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OFS Capital Corporation Announces Second Quarter 2018 Financial Results

August 3, 2018

CHICAGO--(BUSINESS WIRE)--Aug 3, 2018--OFS Capital Corporation (NASDAQ:OFS) (“OFS Capital,” the “Company,” “we,” “us,” or “our”) today announced its financial results for the second quarter ended June 30, 2018.

FINANCIAL HIGHLIGHTS

Net investment income of $4.56 million, or $0.34 per share. Net asset value (“NAV”) per share increased to $13.70 at June 30, 2018 from $13.67 per share at March 31, 2018. At June 30, 2018, 80% of our loan portfolio consisted of senior secured loans, based on fair value. Closed investments in the second quarter of 2018 totaled approximately $47.0 million. As of August 3, 2018, we closed approximately $17.3 million of additional new investments during the third quarter of 2018. As of June 30, 2018, 77% of the fair value of our loan portfolio was floating rate, and the weighted average yield of our loan portfolio was 12.26% (1). As of June 30, 2018, our debt had a weighted average cost of 4.37%. As of June 30, 2018, 96% of our debt was fixed rate and over 86% of our debt matures after 2023. On July 31, 2018, OFS Capital’s Board of Directors declared a distribution of $0.34 per share for the third quarter of 2018, payable on September 28, 2018 to stockholders of record as of September 14, 2018.

“The second quarter was a strong period for us,” said Bilal Rashid, OFS Capital’s Chairman and Chief Executive Officer. “Our net investment income per share was in line with our current distribution rate and we just declared our 23rd straight $0.34 per share quarterly distribution. We believe that our loan portfolio, which is predominantly senior secured, is performing well as evidenced by the increase in our NAV this quarter. We expect our portfolio to be well positioned for a rising interest rate environment as a vast majority of our loan portfolio is floating rate and our liabilities are largely fixed rate.

Since our IPO in 2012, our total return (as measured by change in NAV plus cumulative distributions) is well above the industry average. We believe our strong performance is attributable to the strength of our platform which has been in existence since 1994.”

(1) See Highlights contained in this press release for further information on our weighted average yield. Excluding assets classified as non-accrual, the weighted average yield of our debt investment portfolio was 12.26% at June 30, 2018. Including assets classified as non-accrual, the weighted average yield of our debt investment portfolio was 11.80% at June 30, 2018.

(1) The weighted average yield on our performing debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees divided by (b) amortized cost of our debt investments, excluding assets on non-accrual basis as of the balance sheet date.

(2) The weighted average yield on our total debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees divided by (b) amortized cost of our debt investments, including assets on non-accrual basis as of the balance sheet date.

(3) The weighted average yield on total investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees, plus the effective cash yield on our performing preferred equity investments divided by (b) amortized cost of our total investment portfolio, including assets on non-accrual basis as of the balance sheet date. The weighted average yield of investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses.

PORTFOLIO AND INVESTMENT ACTIVITIES

During the second quarter of 2018, OFS Capital closed $44.2 million of senior secured debt investments, in five new portfolio companies. In addition, we made $2.8 million of new senior secured debt investments in existing portfolio companies.

The total fair value of OFS Capital’s investment portfolio was $362.8 million at June 30, 2018, which was equal to approximately 99% of amortized cost. As of June 30, 2018, the fair value of OFS Capital’s debt investment portfolio totaled $326.5 million in 38 portfolio companies, of which 80% and 20% were senior secured loans and subordinated loans, respectively. As of June 30, 2018, we also held approximately $36.3 million in equity investments, at fair value, in 17 portfolio companies in which we also held debt investments and four portfolio companies in which we solely held an equity investment. We had unfunded commitments of $10.8 million to four portfolio companies at June 30, 2018. As of June 30, 2018, floating rate loans comprised 77% of OFS Capital’s debt investment portfolio, with the remaining 23% in fixed rate loans, as a percentage of fair value.

RESULTS OF OPERATIONS

Income

Interest Income

Interest income increased by $2.6 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to a $2.2 million increase in recurring interest income caused by a 25% increase in the average outstanding loan balance, and an increase of $0.4 million in recurring interest income resulting from a 57 basis point increase in the weighted average yield in our portfolio. Acceleration of loan origination fees, original issue discount, market discount or premium, and loan amendment fees of approximately $110,000 and $128,000 were included in interest income for the three months ended June 30, 2018 and 2017, respectively.

Expenses

Interest expense

Interest expense for the three months ended June 30, 2018 increased $0.8 million over the corresponding period in the prior year due to an increase in borrowings under our revolving line of credit with Pacific Western Bank (the “PWB Credit Facility”) and the $50.0 million issuance of the Unsecured Notes (defined below). The average dollar amount of borrowings outstanding under the PWB Credit Facility during the three months ended June 30, 2018 and 2017 was $7.1 million and $0.7 million, respectively.

Management fee

Management fee expense for the three months ended June 30, 2018 increased $0.3 million over the corresponding period in the prior year due to an increase in our average total assets, primarily due to a increase in net investment activity.

Incentive fee

Incentive fee expense increased by $1.2 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 primarily due to a increase in the income incentive fee of $0.9 million. We accrue the capital gain fee if, on a cumulative basis, the sum of net realized capital gains and (losses) plus net unrealized appreciation and (depreciation) is positive, which was $0 and $(0.3) million for the three months ended June 30, 2018 and 2017, respectively.

Administration fee

Administration fee expense for the three months ended June 30, 2018, increased $0.1 million over the corresponding period in the prior year primarily due to an increase in our allocable portion of OFS Capital Services’s overhead expenses.

Other expenses

Other expenses for the three months ended June 30, 2018, decreased $0.2 million over the corresponding period in the prior year primarily due to legal and other offering costs incurred during the second quarter of 2017 in connection with the closing of a $53.7 million equity offering.

Net Gain (Loss) on Investments

We recognized net losses of $1.7 million on senior secured debt during the three months ended June 30, 2018, primarily as a result of an additional net loss of $1.2 million from the sale of Jobson Healthcare Information, LLC, and additional unrealized losses of $0.5 million, primarily as a result of the net negative impact of portfolio company-specific performance factors and the impact of changes to certain market loan indices.

We recognized net losses of $0.2 million on subordinated debt during the three months ended June 30, 2018, primarily as a result of the negative impact of portfolio company-specific performance factors, including an unrealized depreciation of $0.3 million recognized on our subordinated debt investment in Master Cutlery, LLC, which was placed on non-accrual during the second quarter of 2018 and written down to a fair value of $2.3 million at June 30, 2018.

We recognized net losses of $0.6 million on preferred equity investments for the three months ended June 30, 2018, primarily as a result of unrealized depreciation on certain portfolio investments due to the net negative impact of portfolio company-specific performance factors.

We recognized net gains of $2.9 million on common equity and warrant investments for the three months ended June 30, 2018, primarily as a result of unrealized appreciation stemming from the positive impact of portfolio company-specific performance factors.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2018, we had $22.7 million in cash and cash equivalents, which includes cash and cash equivalents of $20.6 million held by our wholly owned small business investment company, and $149.9 million in outstanding SBA-guaranteed debentures. Our use of cash held by SBIC I LP is restricted by SBA regulation, including limitations on the amount of cash SBIC I LP can distribute to OFS Capital as parent company. As of June 30, 2018, we had $42.0 million available for additional borrowings under our PWB Credit Facility and had drawn all of our available SBA-guaranteed debentures.

In April 2018, we closed the public offering of $50.0 million in aggregate principal amount of our 6.375% notes due 2025 (the “Unsecured Notes”). The total net proceeds to us from the Unsecured Notes, after deducting underwriting discounts of approximately $1.6 million and estimated offering expenses of $0.4 million, were approximately $48.0 million. The Unsecured Notes will mature on April 30, 2025 and bear interest at a rate of 6.375%. The Unsecured Notes are unsecured obligations of the Company and rank pari passu with our existing and future unsecured subordinated indebtedness; effectively subordinated to all of our existing and future secured unsubordinated indebtedness; and structurally subordinated to all existing and future indebtedness and other obligations of any subsidiaries, including the SBA-guaranteed debentures The Unsecured Notes may be redeemed in whole or in part at any time or from time to time at our option on or after April 30, 2020 at the redemption price of 100% of the aggregate principal amount thereof plus accrued and unpaid interest. Interest on the Unsecured Notes is payable quarterly on January 31, April 30, July 31, and October 31 of each year. The Unsecured Notes are listed on the Nasdaq Global Select Market under the trading symbol “OFSSL.” We may from time to time repurchase Unsecured Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of June 30, 2018, the outstanding principal balance of the Unsecured Notes was $50.0 million.

On May 22, 2018, our Board of Directors authorized the Company to initiate the stock repurchase program under which the Company may acquire up to $10.0 million of its outstanding common stock. Under the stock repurchase program, the Company is authorized to repurchase shares in open-market transactions, including through block purchases, depending on prevailing market conditions and other factors. The stock repurchase program may be extended, modified or discontinued at any time for any reason. The Company expects the stock repurchase program to be in place through May 22, 2020, or until the approved dollar amount has been used to repurchase shares. The stock repurchase program does not obligate the Company to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases. No shares of common stock were repurchased during the three months ended June 30, 2018.

CONFERENCE CALL

OFS Capital will host a conference call to discuss these results on Friday, August 3, 2018, at 10:00 AM Eastern Time. Interested parties may participate in the call via the following:

INTERNET: Log on 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 13, 2018 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 #10122867.

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, 2018, which will be filed with the Securities and Exchange Commission later today.

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