OFS Capital Corporation
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good morning and welcome to the OFS Capital Corporation's First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Steve Altebrando. Please go ahead.

[Stephen Altebrando:]

Good morning everyone and thank you for joining us. Also on the call today is Bilal Rashid, Chairman and Chief Executive Officer of OFS Capital; and Jeff Cerny, the company's Chief Financial Officer and Treasurer. Please note that we issued a press release this morning announcing our first quarter 2021 results. This press release was subsequently filed on Form 8-K with the SEC. Both documents can be obtained under the Investor Relations section of our website at ofscapital.com.

[Bilal Rashid:]

Thank you, Steve. Good morning and welcome. I hope that you and your families continue to be safe and healthy. I would like to thank everyone for joining us today to discuss all OFS Capital's performance in the first quarter of 2021. During which OFS Capital performed well. Here are the key takeaways from the quarter. Adjusted net investment income of $0.23 per share, up 5% from the last quarter, an increase of approximately 1% in our NAV, which stood at $11.96 per share as of March 31. This number includes $0.21 per share in right-off of costs and expenses tied to the refinancing of our bonds, a meaningful reduction in our weighted average cost of debt from 5.49% to 5.16% as a result of our capital raising activities in the quarter. We had no new loans or non-accrual, which we believe demonstrates the resilience of our portfolio companies. Lastly, we increase our quarterly distribution by 10% compared to last quarter from $0.20 per share to $0.22 per share, marking our third straight quarterly distribution increase. Our new priorities have always been to preserve capital, while thoughtfully growing our earnings.

[Jeffrey Cerny:]

Thanks Bilal. Good morning everyone. As Bilal just discussed, we continue to be encouraged by the performance of our portfolio companies, as well as the add-on investment activity and the increase in our deal pipeline. We are optimistic about the future of both the economy and the pickup in investment activity. However, we remain cautious moving forward. Turning to our financial results, starting with our balance sheet, we had approximately $41.6 million of cash at the end of the quarter. Only $4.5 million of that cash was in our SBIC as the BDC received a $19.1 million return of capital distribution from our SBIC. In addition, we repaid $9.8 million of SBA debentures during the quarter. At quarter's end, we had only $95.5 million left in outstanding SBA debentures. As Bilal mentioned, 90% of our debt matures in 2024 or later and 64% of our outstanding debt at quarter end was unsecured. Therefore, we feel good about the composition of our liabilities. Our debt to equity ratio of approximately 1.4 times at the end of the quarter, excluding our SBIC debt compares to 1.3 times at year end. Our net asset value per share at the end of the quarter was $11.96, up $0.11 from the prior quarter. The increase was primarily driven by higher fair value marks on our investments. This was offset by a non-cash loss on extinguishment of debt, primarily related to our successful refinancing of approximately $99 million in higher priced unsecured notes and to a lesser extent the prepayment of $9.8 million in SBA debentures I mentioned earlier. In addition, we had higher than normal interest expense due to this unsecured note refinancing, because of the timing difference between when we issued the new unsecured notes and the repayment of certain of our existing notes. Our NAV per share increased quarter-over-quarter and has made a strong recovery since the onset of the pandemic. This quarter's increase includes a $0.21 per share offset for losses and expenses tied to the refinancing I just mentioned. As Bilal mentioned, we had no new non-accruals this quarter. We have not had a new non-accrual since the second quarter of 2020. We currently have 2.3% of the loan portfolio on non-accrual at fair value.

[Bilal Rashid:]

Thank you, Jeff. In closing, we are pleased with our performance in the first quarter. Additionally, once again, we increased our distribution in the second quarter of 2021, reflecting both the improved performance and our outlook for the quarters ahead. We believe that our solid liquidity positions will help us in the current economic environment as we seek to take advantage of potential new investment opportunities and support our existing portfolio companies. Since the beginning of 2011, OFS has invested approximately $1.5 billion with a cumulative net realized loss of principle of only $13.8 million or an annualized loss percentage of approximately 0.1%, while generating attractive yields on our portfolio. We have been steadily increasing our allocation to senior secured loans and our loan portfolio consists primarily of such loans. We have also been increasing our exposure to larger borrowers. Our financing is primarily long-term. As of March 31, 90% of our debt matures in 2024 and beyond. We believe that this gives us operational flexibility to execute on our business plan. Lastly, we benefit from the experience of our adviser, which manages a $2.5 billion corporate credit platform. Our adviser is a part of an asset management group, with over $30 billion in assets with broad resources, including longstanding banking relationships. Our adviser has gone through multiple credit cycles over the past 25 years and we believe it has a strong alignment of interest with all shareholders with a 22% interest in the BDC. I want to acknowledge the continued dedication and hard work of our employees. OFS continues to work diligently to adapt to the evolving impact of the pandemic, especially by supporting our portfolio companies, employees, and other stakeholders. With that, operator, please open up the call for questions.

[Bilal Rashid:]

Thank you all for joining our call today and we look forward to speaking with everyone again next quarter. Operator, you may now end the call. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.