FS Credit Opportunities Corp.

Good morning, and thank you all for joining us for FS Credit Opportunity Corps' third quarter 2025 earnings conference call. Please note that FS Credit Opportunities Corps may be referred to as FSEO, the fund, or the company throughout the call. Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in the press release that FSEO issued on October 22, 2025. In addition, FSEO has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 30th, 2025. A link to today's webcast and presentation is available on the company's webpage at www.futurestandard.com under Events and Presentations. Please note that this call is the property of FSCO. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward-looking statements with regard to future events, performance, or operations of FSCO. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. We ask that you refer to FSEO's most recent filing with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSEO does not undertake to update its forward-looking statements unless required to do so by law. Additionally, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievements of which cannot be assured. Investors should not view the past performance of FSEO or information about the market as indicative of FSEO's future results. Speaking on today's call will be Andrew Beckman, Head of FS Global Credit and Portfolio Manager for FSEO, and Nick Halbutt, Director of Research of FS Global Credit and Portfolio Manager for FSEO. Also joining us on the call is James Beach, Chief Operating Officer of the fund. Following our prepared remarks, we will conduct a Q&A session. I will now turn the call over to Andrew.

Thank you, Josh, and thank you all for joining. We are pleased with the results we delivered for our shareholders during the third quarter of 2025 across several key fronts. First, FSEO delivered a net return of 1.27% based on the fund's net asset value and 9.06% year to date, outperforming senior secured loans by 443 basis points and high yield bonds by 200 basis points. It's worth noting that the portfolio remained highly weighted to first lien senior secured loans throughout the year, representing 80% of the portfolio's fair value as of September 30th, 2025. The fund paid distributions of 20 cents per share during the quarter partially offset by 11 cents per share decline in NAV. While contributors significantly outweighed detractors, the fund's exposure to first lien term loans of first brands was the largest source of depreciation of the quarter. As previously disclosed on October 13th, the fund no longer has exposure to the company. Across our global credit platform, we generated a 0.96 times multiple on invested capital on this position, reflecting a modest loss and a recovery of approximately 96% of invested capital. Second, the fund continued to deliver an attractive monthly distribution. As of November 21st, 2025, the annualized distribution yield was 11.3% based on NAV, and 13.3% based on market price. Following quarter end, the fund declared monthly distributions of 6.78 cents per share for October, November, and December 2025. Third, the fund deployed $151 million in the quarter, bringing year-to-date investment activity to $359 million, with both figures excluding portfolio hedges. We continue to benefit from our robust deal sourcing engine, which includes our team and firm-wide origination network and our private sourcing partnership with J.P. Morgan to finance directly originated investments. Finally, following quarter end, the fund issued $200 million of fixed rate term preferred shares consisting of $50 million due in 2028 and $150 million due in 2030. Proceeds were used to refinance preferred shares maturing in 2025 and will further be used to refinance some preferred shares maturing early 2026. This represents the fund's sixth and seventh preferred issuance since its listing in November of 2022. We believe our continued access to the capital markets and the favorable pricing reflect both the portfolio's strong credit and the market's confidence in our strategy and management team. I'll now turn the call over to Nick to provide our perspective on markets and discuss our investment activity during the quarter.

Thanks, Andrew. Macroeconomic uncertainty and evolving monetary policy expectations continue to shape markets in the third quarter. While growth remained uneven, improving clarity around trade policy and resilient U.S. demand supported sentiment. Inflation eased modestly and interest rates moved lower, helping stabilize rate volatility. Primary syndicated loan activity surged to $404 billion in Q3, the highest quarterly total on record, rebounding sharply after tariff-driven disruptions in the second quarter. Beneath the headline surge, however, net supply remained notably muted. Roughly 82% of third quarter activity was driven by borrowers seeking to cut interest costs, extend maturities, or both. While activity slowed in September, driven by idiosyncratic credit events, new issue spreads tightened quarter over quarter, driven by sustained investor demand and limited primary supply. Private credit market activity surged alongside the public markets. While the following figures are based solely on sponsored-backed investments, they highlight broader private credit trends. U.S.-sponsored lending rose 35% quarter-over-quarter to $83 billion, the strongest pace since late 2023, and just 10% below last year's record level, driven by a surge in M&A and refinancing activity. Leverage modestly increased among improved market confidence total leverage across private deals rose to 5.0 times while core middle market leverage remained disciplined near 4.6 times the average spread per unit of leverage was 27 basis points higher in the lower middle market versus the core and upper middle market covenants remain far more robust in the lower middle market While covenant-like terms have inched higher across direct lending overall, they remain rare for borrowers under 50 million of EBITDA. Larger issuers, especially those over 100 million of EBITDA, are driving the rise in covenant-like structures as they can leverage competition between private and public markets. Turning to our investment activity, we continue to favor private credit, where we see more compelling relative value than in public markets. Approximately 79% of new investment activity was in privately originated investments, nearly 100% of which were in first lien senior secured loans. Originations were strong in the third quarter, supported by our robust sourcing network. This includes direct sponsor coverage, non-bank intermediaries, incumbent borrowers, bespoke non-sponsored deal flow, and our sourcing partnership with J.P. Morgan. Last year, FSEO and other funds managed by our team were among a select group of alternative lenders that partnered with JP Morgan to fund mid-market private credit opportunities sourced through its commercial and investment banking channels. The bank initially committed $10 billion to the sourcing partnership and upsized the commitment to $50 billion earlier this year. This sourcing agreement has become a highly accretive source of deal flow across our platform. A broad investment funnel is essential to generating strong risk-adjusted returns. The more opportunities we evaluate, the more selective we can be in building the fund's portfolio. We made five new private credit investments in the third quarter, weighted to lower and core middle market companies, which we believe represents a competitive sweet spot. These businesses are of meaningful scale and domestically focused, yet often overlooked by larger credit managers due to their size and balance sheet profile. Because these companies often fall outside the standardized criteria of traditional bank lenders, we can negotiate favorable terms and structure investments that mitigate downside risk. Approximately 60% of investments during the quarter were in sponsor-backed businesses, with the remaining 40% in non-sponsored companies. Within sponsored lending, we do not compete against the large direct lending funds and instead lend to small or emerging sponsors where there is typically less competition and greater potential to capture a yield premium. Non-sponsored lending opportunities comprise a wide range of borrowers that in most cases have never accepted outside capital. This includes multi-generational family owned businesses, sole proprietors, or other tightly held businesses. We favor these types of investments because there is often a strong ability to control deal terms and create highly structured investments to protect our downside. Year-to-date, as of September 30, 2025, we have made 14 new private credit investments and a weighted average spread of SOFR plus 679 basis points. Approximately 93% of these investments include one or more maintenance covenants. By contrast, approximately 90% of broadly syndicated loan issuance year to date was covenant light, meaning loans that typically lack maintenance covenants. When considering the excess spread we earn over those markets, plus the covenants and other negotiated protections we've discussed, we believe the fund is well positioned to deliver strong risk-adjusted returns for our clients. Sales exits and repayments totaled $267 million during the quarter, compared with $151 million of purchases, excluding portfolio hedges, as we repositioned the portfolio towards higher yielding investments. The weighted average yield on new purchases was 12.4% versus 11.6% on portfolio exits. We have actively deployed excess liquidity from these sales and repayments into an attractive investment pipeline of private credit deals in the third quarter. As of September 30th, private credit investments represented approximately 74% of the portfolio. Approximately 87% of the portfolio consisted of senior secured debt. Unsecured debt comprised 2% of the portfolio as fair value. Asset-based finance represented approximately 2% of the portfolio, while equity and other investments represented 9%. Turning to the liability side of our balance sheet, we believe our cost structure gives us a competitive edge with 58% of drawn leverage as of September 30th comprised of preferred shares, which provide favorable regulatory treatment versus traditional term and revolving debt facilities and flexibility in the types of assets we can borrow against. I'll now turn it back to Andrew to discuss our forward outlook.

Thanks, Nick. Finally, the stock was down 2.1% in the quarter, but was up 10.1% year to date as of September 30th, 2025. Since quarter end, the fund share price has moved from trading at or slightly above NAV to a discount of approximately 15%. We believe this pullback reflects broader market weakness across closed-end funds investing in below investment-grade credit and investors pricing in the impact of the Fed rate cuts on floating rate strategies, as well as headline risk from recent idiosyncratic credit events attributed broadly to credit. We do not believe the current discount reflects the portfolio's credit quality, income generation, or NAV stability. Our portfolio is built for long-term durability. We believe active management combined with disciplined fundamental credit underwriting remain essential for generating returns while managing risk. As we originate new investments, we carefully evaluate each opportunity for potential risks related to tariffs or broader geopolitical and economic uncertainty. We believe FSEO offers a differentiated value proposition designed to deliver strong risk adjusted returns across diverse market and economic environments supported by several factors. First, we target businesses with strong cash flows, modest leverage, and seasoned management teams with deep operational experience navigating market cycles. We invest in credits with appropriate loan-to-value ratios to help ensure repayment even in a more pronounced economic slowdown. Our sector allocations are guided by our bottoms-up fundamental research, and we generally avoid highly cyclical segments of the economy. Second, we remain focused on senior debt investments that offer strong structural protections and attractive yields or expected total returns. We generally avoid lending to private equity-owned companies that contain heightened risk of asset leakage or potential lender disputes. We're also cautious of credits with aggressive EBITDA ad backs that may not materialize and instead view free cash flow as a more reliable indicator of credit quality. Third, we compete primarily in the core middle market where we believe the risk return profile is most attractive, typically offering higher spreads, lower leverage, and stronger documentation than large cap transactions. Unlike many smaller managers in the space, we bring the resources, infrastructure, and discipline of a large platform, which allows us to originate, underwrite, and manage investments with greater scale and rigor. By focusing our private allocations in this segment, we seek to capitalize on inefficiencies and deliver superior risk-adjusted returns. Finally, our ability to invest across private and public markets differentiates us from traditional credit funds and allows us to adjust allocations based on where we see the most compelling risk-adjusted return opportunities. Our goal is to dynamically allocate capital to the most attractive opportunities across the credit and business cycle, and we think this leads to enhanced stockholder returns relative to a more confined strategy. Importantly, we're not constrained by a specific asset class mandate. In summary, we believe FSEO, supported by the resources and insights of our broader credit platform, is well positioned to deliver strong risk-adjusted returns across a wide range of economic and financial market conditions. The fund's performance during the third quarter reinforced that view. Once again, thank you all for joining us today. And with that, we'll take a brief pause before answering some questions.

Thanks, Andrew. Thanks, Nick. So for the first question, what's driving FSEO's ability to outperform senior secured loans and high yield bond indexes in 2025?

FSEO really benefits from an opportunistic mandate, which allows us to go where we think the risk reward looks best at any particular time. What we've seen more recently is the ability to generate higher returns and take less risk generally in private credit versus kind of public credit. So we've migrated to some of those higher spread transactions that have better downside protection. But importantly, within private credit, we've stayed away from the more generic risk, the more large cap sponsor lending, which mimics more of the public markets and have instead focused more on the core middle market, smaller sponsors, emerging sponsors, and non-sponsors to find additional alpha. So essentially, we think having a flexible mandate where you see where the red lights, green lights and yellow lights are within credit and going where those green lights are create those differentiated returns.

Thanks, Andrew. And why is FSEO expanding its exposure quarter over quarter to private credit? And what makes this space so compelling right now?

Well, when we look at the average private credit investment opportunity and compare it to the average public credit investment opportunity, we think the private credit opportunity screens attractive. Now, I'm talking about the average opportunity because obviously there are opportunities that are unique. But if you look at that average opportunity, you know, what we're seeing is wider spread in the stuff that we're focused on, probably like 150 basis points. So if not more of additional spread versus a similarly situated kind of public company and then. We're also seeing risk reduction things in the private names that are appealing. So like lower leverage, higher quality EBITDA that's kind of being levered, tighter docs that prevent leakage in terms of restricted payments, additional debt, and other things like that. and better maintenance covenants. So when we put it all together, like we actually think the additional return in the private credit names that we're looking at will be greater than just the spread differential, because we think those names will also have lower realized losses because of the structure.

And with deal flow heating up, how does FSEO stay ahead in sourcing and executing high quality investments?

Sourcing is one of the most, if not the most important thing to differentiate yourself within this industry. You need to see things that others don't see. We have a multi-pronged sourcing strategy that focuses on a few different segments. We have a large scale sponsor coverage effort that levers our private equity business, where we are a partner to over 300 private equity firms. And we cover those firms and try to provide them with solutions-based financing, not just plain vanilla direct lending, but more creative solutions as well. We have a large non-sponsor effort where we cover over 350 intermediaries, everything ranging from regional business brokers, law firms, restructuring advisors, non-bank financial advisors, industry consultants and whatnot to suck out non-sponsored deal flow. And then we have a firm-wide channel where we leverage the tentacles that the firm has in large part to just kind of find deal flow that might be coming from other businesses, but might be more appropriate for our business. So what's interesting is we really are a middle market business at heart. And we're going about sourcing as if we're like a large cap business with these very focused and large scale, you know, kind of sourcing efforts to generate the deal flow for our middle market funds.

And last one for you, Andrew, how is FSEO managing risk in a world of macro uncertainty, inflation and shifting rates?

I would say as a whole, we're somewhat cautious on the economic environment. And because we're cautious on the economic environment, it's making us cautious in terms of the types of underlying investments that we're looking at. We are staying away from cyclical sectors unless they're really, really kind of like low levered. We're underwriting investments based on normalized earnings as opposed to potentially what might have been realized more recently. And, you know, we're testing all of our credits to make sure that they can kind of survive through, you know, a downside case, you know, in case we saw like an extended period of like economic weakness. So trying to be cautious about underwriting these things based on a more normalized environment versus today, trying to make sure they can The capital structures are durable enough to withstand potentially like an economic shock. And then again, just trying to favor more defensive sectors.

Thanks, Andrew. And this next one's for Nick. What's next for FSEO as it navigates a rapidly evolving credit landscape?

Well, we continuously... evaluate the range of opportunities in front of us and actively manage the portfolio sort of accordingly. Our credit underwriting is disciplined and that remains a source of downside protection for the fund. Obviously, we have a sourcing network we've developed that we're proud of. We continue to lean into that for opportunities in the lower and core middle markets, in addition to adding resources internally and building bridges externally to enhance what's already a pretty good origination platform. And then, you know, we're always focused on structuring deals in a way that creates both downside protection, but also some upside potential, you know, to the extent that there are positive developments in credits and businesses.

And how does FSEO's long-term track record stack up and what does it mean for investors today?

So we have a 10.9% one-year return and a 13.5% annualized three-year return on net asset value right now, which I think demonstrates strong performance. We've consistently outperformed benchmarks that we measure ourselves against, including most visibly the sort of senior secured loan market and you know, the high yield market as well. Obviously, our track record inspires confidence amongst our team. And, you know, we're proud of that. But it is, of course, no guarantee of future performance.

And last question is, how are you using the public credit sleeve tactically for liquidity and trading alpha? And what's the hurdle to rotate those dollars back into private deals as pipelines rebuild?

So public credit is an opportunistic sleeve in the portfolio. We continuously find investments in the public credit market that we think have good risk reward characteristics in spite of a broader market. landscape where spreads are tight and there's been a deterioration in the quality of deal documents. We're optimistic about the ability for that to persist into the indefinite future. And then lastly, to the extent that there are corrections in markets which lead to the opportunity to source investments at a discount to par, that can add return to our strategy over time.

This concludes today's call. Thank you, Andrew. Thank you, Nick. If you have any follow-up questions, please feel free to reach out. Thank you for joining us, and we look forward to speaking with you next quarter.