Net Investment Income of $0.19 per common
share Declares 31st Consecutive Quarterly Distribution on common
shares
OFS Capital Corporation (NASDAQ:OFS) ("OFS Capital," the
"Company," "we," "us," or "our") today announced its financial
results for the quarter ended June 30, 2020.
FINANCIAL HIGHLIGHTS
- Net investment income of $2.61 million, or $0.19 per
share.
- Net asset value ("NAV") per share increased to $10.10 at June
30, 2020 from $9.71 at March 31, 2020. During the three months
ended June 30, 2020, our portfolio recognized net gains of $5.1
million, or $0.38 per share.
- At June 30, 2020, 90% and 75% of our loan portfolio and total
portfolio, respectively, consisted of senior secured loans, based
on fair value.
- As of June 30, 2020, 90% of our debt matures in 2024 and beyond
and 45% of our outstanding debt is unsecured.
- On July 28, 2020, OFS Capital's Board of Directors declared a
distribution of $0.17 per share for the third quarter of 2020,
payable on September 30, 2020, to stockholders of record as of
September 23, 2020.
We are actively monitoring our portfolio companies throughout
this period of economic uncertainty including assessing portfolio
companies' operational and liquidity outlook. In the second
quarter, we had only one new loan placed on non-accrual status.
With respect to our portfolio, at June 30, 2020, we had unfunded
commitments of $4.3 million to two portfolio companies.
At June 30, 2020, our asset coverage ratio was 166% and we
remained in compliance with all applicable financial covenant
thresholds under our outstanding debt and our minimum asset
coverage requirement under the 1940 Act.
We believe that we have diverse sources of funding. As of
quarter end, we had approximately $31.8 million of cash. In
addition, we had additional capacity on our revolving corporate
credit line with Pacific Western Bank and senior loan facility with
BNP Paribas, which are both subject to a borrowing base and other
covenants. Our senior loan facility has no LIBOR floor and matures
in 2024. At quarter end, we had approximately $153 million in
unsecured bonds that mature in 2025 and beyond. In addition, we had
approximately $134 million of SBA debentures.
"Given the challenging economic and public health impact of the
on-going COVID-19 pandemic, we are pleased that during the quarter
our portfolio companies performed above our expectations,” said
Bilal Rashid, OFS Capital's Chairman and Chief Executive Officer.
"We anticipate that, as we begin to deploy capital into add-on and
new investments and optimize our portfolio, our investment income
will grow.”
HIGHLIGHTS
($ in millions, except for per share
data)
Portfolio Overview
At June 30, 2020
Total assets
$
475.4
Investment portfolio, at fair value
$
435.8
Net assets
$
135.4
Net asset value per share
$
10.10
Weighted average yield on performing debt
investments (1)
10.14
%
Weighted average yield on total debt
investments (2)
9.01
%
Weighted average yield on total
investments (3)
8.52
%
(1)
The weighted average yield on our
performing debt and structured finance note investments is computed
as (a) the sum of (i) the annual stated accruing interest on debt
investments plus the annualized accretion of loan origination fees,
original issue discount, market discount or premium, and loan
amendment fees at the balance sheet date, plus (ii) the annual
effective yield on structured finance notes at the balance sheet
date divided by (b) amortized cost of our debt and structured
finance note investments, excluding debt investments in non-accrual
status as of the balance sheet date.
(2)
The weighted average yield on our total
debt and structured finance note investments is computed as (a) the
sum of (i) the annual stated accruing interest on debt investments
plus the annualized accretion of loan origination fees, original
issue discount, market discount or premium, and loan amendment fees
at the balance sheet date, plus (ii) the annual effective yield on
structured finance notes at the balance sheet date divided by
(b) amortized cost of our debt and structured finance note
investments, including debt investments in non-accrual status as of
the balance sheet date.
(3)
The weighted average yield on total
investments is computed as (a) the annual stated accruing interest
plus the annualized accretion of loan origination fees, original
issue discount, market discount or premium, and loan amendment fees
on our debt investments at the balance sheet date, plus the annual
effective yield on our structured finance notes at the balance
sheet date, plus the effective cash yield on our performing
preferred equity investments divided by (b) amortized cost of our
total investment portfolio, including assets on non-accrual basis
as of the balance sheet date. The weighted average yield of
investments is not the same as a return on investment for our
stockholders but, rather, relates to a portion of our investment
portfolio and is calculated before the payment of all of our fees
and expenses
Quarter Ended June 30,
Operating Results
2020
2019
Total investment income
$
11.0
$
12.9
Net investment income
$
2.6
$
4.9
Net investment income per common share,
basic and diluted
$
0.19
$
0.36
Net increase in net assets resulting from
operations
$
7.7
$
3.4
Quarter Ended June 30,
Portfolio Activity
2020
2019
Number of new portfolio company
investments
5
22
Investments in new portfolio companies
$
2.4
$
40.8
Investments in existing portfolio
companies
$
4.9
$
18.4
Investments in structured finance
notes
$
0.8
$
5.6
Number of portfolio companies and
structured finance notes at end of period
73
69
PORTFOLIO AND INVESTMENT ACTIVITIES
The total fair value of our investment portfolio was $435.8
million at June 30, 2020, which was equal to approximately 91% of
amortized cost. As of June 30, 2020, the fair value of our debt
investment portfolio totaled $361.4 million in 57 portfolio
companies, of which 90% and 10% were senior secured loans and
subordinated loans, respectively. As of June 30, 2020, we also held
approximately $44.3 million in equity investments, at fair value,
in 14 portfolio companies in which we also held debt investments,
as well as eight portfolio companies in which we solely held an
equity investment. As of June 30, 2020, our investment portfolio
also included eight investments in structured finance notes with a
fair value of $30.0 million. We had unfunded commitments of $4.3
million to two portfolio companies at June 30, 2020. As of June 30,
2020, floating rate loans as a percentage of fair value comprised
87% of our debt investment portfolio, with the remaining 13% in
fixed rate loans.
RESULTS OF OPERATIONS
Income
Investment Income Interest income decreased by $1.9
million for the three months ended June 30, 2020, compared to the
three months ended June 30, 2019, primarily due to a $0.2 million
decrease in the average outstanding performing loan balance, as
well as by a $1.7 million decrease resulting from a 189 basis point
decrease in the recurring earned yield on our portfolio.
During the three months ended June 30, 2020, we recognized fee
income of $0.3 million primarily due to prepayment fees.
Syndication fees which are recognized when OFS Advisor sources,
structures, and arranges the lending group, and for which we were
additional compensation declined to $-0- for the three months ended
June 30, 2020, compared to $0.4 million in the first quarter of
2020.
Expenses
Interest expense Interest expense for the three months
ended June 30, 2020 increased $1.3 million over the corresponding
prior year period primarily due to the issuance of the $54.3
million of unsecured notes in October and November 2019 and
borrowings under the BNP revolving credit facility.
Management fee Management fee expense for the three
months ended June 30, 2020 decreased $0.2 million over the
corresponding prior year period due to a decrease in our average
total assets, resulting primarily from an $82.2 million increase in
principal payments and sales of portfolio investments during the
six months ended June 30, 2020 compared to the corresponding prior
year period.
Incentive fee Incentive fee expense decreased $1.0
million for the three months ended June 30, 2020 compared to the
three months ended June 30, 2019, primarily due to an approximately
$0.24 per share decline in net interest margin—total interest
income less interest expense.
Administration fee Administration fee expense for the
three months ended June 30, 2020 increased $0.1 million over the
corresponding period primarily due to an increase in our allocable
portion of the overhead of OFS Capital Services, LLC, our
administrator.
Net Gain (Loss) on Investments
Our portfolio experienced net gains of $5.1 million in the
second quarter primarily as a result of performance improvements
and expansion of the companies' valuation multiples at Pfanstiehl
Holdings, Inc. and Southern Technical Institute, LLC, which lifted
the value of our equity investments in those companies a combined
$7.9 million, as well the return of liquidity to the broadly
syndicated loan market, which contributed to the improvement in the
fair values of $9.0 million of our Structured Finance Note
investments and our loan investments acquired in the broadly
syndicated market. One measure of liquidity in the broadly
syndicated loan market is the average bid-ask spread on the
Refinitiv Market Overall (North America) Loan Index which narrowed
to 1.98 points at June 30, 2020, from 3.41 points at March 31,
2020, but has not yet returned to its long-term historic average of
1.0. These net gains were partially offset by $7.5 million in net
losses, principally on our debt and equity investments in Contract
Datascan Holdings, Inc., TalentSmart Holdings, LLC and 3rd Rock
Gaming Holding, LLC, as well as other portfolio companies as a
result of the impact of the COVID-19 pandemic.
Within our senior debt investments, we recognized net losses of
$4.6 million during the three months ended June 30, 2020, primarily
as a result of unrealized depreciation of $4.2 million and $0.9
million on our senior secured debt in 3rd Rock Gaming Holding, LLC
and Talent Smart Holdings, LLC, respectively, offset by net
unrealized appreciation of $1.5 million on the remaining senior
secured debt investments. We also recognized net realized losses of
$1.0 million due to the sale of approximately $25.2 million of
loans at cost, for an average price of approximately 96% of
par.
Within our subordinated debt investments, we recognized
unrealized depreciation of $0.1 million during the three months
ended June 30, 2020, primarily as a result of unrealized
depreciation of $0.4 million on Contract Datascan Holdings, Inc.,
offset primarily by unrealized appreciation of $0.3 million on
Southern Technical Institute, LLC.
Within our preferred equity investments, we recognized
unrealized depreciation of $1.0 million for the three months ended
June 30, 2020, primarily as a result of unrealized depreciation of
$1.4 million on Contract Datascan Series A units, offset by net
unrealized appreciation of $0.4 million on the remaining preferred
equity investments.
Within our common equity, warrants and other investments, we
recognized unrealized appreciation of $6.3 million for the three
months ended June 30, 2020, primarily as a result of unrealized
appreciation of $6.9 million on Pfanstiehl Holdings, Inc., offset
by net unrealized depreciation of $0.6 million on our remaining
common equity, warrant and other investments as a result of
negative portfolio company-specific performance factors.
Within our Structured Finance Note investments, we recognized
unrealized appreciation of $4.5 million for the three months ended
June 30, 2020, primarily due to the return of liquidity to the
broadly syndicated loan market, which underlie these
investments.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2020, we had $31.8 million in cash, which includes
cash of $22.7 million held by our wholly owned small business
investment company, OFS SBIC I, LP ("SBIC I LP"). Our use of cash
held by SBIC I LP is restricted by SBA regulation, including
limitations on the amount of cash SBIC I LP can distribute to OFS
Capital as parent company. As of June 30, 2020, we had an unused
commitment of $78.9 million under our senior secured revolving
credit facility with Pacific Western Bank, as well as an unused
commitment of $119.4 million under our BNP revolving credit
facility, both subject to a borrowing base and other covenants.
Based on fair values and equity capital at June 30, 2020, we could
access available lines of credit for $68 million and remain in
compliance with 1940 Act asset coverage requirement.
At our request, on July 29, 2020, Pacific Western Bank executed
an amendment to our business loan agreement in order to reduce the
total commitment under the senior secured revolving credit facility
from $100 million to $50 million. We expect to benefit from a
reduction in the unused commitment fee of 0.50% on any unused
portion of the total commitment over $15 million. As of July 29,
2020, we had cash on hand of approximately $23.3 million and, after
giving effect to the reduction, an unused commitment of $36.2
million under our senior secured revolving credit facility with
Pacific Western Bank, subject to a borrowing base and other
covenants.
RECENT DEVELOPMENTS
On March 11, 2020, the World Health Organization declared the
novel coronavirus as a pandemic, and on March 13, 2020 the United
States declared a national emergency with respect to the COVID-19
pandemic. The outbreak of the COVID-19 pandemic has severely
impacted global economic activity and caused significant volatility
and negative pressure in financial markets. The global impact of
the outbreak has been rapidly evolving and many countries,
including the United States, have reacted by instituting
quarantines, mandating business and school closures and restricting
travel. Such actions have created, and may continue to create,
disruption in global supply chains and adversely impact a number of
industries. The outbreak could have a continued adverse impact on
economic and market conditions on a global scale. The rapid
development and fluidity of this situation precludes any prediction
as to the ultimate adverse impact of the ongoing COVID-19 pandemic.
Nevertheless, the COVID-19 pandemic presents material uncertainty
and risks with respect to the underlying value of the Company’s
portfolio companies, the Company’s business, financial condition,
results of operations and cash flows, such as the potential
negative impact to financing arrangements, increased costs of
operations, changes in law and/or regulation, and uncertainty
regarding government and regulatory policy. Further, the
operational and financial performance of the portfolio companies in
which the Company makes investments have been, and may continue to
be, significantly impacted by the COVID-19 pandemic, which in turn
has, and may continue to have, an impact on the valuation of the
Company’s investments.
Accordingly, the Company cannot predict the extent to which its
business, financial condition, results of operations and cash flows
will be affected at this time. The potential impact to the
Company’s results will depend to a large extent on future
developments and new information that may emerge regarding the
duration and severity of the COVID-19 pandemic and the actions
taken by authorities and other entities to contain the coronavirus
or treat its impact, all of which are beyond the Company’s
control.
CONFERENCE CALL
OFS Capital will host a conference call to discuss these results
on Friday, July 31, 2020, 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 (877) 510-7674 (Domestic) or (412) 902-4139
(International) approximately 15 minutes prior to the call. A
telephone replay of the conference call will be available through
August 11, 2020 at 9:00 AM Eastern Time and may be accessed by
calling (877) 344-7529 (Domestic) or (412) 317-0088 (International)
and utilizing conference ID #10146677.
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, 2020,
which we expect to file with the Securities and Exchange Commission
later today.
OFS Capital Corporation and
Subsidiaries
Consolidated Statement of Assets and
Liabilities
(Dollar amounts in thousands, except
per share data)
June 30, 2020
December 31, 2019
(unaudited)
Assets
Investments, at fair value:
Non-control/non-affiliate investments
(amortized cost of $354,004 and $396,201, respectively)
$
314,305
$
372,535
Affiliate investments (amortized cost of
$114,123 and $131,950, respectively)
114,047
135,679
Control investment (amortized cost of
$10,714 and $10,520, respectively)
7,410
8,717
Total investments at fair value (amortized
cost of $478,841 and $538,671, respectively)
435,762
516,931
Cash
31,781
13,447
Interest receivable
3,114
3,349
Receivable for investment sold
634
—
Prepaid expenses and other assets
4,151
4,461
Total assets
$
475,442
$
538,188
Liabilities
Revolving lines of credit
$
51,750
$
56,450
SBA debentures (net of deferred debt
issuance costs of $1,567 and $1,904, respectively)
132,203
147,976
Unsecured notes (net of deferred debt
issuance costs of $4,403 and $4,798 respectively)
148,447
148,052
Interest payable
3,109
3,505
Payable to adviser and affiliates
2,694
4,106
Payable for investments purchased
971
10,264
Accrued professional fees
562
621
Other liabilities
309
587
Total liabilities
340,045
371,561
Commitments and contingencies
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, 2020, and December 31, 2019,
respectively
$
—
$
—
Common stock, par value of $0.01 per
share, 100,000,000 shares authorized, 13,399,694 and 13,376,836
shares issued and outstanding as of June 30, 2020, and December 31,
2019, respectively
134
134
Paid-in capital in excess of par
187,437
187,305
Total distributable earnings (losses)
(52,174
)
(20,812
)
Total net assets
135,397
166,627
Total liabilities and net
assets
$
475,442
$
538,188
Number of shares outstanding
13,399,694
13,376,836
Net asset value per share
$
10.10
$
12.46
OFS Capital Corporation and
Subsidiaries
Condensed Consolidated Statements of
Operations (unaudited)
(Dollar amounts in thousands, except
per share data)
Three Months Ended June
30,
Six Months Ended June
30,
2020
2019
2020
2019
Investment income
Interest income:
Non-control/non-affiliate investments
$
8,233
$
9,287
$
17,305
$
17,929
Affiliate investments
1,692
2,660
4,086
4,993
Control investment
209
263
405
522
Total interest income
10,134
12,210
21,796
23,444
Payment-in-kind interest and dividend
income:
Non-control/non-affiliate investments
264
96
525
193
Affiliate investments
191
300
460
552
Control investment
102
28
187
55
Total payment-in-kind interest and
dividend income
557
424
1,172
800
Dividend income:
Affiliate investments
—
—
100
173
Control investment
—
89
—
89
Total dividend income
—
89
100
262
Fee income:
Non-control/non-affiliate investments
279
154
764
496
Affiliate investments
8
5
13
210
Control investment
3
18
6
33
Total fee income
290
177
783
739
Total investment income
10,981
12,900
23,851
25,245
Expenses
Interest expense
4,931
3,645
9,853
7,100
Management fee
1,869
2,055
3,888
3,898
Incentive fee
215
1,245
1,098
2,408
Professional fees
460
368
1,108
903
Administration fee
500
417
1,020
854
Other expenses
399
310
746
394
Total expenses before incentive fee
waiver
8,374
8,040
17,713
15,557
Incentive fee waiver
—
—
(441
)
—
Total expenses, net of incentive fee
waiver
8,374
8,040
17,272
15,557
Net investment income
2,607
4,860
6,579
9,688
Net realized and unrealized gain
(loss)
Net realized loss on
non-control/non-affiliate investments
(1,040
)
(90
)
(10,013
)
(894
)
Loss on extinguishment of debt
—
—
(149
)
—
Net unrealized appreciation (depreciation)
on non-control/non-affiliate investments, net of taxes
6,808
(3,630
)
(15,614
)
(2,972
)
Net unrealized appreciation (depreciation)
on affiliate investments
(880
)
1,660
(3,804
)
540
Net unrealized appreciation (depreciation)
on control investment
163
553
(1,501
)
723
Net gain (loss)
5,051
(1,507
)
(31,081
)
(2,603
)
Net increase (decrease) in net assets
resulting from operations
$
7,658
$
3,353
$
(24,502
)
$
7,085
Net investment income per common share –
basic and diluted
$
0.19
$
0.36
$
0.49
$
0.73
Net increase (decrease) in net assets
resulting from operations per common share – basic and diluted
$
0.57
$
0.25
$
(1.83
)
$
0.53
Distributions declared per common
share
$
0.17
$
0.34
$
0.51
$
0.68
Basic and diluted weighted average shares
outstanding
13,392,608
13,361,193
13,384,808
13,359,338
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 to $20 million in companies with annual EBITDA
between $3 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 19401, 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; the diversity of the Company's funding sources; the
deployment of capital into add-on and new investments and the
optimization of OFS's portfolio and the impact of such actions on
the Company's investment income growth, when there can be no
assurance that such efforts will improve investment income or that
any such investments will be identified and consummated or that the
portfolio will be optimized; the Company's expectations related to
the reduction in the unused commitment fee for its revolving
corporate credit line with Pacific Western Bank; the effect of the
COVID-19 pandemic on the Company's business, financial condition,
results of operations and cash flows and those of its portfolio
companies, including the Company's and its portfolio companies'
ability to achieve their respective objectives; the effect of the
disruptions caused by the COVID-19 pandemic on the Company's
ability to continue to effectively manage its business and on the
availability of equity and debt capital and the Company's use of
borrowed money to finance a portion of its investments; 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, 2019
filed with the Securities and Exchange Commission under the section
“Risk Factors,” and in "Part II, Item 1A. Risk Factors" in our
Quarterly Report in Form 10-Q for the quarter ended March 31, 2020,
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.
1 Registration does not imply a certain level of skill or
training
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200731005110/en/
INVESTOR RELATIONS CONTACT: Steve Altebrando 646-652-8473
saltebrando@ofsmanagement.com
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