Q3 2024 OFS Capital Corp Earnings Call

Operator: Good day and welcome to the OFS Capital third quarter of 2024 earnings conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any assistance, please signal a conference specialist by pressing the star key followed by zero.

Good day and welcome to the Golub Capital's third quarter of 2024 earnings Conference call.

Speaker Change: All participants will be in a listen only mode for the duration of the call and should you need any assistance. Please secondly, Congress specialist by pressing the star key followed by zero.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two.

Speaker Change: After todays presentation, there will be an opportunity to ask questions.

Speaker Change: Ask a question you May press Star then one on your telephone keypad to withdraw a question. Please press Star then two.

Operator: Also, please be aware that today's call is being recorded.

Speaker Change: Also please be aware that today's call's being recorded.

Stephen Altebrando: I would now like to turn the call over to Steve Altebrando. Please go ahead, sir. and thank you for joining us.

Speaker Change: I'd now like to turn the call over to Steve Brenda. Please go ahead Sir.

Steve Brenda: Good morning, everyone and thank you for joining us.

Bilal Rashid: 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.

Steve Brenda: 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.

Stephen Altebrando: Before we begin, please note that the statements made on this call and webcast may constitute forward-looking statements as defined under applicable securities. 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 SBA. Although we believe these assumptions are reasonable, any of those assumptions could prove inaccurate.

Steve Brenda: 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.

Steve Brenda: 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.

Steve Brenda: 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.

Steve Brenda: 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.

Stephen Altebrando: And as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these board like 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.

Steve Brenda: You should not place undue reliance on these forward looking statements Oss 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: With that, I'll turn the call over to Chairman and Chief Executive Officer, Bilal Rashid. Thank you, Steve. Earlier this morning, we announced our third quarter earnings, our net investment income increased by approximately 4.8% to $0.27 per share. Our net asset value per share decreased modestly by 1.9% to $11.29 per share. With respect to net investment income, while we had an improvement this quarter, we remain focused on increasing this metric longer term, primarily by rotating certain non-interest-earning equity positions into interest-earning assets. As we discussed on our last call, we continue to explore potential alternatives for our minority equity investment in FANSTEAM, our largest equity position.

Bilal Rashid: Thank you Steve.

Bilal Rashid: This morning, we announced our third quarter earnings.

Bilal Rashid: Net investment income increased by approximately four 8% to 27 cents per share.

Bilal Rashid: Net asset value per share decreased modestly by one 9% to $11.29 per share.

Bilal Rashid: With respect to net investment income.

Bilal Rashid: While we had an improvement this quarter, we remain focused on increasing this metric longer term.

Bilal Rashid: Primarily by rotating certain non interest, earning equity positions into interest earning assets.

Bilal Rashid: As we discussed on our last call.

Bilal Rashid: We continue to explore potential alternatives for our minority equity investment in fancy.

Bilal Rashid: Our largest equity position.

Bilal Rashid: In the meantime, the fair value of the position continued to improve this quarter, appreciating by $2.8 million to $73.7 million at quarter end. The increase in value is primarily attributed to improved fundamental performance of the company. As a reminder, this is a position we invested in more than 10 years ago at a cost of only $200,000. To date, we have received $3.4 million in distributions for approximately 16 times our cost. A net asset value per share decreased by 1.9% as a result of certain markdowns during the quarter in our loan and structured finance position. which were offset by an increase in the value of our equity positions, notably Francine.

Bilal Rashid: In the meantime, the fair value of the position continued to improve this quarter appreciating by $2.8 million to $73 $7 million at quarter end.

Bilal Rashid: The increase in value is primarily attributed to improved fundamental performance of the company.

Bilal Rashid: As a reminder, this is a position we invested in more than 10 years ago at a cost of only $200000.

Bilal Rashid: To date, we have received $3 $4 million in distributions or approximately 16 times our cost.

Bilal Rashid: Our net asset value per share decreased by one 9% as a result of certain markdowns during the quarter.

Bilal Rashid: Loan and structured finance positions.

Bilal Rashid: Which were offset by an increase in the value of our equity positions, notably benzene.

Bilal Rashid: Our non-accrual metrics as a percentage of our total portfolio at fair value were relatively stable compared to the prior quarter. We removed one loan which had previously been on non-accrual status during the quarter and we placed one loan on non-accrual this quarter, representing only 0.6% of the total portfolio at fair value. Overall, we believe the portfolio continues to be 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. At Quarter End, our largest sector exposures at fair value are in manufacturing and healthcare.

Bilal Rashid: Our non accrual metrics as a percentage of our total portfolio at fair value.

Bilal Rashid: Were relatively stable compared to the prior quarter.

Bilal Rashid: We removed one loan which had previously been on non accrual status during the quarter and we placed one loan on non accrual this quarter, representing only <unk>, 6% of the total portfolio at fair value.

Bilal Rashid: Overall, we believe the portfolio continues to be well positioned for the current macroeconomic environment.

Bilal Rashid: As part of our long standing investment discipline the.

Bilal Rashid: We remain committed to avoiding highly cyclical industries.

Bilal Rashid: We believe that our loan portfolio remains well diversified and defensively positioned.

Bilal Rashid: At quarter end, our largest sector exposures at fair value or in manufacturing and health care.

Bilal Rashid: Another key part of our investment discipline is investing higher in the capital structure. with 100% of our loan portfolio at fair value in first lien and second lien senior secured loans. In our view, our financing continues to benefit our company. At the end of the third quarter, 100% of our outstanding debt matures in 2026 or later, and 72% of our outstanding debt is unsecured. Our non-recourse $150 million floating rate facility with BNP Paribas matures in June 2027. Our Bank of California floating rate corporate line of credit provides us additional liquidity and flexibility. As we have discussed before, in 2021, we logged in $180 million of fixed rate, unsecured debt, bearing a weighted average coupon of 4.8%.

Another key part of our investment discipline is investing higher in the capital structure.

Bilal Rashid: With 100% of our loan portfolio at fair value in first lien and second lien senior secured loans.

Bilal Rashid: In our view a financing continues to benefit our company.

Bilal Rashid: At the end of the third quarter.

Bilal Rashid: 100% of our outstanding debt matures in 2026 owned data and.

Bilal Rashid: And 72% of our outstanding debt is unsecured.

Bilal Rashid: Our non recourse $150 million floating rate facility with BNP Paribas matures in June 2027.

Bilal Rashid: Our banc of California floating rate corporate line of credit provides us additional liquidity and flexibility.

Bilal Rashid: As we have discussed before.

Bilal Rashid: 2021 we locked in $180 million of fixed rate unsecured debt bearing a weighted average coupon of four 8%.

Bilal Rashid: which remains notably lower than current market prices. Looking ahead, we believe the recent interest rate cut by the Federal Reserve and potential additional interest rate reductions in the near to medium term will put some pressure on our net interest margin. However, we also believe that lower interest rates should have a positive impact on the health of the loan portfolio. as it decreases the debt service burden on our borrowers. Additionally, we believe that lower rates reduce the risk of a recession, which would bode well for our portfolio. We expect M&A activity to pick up in the coming quarters.

Bilal Rashid: So it remains notably lower than current market pricing.

Looking ahead, we believe the recent interest rate cuts by the federal reserve and potential additional interest rate reductions and the near to medium term will put some pressure on our net interest margin.

Bilal Rashid: However, we also believe that lower interest rates should have a positive impact on the health of the loan portfolio.

Bilal Rashid: Is it decreases the debt service burden.

Bilal Rashid: On our borrowers.

Bilal Rashid: Additionally, we believe that lower rates reduced the risk of a recession.

Bilal Rashid: Which would bode well for our portfolio.

Bilal Rashid: We expect M&A activity to pick up in the coming quarters.

Bilal Rashid: could lead to higher originations and fee income and a potential positive impact on net investment income. As we navigate this market environment, we have confidence in the experience of our advisor, which manages approximately $3.9 billion across the loan 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.

Bilal Rashid: Which could lead to higher originations and fee income and a potential positive impact.

Our net investment income.

Bilal Rashid: As we navigate this market environment, we have confidence in the experience of our adviser.

Bilal Rashid: Which manages approximately $3 $9 billion across the known in structured credit markets.

Bilal Rashid: His expertise in multiple asset classes and industries.

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

Jeffrey Cerny: 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, Bilal. Good morning, everyone. As Bilal mentioned, we posted net investment income of $0.27 per share for the third quarter, which was up $0.01 per share from the second quarter, primarily due to a decrease in G&A expenses, which more than offset the modest decline in investment income. Our current distribution rate represents a 16.1 percent annualized yield based on the market price of our common stock at quarter end. We also announce that our quarterly distribution will remain at 34 cents per share for the fourth quarter.

Speaker Change: At this point I'll turn the call over to Jeff Cerny.

Chief Financial Officer.

Jeff Cerny: Give you more details and color for the quarter.

Jeff Cerny: Thanks, Paul Good morning, everyone.

Jeff Cerny: It was below mentioned, we posted net investment income of 27 per share for the third quarter, which was up one cent per share from the second quarter, primarily due to a decrease in G&A expenses, which more than offset the modest decline in investment income.

Jeff Cerny: Our current distribution rate represents a 16, 1% annualized yield based on the market price of our common stock at quarter end.

Jeff Cerny: We also announced that our quarterly distribution will remain at 34 cents per share for the fourth quarter.

Jeffrey Cerny: We are focused on improving net investment income so that it exceeds our distribution rate. As Bilal discussed, we are actively exploring potential alternatives to monetize certain non-interest earning equity investments to increase our net investment income, primarily our minority equity stake in FANSEA. Our net asset value per share decreased by approximately 1.9% or $0.22. this quarter. This decrease was primarily the result of certain markdowns during the quarter in our loan and structured finance positions, which were offset by an increase in the value of our equity positions, notably fan steel, as Bilal described. Our one new non-accrual loan, JP Intermediate, was downgraded this quarter based on our internal credit rating scale.

Jeff Cerny: We are focused on improving net investment income so that exceeds our distribution rate.

Speaker Change: As Bilal discussed we are actively exploring potential alternatives to monetize certain noninterest, earning equity investments to increase our net investment income primarily our minority equity stake in van steel.

Our net asset value per share decreased by approximately one 9% or 22 cents. This quarter. This decrease was primarily the result of certain markdowns during the quarter in our loan and structured finance positions, which were offset by an increase in the value of our equity positions, notably fan steel as Bill I'll.

Speaker Change: Right.

Speaker Change: Our one new non accrual loan J P. Intermediate was downgraded this quarter based on our internal credit ratings scale. It.

Jeffrey Cerny: It represents 0.6% of the total portfolio at fair value. In addition, we removed one loan which had previously been on non-accrual status during the quarter. Our non-accrual metrics as a percentage of our total portfolio at fair value were relatively stable compared to the prior quarter. Overall, we believe the portfolio continues to be well-positioned for the current macroeconomic environment, and we believe the overall quality of the portfolio remains stable. 5.4 percent of our total investments at fair value were on non-accrual status at corner Turning to the income statement, total investment income was down approximately 2% to $10.9 million this quarter.

It represents 0.6% of the total portfolio at fair value in.

Speaker Change: In addition, we removed one loan which had previously been on non accrual status during the quarter.

Our non accrual metrics as a percentage of our total portfolio at fair value were relatively stable compared to the prior quarter.

Overall, we believe the portfolio continues to be well positioned for the current macroeconomic environment and we believe the overall quality of the portfolio remains stable.

Speaker Change: Five 4% of our total investments at fair value were on nonaccrual status at quarter end.

Speaker Change: Turning to the income statement total investment income was down approximately 2% to $10 $9 million this quarter.

Jeffrey Cerny: This was primarily driven by one of our large loan positions being repaid at par, which impacted interest income as we redeployed the proceeds into a handful of new loan positions. Our Regulatory Asset Coverage Ratio stands at 161% at quarter end. Total expenses were down 5.3% during the period to $7.3 million primarily due to a decrease in G&A expenses, as I mentioned earlier, most notably a reduction in administration fees. Turning to net investment income, it was up 1 cent to 27 cents per share for the third quarter. We described our plans to increase net investment income, and 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.

Speaker Change: This was primarily driven by one of our large loan positions being repaid at par, which impacted interest income as we redeployed the proceeds into a handful of new loan positions.

Speaker Change: Our regulatory asset coverage ratio stands at 161% at quarter end.

Speaker Change: Total expenses were down five 3% during the period to $7.3 million, primarily due to a decrease in G&A expenses as I mentioned earlier, most notably a reduction in administration fees.

Speaker Change: Turning to net investment income it was up one sent to <unk> 27 per share for the third quarter. We described our plans to increase net investment income and it is also worth noting that at quarter end all of our outstanding debt matures in 2026, or later and approximately 72% of our.

Speaker Change: Standing debt was unsecured.

Jeffrey Cerny: Turning to our investments, we believe the overall performance of our portfolio companies remained relatively stable compared to last quarter, despite this uncertain macroeconomic environment. We do believe that the recent interest rate reduction and the expected future reductions will benefit our borrowers overall. We are committed to being senior in the capital structure and selective in our underwriting. As M&A activity has remained subdued, we continue to work with our portfolio companies as they identify add-on opportunities for growth. As of September 30th, we had $8.5 million in commitments under various credit facilities to fund investments to our portfolio.

Speaker Change: Turning to our investments we believe the overall performance of our portfolio companies remained relatively stable compared to last quarter. Despite this uncertain macroeconomic environment.

Speaker Change: We do believe that the recent interest rate reduction and the expected future reductions will benefit our borrowers overall.

Speaker Change: We are committed to being senior in the capital structure and selective in our underwriting.

Speaker Change: M&A activity has remained subdued we continued to work with our portfolio companies as they identify add on opportunities for growth.

Speaker Change: As of September 30th we had $8 $5 million in commitments under various credit facilities to fund investments to our portfolio of companies.

Jeffrey Cerny: The majority of our investments are in loans and 100% of our loan portfolio at fair value was senior secured as of September 30th. Based on amortized cost as of quarter end, our investment portfolio is comprised of approximately 71% senior secured loans, 23% structured finance securities, and 6% equity securities. At the end of the quarter, we had investments in 69 unique issuers totaling $394.7 million on a fair value basis. The Weighted Average Performing Investment Income Yield on the Interest-Bearing Portion of the Portfolio improved slightly to 13.6%. which is up about 0.2% quarter over quarter. This includes all interest, prepayment fees, and amortization of deferred loan fees.

Speaker Change: The majority.

Speaker Change: Any of our investments are in loans and 100% of our loan portfolio at fair value was senior secured as of September 30th.

Speaker Change: Based on amortized cost as of quarter end, our investment portfolio was comprised of approximately 71% senior secured loans, 23% structured finance securities and 6% equity Securities.

Speaker Change: At the end of the quarter, we had investments in 69 unique issuers totaling $394 $7 million on a fair value basis.

Speaker Change: The weighted average performing investment income yield on the interest bearing portion of the portfolio improved slightly to 13, 6%.

Speaker Change: Which is up about 0.2% quarter over quarter.

Speaker Change: This includes all interest prepayment fees and amortization of deferred loan fees.

Bilal Rashid: With that, I'll turn the call back over to Bilal. Thank you, Jeff. In closing, we remain focused on increasing our net investment income in the coming quarters. specifically by exploring the sale of certain non-interest-earning equity positions and redeploying the proceeds into interest-earning assets. We continue to focus on capital preservation. and we remain confident in the overall quality and fundamentals of our portfolio. We believe our longstanding experience and investment discipline has served us well over the past 13 years. Since the beginning of 2011, the BDC has invested more than $2 billion with a cumulative net realized loss of just 3.2%, while generating attractive risk-adjusted returns on our portfolio.

Speaker Change: With that I'll turn the call back over to below.

Bilal Rashid: Thank you Jeff.

In closing we remain focused on increasing our net investment income in the coming quarters spin.

Bilal Rashid: Specifically by exploring the sale of certain non interest, earning equity positions and.

Bilal Rashid: And redeploying the proceeds into interest earning assets.

Bilal Rashid: We continue to focus on capital preservation.

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

We believe our long standing experience and investment discipline has served us well over the past 13 years.

Bilal Rashid: Since the beginning of 2011.

Bilal Rashid: The BDC has invested more than $2 billion with a cumulative net realized loss of just three 2%.

Bilal Rashid: While generating attractive risk adjusted returns on our portfolio.

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 $3.9 billion corporate credit platform affiliated with a $29 billion asset management group, our advisor has broad expertise, including longstanding 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 strongly aligned with the shareholders as they maintain an approximately 23% ownership in the company.

Bilal Rashid: We believe our business is especially equipped to navigate this market successfully due to the size experience and reputation of our adviser.

Bilal Rashid: With $3 9 billion corporate credit platform affiliated with a $29 billion asset management group.

Our adviser has broad expertise in building long standing banking and capital markets relationships.

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

Bilal Rashid: Our adviser and affiliates.

Bilal Rashid: <unk> aligned with the 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 then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. And if you would like to withdraw a question, please press star, then two.

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

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question you May press Star then one on your telephone keypad.

Speaker Change: If you are using a speakerphone. Please pick up your handset before pressing the keys and if you would like to withdraw your question. Please press Star then two.

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

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

Speaker Change: Yeah.

Operator: And this will conclude our question and answer session and will also conclude today's conference call. Thank you all for attending today's presentation.

Speaker Change: And this will conclude our question and answer session and will also conclude today's conference call.

Speaker Change: You all for attending today's presentation you may now disconnect your lines.

Operator: You may now disconnect your lines.