OFS Capital Corporation Announces Second Quarter 2024 Financial Results

Rhea-AI Summary

OFS Capital (NASDAQ: OFS) reported its Q2 2024 financial results. Net investment income decreased to $0.26 per share from $0.42 in Q1 2024. The company saw a net gain on investments of $0.51 per share, primarily due to net unrealized appreciation of $0.83 per share, partially offset by net realized losses of $0.32 per share. Net asset value per share increased to $11.51 from $11.08 in Q1 2024. The investment portfolio's weighted-average performing income yield rose to 13.4% from 13.0% in the previous quarter. The Board declared a Q3 distribution of $0.34 per share. As of June 30, 2024, 92% of the loan portfolio consisted of floating rate loans, and approximately 100% were first lien and second lien loans.

Positive

• Net asset value per share increased to $11.51 from $11.08 in Q1 2024
• Net gain on investments of $0.51 per share for Q2 2024
• Investment portfolio's weighted-average performing income yield rose to 13.4% from 13.0% in Q1 2024
• 92% of loan portfolio consisted of floating rate loans, benefiting from rising interest rates
• No new loans placed on non-accrual status during Q2 2024

Negative

• Net investment income decreased to $0.26 per share from $0.42 in Q1 2024
• Net realized losses of $0.32 per share in Q2 2024
• Total investment income decreased to $11.2 million from $14.2 million in Q1 2024

Financial Analyst

OFS Capital's Q2 2024 results present a mixed picture. Net investment income decreased to $0.26 per share from $0.42 in Q1, indicating reduced core earnings. However, the net asset value (NAV) per share increased to $11.51 from $11.08, driven by a net gain on investments of $0.51 per share.

The portfolio's weighted-average performing income yield improved to 13.4% from 13.0%, primarily due to accelerated deferred fees from loan repayments. This suggests improved portfolio performance, but it's important to note that this increase may not be sustainable if it's mainly driven by one-time fee accelerations.

The company's investment portfolio of $398.2 million is well-positioned with 92% floating rate loans and 100% first and second lien loans. This structure should benefit from rising interest rates, potentially leading to increased interest income in future quarters.

However, investors should be cautious about the decrease in total investment income to $11.2 million from $14.2 million in the previous quarter, primarily due to lower dividend and interest income. This decline in top-line revenue could pressure future earnings if it continues.

The reduction in expenses, particularly in interest expense and incentive fees, helped mitigate the impact of lower income on net investment income. However, the sustainability of these expense reductions should be monitored.

Overall, while the NAV increase is positive, the decline in net investment income and total investment income warrants close attention in future quarters to assess the company's ability to maintain its current $0.34 per share quarterly distribution.

Investment Portfolio Manager

The composition and performance of OFS Capital's investment portfolio deserve closer scrutiny. The total investments of $398.2 million, at 103% of amortized cost, suggest a slight overall appreciation in the portfolio's value. The portfolio's structure is noteworthy:

• Debt investments: $236.9 million (85% first lien, 15% second lien)
• Equity investments: $85.7 million
• Structured finance securities: $75.6 million

This diversification across debt, equity and structured finance provides some risk mitigation. The heavy weighting towards first lien debt (85% of debt investments) indicates a conservative approach to credit risk.

The improvement in weighted-average performing income yield to 13.4% from 13.0% is positive, but as mentioned, it's partly due to accelerated fees. The realized yield of 11.8% provides a more stable indicator of portfolio performance.

It's encouraging that no new loans were placed on non-accrual status and one issuer was removed from non-accrual. This suggests stable credit quality, but ongoing monitoring is important given the current economic uncertainties.

The net gain on investments of $6.9 million, primarily from unrealized appreciation, is positive but should be viewed cautiously as unrealized gains can reverse quickly in volatile markets.

The relatively low level of new investments ($5.0 million) compared to the portfolio size indicates a cautious approach to deploying capital. This could be prudent in uncertain markets but may also limit growth potential if maintained long-term.

In summary, while the portfolio shows some positive trends, investors should watch for sustained improvement in core income generation and any shifts in credit quality in future quarters.

Risk Management Specialist

From a risk management perspective, OFS Capital's Q2 2024 results reveal both strengths and potential vulnerabilities:

Strengths:

• High proportion of floating rate loans (92%) provides a hedge against interest rate risk
• Strong focus on senior secured lending (100% first and second lien) reduces credit risk
• Decrease in non-accrual loans suggests improving credit quality
• Unused credit facilities ($25.0 million with Banc of California and $80.9 million with BNP Paribas) provide liquidity buffer

Potential Risks:

• Decline in net investment income could pressure dividend sustainability if prolonged
• Significant portion of gains from unrealized appreciation ($11.3 million) which could reverse
• Concentration risk: $75.6 million in structured finance securities may be sensitive to market volatility
• Cash position of $5.6 million is relatively low, with $2.7 million restricted
• Outstanding commitments of $8.9 million could strain liquidity if called upon

The company's risk profile benefits from its focus on senior secured, floating-rate loans. However, the decline in investment income and relatively tight liquidity position warrant close monitoring. The unused credit facilities provide a safety net, but their availability depends on maintaining covenant compliance.

The removal of one non-accrual loan is positive, but investors should watch for any new credit issues given the uncertain economic environment. The structured finance securities, while providing diversification, could be a source of volatility.

Overall, while OFS Capital's risk management appears sound, the company's ability to navigate potential economic headwinds and maintain its income generation will be important in the coming quarters.

Declares Third Quarter Distribution of $0.34 Per Share

CHICAGO--(BUSINESS WIRE)-- OFS Capital Corporation (NASDAQ: OFS) (“OFS Capital,” the “Company,” “we,” “us,” or “our”) today announced its financial results for the fiscal quarter ended June 30, 2024.

SECOND QUARTER FINANCIAL HIGHLIGHTS

• Net investment income decreased to $0.26 per common share for the quarter ended June 30, 2024 from $0.42 per common share for the quarter ended March 31, 2024.
• Net gain on investments of $0.51 per common share for the quarter ended June 30, 2024, primarily comprised of net unrealized appreciation of $0.83 per common share, partially offset by net realized losses of $0.32 per common share.
• Net asset value per common share increased to $11.51 as of June 30, 2024 from $11.08 as of March 31, 2024.
• As of June 30, 2024, based on fair value, 92% of our loan portfolio consisted of floating rate loans and approximately 100% of our loan portfolio consisted of first lien and second lien loans.
• For the quarter ended June 30, 2024, the investment portfolio’s weighted-average performing income yield increased to 13.4% from 13.0% during the prior quarter, primarily due to the acceleration of deferred fees from loan repayments.
• No new loans were placed on non-accrual status during the second quarter. The number of issuers with loans on non-accrual status decreased by one from the prior quarter.

OTHER RECENT EVENTS

• On July 30, 2024, our Board of Directors declared a distribution of $0.34 per common share for the third quarter of 2024, payable on September 30, 2024 to stockholders of record as of September 20, 2024.

SELECTED FINANCIAL HIGHLIGHTS (unaudited)	Three Months Ended
(Per common share)	June 30, 2024				March 31, 2024
Net Investment Income
Net investment income	$	0.26			$	0.42
Net Realized/Unrealized Gain (Loss)
Net realized gain (loss) on investments, net of taxes	$	(0.32	)		$	0.06
Net unrealized appreciation (depreciation) on investments, net of taxes		0.83				(1.15	)
Net realized/unrealized gain (loss)	$	0.51			$	(1.09	)
Earnings (Loss)
Earnings (loss)	$	0.77			$	(0.67	)
Net Asset Value
Net asset value	$	11.51			$	11.08
Distributions paid	$	0.34			$	0.34
	As of
(in millions)	June 30, 2024				March 31, 2024
Balance Sheet Highlights (unaudited)
Investment portfolio, at fair value	$	398.2			$	400.4
Total assets		407.9				410.5
Net assets		154.2				148.4

“We are pleased to announce an increase in our net asset value per common share to $11.51 as of June 30, 2024 from $11.08 as of March 31, 2024,” said Bilal Rashid, OFS Capital’s Chairman and Chief Executive Officer. “We believe that we continue to benefit from our balance sheet positioning, with the vast majority of our loan portfolio being floating rate and the majority of our debt being fixed-rate.”

PORTFOLIO AND INVESTMENT ACTIVITIES ($ in millions)
		Three Months Ended
Portfolio Yields(1)		June 30, 2024				March 31, 2024
Average performing interest-bearing investments, at cost		$	322.6			$	338.0
Weighted-average performing income yield - interest-bearing investments(2)			13.4	%			13.0	%
Weighted-average realized yield - interest-bearing investments(3)			11.8	%			11.6	%

(1)		The weighted-average yield of our investments is not the same as a return on investment for our stockholders, but rather relates to our investment portfolio and is calculated before the payment of all of our fees and expenses.
(2)		Performing income yield is calculated as (a) the actual amount earned on performing interest-bearing investments, including interest, prepayment fees and amortization of net loan fees, divided by (b) the weighted-average of total performing interest-bearing investments at amortized cost.
(3)		Realized yield is calculated as (a) the actual amount earned on interest-bearing investments, including interest, prepayment fees and amortization of net loan fees, divided by (b) the weighted-average of total interest-bearing investments at amortized cost, in each case, including debt investments on non-accrual status and non-income producing structured finance securities.

		Three Months Ended
Portfolio Purchase Activity		June 30, 2024				March 31, 2024
Investments in debt and equity investments		$	5.0			$	7.3
Investments in structured finance securities			—				—
Total investment purchases and originations		$	5.0			$	7.3

As of June 30, 2024, based on fair value, our investment portfolio was comprised of the following:

• Total investments of $398.2 million, which was equal to approximately 103% of amortized cost;
• Debt investments of $236.9 million, of which approximately 85% and 15% were first lien and second lien loans, respectively;
• Equity investments of $85.7 million;
• Structured finance securities of $75.6 million; and
• Unfunded commitments of $8.9 million to eight portfolio companies.

During the quarter ended June 30, 2024, no new loans were placed on non-accrual status.

RESULTS OF OPERATIONS (unaudited)
(in thousands)	Three Months Ended
	June 30, 2024				March 31, 2024
Total investment income	$	11,165			$	14,233
Expenses:
Interest expense		4,117				4,572
Base management and incentive fees		2,337				2,922
Other expenses		1,274				1,143
Total expenses		7,728				8,637
Net investment income		3,437				5,596
Net gain (loss) on investments		6,891				(14,645	)
Net increase (decrease) in net assets resulting from operations	$	10,328			$	(9,049	)

Investment Income

For the quarter ended June 30, 2024, total investment income decreased to $11.2 million from $14.2 million in the prior quarter, primarily due to decreases in total dividend income of $2.4 million and interest income of $0.5 million.

Expenses

For the quarter ended June 30, 2024, total expenses decreased by $0.9 million to $7.7 million compared to the prior quarter, primarily due to declines in interest expense of $0.5 million and incentive fees of $0.5 million.

Net Gain (Loss) on Investments

For the quarter ended June 30, 2024, we recognized a net gain on investments of $6.9 million, primarily comprised of net unrealized appreciation of $11.3 million, partially offset by net realized losses of $4.3 million.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2024, we had $5.6 million in cash, which includes $2.7 million held by OFSCC-FS, LLC (“OFSCC-FS”), an indirect wholly owned subsidiary. Our use of cash held by OFSCC-FS is restricted by contractual conditions of our credit facility with BNP Paribas, including limitations on the amount of cash OFSCC-FS can distribute to us.

As of June 30, 2024, we had no outstanding balance and an unused commitment of $25.0 million under our senior secured revolving credit facility with Banc of California, as well as an unused commitment of $80.9 million under our revolving credit facility with BNP Paribas, both of which are subject to borrowing base requirements and other covenants. As of June 30, 2024, we had outstanding commitments to fund portfolio company investments totaling $8.9 million under various undrawn revolvers and other credit facilities.

CONFERENCE CALL

OFS Capital will host a conference call to discuss these results on Friday, August 2, 2024, at 10:00 AM Eastern Time. Interested parties may participate in the call via the following:

INTERNET: Go to www.ofscapital.com at least 15 minutes prior to the start time of the call to register, download, and install any necessary audio software. A replay will be available for 90 days on OFS Capital’s website at www.ofscapital.com.

TELEPHONE: Dial (844) 816-1364 (Domestic) or (412) 317-5699 (International) approximately 15 minutes prior to the call. A telephone replay of the conference call will be available through August 12, 2024 and may be accessed by calling (877) 344-7529 (Domestic) or (412) 317-0088 (International) and utilizing conference ID #5908152.

For more detailed discussion of the financial and other information included in this press release, please refer to OFS Capital’s Form 10-Q for the second quarter ended June 30, 2024.

OFS Capital Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities (unaudited)
(Dollar amounts in thousands, except per share data)
	June 30, 2024				December 31, 2023
Assets
Total investments, at fair value (amortized cost of $385,446 and $403,530, respectively)	$	398,156			$	420,287
Cash and cash equivalents		5,580				45,349
Interest receivable		2,945				2,217
Prepaid expenses and other assets		1,194				1,965
Total assets	$	407,875			$	469,818
Liabilities
Revolving lines of credit	$	69,100			$	90,500
Unsecured Notes (net of deferred debt issuance costs of $2,178 and $2,667, respectively)		177,822				177,333
SBA debentures (net of deferred debt issuance costs of $0 and $20, respectively)		—				31,900
Interest payable		3,249				3,712
Payable to adviser and affiliates		2,931				3,556
Other liabilities		601				813
Total liabilities	$	253,703			$	307,814
Net assets
Preferred stock, par value of $0.01 per share, 2,000,000 shares authorized, -0- shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively	$	—			$	—
Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 13,398,078 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively		134				134
Paid-in capital in excess of par		184,841				184,841
Total accumulated losses		(30,803	)			(22,971	)
Total net assets		154,172				162,004
Total liabilities and net assets	$	407,875			$	469,818
Number of common shares outstanding		13,398,078				13,398,078
Net asset value per share	$	11.51			$	12.09

OFS Capital Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
(Dollar amounts in thousands, except per share data)
	Three Months Ended June 30,								Six Months Ended June 30,
		2024				2023				2024				2023
Investment income
Interest income	$	10,854			$	14,101			$	22,247			$	27,494
Dividend income		280				334				2,991				1,119
Fee income		31				91				160				196
Total investment income		11,165				14,526				25,398				28,809
Expenses
Interest expense		4,117				5,011				8,689				9,885
Base management fee		1,478				1,883				3,001				3,777
Income Incentive Fee		859				1,280				2,258				2,518
Professional fees		414				429				828				865
Administration fee		453				440				847				922
Other expenses		407				360				742				769
Total expenses		7,728				9,403				16,365				18,736
Net investment income		3,437				5,123				9,033				10,073
Net realized and unrealized gain (loss) on investments
Net realized loss, net of taxes		(4,304	)			(10,408	)			(3,506	)			(10,412	)
Net unrealized appreciation (depreciation), net of taxes		11,195				3,321				(4,248	)			2,200
Net gain (loss) on investments		6,891				(7,087	)			(7,754	)			(8,212	)
Loss on extinguishment of debt		—				—				—				(19	)
Net increase (decrease) in net assets resulting from operations	$	10,328			$	(1,964	)		$	1,279			$	1,842
Net investment income per common share – basic and diluted	$	0.26			$	0.38			$	0.67			$	0.75
Net increase (decrease) in net assets resulting from operations per common share – basic and diluted	$	0.77			$	(0.15	)		$	0.10			$	0.13
Distributions declared per common share	$	0.34			$	0.33			$	0.68			$	0.66
Basic and diluted weighted-average common shares outstanding		13,398,078				13,398,078				13,398,078				13,398,078

ABOUT OFS CAPITAL

The Company is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company. The Company’s investment objective is to provide stockholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments. The Company invests primarily in privately held middle-market companies in the United States, including lower-middle-market companies, targeting investments of $3 million to $20 million in companies with annual EBITDA between $5 million and $50 million. The Company offers flexible solutions through a variety of asset classes including senior secured loans, which includes first-lien, second-lien and unitranche loans, as well as subordinated loans and, to a lesser extent, warrants and other equity securities. The Company’s investment activities are managed by OFS Capital Management, LLC, an investment adviser registered under the Investment Advisers Act of 1940⁽⁴⁾, as amended, and headquartered in Chicago, Illinois, with additional offices in New York and Los Angeles.

FORWARD-LOOKING STATEMENTS

Statements in this press release regarding management's future expectations, beliefs, intentions, goals, strategies, plans or prospects, including statements relating to: OFS Capital’s results of operations, including net investment income, net asset value and net investment gains and losses and the factors that may affect such results; management’s belief that the Company continues to benefit from its balance sheet positioning due to a high percentage of floating rate loans in the portfolio and a majority of liabilities that have a fixed rate of interest, when there can be no assurance that such a composition will lead to future success; and other factors may constitute forward-looking statements for purposes of the safe harbor protection under applicable securities laws. Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including those risks, uncertainties and factors referred to in OFS Capital’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission under the section “Risk Factors,” as well as other documents that may be filed by OFS Capital from time to time with the Securities and Exchange Commission. As a result of such risks, uncertainties and factors, actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein. OFS Capital is providing the information in this press release as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

(4) Registration does not imply a certain level of skill or training

OFS® and OFS Capital® are registered trademarks of Orchard First Source Asset Management, LLC

View source version on businesswire.com: https://www.businesswire.com/news/home/20240801475954/en/

INVESTOR RELATIONS CONTACT:

Steve Altebrando

847-734-2084

investorrelations@ofscapital.com

Source: OFS Capital Corporation

FAQ

What was OFS Capital's net asset value per share as of June 30, 2024?

OFS Capital's net asset value per share increased to $11.51 as of June 30, 2024, up from $11.08 as of March 31, 2024.

How much did OFS Capital declare in dividends for Q3 2024?

OFS Capital declared a distribution of $0.34 per common share for the third quarter of 2024, payable on September 30, 2024, to stockholders of record as of September 20, 2024.

What was OFS Capital's net investment income per share for Q2 2024?

OFS Capital's net investment income decreased to $0.26 per common share for the quarter ended June 30, 2024, down from $0.42 per common share in the previous quarter.

What percentage of OFS Capital's loan portfolio was floating rate as of June 30, 2024?

As of June 30, 2024, 92% of OFS Capital's loan portfolio consisted of floating rate loans based on fair value.