end, primarily due to unrealized depreciation concentrated in a couple of positions.
As we discussed recently on our prior call. We believe the overall health of the portfolio remains solid.
Bilal Rashid: We placed one bar on non accrual status this quarter, representing approximately 2% of the portfolio at fair value.
Bilal Rashid: We believe that we continue to benefit from our balance sheet positioning.
Bilal Rashid: With the majority of our debt being fixed rate and the vast majority of our loan portfolio being floating rate.
Bilal Rashid: Our net asset value in the first quarter declined to $11, an eight cents per share.
Bilal Rashid: $12.09 at year end.
Primarily due to unrealized depreciation concentrated in a couple of positions most notably an equity investment in fan steel holdings.
Bilal Rashid: Most notably, our equity investment in fan steel holdings, which Jeff will describe in more detail. Noting this decline, we remain comfortable with our portfolio and 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.
Bilal Rashid: Which Jeff will describe in more detail.
Bilal Rashid: Noting this decline we remain comfortable with our portfolio and believe it is well positioned for the current macroeconomic environment.
Bilal Rashid: As part of our long standing investment discipline, we remain committed to avoiding highly cyclical industries.
Bilal Rashid: We believe that our portfolio remains well diversified and defensively positioned with our largest sector exposures being manufacturing, healthcare, wholesale trade, and business services at fair value at quarter end. Another key part of our investment discipline is investing higher in the capital structure, with approximately 100% of our loan portfolio at fair value in first and second lien senior secured loans. We believe that this positioning will continue to benefit us in this uncertain macroeconomic environment. In terms of new originations, M&A activity remains subdued, though we anticipate that an increase in activity later in the year may occur as we get more clarity on interest rates.
We believe that our portfolio remains well diversified and defensively positioned with our largest sector exposures being manufacturing healthcare wholesale trade and business services at fair value at quarter end.
Bilal Rashid: Another key part of our investment discipline is investing higher in the capital structure with approximately 100% of our loan portfolio at fair value in first and second lien senior secured loans.
We believe that this positioning will continue to benefit us in this uncertain macroeconomic environment.
In terms of new originations M&A activity remained subdued.
Bilal Rashid: Though we anticipate that an increase in activity later in the year may occur.
Bilal Rashid: As we get more clarity on interest rates.
Bilal Rashid: In the meantime, we remain active in supporting our existing portfolio companies. In our view, our financing continues to benefit our company. At the end of the first quarter, 100% of our outstanding debt matures in 2026 or later, and 70% 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 in 2021, and that has a weighted average coupon of 4.8%, which is notably lower than current market pricing.
Bilal Rashid: In the meantime, we remain active in supporting our existing portfolio companies.
Bilal Rashid: In our view are financing continues to benefit our company.
Bilal Rashid: At the end of the first quarter, 100% of our outstanding debt matures in 2026, or later and 70% of our outstanding debt is unsecured.
Bilal Rashid: Our non recourse $150 million senior loan facility with BNP Paribas.
<unk> in June 2027.
Bilal Rashid: Corporate line of credit is flexible with no mark to market provisions.
Bilal Rashid: As we have discussed before we locked in $180 million of fixed rate unsecured debt in 2021.
Bilal Rashid: And that has a weighted average coupon of four 8%, which is notably lower than current market pricing.
Bilal Rashid: As mentioned on our last call, we completely paid down our remaining $31 $9 million in S. P. I see that in March which was due to mature in early 2025.
Bilal Rashid: As mentioned on our last call, we completely paid down our remaining $31.9 million in SBIC debt in March, which was due to mature in early 2025. As we navigate this market environment, we have confidence in the experience of our advisor, which manages approximately $4 billion across the loan and structured credit market, has 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.
Bilal Rashid: As we navigate this market environment, we have confidence in the experience of our adviser, which manages approximately $4 billion across the known in structured credit markets.
Bilal Rashid: Has 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.
Jeffrey A. Cerny: Chief Financial Officer to give you more details and color for the quarter.
Jeffrey A. Cerny: Thanks, Paul Good morning, everyone.
Jeffrey A. Cerny: Thanks, Bilal. Good morning, everyone. As Bilal mentioned, we posted net investment income of $0.42 per share for the first quarter, once again covering our 34 cents per share distribution declared during the quarter. Our current distribution rate represents a 13.7% annualized yield based on the price of our common stock at the quarter end. We also announce that our quarterly distribution for the second quarter will remain at $0.34 per share.
Jeffrey A. Cerny: As Bilal mentioned, we posted net investment income of 42 per share for the first quarter. Once again, covering our 34 cents per share distribution declared during the quarter.
Our current distribution rate represents a 13, 7% annualized yield based on the price of our common stock at quarter end.
We also announced that our quarterly distribution for the second quarter will remain at 34 cents per share.
Jeffrey A. Cerny: Our net asset value per share decreased by approximately $1 to $11.08.
Jeffrey A. Cerny: Our net asset value per share decreased by approximately $1 to $11.80. As Bilal mentioned, this decline was primarily due to unrealized depreciation concentrated in a couple of positions, most notably our equity position in Fann Steel Holdings, which declined $7.9 million, or $0.59. Fansteel is a manufacturer of specialized products for leading biopharmaceutical companies.
Jeffrey A. Cerny: As Bilal mentioned this decline was primarily due to unrealized depreciation concentrated in a couple of positions most notably our equity position in fan steel holdings, which declined $7 $9 million or <unk> 59 per share.
Jeffrey A. Cerny: Van steel is a manufacturer of specialized products for leading biopharmaceutical firms. We believe its recent decline in value was due to a cyclical downturn in the life Sciences industry.
Jeffrey A. Cerny: We believe its recent decline in value is due to a cyclical downturn in the life sciences industry. However, we remain positive about the long-term outlook for the company. 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 $3.4 million in distributions, or approximately 17 times our cost. And as of quarter end, our fair value is $63.1 million. As you know, we have experience in making these kinds of selective equity investments alongside certain of our initial, This quarter, we had another equity realization in TRS Services for gross proceeds of $3.9 million, recognizing a realized gain of $1.4 million.
Jeffrey A. Cerny: However, we remain positive about the long term outlook for the business.
Jeffrey A. Cerny: In addition, we recognized $1.9 million of accumulated preferred dividends from this investment during the quarter. As mentioned, we placed one borrower on non-accrual status during the quarter. SSJA Bariatric, a provider of bariatric surgery and weight management solutions, and its sponsor, as well as the founder and CEO, have recently contributed meaningful additional capital to the company, which in our view demonstrates their commitment to the business.
Jeffrey A. Cerny: This is a position we invested in more than 10 years ago at a modest cost of only $200000.
Jeffrey A. Cerny: To date, we have received approximately $3 $4 million in distributions or approximately 17 times, our cost and as of quarter end, our fair value of $63 $1 million.
Jeffrey A. Cerny: As you know we have experience in making these kind of selective equity investments alongside certain of our initial debt investments.
Jeffrey A. Cerny: This quarter, we had another equity realization in Trs services for gross proceeds of $3 $9 million, recognizing a realized gain of $1.4 million.
Jeffrey A. Cerny: In addition, we recognized $1.9 million of accumulated preferred dividends from this investment during the quarter.
Jeffrey A. Cerny: As mentioned, we placed one borrower on non accrual status during the quarter S. S. J, a bariatrics a provider of bariatric surgery and weight management solutions.
Jeffrey A. Cerny: The sponsor as well as the founder and CEO.
Jeffrey A. Cerny: Ah briefly contributed meaningful additional capital into the company, which in our view demonstrates their commitment to the business.
Jeffrey A. Cerny: This loan had a fair value of approximately $8.8 million as of March 31st, representing approximately 2% of the portfolio. Overall, 4.8% of our investments at fair value were on non-accrual status at quarter end. Turning to the income statement, total investment income was up by approximately 6% to $14.2 million compared to the prior year. This was largely due to a non-recurring increase in dividends, which includes the TRS dividends I just mentioned, offset by a decline in interest income, partly due to a smaller overall investment portfolio.
Jeffrey A. Cerny: This one had a fair value of approximately $8 $8 million as of March 31st.
Jeffrey A. Cerny: Representing approximately 2% of the portfolio.
Jeffrey A. Cerny: Overall for 8% of our investments at fair value were on nonaccrual status at quarter sense.
Jeffrey A. Cerny: Turning to the income statement total investment income was up by approximately 6% to $14 $2 million compared to the prior quarter.
This was largely due to a nonrecurring increase in dividend income, which includes the Trs dividends I just mentioned offset by a decline in interest income partly due to a smaller overall investment portfolio.
Jeffrey A. Cerny: This lower overall investment balance is partly related to certain larger prepayments we received in the fourth quarter of 2023, which we utilized to redeem our remaining $31.9 million of SBI debt. On March 1st, we completed this redemption, which I previously mentioned was our plan at our prior meeting.
Jeffrey A. Cerny: This lower overall investment balances partly related to certain larger prepayments. We received in the fourth quarter of 2023, which we utilized to redeem our remaining $31 $9 million of S. B IC debentures.
Jeffrey A. Cerny: On March 1st we completed this redemption, which I previously mentioned was our plan on our prior call.
Jeffrey A. Cerny: Total expenses of $8.6 million were down approximately 1.7% during the period, primarily due to a decrease in interest expense related to lower average outstanding debt balances during the quarter.
Jeffrey A. Cerny: Total expenses of $8.6 million were down approximately 1.7% during the period, primarily due to a decrease in interest expense related to lower average outstanding debt. As I mentioned, net investment income was $0.42 per share for the first quarter. Net investment income covered our $0.34 distribution for the first quarter, and we believe that net investment income has benefited from our balance sheet positioning, given that 91% of our loan portfolio at fair value is floating rate, while approximately 70% of our outstanding debt is non-floating rate.
Jeffrey A. Cerny: As I mentioned net investment income was 42 cents per share for the first quarter net investment income covered our 34 set distribution for the first quarter and we believe that net investment income has benefited from our balance sheet positioning given that 91% of our loan portfolio at fair value was floating rate.
Jeffrey A. Cerny: While approximately 70% of our outstanding debt is fixed rate.
Jeffrey A. Cerny: It is also worth noting that at quarter end all of our outstanding debt matures in 2026 or later at approximately 70% of our outstanding debt was unsecured.
Jeffrey A. Cerny: It is also worth noting that at quarter end, all of our outstanding debt matures in 2026 or later, and approximately 70% of our outstanding debt. While we have been actively paying down debt over the past few quarters, we have experienced a decline in our regulatory asset coverage ratio due to the unrealized depreciation concentrated in a few quarters. In the last quarter, we paid down $43.9 million of debt, including the SBIC debt I mentioned earlier. However, while the SBIC debt contributed to an overall reduction in the balance sheet leverage, this step was not a component of our regulatory asset coverage.
Jeffrey A. Cerny: Yeah.
While we have been actively paying down debt over the past few quarters, we have experienced a decline in our regulatory asset coverage ratio due to the unrealized depreciation concentrated in a few positions.
Jeffrey A. Cerny: And the last quarter, we paid down $43.9 million of debt, including the S. P. I see that I mentioned earlier.
Jeffrey A. Cerny: However, while the Spi see that contributed to an overall reduction in the balance sheet leverage this debt was not a component of a regulatory asset coverage requirement.
Jeffrey A. Cerny: As of quarter end, our debt-to-equity ratio was approximately 1.74 times, and our regulatory asset coverage ratio was 106%. Turning to our investments, we believe the overall performance of our portfolio companies remains solid in this uncertain macroeconomic environment. We are committed to being senior in the capital structure and selective in our underwriting. We remained cautious about new originations and continued to see slow M&A activity during the first quarter.
Jeffrey A. Cerny: As of quarter end, our debt to equity ratio was approximately 1.74 times and our regulatory asset coverage ratio was 157%.
Jeffrey A. Cerny: Turning to our investments we believe the overall performance of our portfolio companies remains solid in this uncertain macroeconomic environment.
We are committed to being senior in the capital structure and selective in our underwriting we remained cautious about new originations and continued to see slow M&A activity during the first quarter.
Jeffrey A. Cerny: We continue to support our portfolio companies as they identify add on opportunities for growth and.
Jeffrey A. Cerny: We continue to support our portfolio companies as they identify add-on opportunities for growth, and we also funded a new middle market investment in the..., as of March 31st. We had $10.9 million in commitments to fund investments under various credits. The majority of our investments are in loans, and approximately 100% of our loan portfolio at fair value was senior secured as of 2020. Based on amortized cost as of quarter end, our investment portfolio is comprised of approximately 69% Senior Secured Loans, 1% Subordinated Debt, 24% Structured Finance Securities, and 6% Equity.
Jeffrey A. Cerny: And we also funded a new middle market investment in the first quarter as of March 31, we had $10 $9 million and commitments to fund investments under our various credit facilities to our portfolio of companies.
Jeffrey A. Cerny: The majority of our investments are in loans and approximately a 100% of our loan portfolio at fair value was senior secured as of March 31.
Jeffrey A. Cerny: Based on amortized cost as of quarter end, our investment portfolio was comprised of approximately 69% senior secured loans, 1% subordinated debt, 24% structured finance securities and 6% equity Securities.
Jeffrey A. Cerny: At the end of the quarter, we had investments in 74 unique issuers, totaling $400.4 million at a fair value. The Weighted Average Performing Investment Income Yield on the interest-bearing portion of the portfolio is 13%, which is down about 1.1% quarter over quarter. This includes all interest, prepayment fees, and amortization of deferred. The decline was largely due to the nonaccrual loan I mentioned earlier, as well as a slight decrease in the yields earned on our structured financing.
Jeffrey A. Cerny: At the end of the quarter, we had investments in 74 unique issuers totaling $404 million on a fair value basis.
Jeffrey A. Cerny: The weighted average performing investment income yield on the interest bearing portion of the portfolio was 13%.
Jeffrey A. Cerny: Which is down about 1.1% quarter over quarter.
Jeffrey A. Cerny: This includes all interest prepayment fees and amortization of deferred loan fees.
Jeffrey A. Cerny: The decline was largely due to the non accrual loan I mentioned earlier as well as a slight decrease on the yields earned on our structured finance investments.
Jeffrey A. Cerny: With that I'll turn the call back over to Bilal.
Bilal Rashid: With that, I'll turn the call back over to Bilal.
Bilal Rashid: Thank you Jeff in closing, we believe our portfolio remains in good shape with just one new nonaccrual in the quarter.
Bilal Rashid: Thank you, Jeff. In closing, we believe our portfolio remains in good shape with just one new non-accrual in the quarter. Our focus remains on capital preservation, with approximately 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. Since the beginning of 2011, BDC has invested more than $1.9 billion with a cumulative net realized loss of just 2.5% over the past 13 years, while generating attractive risk-adjusted returns on its portfolio.
Bilal Rashid: Our focus remains on capital preservation with approximately 100% of our loan portfolio at fair value being senior secured and we remain confident in the overall quality and fundamentals of our portfolio.
Bilal Rashid: We have relied on our long standing experience and investment discipline, which we believe has served us well.
Bilal Rashid: Since the beginning of 2011, the BDC has invested more than $1.9 billion.
Bilal Rashid: With accumulative net realized loss of just 2.5% 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.
Bilal Rashid: We believe our business is especially equipped to navigate this market successfully due to the size, experience, and reputation of our advisors, with a $4 billion corporate credit platform affiliated with a $30 billion asset management group. Our advisors have broad expertise, including longstanding banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the last 25 years. Our advisors and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the company.
Bilal Rashid: Experience and reputation of our adviser.
Bilal Rashid: With a 4 billion corporate credit platform affiliated with a $30 billion asset management group.
Bilal Rashid: Our adviser has broad expertise, including long standing banking and capital markets relationships.
Bilal Rashid: Our corporate credit platform has gone through multiple credit cycles over the last 25 plus years.
Bilal Rashid: Advisor and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the company.
Operator: With that, Operator, please open up the call for questions. We will now begin the question and answer session. To ask a question, you may press star.
Bilal Rashid: With that operator, please open up the call for questions.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. It. Please press Star then two we will pause momentarily to assemble.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw it, please press star, then 2. We will pause momentarily to assemble our roster. Our first question comes from Mitchell Penn of Oppenheimer. Please go ahead.
Speaker Change: Simple our roster.
Speaker Change: Our first question comes from Mitchel Penn of Oppenheimer.
Mitchel Stuart Penn: Please go ahead.
Mitchel Stuart Penn: Thanks. Hey guys, a quick question. Do you guys feel with the interest..., income down this quarter? Do you feel like that can come back? Do you see a path to covering the dividend, or do you think there's going to be some gains to make up any shortfalls?
Mitchel Stuart Penn: Thanks, Hey, guys a quick question.
Mitchel Stuart Penn: Do you guys feel with the interest income down.
Mitchel Stuart Penn: This quarter do you feel like that can come back or.
Mitchel Stuart Penn: You guys are you do you see that do you see a path to covering the dividend or are they going.
Mitchel Stuart Penn: Do you think theres going to be some gains to make up any shortfalls.
Mitchel Stuart Penn: Good morning Mitchell This is Jeff Thanks for the question.
Jeffrey A. Cerny: Morning, Mitchell. This is Jeff.
Mitchel Stuart Penn: Yes.
Jeffrey A. Cerny: Thanks for the question. Yes, I think there is a path. Absolutely. We are continuing to realize on certain equity investments, and one of our largest positions is a non-interest earning asset. So certainly, as we think about converting that to an interest earning asset, we should be able to cover our dividend going forward. Thank you.
Jeffrey A. Cerny: There is a path.
Jeffrey A. Cerny: Absolutely.
Jeffrey A. Cerny: As you know.
Jeffrey A. Cerny: We are continuing to realize on certain equity investments in one of our largest positions us as a noninterest earning asset so certainly.
You know as we think about converting that to an interest earning asset we should be able to cover cover our dividend going forward.
Got it thanks, so much guys yep.
Jeffrey A. Cerny: Got it. Thanks so much, guys. Yep.
Speaker Change: This concludes our question and answer session. The conference has now finished thank you for attending today's presentation. You may now disconnect.
Operator: This concludes our question and answer session. The conference is now finished. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
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