OFS OFS Capital Corporation

Declares Third Quarter 2022 Distribution of $0.29 Per Share

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, 2022. On August 2, 2022, OFS Capital’s Board of Directors declared a distribution of $0.29 per common share for the third quarter of 2022, payable on September 30, 2022 to stockholders of record as of September 23, 2022.

SECOND QUARTER FINANCIAL HIGHLIGHTS

• Net investment income of $6.2 million, or $0.47 per common share.

• Adjusted net investment income (“Adjusted NII”)(1) of $3.3 million, or $0.24 per common share.

• Net loss on investments of $1.12 per common share, primarily comprised of unrealized losses of $1.11 per common share due to widening of liquid credit market spreads.

• Net asset value (“NAV”) per common share of $14.57 as of June 30, 2022, a decrease from $15.52 at March 31, 2022, primarily due to unrealized losses.

• As of June 30, 2022, based on fair value, 93% of our loan portfolio consisted of floating rate loans and 98% of our loan portfolio consisted of senior secured loans.

• As of June 30, 2022, 100% of our outstanding debt matures in 2025 and beyond, 63% of our outstanding debt has a fixed interest rate and 49% of our outstanding debt is unsecured.

SELECTED FINANCIAL HIGHLIGHTS (unaudited)

Three Months Ended

(Per common share)

June 30, 2022

 

March 31, 2022

Net Investment Income

 

 

 

Net investment income

$

0.47

 

 

$

0.22

 

 

 

 

 

Net Realized/Unrealized Gain (Loss)

 

 

 

Net realized gain (loss) on investments

$

(0.01

)

 

$

0.02

 

Net unrealized gain (loss) on investments

 

(1.11

)

 

 

0.39

 

Net loss on extinguishment of debt

 

—

 

 

 

(0.01

)

Net gain (loss)

$

(1.12

)

 

$

0.40

 

 

 

 

 

Earnings (Loss)

 

 

 

Earnings (loss)

$

(0.66

)

 

$

0.62

 

 

 

 

 

Net Asset Value

 

 

 

Net asset value

$

14.57

 

 

$

15.52

 

Distributions paid

$

0.29

 

 

$

0.28

 

 

 

 

 

Adjusted NII (1) — Non-GAAP

 

 

 

Net investment income

$

0.47

 

 

$

0.22

 

Capital gain incentive fee accrual

 

(0.23

)

 

 

0.08

 

Adjusted NII — Non-GAAP

$

0.24

 

 

$

0.30

 

 

As of

(in millions, except per share data)

June 30, 2022

 

March 31, 2022

Balance Sheet Highlights (unaudited)

 

 

 

Investment portfolio, at fair value

$

547.7

 

$

556.9

Total assets

 

567.3

 

 

571.7

Net asset value per common share

 

14.57

 

 

15.52

“We believe our balance sheet is well positioned to navigate through an uncertain economic environment with rising interest rates and a slow down in the economy,” said Bilal Rashid, OFS Capital’s Chairman and Chief Executive Officer. “Approximately, 98% of our loan portfolio is senior secured and 93% of our loans are floating rate, with 63% of our outstanding debt being fixed rate.”

(1)

 

On a supplemental basis, we disclose Adjusted NII (including on a per share basis), which is a financial measure calculated and presented on basis other than in accordance with generally accepted accounting principles of the United States of America (“GAAP”). Adjusted NII represents net investment income, excluding the capital gains incentive fee, in periods in which such expense occurs. GAAP requires recognition of a capital gains incentive fee in our financial statements when aggregate net realized and unrealized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the reporting date is positive. Such fees are subject to further conditions specified in the investment advisory agreement with OFS Capital Management, LLC, principally related to the realization of such net gains, before OFS Capital Management, LLC is entitled to payment, and such recognized fees are subject to the risk of reversal should unrealized gains diminish to become losses. Management believes that Adjusted NII is a useful indicator of operations exclusive of any net capital gains incentive fee, as net investment income does not include the net gains, realized or unrealized, associated with the capital gains incentive fee.

 

 

 

Management believes Adjusted NII facilitates analysis of our results of operations and provides greater transparency into the determination of incentive fees. Adjusted NII is not meant as a substitute for net investment income determined in accordance with GAAP and should be considered in the context of the entirety of our reported results of operations, financial position and cash flows determined in accordance with GAAP. A reconciliation of net investment income determined in accordance with GAAP to Adjusted NII is set forth in Schedule I to this press release.

PORTFOLIO AND INVESTMENT ACTIVITIES ($ in millions, except for per share data)

 

 

 

As of and for the Three Months Ended

Portfolio Overview

 

June 30, 2022

 

March 31, 2022

Investment portfolio, at fair value

 

$

547.7

 

 

$

556.9

 

Weighted-average performing income yield - interest-bearing investments (2)

 

 

9.1

%

 

 

9.0

%

Weighted-average realized yield - interest-bearing investments (3)

 

 

8.6

%

 

 

8.6

%

Weighted-average realized yield on total investments (4)

 

 

8.2

%

 

 

8.2

%

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)

 

Income yield is calculated as (a) the actual amount earned on performing investments, including interest and prepayment fees and amortization of net loan fees, divided by (b) the weighted-average of total performing investments amortized cost.

 

(3)

 

Realized yield is computed as (a) the actual amount earned on interest-bearing investments, including interest, prepayment fees and net loan fees, divided by (b) the weighted-average of total interest-bearing investments amortized cost, in each case, including debt investments on non-accrual status and non-income producing Structured Finance Notes.

 

(4)

 

Realized yield is computed as (a) the actual amount earned on all investments including interest, dividends and prepayment fees, amortization of net loan fees, and dividends received divided by (b) the weighted-average of total investments amortized cost or cost.

 

 

Three Months Ended

Portfolio Activity

 

June 30, 2022

 

March 31, 2022

Investments in new portfolio companies

 

$

26.9

 

$

33.0

Investments in existing portfolio companies

 

 

4.4

 

 

15.1

Investments in structured finance notes

 

 

21.1

 

 

22.1

As of June 30, 2022, based on fair value, our investment portfolio was comprised of the following:

• Total investments of $547.7 million, which was equal to approximately 108% of amortized cost;

• Debt investments of $356.0 million in 66 portfolio companies, of which 98% and 2% were senior secured loans and subordinated loans, respectively;

• Equity investments of $101.8 million;

• 23 structured finance note investments totaling $89.9 million; and

• Unfunded commitments of $37.3 million to 17 portfolio companies.

During the quarter ended June 30, 2022, two loans with an aggregate fair value of $10.4 million were placed on non-accrual status. One of those loans is a PIK loan where we stopped accruing our PIK coupon due to a decline in its fair value; however, that portfolio company remains current on another debt tranche that requires cash interest payments.

RESULTS OF OPERATIONS

Investment Income

For the quarter ended June 30, 2022, total investment income of $10.4 million decreased by $0.5 million compared to the quarter ended March 31, 2022, primarily due to a decrease of $1.0 million in dividend and fee income, offset by an increase of $0.5 million in interest income. Interest income increased $0.5 million compared to the prior quarter primarily due to a increase in our portfolio’s weighted-average performing income yield to 9.1%.

Expenses

For the quarter ended June 30, 2022, total expenses of $4.2 million decreased by $3.8 million compared to the quarter ended March 31, 2022, primarily due to a reversal of a previously accrued capital gains fee due to a $14.9 million reduction in net unrealized appreciation on the investment portfolio.

Net Gain (Loss) on Investments

Our portfolio experienced net losses of $15.1 million in the second quarter of 2022, primarily as a result of unrealized depreciation of $9.3 million and $6.7 million on our CLO investments and broadly syndicated loan investments, respectively, attributable to widening of liquid credit market spreads. These losses were partially offset by net gains, primarily consisting of unrealized appreciation on our common equity investments that were primarily attributable to an increase in fair value of $7.8 million on our equity investment in Pfanstiehl Holdings, Inc.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2022, we had $14.8 million in cash, which includes $7.5 million held by our wholly owned small business investment company, OFS SBIC I, LP (“SBIC I LP”), and $2.9 million held by OFSCC-FS, LLC (“OFSCC-FS”), an indirect wholly owned subsidiary. Our use of cash held by SBIC I LP and OFSCC-FS is restricted by regulatory and contractual conditions, including limitations on the amount of cash SBIC I LP and OFSCC-FS can distribute to us.

As of June 30, 2022, we had an unused commitment of $35.0 million under our senior secured revolving credit facility with Pacific Western Bank, as well as an unused commitment of $15.9 million under our revolving credit facility with BNP Paribas (“BNP Facility”), both subject to borrowing base requirements and other covenants. Based on fair values and equity capital at June 30, 2022, we could access all unused commitments under our credit facilities and remain in compliance with the 1940 Act asset coverage requirement.

On June 24, 2022, we amended the BNP Facility to, among other things: (i) extend the reinvestment period under the BNP Facility for three years from June 20, 2022 to June 20, 2025; (ii) extend the maturity date under the BNP Facility from June 20, 2024 to June 20, 2027; (iii) convert the benchmark interest rate from LIBOR to SOFR; (iv) increase the applicable margin by 0.40% on all classes of loans; and (v) increase the applicable margin floor from 1.925% to 2.65%.

CONFERENCE CALL

OFS Capital will host a conference call to discuss these results on Friday, August 5, 2022, 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 15, 2022 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 #3869035.

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, 2022.

OFS Capital Corporation and Subsidiaries Consolidated Statement of Assets and Liabilities (Dollar amounts in thousands, except per share data)

 

 

June 30, 2022

 

December 31, 2021

 

(unaudited)

 

 

Assets

 

 

 

Total investments, at fair value (amortized cost of $507,484 and $457,312, respectively)

 

547,677

 

 

507,099

Cash

 

14,844

 

 

43,048

Interest receivable

 

1,883

 

 

1,475

Receivable for investments sold

 

—

 

 

14,893

Prepaid expenses and other assets

 

2,917

 

 

2,533

Total assets

$

567,321

 

$

569,048

 

 

 

 

Liabilities

 

 

 

Revolving lines of credit

$

134,100

 

$

100,000

SBA debentures (net of deferred debt issuance costs of $319 and $555, respectively)

 

50,601

 

 

69,365

Unsecured notes (net of deferred debt issuance costs of $4,155 and $4,554, respectively)

 

175,845

 

 

175,446

Interest payable

 

3,714

 

 

3,685

Payable to adviser and affiliates

 

2,672

 

 

6,217

Payable for investments purchased

 

3,905

 

 

8,788

Accrued professional fees

 

383

 

 

452

Other liabilities

 

389

 

 

1,351

Total liabilities

 

371,609

 

 

365,304

 

 

 

 

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, 2022 and December 31, 2021, respectively

$

—

 

$

—

Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 13,429,777 and 13,422,413 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

 

134

 

 

134

Paid-in capital in excess of par

 

185,195

 

 

185,113

Total distributable earnings

 

10,383

 

 

18,497

Total net assets

 

195,712

 

 

203,744

 

 

 

 

Total liabilities and net assets

$

567,321

 

$

569,048

 

 

 

 

Number of shares outstanding

 

13,429,777

 

 

13,422,413

Net asset value per share

$

14.57

 

$

15.18

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,

 

2022

 

2021

 

2022

 

2021

Investment income

 

 

 

 

 

 

 

Interest income

$

10,345

 

 

$

10,638

 

 

$

20,188

 

 

$

20,794

 

Dividend income

 

5

 

 

 

195

 

 

 

763

 

 

 

242

 

Fee income

 

82

 

 

 

583

 

 

 

427

 

 

 

871

 

Total investment income

 

10,432

 

 

 

11,416

 

 

 

21,378

 

 

 

21,907

 

Expenses

 

 

 

 

 

 

 

Interest expense

 

3,943

 

 

 

4,241

 

 

 

7,567

 

 

 

9,066

 

Management fee

 

2,056

 

 

 

1,876

 

 

 

4,076

 

 

 

3,710

 

Income Incentive Fee

 

—

 

 

 

809

 

 

 

—

 

 

 

809

 

Capital Gains Fee

 

(2,988

)

 

 

—

 

 

 

(1,916

)

 

 

—

 

Professional fees

 

352

 

 

 

489

 

 

 

759

 

 

 

876

 

Administration fee

 

423

 

 

 

439

 

 

 

874

 

 

 

1,007

 

Other expenses

 

398

 

 

 

327

 

 

 

765

 

 

 

654

 

Total expenses

 

4,184

 

 

 

8,181

 

 

 

12,125

 

 

 

16,122

 

Net investment income

 

6,248

 

 

 

3,235

 

 

 

9,253

 

 

 

5,785

 

Net realized and unrealized gain (loss) on investments

 

 

 

 

 

 

 

Net realized gain (loss), net of taxes

 

(190

)

 

 

(10,841

)

 

 

27

 

 

 

(10,750

)

Net unrealized gain (loss), net of taxes

 

(14,882

)

 

 

30,047

 

 

 

(9,599

)

 

 

33,879

 

Net gain (loss) on investments

 

(15,072

)

 

 

19,206

 

 

 

(9,572

)

 

 

23,129

 

Loss on extinguishment of debt

 

—

 

 

 

—

 

 

 

(144

)

 

 

(2,299

)

Net increase (decrease) in net assets resulting from operations

$

(8,824

)

 

$

22,441

 

 

$

(463

)

 

$

26,615

 

Net investment income per common share – basic and diluted

$

0.47

 

 

$

0.24

 

 

$

0.69

 

 

$

0.43

 

Net increase (decrease) in net assets resulting from operations per common share – basic and diluted

$

(0.66

)

 

$

1.67

 

 

$

(0.03

)

 

$

1.98

 

Distributions declared per common share

$

0.29

 

 

$

0.22

 

 

$

0.57

 

 

$

0.42

 

Basic and diluted weighted average shares outstanding

 

13,425,477

 

 

 

13,411,998

 

 

 

13,423,970

 

 

 

13,410,524

 

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 19405, 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, adjusted 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’s balance sheet is well positioned for the future in a rising interest rate environment 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, 2021 filed with the Securities and Exchange Commission under the section “Risk Factors,” and in “Part II, Item 1A. Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, 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.

5

 

Registration does not imply a certain level of skill or training

Schedule 1

Non-GAAP Financial Measure – Adjusted Net Investment Income

On a supplemental basis, we disclose Adjusted NII (including on a per share basis), which is a financial measure calculated and presented on basis other than in accordance with GAAP. Adjusted NII represents net investment income, excluding the capital gains incentive fee, in periods in which such expense occurs. GAAP requires recognition of a capital gains incentive fee in our financial statements when aggregate net realized and unrealized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the reporting date is positive. Such fees are subject to further conditions specified in the investment advisory agreement with OFS Capital Management, LLC, principally related to the realization of such net gains, before OFS Capital Management, LLC is entitled to payment, and such recognized fees are subject to the risk of reversal should unrealized gains diminish to become losses. Management believes that Adjusted NII is a useful indicator of operations exclusive of any net capital gains incentive fee, as net investment income does not include the net gains, realized or unrealized, associated with the capital gains incentive fee. Management believes Adjusted NII facilitates analysis of our results of operations and provides greater transparency into the determination of incentive fees. Adjusted NII is not meant as a substitute for net investment income determined in accordance with GAAP and should be considered in the context of the entirety of our reported results of operations, financial position and cash flows determined in accordance with GAAP.

The following table provides a reconciliation from net investment income (the most comparable GAAP measure) to Adjusted NII for the three months ended June 30, 2022 and March 31, 2022 and six months ended June 30, 2022 and 2021, respectively (dollar amounts in thousands, except per share data) (unaudited):

 

Three Months Ended

 

Six Months Ended June 30,

 

June 30, 2022

 

March 31, 2022

 

2022

 

2021

 

(000's)

 

Per Share

 

(000's)

 

Per Share

 

(000's)

 

Per Share

 

(000's)

 

Per Share

Net investment income

$

6,248

 

 

$

0.47

 

 

$

3,005

 

$

0.22

 

$

9,253

 

 

$

0.69

 

 

$

5,785

 

$

0.43

Capital Gains Fee

 

(2,988

)

 

 

(0.23

)

 

 

1,072

 

 

0.08

 

 

(1,916

)

 

 

(0.15

)

 

 

—

 

 

—

Adjusted NII

$

3,260

 

 

$

0.24

 

 

$

4,077

 

$

0.30

 

$

7,337

 

 

$

0.54

 

 

$

5,785

 

$

0.43

Although these non-GAAP financial measures are intended to enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

View source version on businesswire.com: https://www.businesswire.com/news/home/20220805005042/en/

INVESTOR RELATIONS CONTACT: Steve Altebrando 646-652-8473 saltebrando@ofsmanagement.com