OFS Capital Q1 2025 Earnings Report

OFS Capital EPS Results

• Actual EPS: $0.26
• Consensus EPS: $0.33
• Beat/Miss: Missed by -$0.07
• One Year Ago EPS: N/A

OFS Capital Revenue Results

• Actual Revenue: $10.30 million
• Expected Revenue: $11.90 million
• Beat/Miss: Missed by -$1.61 million
• YoY Revenue Growth: N/A

OFS Capital Announcement Details

• Quarter: Q1 2025
• Date: 5/1/2025
• Time: After Market Closes
• Conference Call Date: Friday, May 2, 2025
• Conference Call Time: 10:00AM ET

OFS Capital (NASDAQ:OFS) (NASDAQ: OFS) is a business development company (BDC) that provides customized debt and equity financing solutions to U.S. middle-market companies. As an externally managed BDC, OFS Capital focuses on sponsoring capital structures that support growth initiatives, recapitalizations, acquisitions and other strategic transactions. The firm targets companies that demonstrate strong cash flow potential and scalable business models across a range of industries.

The company’s investment portfolio typically includes senior secured loans, unitranche facilities, mezzanine debt and equity co-investments. OFS Capital generally commits between $5 million and $35 million per transaction, partnering with management teams to help accelerate expansion, fund acquisitions and refinance existing debt. Key sectors of focus include business services, healthcare, specialty finance, manufacturing and consumer products.

Founded in 2007 under the name ORIX Financial Services and rebranded as OFS Capital in 2015, the firm is headquartered in New York City. OFS Capital’s investment activities are overseen by OFS Capital Management, LLC, an external adviser composed of seasoned professionals with deep experience in private credit and middle-market investing. The management team emphasizes disciplined underwriting, active portfolio monitoring and tailored capital solutions.

OFS Capital seeks to generate current income for its shareholders while pursuing long-term capital appreciation through diverse private credit and equity investments. The company’s flexible mandate and hands-on approach aim to deliver value to both its portfolio companies and investors by providing strategic financing alternatives uncommon in the traditional banking sector.

OFS Capital Q1 2025 Earnings Call Transcript

Key Takeaways

• Net investment income dropped to $0.26 per share in Q1 from $0.30 in the prior quarter, reflecting the loss of non-recurring dividend and fee income.
• Net asset value per share declined by 7% to $11.97, driven by company-specific marks and broader credit market price declines.
• The board maintained the quarterly distribution at $0.34 per share, representing a 14.6% annualized yield based on the current market price.
• The portfolio remains stable with no new non-accruals, high diversification and 85% of loans in first-lien senior secured positions for defensive positioning.
• Management remains cautious amid macroeconomic uncertainty and subdued M&A activity, focusing on preserving capital and selectively deploying new investments.

Presentation

[Operator]

Good day, and welcome to the OFS Capital Corporation Q1 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key for advice view. 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 Altebrando, Head of Investor Relations. Please go ahead.

[Steve Altebrando, Head of Investor Relations at OFS Capital Corporation]

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.

[Steve Altebrando, Head of Investor Relations at OFS Capital Corporation]

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, Bilal Rashid.

[Bilal Rashid, Chairman and CEO at OFS Capital Corporation]

Thank you, Steve. As you know, we announced our first-quarter earnings yesterday. For the current quarter, our net investment income was $0.26 per share compared to $0.30 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. 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 Pan 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.

[Bilal Rashid, Chairman and CEO at OFS Capital Corporation]

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 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, 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.

[Bilal Rashid, Chairman and CEO at OFS Capital Corporation]

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. 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.

[Bilal Rashid, Chairman and CEO at OFS Capital Corporation]

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. 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. 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.

[Kyle Spina, CFO and Treasurer at OFS Capital Corporation]

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 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. On 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.

[Kyle Spina, CFO and Treasurer at OFS Capital Corporation]

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 ratings. 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.

[Kyle Spina, CFO and Treasurer at OFS Capital Corporation]

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. 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 loan holdings being in first lien positions.

[Kyle Spina, CFO and Treasurer at OFS Capital Corporation]

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 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 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 $403.1 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.

[Kyle Spina, CFO and Treasurer at OFS Capital Corporation]

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 Bilal for concluding remarks.

[Bilal Rashid, Chairman and CEO at OFS Capital Corporation]

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 longstanding experience and investment discipline have served us well over the past 14 years.

[Bilal Rashid, Chairman and CEO at OFS Capital Corporation]

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 advisor. 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. Our corporate credit platform has gone through multiple credit cycles over the last 25+ 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.

[Operator]

Thank you. We will now begin the question and answer session. To ask a question, you may press * 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 * 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.

Participants

Executives

• Bilal Rashid, Chairman and CEO
• Kyle Spina, CFO and Treasurer
• Steve Altebrando, Head of Investor Relations