OFS Capital Corporation

Today I am welcome to the OFS Capital Corporation Q1 2025 earnings content call. Our participants will be in lesson only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event has been recorded. I would now like to turn the conference over to Mr. Steve Altibrandour, head of Investor Relations. Please go ahead.

Good morning everyone and thank you for joining us. Also on the call today are the law received our chairman and chief executive officer and Kyle Spina, 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 Actual Securities Law. Such statements reflect various assumptions, expectations, and opinions by OFS Capital Management concerning anticipated results are not guaranteed as 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 in -to-time our filings with the SEC. 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. 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, Alana Shee.

Thank you, Steve. 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 dividends 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. As we continue to explore potential ways to monetize our minority equity investment in grand steel holding, 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 distribution 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 impacts of global tariffs and the related callout. 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. This could lead to earnings pressure on our portfolio companies and in return on the earnings of the BDC. That being said, we are encouraging 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 senior secured loans. 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. 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 market, we are being cautious in deploying new capital. Looking ahead, we will rely on the long-standing experience of our advisor, which manages approximately $4.1 billion across the loan and structure 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 Guy 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 in our loan portfolio, attributed both to the impact of last year's interest rate cuts. We announced 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 .6% annual ITO based on the market price of our common stock. We continue to focus on improving our long-term returns while concentrating on preserving capital. Our net asset value per share decreased by approximately 7% or $0.88 this quarter, primarily attributable to net unrealized appreciation in our investment portfolio. The depreciation was recognized across all AFTEC 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 the law 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. 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-occurring 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. Total expenses decreased by approximately 10% during the period to $6.8 million primarily due to a decrease in the incentive fee. 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 opportunities for growth with our existing issuers and as of quarter end, had $13.8 million in unfunded commitments to our portfolio companies. The majority of our investments are in loans and 100% of our loan portfolio was senior secured at quarter end. Based on amortized costs of quarter end, our investment portfolio was 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 .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. This metric includes all interest, pre-payment fees, and amortization of deferred loans fee income, but excludes syndication fee income if applicable. With that, I'll turn the call back over to Volal 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. We continue to focus on capital preservation, which is especially critical during these uncertain economic times. We believe our long-standing experience and investment decisions have served us well over the past 14 years. Since the beginning of 2011, the BBC has invested more than $2 billion in capital. Our corporate credit platform has gone through multiple credit cycles over the last 25 plus years. Our advisor and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the company. With that, operator, please open up the call for questions.

Thank you. 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. 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. As there are no questions, this concludes our conference. Thank you for attending today's presentation. You may now disconnect.