Q4 2024 OFS Capital Corp Earnings Call
Good day and welcome to the Old Bus couple Corporation Q4, 'twenty 'twenty four earnings conference call.
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Speaker Change: And now I'd like to turn the conference over to Steve older Brenda.
Steve: Go ahead, good morning, everyone and thank you for joining us.
Steve: 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 that.
Steve: 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.
Steve: 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: 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.
Steve: 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.
Speaker Change: Thank you Steve.
Bilal Rashid: We announced our fourth quarter earnings earlier this morning.
Speaker Change: For the quarter.
Speaker Change: Net investment income increased by approximately 13% to 30 cents per share.
Net asset value per share increased by 14% to $12.85 per share.
Speaker Change: The improvement in net investment income was primarily driven by an increase in dividend income contributed to a nonrecurring distribution on one of our equity positions and other nonrecurring fee income.
Speaker Change: We remain focused on rotating certain non interest, earning equity positions into interest earning assets to improve net investment income in the long term.
Speaker Change: Yeah.
Speaker Change: As we have discussed on previous calls we continue to explore potential ways to monetize our minority equity investment in <unk> holdings.
Speaker Change: Our largest equity position, whose fair value continued to increase in the quarter due to improved fundamental performance.
Appreciate thing by $15.6 million to $89 3 million at quarter end.
Speaker Change: As we have noted before this is a position we invested in more than 11 years ago at a cost of only $200000.
Speaker Change: To date, we have received approximately $3 $9 billion in distributions or approximately 18 times our cost.
Speaker Change: As I just mentioned, we had a significant increase in net asset value per share.
Speaker Change: Primarily related to an increase in the value of our equity positions as well as some of our structured finance positions.
Speaker Change: We had no new non accruals this quarter, we believe our portfolio continues to be well positioned for the current macroeconomic environment.
Speaker Change: As part of our long standing investment discipline.
Speaker Change: We remain committed to avoiding highly cyclical industries.
Speaker Change: We believe that our loan portfolio remains well diversified and defensively positioned.
Speaker Change: At quarter end, our largest sector exposures at fair value or in manufacturing and health care.
Speaker Change: Another key part of our investment discipline is investing higher in the capital structure.
Speaker Change: But the 100% of our loan portfolio at fair value and first lien and second lien senior secured loans.
Speaker Change: We believe the fed rate cuts during the second half of 'twenty 'twenty four have had a positive impact on our portfolio companies by reducing interest costs, despite putting pressure on our known genes.
Speaker Change: In our view a financing continues to provide us operational flexibility.
Speaker Change: 72% of our outstanding debt is unsecured at the end of the quarter.
Speaker Change: Non recourse $150 million floating rate facility with BNP Paribas matures in June 2027.
Speaker Change: Our 25 billion dollar bank of California floating rate corporate line of credit provides us additional liquidity and flexibility.
Speaker Change: M&A activity continues to remain muted.
Speaker Change: However, we continue to find investment opportunities from our existing borrowers.
Speaker Change: As we navigate this uncertain market environment.
Speaker Change: Our confidence in the experience of our adviser, which manages approximately $3 $9 billion across the known in structured credit markets.
Speaker Change: His expertise in multiple asset classes and industries and has a more than 25 year track record through multiple credit cycles.
Speaker Change: 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.
Jeff Cerny: Thanks, Paul Good morning, everyone.
Bilal Rashid: As Bilal mentioned, we posted net investment income of $4 $1 million or <unk> 30 per share for the fourth quarter.
Jeff Cerny: Which was up 13% from the third quarter or <unk> <unk> per share.
Jeff Cerny: This was primarily due to an increase in nonrecurring dividend and fee income offset modestly by a decline in interest income attributed to the impact of interest rate cuts on reference rates.
Jeff Cerny: We also announced that our quarterly distributions will remain at 34 cents per share for the first quarter of 2025.
Jeff Cerny: At quarter end, our quarterly distribution rate represented a 16.9% annualized yield based on the market price of our common stock.
Jeff Cerny: We remain focused on improving that investment income so that exceeds our distribution rate.
Bilal Rashid: As Bilal mentioned, we continue to actively explore alternatives to monetize certain equity investments to increase our net investment income.
Bilal Rashid: Primarily our minority equity stake in finance deal.
Bilal Rashid: Our net asset value per share increased by almost 14% or $1.56 this quarter.
Bilal Rashid: Primarily attributed to net unrealized depreciation on our investment portfolio.
Bilal Rashid: The appreciation was across all asset classes, but was most pronounced in our equity holdings with the value of our fans deal equity significantly increasing by $15 $6 million during the fourth quarter as a result of its continued strong performance.
Bilal Rashid: We had no new loans placed on nonaccrual during the quarter.
Bilal Rashid: We exited one loan on non accrual status, which had been written down in prior quarters.
Bilal Rashid: At fair value are non accruals as a percentage of our total portfolio were stable compared to the prior quarter.
Bilal Rashid: Our regulatory asset coverage ratio increased by eight percentage points and now stands at 169% at quarter end.
Bilal Rashid: We have begun proactively exploring refinancing and extension options on some of our debt facilities.
Bilal Rashid: It is also worth noting that at quarter end, approximately 72% of our outstanding debt was unsecured.
Bilal Rashid: Turning to the income statement.
Bilal Rashid: Total investment income was up almost 7% to $11.6 million this quarter.
Bilal Rashid: This was primarily driven by the dividend income and fee income discussed earlier.
Bilal Rashid: Offset modestly by lower interest income due to a smaller loan portfolio.
Bilal Rashid: As well as interest rate cuts impacting sofa.
Bilal Rashid: Total expenses were up modestly by three 5% during the period to $7 $6 million, primarily due to an increase in management and incentive fees.
Bilal Rashid: As I mentioned at the top of my remarks, net investment income was up approximately 13% or <unk> <unk> per share.
Bilal Rashid: To 30 for the fourth quarter.
Bilal Rashid: Turning to our investments.
Bilal Rashid: Believe the vast majority of our loan portfolio remains healthy.
Bilal Rashid: Although there were a few additional borrowers that performed below our expectations during the quarter. We believe that these borrowers remain positioned to make full interest and principal payments.
Bilal Rashid: We are committed to being senior in the capital structure and selective in our underwriting.
Bilal Rashid: As M&A activity has remained subdued we continue to work with our portfolio companies as they identify add on opportunities for growth.
Bilal Rashid: As of December 31st we had $18 $8 million in unfunded commitments to our portfolio of companies.
Bilal Rashid: The majority of our investments are loans and 100% of our loan portfolio was senior secured at year end.
Bilal Rashid: Just on amortized cost as of quarter end, our investment portfolio was comprised of approximately 69% senior secured loans, 25% structured finance securities and 6% equity Securities.
Bilal Rashid: At the end of the quarter, we had investments in 64 unique issuers totaling $409 $7 million at fair value.
Bilal Rashid: On the interest bearing portion of the portfolio. The weighted average performing investment income yield improved slightly to 13, 8%, which is up about 0.2% quarter over quarter.
Bilal Rashid: This includes all interest prepayment fees and amortization of deferred loan fees.
Bilal Rashid: The increase was primarily due to our proactive rotation of our structured finance securities.
Bilal Rashid: With that I'll turn the call over to Bilal.
Bilal Rashid: Thank you Jeff.
Bilal Rashid: In closing we remain focused on increasing our net investment income over the long term.
Bilal Rashid: Specifically by exploring the sale of certain non interest earning equity positions.
Bilal Rashid: And redeploying the proceeds into interest earning assets.
Bilal Rashid: We continue to focus on capital preservation, which is especially critical during these uncertain economic times we.
Bilal Rashid: 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, the BDC has invested more than $2 billion with a cumulative net realized loss of.
Bilal Rashid: 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 adviser.
Bilal Rashid: With $3 9 billion corporate credit platform affiliated with a $30 billion.
Bilal Rashid: Could management group, our advisor 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: <unk> advisor and affiliates are also strongly aligned with shareholders as they maintain and approximately 23% ownership in the company.
Bilal Rashid: With that operator, please open the call for questions.
Bilal Rashid: Thank you.
Bilal Rashid: A question and answer session.
Bilal Rashid: To ask a question you May press Star then one on your telephone keypad.
Bilal Rashid: If we use the speaker phone we ask you. Please pickup your handset before pressing the keys.
Bilal Rashid: Your question. Please press Star then two.
Bilal Rashid: We'll pause for just a moment to assemble our us.
Bilal Rashid: This concludes today's question and answer session and today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.