OFS Capital Corporation (NASDAQ:OFS) reported a 20% increase in net investment income per share for the first quarter of 2024, reaching $0.42, compared to the previous quarter. Despite this rise, the company's net asset value (NAV) per share saw a decline, primarily due to unrealized depreciation in a few positions, notably in Pfanstiehl Holdings. The distribution for the quarter remained covered at $0.34 per share. The company remains confident in its portfolio, which is predominantly composed of senior secured loans, well-suited for the current uncertain macroeconomic environment.
Key Takeaways
- OFS Capital announced a net investment income of $0.42 per share for Q1 2024, a 20% increase over the previous quarter.
- The company's NAV per share decreased to $11.08, mainly due to unrealized depreciation in certain investments.
- One borrower, SSJA Bariatric, was placed on non-accrual status, representing about 2% of the portfolio at fair value.
- OFS Capital's portfolio remains largely in senior secured loans, with the company avoiding highly-cyclical industries.
- The corporate credit facility and debt structure are well-positioned, with no debt maturing before 2026 and a significant portion being unsecured.
Company Outlook
- OFS Capital maintains a defensive portfolio positioning, with a focus on capital preservation.
- The company anticipates a potential increase in M&A activity later in the year, which may provide new investment opportunities.
- OFS Capital advisor's experience and long track record through multiple credit cycles contribute to the company's confidence in navigating the market.
Bearish Highlights
- The NAV per share decline was a key negative point, driven by a notable unrealized depreciation.
- Slow M&A activity has impacted new originations, with the company remaining cautious in this area.
Bullish Highlights
- The increase in net investment income per share is a positive indicator of the company's earning power.
- Successful equity realizations, such as the one in TRS Services, demonstrate the company's ability to generate gains.
- The company's debt structure, with fixed-rate unsecured debt at favorable rates, positions it well against market volatility.
Misses
- The decrease in interest income, partly due to a smaller overall investment portfolio, was a miss for the quarter.
- The overall investment income yield on the interest-bearing portion of the portfolio decreased by about 1.1%.
Q&A highlights
- In response to a question about the potential for interest income to recover, CFO Jeff Cerny expressed confidence in the company's ability to cover dividends through the realization of equity investments and conversion of noninterest-earning assets to interest-earning ones.
OFS Capital's first quarter of 2024 shows a mixed financial picture, with a rise in net investment income and a decrease in NAV per share. The company's cautious approach to investment, with an emphasis on senior secured loans and avoidance of highly-cyclical industries, reflects its strategy to navigate an uncertain economic landscape. Despite slower M&A activity, OFS Capital is actively supporting its portfolio companies and remains optimistic about future investment opportunities. The company's solid balance sheet and experienced advisory team provide a strong foundation for future growth.
InvestingPro Insights
OFS Capital Corporation's recent financial performance indicates a company navigating through market challenges with a strategic focus on income generation and capital preservation. The rise in net investment income per share is a testament to the company's earning power, even as it contends with a decrease in NAV per share. Here are some key InvestingPro Data and InvestingPro Tips that provide further context to the company's financial health and outlook:
- The company's Market Cap stands at 127.15M USD, reflecting its size and market presence within the investment sector.
- OFS Capital's Revenue Growth over the last twelve months as of Q4 2023 was 16.82%, showing a robust top-line expansion. However, it is important to note a quarterly dip, with Revenue Growth for Q4 2023 at -3.68%.
- A significant Dividend Yield of 14.33% as of the latest data suggests that OFS Capital continues to return value to its shareholders, consistent with the InvestingPro Tip that the company pays a significant dividend to shareholders.
InvestingPro Tips for OFS Capital highlight some critical aspects of its investment profile:
1. The company has maintained dividend payments for 12 consecutive years, which aligns with the defensive portfolio positioning mentioned in the company outlook.
2. Analysts have shown concern by revising their earnings downwards for the upcoming period, a point investors may wish to consider in light of the company's recent financial results.
For those looking to delve deeper into OFS Capital's financial metrics and gain additional insights, InvestingPro offers a wealth of information and tips. Currently, there are more tips available to help investors make informed decisions. Use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
Full transcript - OFS Capital Corp (OFS) Q1 2024:
Operator: Good day, and welcome to the OFS Capital Corporation First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Steve Altebrando, Vice President of Capital Markets. Please go ahead.
Steve Altebrando: Good morning, everyone, and thank you for joining us. Also on the call today are Bilal Rashid, our Chairman and Chief Executive Officer; and Jeff Cerny, 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. Although we believe these assumptions are reasonable, any of those assumptions could prove inaccurate, 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: Thank you, Steve. Earlier this morning, we announced our first quarter results. Our net investment income in the first quarter was $0.42 per share, representing a 20% increase over the prior quarter. This increase is primarily due to certain non-recurring items. We continue to cover our distribution of $0.34 per share. As we discussed recently on our prior call, we believe the overall health of the portfolio remains solid. We placed one borrower on non-accrual status this quarter, representing approximately 2% of the portfolio at fair value. We believe that we continue to benefit from our balance sheet positioning with the majority of our debt being fixed rate and the vast majority of our loan portfolio being floating rate. Our net asset value in the first quarter declined to $11.08 per share from $12.09 at year-end, primarily due to unrealized depreciation concentrated in a couple of positions, most notably our equity investment in Pfanstiehl Holdings, which Jeff will describe in more detail. Noting this decline, we remain comfortable with our portfolio and believe it is well-positioned for the current macroeconomic environment. As part of our long-standing investment discipline, we remain committed to avoiding highly-cyclical industries. We believe that our portfolio remains well diversified and defensively positioned, with our largest sector exposures being manufacturing, healthcare, wholesale trade, and business services at fair value at quarter-end. Another key part of our investment discipline is investing higher in the capital structure with approximately 100% of our loan portfolio at fair value in first- and second-lien senior secured loans. We believe that this positioning will continue to benefit us in this uncertain macroeconomic environment. In terms of new originations, M&A activity remains subdued, though we anticipate that an increase in activity later in the year may occur as we get more clarity on interest rates. In the meantime, we remain active in supporting our existing portfolio companies. In our view, our financing continues to benefit our company. At the end of the first quarter, 100% of our outstanding debt matures in 2026 or later and 70% of our outstanding debt is unsecured. Our non-recourse $150 million senior loan facility with BNP Paribas (OTC:BNPQY) matures in June 2027. Our corporate line of credit is flexible with no mark-to-market provisions. As we have discussed before, we locked in $180 million of fixed rate unsecured debt in 2021, and that has a weighted average coupon of 4.8%, which is notably lower than current market pricing. As mentioned on our last call, we completely paid down our remaining $31.9 million in SBIC debt in March, which was due to mature in early 2025. As we navigate this market environment, we have confidence in the experience of our advisor, which manages approximately $4 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 Jeff Cerny, our Chief Financial Officer, to give you more details and color for the quarter.
Jeff Cerny: Thanks, Bilal. Good morning, everyone. As Bilal mentioned, we posted net investment income of $0.42 per share for the first quarter, once again, covering our $0.34 per share distribution declared during the quarter. Our current distribution rate represents a 13.7% annualized yield based on the price of our common stock at quarter-end. We also announced that our quarterly distribution for the second quarter will remain at $0.34 per share. Our net asset value per share decreased by approximately $1 to $11.08. As Bilal mentioned, this decline was primarily due to unrealized depreciation concentrated in a couple of positions, most notably our equity position in Pfanstiehl Holdings, which declined $7.9 million or $0.59 per share. Pfanstiehl is a manufacturer of specialized products for leading biopharmaceutical firms. We believe its recent decline in value is due to a cyclical downturn in the life sciences industry. However, we remain positive about the long-term outlook for the business. This is a position we invested in more than 10 years ago at a modest cost of only $200,000. To date, we have received approximately $3.4 million in distributions, or approximately 17 times our cost, and as of quarter-end, our fair value is $63.1 million. As you know, we have experience in making these kind of selective equity investments alongside certain of our initial debt investments. This quarter, we had another equity realization in TRS Services for gross proceeds of $3.9 million, recognizing a realized gain of $1.4 million. In addition, we recognized $1.9 million of accumulated preferred dividends from this investment during the quarter. As mentioned, we placed one borrower on non-accrual status during the quarter. SSJA Bariatric, a provider of bariatric surgery and weight management solutions. The sponsor as well as the Founder and CEO have recently contributed meaningful additional capital into the company, which in our view demonstrates their commitment to the business. This loan had a fair value of approximately $8.8 million as of March 31st, representing approximately 2% of the portfolio. Overall, 4.8% of our investments at fair value were on non-accrual status at quarter-end. Turning to the income statement, total investment income was up by approximately 6% to $14.2 million compared to the prior quarter. This was largely due to a non-recurring increase in dividend income, which includes the TRS dividends I just mentioned, offset by a decline in interest income partly due to a smaller overall investment portfolio. This lower overall investment balance is partly related to certain larger prepayments we received in the fourth quarter of 2023, which we utilized to redeem our remaining $31.9 million of SBIC debentures. On March 1st, we completed this redemption, which I previously mentioned was our plan on our prior call. Total expenses of $8.6 million were down approximately 1.7% during the period, primarily due to a decrease in interest expense related to lower average outstanding debt balances during the quarter. As I mentioned, net investment income was $0.42 per share for the first quarter. Net investment income covered our $0.34 distribution for the first quarter, and we believe that net investment income has benefited from our balance sheet positioning given that 91% of our loan portfolio at fair value is floating rate, while approximately 70% of our outstanding debt is fixed rate. It is also worth noting that at quarter-end, all of our outstanding debt matures in 2026 or later, and approximately 70% of our outstanding debt was unsecured. While we have been actively paying down debt over the past few quarters, we have experienced a decline in our regulatory asset coverage ratio due to the unrealized depreciation concentrated in a few positions. In the last quarter, we paid down $43.9 million of debt, including the SBIC debt I mentioned earlier. However, while the SBIC debt contributed to an overall reduction in the balance sheet leverage, this debt was not a component of our regulatory asset coverage requirement. As of quarter-end, our debt-to-equity ratio was approximately 1.74 times and our regulatory asset coverage ratio was 157%. Turning to our investments, we believe the overall performance of our portfolio companies remains solid in this uncertain macroeconomic environment. We are committed to being senior in the capital structure and selective in our underwriting. We remained cautious about new originations and continued to see slow M&A activity during the first quarter. We continue to support our portfolio companies as they identify add-on opportunities for growth, and we also funded a new middle market investment in the first quarter. As of March 31st, we had $10.9 million in commitments to fund investments under various credit facilities to our portfolio companies. The majority of our investments are in loans and approximately 100% of our loan portfolio at fair value was senior secured as of March 31st. Based on amortized cost as of quarter-end, our investment portfolio was comprised of approximately 69% senior secured loans, 1% subordinated debt, 24% structured finance securities, and 6% equity securities. At the end of the quarter, we had investments in 74 unique issuers totaling $400.4 million on a fair value basis. The weighted average performing investment income yield on the interest-bearing portion of the portfolio was 13%, which is down about 1.1% quarter-over-quarter. This includes all interest, prepayment fees, and amortization of deferred loan fees. The decline was largely due to the non-accrual loan I mentioned earlier, as well as a slight decrease on the yields earned on our structured finance investments. With that, I'll turn the call back over to Bilal.
Bilal Rashid: Thank you, Jeff. In closing, we believe our portfolio remains in good shape with just one new non-accrual in the quarter. Our focus remains on capital preservation with approximately 100% of our loan portfolio at fair value being senior secured, and we remain confident in the overall quality and fundamentals of our portfolio. We have relied on our long-standing experience and investment discipline, which we believe has served us well. Since the beginning of 2011, the BDC has invested more than $1.9 billion, with a cumulative net realized loss of just 2.5% over the past 13 years, 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 billion corporate credit platform affiliated with a $30 billion asset management group, our advisor has broad expertise, including long-standing banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the last 25-plus 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: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mitchel Penn of Oppenheimer. Please go ahead.
Mitchel Penn: Thanks. Hey, guys. A quick question. Do you guys feel, with the interest income down this quarter, do you feel like that can come back? Or you guys -- are you -- do you see that your -- do you see a path to covering the dividend, or are they going to -- do you think there's going to be some gains to make up any shortfalls?
Jeff Cerny: Good morning, Mitchel. This is Jeff.
Mitchel Penn: Good morning.
Jeff Cerny: Thanks for the question. Yes, there is a path, absolutely. As you know, we are continuing to realize on certain equity investments and one of our largest positions is a noninterest-earning asset. So, certainly, as we think about converting that to an interest-earning asset, we should be able to cover our dividend going forward.
Mitchel Penn: Got it. Thanks so much, guys.
Operator: This concludes our question-and-answer session. The conference is now finished. Thank you for attending today's presentation. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.