OFS Capital (NASDAQ:OFS) reported fourth-quarter financial results on Tuesday. The transcript from the company’s fourth-quarter earnings call has been provided below.
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Full Transcript
OPERATOR
Good day and welcome to the OFS Capital Corporation fourth quarter 2025 earnings conference. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by zero. After today’s presentation there will be an opportunity to ask questions. To ask a question you may press Star then one on the touchtone phone. To withdraw your question, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Steve Altebrando, Head of Investor Relations. Please go ahead.
Bilal Rashid
Thank you Steve. Yesterday we announced our fourth quarter earnings. Net investment income totaled $0.20 per share, down from $0.22 per share in the prior quarter. The decline was primarily driven by a lower net interest margin resulting from higher interest rates on our new unsecured notes. These notes refinanced our existing debt that was issued in a historically low interest rate environment. In doing so, we were able to meaningfully extend the maturity of our debt. In addition, the interest rates on our loan portfolio have been impacted by the Fed’s continued reduction in benchmark rates, which also had an effect on our interest margin. Our net asset value at December 31st was $9.19 per share compared to $10.17 per share in the prior quarter. The decline was primarily due to further markdowns of a couple of non performing loans. In addition, we experienced unrealized depreciation on our CLO equity holdings due to spread tightening in the underlying loan collateral. Overall, we believe our credit portfolio is stable during the quarter we placed one loan on non accrual. However, we placed one loan back on accrual status following the completion of a restructuring transaction. While we remain committed to preserving capital, we continue to be focused on improving our net investment income over the long term. This includes our efforts to monetize our minority equity position in Fansteel, our largest position in the portfolio with a fair value of approximately $79.4 million at quarter end. We are encouraged by the company’s continued operational momentum and in our view believe its long term outlook remains compelling. A successful exit could improve net investment income and reduce portfolio concentration. At the same time, we remain disciplined in balancing the timing of a potential exit with the realization value of the asset in order to maximize our overall returns. Since our initial $200,000 investment in 2014, our position in Fan Steel has generated approximately $4.2 million in distributions to date, representing roughly a 19 times return on our cost. As we look ahead, the macroeconomic environment remains uncertain. From a monetary standpoint, the Fed held rates steady in January following three cuts in 2025. However, there remains potential for additional reductions in the near term. Because most of our loan portfolio is floating rate, further rate cuts could put additional pressure on our net investment income. On the other hand, further cuts would continue to reduce the interest burden on our portfolio companies and help improve their cash flows. We have deliberately constructed our loan portfolio to be resilient by avoiding highly cyclical industries and maintaining our strong diversification. Our loan portfolio is entirely composed of first and second lien senior secured loans with 95% of our loan holdings in first lien positions based on fair value, reflecting our commitment to positioning higher in the capital structure. As for new originations, middle market M and A activity this year has remained below expectations. However, we remain actively engaged with our existing portfolio companies and are prepared to deploy additional capital if needed. As discussed on prior calls, we continue to pursue efforts to strengthen our balance sheet by extending our debt maturities and reducing our outstanding debt. We have successfully pushed out all near term maturities of our debt so that the earliest remaining maturity is in 2028. We have also lowered our total debt balance by $18.8 million. To further deleverage, the balance sheet last month fully repaid our unsecured notes that were scheduled to mature in February 2026. In addition, in early January we extended the maturity of our $25 million bank of California facility to February 2028. Last month we also entered into a credit facility with Natixis, which allowed us to refinance our existing facility with BNP. We believe that this new facility, which matures in 2031, further strengthens our balance sheet positioning as we continue to operate in an uncertain environment. We remain confident in the experience and capabilities of our Advisor. With approximately $4 billion in assets under management across the loan and structured credit markets, deep expertise across industries, and a track record spanning more than 25 years and multiple credit cycles, we believe we are well positioned to navigate the current landscape and respond to evolving conditions. With that, I’ll turn the call over to Kyle Spina, our Chief Financial Officer, to give you more details and color for the quarter.
Kyle Spina
Thanks Bilal and good morning everyone. As Bilal mentioned, we posted net investment income of $2.7 million or $0.20 per share for the fourth quarter, which was down $0.02 per share from the third quarter. Top line income decreased $1.2 million quarter over quarter, partially offset by a $937,000 decrease in total expenses resulting in the decline in net investment income. We announced that we are maintaining our quarterly distribution at $0.17 per share for the first quarter of 2026. At December 31, our quarterly distribution rate represented a 14.3% annualized yield based on the market price of our common stock. While we concentrate on preserving capital, we remain focused on improving our long term returns as we continue exploring avenues to monetize our equity investment advance seal. Our net asset value per share decreased by approximately 10% or $0.98 this quarter to $9.19. As Bilal described, the decline in our investment portfolio at fair value was most pronounced in a few loans performing below expectations. We also observed more meaningful net unrealized depreciation in our CLO equity holdings totaling $3.2 million attributable to spread tightening and the underlying loan collateral placed one loan on non accrual status during the quarter representing 1.2% of the total portfolio at fair value. However, we placed one loan back on accrual status during the quarter representing 1.1% of the total portfolio at fair value following the completion of a restructuring transaction. Additionally, after quarter end, we exited one of our long time non accrual loans for a partial recovery. Overall, our loan portfolio at fair value was relatively stable quarter over quarter based on our internal credit ratings. At quarter end, our regulatory asset coverage ratio was 156%, a decrease of 1 percentage point from the prior quarter. As Bilal described, during the quarter we continued the repayment of our 4.75% unsecured notes which were scheduled to mature in February 2026. We repaid $15 million in late December and completed the final $16 million redemption in early February. Additionally, shortly after quarter end in early January, we executed a two year maturity extension of our $25 million credit facility with bank of California to February 2028. Last month we also entered into a credit facility with Natixis which provides for borrowings of up to $80 million. This new facility has a three year reinvestment period and a five year maturity. In addition, the coupon interest rate on the new financing is 30 basis points tighter than our prior facility with BMP. In connection with the closing of the Natixis facility, we fully repaid our credit facility with BNP. Following the completion of these various transactions, we’ve extended our debt maturities and operational flexibility with our earliest maturity now standing at February 2028. Turning to the income statement, total investment income decreased approximately 11% to $9.4 million this quarter. This was primarily driven by a decrease in non recurring dividend fee and certain interest income recognized during the prior quarter totaling approximately $0.8 million. Interest income was also impacted by the new non accrual loan investment and a smaller interest bearing portfolio. Total expenses decreased by approximately 12% during the period to $6.7 million. The decrease was primarily attributable to a $607,000 decrease in the incentive fee. Looking ahead, we anticipate further net interest margin compression attributable to lower reference rates following the Fed’s aggregate 50 basis point rate cuts in the fourth quarter of 2025 with 175 basis points cumulative rate cuts dating back to September 2024. We expect this will impact yields on our predominantly floating rate loan portfolio. In addition, we continue to observe net interest margin compression following the partial redemption of our February 2026 unsecured notes completed in the third quarter of 2025. Turning to our investments, we believe the majority of our loan portfolio remains solid while we continue to closely monitor certain borrowers performing below our expectations. As mentioned, overall, the number of issuers with loans on non accrual status was unchanged quarter over quarter with one loan placed on non accrual status and one loan placed back on accrual status during the fourth quarter. With respect to our loan portfolio, we are committed to being senior in the capital structure and selective in our underwriting, with 95% of our loan holdings being in first lien positions based on fair value From a deployment perspective, we continue to focus on add on opportunities for growth with our existing issuers and as of quarter end had $13.2 million in unfunded commitments to our portfolio companies. The majority of our investments are in loans and 100% of our loan portfolio was senior secured at quarter end based on amortized cost. As of quarter end, our investment portfolio was comprised of approximately 65% senior secured loans, 24% structured finance securities and 11% equity securities. At the end of the quarter we had investments in 57 unique issuers totaling $342.0 million at fair value. On the interest bearing portion of the portfolio, the weighted average performing investment income yield increased modestly to 13.5% which is up about 0.2% quarter over quarter. The increase in yield was primarily due to an increase in earned yields on our structured finance securities attributable to certain deal reset transactions executed during the quarter. This metric includes all interest, prepayment, fee and amortization of deferred loan fee income but excludes syndication fee income if applicable. With that, I’ll turn the call back over to Bilal for concluding remarks.
Bilal Rashid
Thank you Kyle in today’s uncertain economic environment, we remain focused on preserving capital and strengthening our balance sheet. As we mentioned, we have extended the maturities of our debt which now matures between 2028 and 2031. We expect that this will give us operational flexibility over the coming years. As we look ahead, we are focused on defensively positioning our balance sheet by continuing to reduce our overall debt. Building upon the $18.8 million in debt reduction during the quarter. We believe our loan portfolio remains diversified across multiple industries and is well positioned to withstand this market. We continue to maintain our focus on investing higher in the capital structure. As with prior quarters, we remain focused on increasing our net investment income over the long term specifically through our efforts to monetize certain non interest earning equity positions including our investment in Fan Steel. Our team’s long standing experience and investment discipline has driven consistent results. Since 2011, the BDC has invested more than $2 billion with an annualized net realized loss of just 0.25% while continuing to generate attractive risk adjusted returns on our portfolio. As always, we will continue to rely on the size, experience and reputation of our Advisor with a $4 billion corporate credit platform and affiliation with a $32 billion asset management group. Our advisor brings deep credit experience and 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 BDC. With that operator, please open up the call for questions.
OPERATOR
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble the roster. Showing no questions. This will conclude our question and answer session as well as conference call. Thank you for attending today’s presentation. You may now disconnect.
Summary
OFS Capital reported a decline in net investment income to $0.20 per share, down from $0.22 per share in the previous quarter, mainly due to a lower net interest margin affected by higher interest rates on new unsecured notes.
The company’s net asset value decreased to $9.19 per share from $10.17 per share, primarily due to markdowns of non-performing loans and unrealized depreciation in CLO equity holdings.
OFS Capital is focused on improving long-term net investment income, particularly through potential monetization of its minority equity position in Fansteel, and has been strengthening its balance sheet by extending debt maturities to 2028 and beyond.
The company expects further net interest margin compression due to lower reference rates and continues to monitor certain borrowers performing below expectations while maintaining a diversified and senior secured loan portfolio.
Management emphasized the company’s defensive positioning and operational flexibility amid an uncertain economic environment, highlighting the expertise and alignment of their Advisor with a strong track record in the corporate credit market.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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