Q1 2025 OFS Capital Corp Earnings Call

Operator: Before we begin, please note that the statements made on this call and webcast may constitute forward-looking statements as defined under applicable security 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 FDA. Although we believe these assumptions are reasonable, any of those assumptions could prove incorrect, and as a result, the forward-looking statements based on those assumptions also could be incorrect.

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 LFS 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 SEC.

Although we believe these assumptions are reasonable any of those assumptions could prove incorrect and as a result of forward looking statements based on those assumptions also could be incorrect.

Operator: You should not place undue reliance on these four. 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.

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.

Bilal Rashid: With that, I'll turn the call over to Chairman and Chief Executive Officer Bilal Rashid. Thank you, Steve.

With that I'll turn the call over to chairman and Chief Executive Officer Bilal Rashid.

Thank you Steve as you know, we announced our first quarter earnings yesterday for the current quarter.

Bilal Rashid: As you know, we announced our first quarter earnings yesterday. For the current quarter, our net investment income was 26 cents per share compared to 30 cents per share in the prior quarter. Our net asset value was $11.97 per share compared to $12.85 per share in the prior quarter. As mentioned on our last call, net investment income in the prior quarter included non-recurring dividend and fee income. As a result, we had a decrease in net investment income this quarter. We remain focused on rotating certain non-interest-earning equity positions into interest-earning assets to improve net investment income in the long term.

Net investment income was 26 cents per share compared to 30 cents per share in the prior quarter.

Our net asset value was $11.97 per share compared to $12.85 per share in the prior quarter.

As mentioned on our last call net investment income in the prior quarter included nonrecurring dividend and fee income.

As a result, we had a decrease in net investment income this quarter.

We remain focused on rotating certain non interest, earning equity positions and go interest earning assets to it.

Improved net investment income and the long term.

Bilal Rashid: as we continue to explore potential ways to monetize our minority equity investment in Penn Steel Holdings, our largest equity position. As we have noted before, this is a position we invested in more than 11 years ago at a cost of only $200,000. To date, we have received approximately $3.9 million in distributions for approximately 18 times our cost. The decline in our net asset value per share is primarily due to certain company specific marks, as well as a more widespread decline in pricing across the broader credit market. In our view, The overall economic outlook remains uncertain given the potential impact of global tariffs and the related fallout.

As we continue to explore potential ways to monetize our minority equity investment and Penn Steel Holdings'.

Largest equity position.

As we have noted before this is a position we invested in more than 11 years ago at a cost of only $200000.

To date, we have received approximately $3 $9 million in distributions or approximately 18 times our cost.

The decline in our net asset value per share is primarily due to southern company specific marks as well as a more widespread decline in pricing across the broader credit markets.

In our view.

The overall economic outlook remains uncertain, given the potential impact of global status.

And the related fallout.

Bilal Rashid: It is too early to estimate how this rapidly changing global economic environment will affect our portfolio. However, we believe that the chances of a slowdown in economic activity have increased, which could lead to earnings pressure on our portfolio companies and in return on the earnings of the BDC. That being said, we are encouraged by the general stability of our portfolio with no new non-accruals this quarter. We believe that we have constructed our loan portfolio to withstand the challenges of an uncertain macroeconomic environment. specifically by avoiding highly cyclical industries and maintaining strong diversification. We remain focused on investing higher in the capital structure with 100% of our loan portfolio in first lien and second lien senior secured loans.

It is too early to estimate how this rapidly changing global economic environment will affect our portfolio. However.

However, we believe that the chances of a slowdown in economic activity has increased which could lead to earnings pressure on our portfolio companies and in return on the earnings of the BDC.

That being said we are encouraged by the general stability of our portfolio with no new non accruals this quarter.

We believe that we have consented our loan portfolio to withstand the challenges of an uncertain macroeconomic environment, specifically by avoiding highly cyclical industries.

And maintaining strong diversification.

We remain focused on investing higher in the capital structure with 100% of our loan portfolio in first lien and second lien senior secured loans.

Bilal Rashid: As we navigate this period of uncertainty, we are focused on keeping regular dialogue with our portfolio companies and supporting them with additional capital as they deal with these unprecedented times. In our view, our financing continues to provide us operational flexibility. 73% of our outstanding debt is unsecured at the end of the quarter. Our non-recourse $150 million floating rate facility with BNP Paribas matures in June 2027. and our $25 million Bank of California floating rate corporate line of credit provides us additional liquidity and flexibility.

As we navigate this period of uncertainty.

We are focused on keeping regular dialogue with our portfolio companies and supporting them with additional capital as they deal with these unprecedented times.

And our view on financing continues to provide us operational flexibility.

73% of our outstanding debt is unsecured at the end of the quarter.

Our non recourse $150 million.

Floating rate facility with BNP Paribas.

It shows in June 2027.

And our 25 million dollar banc of California floating rate corporate line of credit provides us additional liquidity and flexibility.

Bilal Rashid: M&A activity has been fairly quiet so far in 2025, more so than many had expected as we entered the new year. We believe that the macroeconomic uncertainty will continue to dampen the prospects of increased M&A activity. Given this outlook and volatility in the capital markets, we are being cautious in deploying new capital.

M&A activity has been fairly quiet so far in 2025.

More so than many had expected as we entered the new year.

We believe that the macro economic uncertainty will continue to dampen the prospects of increased M&A activity.

Given this outlook and volatility in the capital markets, we are being cautious in deploying new capital.

Bilal Rashid: Looking ahead, we will rely on the longstanding experience of our advisor, which manages approximately $4.1 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.

Looking ahead, we have.

Will rely on the longstanding experience of our adviser, which manages approximately $4 $1 billion across the known in structured credit markets.

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Kyle Spina: At this point, I'll turn the call over to Kyle Spina, our Chief Financial Officer, to give you more details and color for the quarter. Thanks, Bilal, and good morning everyone. As Bilal mentioned, we posted net investment income of $3.5 million, or $0.26 per share for the first quarter, which was down $0.04 per share from the fourth quarter. This decrease was primarily due to a drop in non-recurring dividend and fee income recognized in the prior quarter, as well as an anticipated decline in interest income on our loan portfolio attributable to the impact of last year's interest rate cut.

Guide Spina: At this point I'll turn the call over to guide spina.

Guide Spina: Our Chief Financial Officer to give you more details and color for the quarter.

Speaker Change: Thanks, Paul and good morning, everyone. As Bilal mentioned, we posted net investment income of $3 $5 million or 26 cents per share for the first quarter, which was down four cents per share from the fourth quarter.

Speaker Change: This decrease was primarily due to a drop in nonrecurring dividend and fee income recognized in the prior quarter as well as an anticipated decline in interest income on our loan portfolio attributable to the impact of last year's interest rate cuts.

Kyle Spina: We announce that we are maintaining our quarterly distribution at $0.34 per share for the second quarter of 2025 while we continue to cautiously evaluate this fluid macroeconomic environment. In March 31st, our quarterly distribution rate represented a 14.6% annualized yield based on the market price of our common stock. We continue to focus on improving our long-term returns while concentrating on preserving capital.

Speaker Change: We announced that we are maintaining our quarterly distribution at 34 cents per share for the second quarter of 2025.

Speaker Change: We continue to cautiously evaluate this fluid macroeconomic environment.

Speaker Change: At March 31, our quarterly distribution rate represented a 14.6% annualized yield based on the market price of our common stock.

Speaker Change: We continue to focus on improving our long term returns, while concentrating on preserving capital or not.

Kyle Spina: Our net asset value per share decreased by approximately 7% or $0.88 this quarter, primarily attributable to net unrealized depreciation in our investment portfolio. The depreciation was recognized across all asset classes, but was most pronounced in our loan portfolio with a mix of issuer-specific factors and broader credit market price declines contributing to this net depreciation. As Bilal mentioned, we had no loans placed on non-accrual during the quarter and our loan portfolio was generally stable based on our internal credit rating. Our Regulatory Asset Coverage Ratio decreased by 4 percentage points and stood at 165% at quarter end.

Speaker Change: Asset value per share decreased by approximately 7% or 88 cents. This quarter, primarily attributable to net unrealized depreciation on our investment portfolio the.

Speaker Change: The depreciation was recognized across all asset classes, but was most pronounced in our loan portfolio with a mix of issuer specific factors and broader credit market price declines contributing to this net depreciation is.

Speaker Change: As Bilal mentioned, we had no loans placed on non accrual during the quarter and our loan portfolio was generally stable based on our internal credit ratings.

Speaker Change: Our regulatory asset coverage ratio decreased by four percentage points and stood at 165% at quarter end. We have continued to proactively explore refinancing and extension options on certain of our debt facilities that have upcoming maturities in the next year.

Kyle Spina: We have continued to proactively explore refinancing and extension options on certain of our debt facilities that have upcoming maturities in the next year. At quarter end, approximately 73% of our outstanding debt was unsecured. Now, turning to the income statement, total investment income decreased approximately 12% to $10.3 million this quarter. As I just mentioned, this was primarily driven by the non-recurring dividend and fee income recognized in the prior quarter, as well as lower interest income on our loan portfolio due to the impact of interest rate cuts.

Speaker Change: At quarter end, approximately 73% of our outstanding debt was unsecured.

Speaker Change: Now turning to the income statement total investment income decreased approximately 12% to $10 $3 million. This quarter as I. Just mentioned this was primarily driven by the nonrecurring dividend and fee income recognized in the prior quarter as well as lower interest income on our loan portfolio due to the impact of interest rate cuts.

Kyle Spina: Total expenses decreased by approximately 10% during the period to $6.8 million, primarily due to a decrease in the incentive Turning to our investments, we believe the vast majority of our loan portfolio remains healthy while we continue to closely monitor a handful of borrowers performing below our expectations. As mentioned, we had no new non-accrual loans in the first quarter. With respect to our loan portfolio, we are committed to being senior in the capital structure and selective in our underwriting, with 85% of our loan holdings being in first lien position. We continue to focus on add-on opportunities for growth with our existing issuers and as of quarter end had $13.8 million in unfunded commitments to our portfolio.

Speaker Change: Total expenses decreased by approximately 10% during the period to $6 $8 million, primarily due to a decrease in the incentive fee.

Speaker Change: Turning to our investments we believe the vast majority of our loan portfolio remains healthy while we continue to closely monitor a handful of borrowers performing below our expectations as mentioned, we had no new non accrual loans in the first quarter.

Speaker Change: With respect to our loan portfolio, we are committed to being senior in the capital structure and selective in our underwriting with 85% of our loan holdings being in first lien positions. We continue to focus on add on opportunities for growth with our existing issuers and as of quarter end had $13 $8 million in unfunded commitments short portfolio companies.

Kyle Spina: The majority of our investments are in loans, and 100% of our loan portfolio was senior secured at quarter-end. Based on amortized costs as of quarter-end, our investment portfolio is comprised of approximately 69% senior secured loans, 25% structured finance securities, and 6% equity securities. At the end of the quarter, we had investments in 63 unique issuers totaling $403.1 million of fair value. On the interest-bearing portion of the portfolio, the weighted average performing investment income yield declined modestly to 13.4%, which is down about 0.4% quarter over quarter. The decrease in yield was primarily due to the impact of last year's interest rate cuts on our contractual interest income.

Speaker Change: The majority of our investments are in loans and 100% of our loan portfolio was senior secured at quarter end.

Speaker Change: Based 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.

Speaker Change: At the end of the quarter, we had investments in 63 unique issuers totaling $403 $1 million of fair value on the interest bearing portion of the portfolio. The weighted average performing investment income yield declined modestly to 13, 4%, which is down about 0.4% quarter over quarter.

Speaker Change: The decrease in yield was primarily due to the impact of last year's interest rate cuts on our contractual interest income this.

Kyle Spina: This metric includes all interest, prepayment fee, and amortization of deferred loan fee income, but excludes syndication fee income if applicable.

Speaker Change: This metric includes all interest prepayment fee and amortization of deferred loan fee income, but excludes syndication fee income if applicable.

Bilal Rashid: With that, I'll turn the call back over to Bilal for concluding remarks. Thank you, Kyle. In closing, we recognize that the current macroeconomic uncertainty may have a negative impact on the economy. However, we believe our portfolio is generally stable and is defensively positioned to withstand the pressures of this challenging environment. Our portfolio remains diversified across multiple industries and we continue to be committed to investing higher in the capital structure. We are focused on increasing our net investment income over the long term, specifically by exploring the sale of certain non-interest-earning equity positions and redeploying the proceeds into interest-earning assets.

Paul: That I will turn the call back over to Paul for concluding remarks.

Speaker Change: Thank you Kyle and closing we recognize that the current macroeconomic uncertainty may have a negative impact on the economy. However.

Speaker Change: However, we believe our portfolio is generally stable and is defensively positioned to withstand the pressures of this challenging environment.

Speaker Change: Our portfolio remains diversified across multiple industries, and we continue to be committed to investing higher in the capital structure.

Speaker Change: We are focused on increasing our net investment income over the long term.

Speaker Change: Typically by exploring the sale of certain non interest, earning equity positions 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 believe our longstanding experience and investment discipline have served us well over the past 14 years. Since the beginning of 2011, the BDC has invested more than $2 billion with a cumulative net realized loss of just 3.4% 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 advisors. With a $4.1 billion corporate credit platform affiliated with a $30 billion asset management group, our advisor has broad expertise including longstanding banking and capital markets relationships.

Speaker Change: We continue to focus on capital preservation, which is especially critical during these uncertain economic times.

Speaker Change: I believe our long standing experience and investment discipline.

Speaker Change: <unk> well over the past 14 years.

Speaker Change: Since the beginning of 2011, the BDC has invested more than $2 billion with a cumulative net realized loss of just three 4% while generating attractive risk adjusted returns on our portfolio.

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

Speaker Change: With a $4 1 billion corporate credit platform affiliated with a $30 billion asset management group.

Speaker Change: Visor has broad expertise and building 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.

Speaker Change: Corporate credit platform has gone through multiple credit cycles over the last 25 plus years.

Bilal Rashid: Our advisor and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the company.

Speaker Change: Our advisor and affiliates.

Speaker Change: We're 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. Thank you.

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

Speaker Change: Thank you.

Operator: 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're using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.

Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

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

Operator: As there are no questions, this concludes our conference. Thank you for attending today's presentation.

Speaker Change: As there are no questions. This concludes our conference. Thank you for attending today's presentation you may now disconnect.

Operator: You may now disconnect.

Speaker Change: Oh.

Speaker Change: Uh huh.

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Speaker Change: Oh.

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Speaker Change: Okay.

Speaker Change: Okay.