OFS Capital Corporation (NASDAQ:OFS) Q3 2023 Earnings Report Call Record November 3, 2023
operator: good morning. Welcome to the OFS Capital Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this event is being logged. I would now like to turn the conference over to Steve Altebrand, Vice President of Capital Markets. Please move on.
Steve Altebrand: Good morning, ladies and gentlemen. Thank you for your participation. Also participating in today’s conference call is Bilal Rashid, our Chairman and Chief Executive Officer. Jeff Cerny, the company’s chief financial officer and treasurer. Before we begin, please be aware that statements made on this conference call and webcast may constitute forward-looking statements as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions of OFS Capital management regarding expected results, are not guarantees of future performance, and are subject to known and unknown risks, uncertainties and and other factors that could cause actual results to differ materially from such statements. Uncertainties and other factors, including the risk factors described from time to time in our filings with the SEC, are to some extent beyond management’s control.
Although the Company believes that these assumptions are reasonable, any of those assumptions may prove to be incorrect and, as a result, any forward-looking statements based on those assumptions may May be inaccurate. You should not place undue reliance on these forward-looking statements. OFS Capital undertakes no obligation to update any forward-looking statements made herein, and all forward-looking statements speak only as of the date of this conference call. I will now turn the call over to Bilal Rashid, Chairman and Chief Executive Officer.
Bilal Rashid: Thank you, Steve. good morning. This quarter, we are pleased to report that net investment income increased for the fourth straight quarter, to $0.40 per share, an increase of 5% from the second quarter. We believe this increase is partly a result of our balance sheet position, with a majority of our debt being fixed rate and a majority of our loan portfolio being variable rate. Our net asset value decreased 1.5% to $12.74 per share primarily due to unrealized depreciation of certain assets. This was partially offset by broad net unrealized value increases in the rest of the investment portfolio, particularly in structured finance investments. In this uncertain macroeconomic environment, the overall performance of our portfolio companies remains strong.
In our view, the majority of our portfolio companies remain well-positioned to manage increased borrowing costs. Portfolio yields continued to increase compared to the previous quarter, consistent with the observed increase in benchmark interest rates. As part of our longstanding investment discipline, we have historically avoided investing in highly cyclical industries. We believe our well-diversified portfolio is defensively positioned, with exposure to the largest sectors: manufacturing, healthcare, business services, and technology. At fair value, 99% of our loan portfolio is senior secured. In this uncertain economic environment, we believe that being at the top of the capital structure continues to pay dividends. Regarding new business creation, interest rate and macroeconomic uncertainties continue to constrain M&A activity relative to historical levels.
Like many market participants, we are optimistic that activity will pick up in the first half of next year. In the meantime, we will continue to use our capital prudently. Our funding continues to benefit us. As of the end of the third quarter, approximately 89% of our outstanding debt matures beyond 2026, 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 credit facility is flexible and has no mark-to-market provisions. As previously discussed, the Company secured $180 million in fixed rate unsecured debt two years ago, with a weighted average coupon of 4.8%, below current market value. significantly lower. You will also continue to benefit from the experience of an advisor with approximately $4.2 billion under management across loan and structured credit markets, multi-asset class and industry expertise, and over 25 years of track record across multiple credits. is expected. cycle.
At this point, I’d like to turn the call over to Jeff Cerny, our Chief Financial Officer, to go over the details and what’s in store for this quarter.
Jeff Cerny: Thank you, Bilal. Good morning, ladies and gentlemen. As Mr. Bilal stated, the Company recorded a net investment income of $0.40 per share in the third quarter. This compares favorably with last quarter’s net investment income of $0.38 per share. The company also announced that his quarterly distribution for the fourth quarter will remain at $0.34 per share. This equates to an annualized yield per share of his 12.1% as of the close of trading on September 30th. On a quarter-over-quarter basis, our net investment income increased approximately 5%. The increase was primarily due to non-recurring interest income from a CLO warehouse investment that was repaid near the end of the quarter. Our net asset value per share decreased $0.20 per share, or approximately 1.5%, to $12.74 per share.
A small business entrepreneur receives a loan check from the Small Business Administration (SBA).
As Mr. Bilal noted, this decline was primarily related to the downward revision of several rating marks in the quarter, and was partially due to broad unrealized gains in the rest of the investment portfolio, particularly structured finance investments. offset by. During the quarter, the Company financed his loans with a total fair value of $6.4 million on an interest-free basis. As of September 30, 3.7% of our total investments at fair value were in accrual status, some of which are still paying cash interest. Let’s move on to the income statement.Total investment income increased by approx. [0.2%] Up to $14.7 million. As previously mentioned, this is primarily due to higher interest income from his CLO warehouse investment due to payments near the end of the quarter.
Total expenses for the period decreased slightly to $9.3 million, primarily due to a decrease in our average debt balance and a corresponding decrease in interest expense. As I mentioned, net investment income for the third quarter was $0.40 per share. This is an increase of $0.02 compared to the previous quarter and continues the trend of quarterly increases over the past year. We continue to believe that our net investment income will benefit from our balance sheet position, given that 94% of our loan portfolio by fair value is floating rate and 70% of our outstanding debt is fixed rate. . It is also worth noting that as of quarter end, 89% of the Company’s outstanding debt matured after 2026, and 59% of the Company’s outstanding debt was unsecured. Excluding SBIC debt, our regulatory debt-equity ratio was relatively stable sequentially at approximately 1.59x, and our regulatory asset coverage ratio was 163%.
Let’s look at our investments. Despite the weakness in some of our investments in this uncertain macroeconomic environment, the overall performance of our portfolio companies remains strong. We are highly positioned in our capital structure and committed to being selective in our underwriting. We remain cautious regarding new business, and we continue to see a slowdown in M&A activity in the third quarter. We continue to support our portfolio companies as they identify additional opportunities for growth and are funding them in the current quarter or considering additional financing in the fourth quarter. As of September 30, the Company has committed investment funds to portfolio companies totaling $14.1 million under various credit facilities. The majority of our investments are loans, with 99% of our portfolio’s fair value being senior collateral as of September 30th.
As a percentage of costs, our overall investment portfolio is approximately 71% senior secured loans, 1% subordinated debt, 23% structured finance securities, and 5% equity. 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 30, the weighted average operating income yield on the interest-bearing portion of the portfolio, which includes the amortization of all interest prepayment fees and deferred loan fees, increased 80 basis points to 14.6%. I’ll now turn the call back to Bilal.
Bilal Rashid: Thank you, Jeff. To conclude today’s call, I’m pleased to report continued growth in net investment income this quarter. We believe this is mainly due to the strong position of our balance sheet. The majority of our loan portfolio consists of floating rate investments and 70% of our outstanding debt is fixed rate. With nearly 100% of our loan portfolio at fair value in senior collateral, we remain focused on capital preservation and remain confident in the overall quality and fundamentals of our portfolio. The Company’s financing is long-term in nature, with approximately 89% of its outstanding debt maturing beyond 2026. We rely on years of experience and investment discipline, and it works for us.
Since the beginning of 2011, BDC has invested more than $1.9 billion, generating attractive risk-adjusted returns for its portfolio with cumulative realized debt losses of only 2.5% over the past 13 years. We believe that due to the size, experience and reputation of our advisors, our business is particularly equipped to successfully navigate this market. Partnering with over $30 billion in asset management groups and with a $4.2 billion corporate credit platform, our advisors have a wide range of expertise, including many years of banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the past 25 years. Our advisors maintain approximately 22% ownership in BDC, so alignment with shareholders is also strong.
Now, operator, please begin accepting questions.
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