Q1 2024 OFS Capital Corp Earnings Call

Participants

Steve Altebrando; IR Contact Officer; OFS Capital Corp

Bilal Rashid; Chairman of the Board, Chief Executive Officer; OFS Capital Corp

Jeffrey Cerny; Chief Financial Officer, Treasurer, Director; OFS Capital Corp

Mitchel Penn; Analyst; Oppenheimer & Co., Inc.

Presentation

Operator

Good day and welcome to the OFS Capital Corporation First Quarter 2024 earnings conference call. (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 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.
And 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 nonrecurring 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 remained solid. We placed one borrower on nonaccrual 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 fin Steel 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 macro economic 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 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 adviser, which manages approximately $4 billion across the non 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.

Jeffrey Cerny

Thanks, Bill, and good morning, everyone. As Bill 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 this quarter, 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 $11.8. As Bilal mentioned, this decline was primarily due to unrealized depreciation concentrated in a couple of positions, most notably our equity position in fin Steel Holdings, which declined $7.9 million or $0.59 per share. Fad steel is a manufacturer of specialized products for leading biopharmaceutical. 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 kinds of selective equity investments alongside certain of our initial benefits 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 nonaccrual status during the quarter. SSJA. bariatric, a provider of bariatric surgery and weight management solutions. The sponsor as well as the founder and CEO. of 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 nonaccrual 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 nonrecurring 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 balances 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 first, 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 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. that 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.
Perfect. 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 continued 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. The majority of our investments are 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 nonaccrual loan I mentioned earlier, as well as a slight decrease on the yields earned on our structured finance advice.
With that, I'll turn the call back over to Bilal.

Bilal Rashid

Thank you, Joe. In closing, we believe our portfolio remains in good shape with just one new nonaccrual 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% for 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 adviser with a $4 billion corporate credit platform affiliated with a $30 billion asset management group, our adviser has broad expertise, including long-standing banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles for the last 25 plus years. Our adviser 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.

Question and Answer Session

Operator

(Operator Instructions) Mitchel Penn, Oppenheimer.

Mitchel Penn

Hey, guys, a quick question. Tom, do you guys feel with the interest income down and this quarter, do you feel like that can come back or some you guys.
Sorry, are you do you see that your do you see a path to covering the dividend or are they going to I do think there's going to be some gains to make up penny shortfalls.

Jeffrey Cerny

Morning, Mitchell, this is Jeff. Thanks for the question, Tom.
Yes, I would there is a path Absolutely. As you know, we are continuing to realize on certain equity investments and one of our largest positions as a non-interest earning asset. So certainly some you know, as we think about converting that to an interest earning asset, we should be able to cover cover our dividend going forward.

Operator

Yes, this concludes our question and answer session. The conference is now finished. Thank you for attending today's presentation. You may now disconnect.