OFS Capital Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2025

There are 4 speakers on the call.

Operator

Good day, and welcome to the OFS Corporation q one twenty twenty five earnings conference call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Mr. Steve Altibrandeau, Head of Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us. Also on the call today are Bilal Rashid, 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 applicable securities laws. 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 SEC.

Speaker 1

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, Lal Rashid.

Speaker 2

Thank you, Steve. As you know, we announced our first quarter earnings yesterday. For the current quarter, our net investment income was 26¢ per share compared to 30¢ 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.

Speaker 2

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 Penn Steel Holdings, our largest equity position. As we have noted before, this is a position we invested in more than eleven years ago at a cost of only $200,000. To date, we have received approximately $3,900,000 in distribution or approximately 18 times our cost.

Speaker 2

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 markets. In our view, the overall economic outlook remains uncertain given the potential impact of global tariffs and the related fallout. 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.

Speaker 2

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 industry and maintaining strong diversification. We remain focused on investing higher in the capital structure with % of our loan portfolio in first lien and second lien 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.

Speaker 2

73% of our outstanding debt is unsecured at the end of the quarter. Our nonrecourse $150,000,000 floating rate facility with BNP Paribas matures in June 2027, and our $25,000,000 Bank of California floating rate corporate line of credit provides us additional liquidity and flexibility. M and 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 and a activity. Given this outlook and volatility in the capital markets, we are being cautious in deploying new capital.

Speaker 2

Looking ahead, we will rely on the long standing experience of our adviser, which manages approximately $4,100,000,000 across the loan and structured credit markets, has expertise in multiple asset classes and industries, and has a more than twenty five year track record through multiple credit cycles. 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.

Speaker 3

Thanks, Bilal, and good morning, everyone. As Bilal mentioned, we posted net investment income of $3,500,000 or $0.26 per share for the first quarter, which was down $04 per share from the fourth quarter. 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. We announced that we are maintaining our quarterly distribution at 34¢ per share for the second quarter of twenty twenty five while we continue to cautiously evaluate this fluid macroeconomic environment. At March 31, our quarterly distribution rate represented a 14.6% annualized yield based on the market price of our common stock.

Speaker 3

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 depreciation on 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 four percentage points and stood at a 65% at quarter end.

Speaker 3

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 $10,300,000 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 3

Total expenses decreased by approximately 10% during the period to $6,800,000 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 nonaccrual 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 positions. We continue to focus on add on opportunities for growth with our existing issuers and as of quarter end had $13,800,000 in unfunded commitments to our portfolio companies.

Speaker 3

The majority of our investments are in loans, and a % of our loan portfolio was senior secured at quarter end. 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. At the end of the quarter, we had investments in 63 unique issuers totaling $403,100,000 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 3

This metric includes all interest, prepayment fee and amortization of deferred loan fee income, but excludes syndication fee income if applicable. With that, I'll turn the call back over to Lal for concluding remarks.

Speaker 2

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.

Speaker 2

We continue to focus on capital preservation, which is especially critical during these uncertain economic times. We believe our long standing experience and investment discipline has served us well over the past fourteen years. Since the beginning of 02/2011, the BDC has invested more than $2,000,000,000 for the 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 adviser. With a $4,100,000,000 corporate credit platform affiliated with a $30,000,000,000 asset management group, our adviser has broad expertise, including long standing banking and capital markets relationships.

Speaker 2

Our corporate credit platform has gone through multiple credit cycles over the last twenty five plus years. Our adviser 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.

Operator

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're 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.

Operator

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.

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Key Takeaways

  • For Q1, the company reported net investment income of $0.26 per share (down from $0.30) and NAV of $11.97 per share (down from $12.85) primarily due to non-recurring dividend and fee income recognized in the prior quarter.
  • The portfolio remains healthy with no new non-accruals this quarter, broad industry diversification, and approximately 85% of loans in first-lien or second-lien senior secured positions.
  • Management expressed caution given global tariffs and potential economic slowdown, noting quieter M&A activity and a focus on monetizing long-held equity stakes like Penn Steel to redeploy into interest-earning assets.
  • The board has maintained the quarterly distribution at $0.34 per share, representing a 14.6% annualized yield on the market price, while emphasizing capital preservation amid market volatility.
  • Liquidity and financing flexibility remain strong, with 73% of debt unsecured, a $150 million floating-rate facility maturing in 2027, and a $25 million corporate line of credit for additional support.
AI Generated. May Contain Errors.
Earnings Conference Call
OFS Capital Q1 2025
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