Market Overview

OFS Capital Corporation Announces Third Quarter Financial Results

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Declares a $0.34 Per Share Distribution

OFS Capital Corporation (NASDAQ:OFS) ("OFS Capital", "we", "us", or
"our") today announced its financial results for the quarter ended
September 30, 2017.

FINANCIAL HIGHLIGHTS

  • Net investment income of $4.4 million, or $0.33 per share.
  • Closed investments totaled $42.4 million in the third quarter of 2017;
    as of September 30, 2017, 76% of our loan portfolio was senior secured.
  • 73% of the fair value of our loan portfolio was floating rate, and the
    weighted average yield of our performing loan portfolio was 11.50% as
    of September 30, 2017(1).
  • At September 30, 2017, we had one loan investment on non-accrual.
  • 90% of our debt is fixed rate with a weighted average cost of 3.43% as
    of September 30, 2017, with maturities in 2022 and beyond.
  • On October 31, 2017, OFS Capital's Board of Directors declared a
    distribution of $0.34 per share for the fourth quarter of 2017,
    payable on December 29, 2017 to stockholders of record as of December
    15, 2017.

"We remain focused on generating strong distributions for our
shareholders," said Bilal Rashid, OFS Capital's Chairman and Chief
Executive Officer. "We closed $108.6 million in investments over the
last two quarters. We believe that we are well positioned to grow
earnings as we prudently deploy the $53.9 million of cash on hand at the
end of the third quarter. Our commitment to capital preservation, and
strong long-term performance is enhanced by the alignment of interests
of our stockholders and our external manager, which continues to own
approximately 2.9 million shares, or 22% of the outstanding OFS
Capital common stock."

       
(1)     See Highlights contained in this press release for further
information on our weighted average yield. Including assets on non-
accrual, the weighted average yield of our debt investment portfolio
was 11.17% at September 30, 2017.
 

HIGHLIGHTS

($ in millions, except for per share data)

     
Portfolio Overview At September 30, 2017
Total assets $ 356.5
Investment portfolio, at fair value $ 296.6
Net assets $ 188.7
Net asset value per share $ 14.15
Weighted average yield (1) 11.50 %
Weighted average yield, including loans on non-accrual (1) 11.17 %
 
   
(1) The weighted average yield on our debt investments is computed as
(a) the annual stated accruing interest 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 debt investments, excluding assets on non-accrual
basis as of the balance sheet date. The weighted average yield of
our debt 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.
 
     
Quarter ended September 30,
Operating Results 2017   2016
Total investment income $ 9.1 $ 7.4
Net investment income $ 4.4 $ 3.3
Net investment income per common share, basic and diluted $ 0.33 $ 0.34
Net increase in net assets resulting from operations per common
share, basic and diluted
$ 0.09 $ 0.25
 
     
Quarter ended September 30,
Portfolio Activity 2017   2016
Number of new portfolio companies 3 2
Investments in new portfolio companies $ 40.5 $ 14.3
Investments in existing portfolio companies $ 1.9 $ 2.1
Number of portfolio companies at end of period 40 38
 

PORTFOLIO AND INVESTMENT ACTIVITIES

During the third quarter of 2017, OFS Capital closed $40.5 million of
investments in three new portfolio companies, including a $21.3 million
senior secured debt investment together with a $2.9 million preferred
equity investment, an $8.7 million subordinated debt investment together
with a $0.7 million common equity investment, and a $6.9 million senior
secured debt investment. In addition, OFS Capital closed $1.0 million of
new senior secured debt investments in two existing portfolio companies,
which included a delayed draw funding of $0.5 million, and a $1.0
million preferred equity investment in an existing portfolio company.

The total fair value of OFS Capital's investment portfolio was $296.6
million at September 30, 2017, which was equal to approximately 98% of
amortized cost. As of September 30, 2017, the fair value of OFS
Capital's debt investment portfolio totaled $257.1 million in 37
portfolio companies, of which 76% and 24% were senior secured loans and
subordinated loans, respectively. As of September 30, 2017, we also held
approximately $39.5 million in equity investments, at fair value, in 17
portfolio companies in which we also held debt investments and three
portfolio companies in which we solely held an equity investment. We had
unfunded commitments of $4.5 million to three portfolio companies at
September 30, 2017. As of September 30, 2017, floating rate loans
comprised 73% of OFS Capital's debt investment portfolio, with the
remaining 27% in fixed rate loans, as a percentage of fair value.

RESULTS OF OPERATIONS

Income

Interest Income:

Interest income increased by $1.2 million for the three months ended
September 30, 2017 compared to the three months ended September 30,
2016. The $1.2 million increase was due to a $1.1 million increase
primarily attributable to a 19% increase in the average outstanding loan
balance, and a $0.2 million increase in Net Loan Fee amortization,
offset by a $0.1 million decrease primarily attributable to a 30 basis
points decrease in the weighted average yield in our portfolio.
Acceleration of Net Loan Fees of $0.3 million and $0.1 million were
included in interest income for the three months ended September 30,
2017 and 2016, respectively.

Fee Income:

Fee income increased by $0.6 million for the three months ended
September 30, 2017 compared to the three months ended September 30,
2016, primarily due to an increase in prepayment fees and structuring
fees of $0.3 million and $0.4 million, respectively, offset by a $0.1
million decrease in other fees. We recorded prepayment fees of $0.3
million resulting from $17.5 million of unscheduled principal payments
during the three months ended September 30, 2017. We did not receive any
unscheduled principal payments subject to prepayment fees during the
three months ended September 30, 2016. We recorded structuring fees of
$0.5 million in connection with the closing of $30.2 million of
investments during the three months ended September 30, 2017 compared to
structuring fees of $0.1 million in connection with the closing of $9.5
million of investments during the three months ended September 30, 2016.

Expenses

Interest expense for the three and nine months ended September 30, 2017,
increased over the corresponding periods in the prior year due to an
increase in borrowings under our senior secured revolving credit
facility ("PWB Credit Facility"). The average dollar amount of
borrowings under the PWB Credit Facility outstanding during the three
and nine months ended September 30, 2017 was $11.1 million and $5.8
million, respectively. There were no borrowings under the PWB Credit
Facility during the three or nine months ended September 30, 2016.

Management fee expense for the three months ended September 30, 2017,
increased 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, including deployment of funds from our follow-on
public offering of 3,625,000 shares of our common stock in April 2017
(the "Offering").

Incentive fee expense increased by $0.3 million for the three months
ended September 30, 2017, compared to the three months ended September
30, 2016 due to an increase in pre-incentive fee net investment income
compared to the prior year, which was primarily attributable to an
increase in the average investment balance as a result of net investment
activity, including deployment of funds from the Offering.

Net gain (loss) on investments

Net gain (loss) on investments consists of the sum of: (a) realized
gains and losses from the sale of debt or equity securities, or the
redemption of equity securities; and (b) changes in net unrealized
appreciation/depreciation on debt and equity investments. In the period
in which a realized gain or loss is recognized, such gain or loss will
generally be offset by the reversal of previously recognized unrealized
appreciation or depreciation, and the net gain recognized in that period
will generally be smaller. The unrealized appreciation or depreciation
on debt securities is also reversed when those investments are redeemed
or paid off prior to maturity. In such instances, the reversal of
unrealized appreciation or depreciation will be reported as a net loss
or gain, respectively, and may be partially offset by the acceleration
of any premium or discount on the debt security in interest income and
any prepayment fees on the debt security in fee income.

We recognized net losses of $1.7 million on senior secured debt during
the three months ended September 30, 2017, primarily as a result of the
negative impact of portfolio company-specific performance factors. In
addition, a previously recognized cumulative unrealized loss of $5.0
million at June 30, 2017, on My Alarm Center, LLC was realized during
the three months ended September 30, 2017 upon restructure of the senior
secured debt investment into preferred and common equity interests.

We recognized net losses of $2.3 million on subordinated debt during the
three months ended September 30, 2017, primarily as a result of the
negative impact of portfolio company-specific performance factors,
including an unrealized loss of $1.2 million recognized on our
subordinated debt investment in Community Intervention Services, Inc.,
which was placed on non-accrual during 2016.

We recognized net gains of $0.3 million on preferred equity investments
for the three months ended September 30, 2017, primarily as a result of
the positive impact from changes to EBITDA multiples used in our
valuations as a result of pending transactions, offset by the net
negative impact of portfolio company-specific performance factors.
Included in net gains of $0.3 million for the three months ended
September 30, 2017 was a realized gain of $3.6 million we recognized
upon exit of a preferred equity investment. We recognized cumulative
unrealized gains of approximately $3.6 million on this investment
through June 30, 2017, which resulted in a net gain of $-0- during the
three months ended September 30, 2017. In addition, previously
recognized cumulative unrealized losses of $0.3 million at June 30,
2017, on our preferred equity investments in My Alarm Center, LLC, was
realized upon restructuring.

We recognized net gains of $0.5 million on common equity and warrant
investments for the three months ended September 30, 2017, primarily as
a result of the positive impact of portfolio company-specific
performance factors.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2017, we had $53.4 million in cash and cash equivalents
and $149.9 million in outstanding SBA-guaranteed debentures. As of
September 30, 2017, we had $17.9 million available for additional
borrowings on our senior secured revolving credit facility with Pacific
Western Bank and had drawn all of our available SBA-guaranteed
debentures.

CONFERENCE CALL

OFS Capital will host a conference call to discuss these results and its
business on Friday, November 3, 2017, 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 November 13,
2017, 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 #10113774.

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 third quarter ended September 30, 2017, which we expect to file
with the Securities and Exchange Commission later today.

FORWARD-LOOKING STATEMENTS

Statements in this press release regarding management's future
expectations, beliefs, intentions, goals, strategies, plans or
prospects, including statements relating to: OFS Capital's results of
operations, including net investment income, net asset value and net
investment gains and losses and the factors that may affect such
results; management's belief that OFS Capital is positioned to grow
earnings while deploying capital; and other factors may constitute
forward-looking statements for purposes of the safe harbor protection
under applicable securities laws. Forward-looking statements can be
identified by terminology such as "anticipate," "believe," "could,"
"could increase the likelihood," "estimate," "expect," "intend," "is
planned," "may," "should," "will," "will enable," "would be expected,"
"look forward," "may provide," "would" or similar terms, variations of
such terms or the negative of those terms. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors including those risks, uncertainties and factors referred to in
OFS Capital's Annual Report on Form 10-K for the year ended December 31,
2016 filed with the Securities and Exchange Commission under the section
"Risk Factors," as well as other documents that may be filed by OFS
Capital from time to time with the Securities and Exchange Commission.
As a result of such risks, uncertainties and factors, actual results may
differ materially from any future results, performance or achievements
discussed in or implied by the forward-looking statements contained
herein. OFS Capital is providing the information in this press release
as of this date and assumes no obligations to update the information
included in this press release or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

 

OFS Capital Corporation and Subsidiaries

 

Consolidated Balance Sheets

(Dollar amounts in thousands, except per share data)

 

September 30,
2017

   

December 31,
2016

(unaudited)
Assets
Investments, at fair value
Non-control/non-affiliate investments (amortized cost of $224,616
and $178,279, respectively)
$ 212,206 $ 173,219
Affiliate investments (amortized cost of $67,260 and $76,306,
respectively)
73,727 81,708
Control investments (amortized cost of $10,182 and $24,722,
respectively)
10,697   26,700
Total investments at fair value (amortized cost of $302,058 and
$279,307, respectively)
296,630 281,627
Cash and cash equivalents 53,868 17,659
Interest receivable 1,782 1,770
Prepaid expenses and other assets 4,229   3,974
Total assets $ 356,509   $ 305,030
 
Liabilities
Revolving line of credit $ 17,100 $ 9,500
SBA debentures (net of deferred debt issuance costs of $2,752 and
$3,037, respectively)
147,128 146,843
Interest payable 395 1,599
Management and incentive fees payable 2,400 2,119
Administration fee payable 382 435
Accrued professional fees 368 477
Other liabilities 80   279
Total liabilities 167,853   161,252
 
Commitments and Contingencies
 
Net Assets
Preferred stock, par value of $0.01 per share, 2,000,000 shares
authorized, -0- shares issued and outstanding as of September 30,
2017, and December 31, 2016, respectively
$ $
Common stock, par value of $0.01 per share, 100,000,000 shares
authorized, 13,334,851 and 9,700,297 shares issued and outstanding
as of September 30, 2017, and December 31, 2016, respectively
133 97
Paid-in capital in excess of par 189,278 134,300
Accumulated undistributed net investment income 6,942 6,731

Accumulated undistributed net realized gain (loss)

(2,269 ) 330
Accumulated net unrealized appreciation (depreciation) on investments (5,428 ) 2,320
Total net assets 188,656   143,778
 
Total liabilities and net assets $ 356,509   $ 305,030
 
Number of shares outstanding 13,334,851   9,700,297
Net asset value per share $ 14.15   $ 14.82
 
 

OFS Capital Corporation and Subsidiaries

 

Consolidated Statements of Operations (unaudited)

(Dollar amounts in thousands, except per share data)

 
     

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

2017   2016 2017   2016
Investment income
Interest income
Non-control/non-affiliate investments $ 5,759 $ 4,355 $ 15,281 $ 13,522
Affiliate investments 1,796 1,643 5,382 5,000
Control investment 263   582   1,406   1,413  
Total interest income 7,818 6,580 22,069 19,935
Dividend income
Non-control/non-affiliate investments 77 102 289 264
Affiliate investments 242 343 944 1,166
Control investments 92   83   262   194  
Total dividend income 411 528 1,495 1,624
Fee income
Non-control/non-affiliate investments 679 169 1,004 1,164
Affiliate investments 197 48 431 87
Control investments 17   34   135   75  
Total fee income 893   251   1,570   1,326  
 
Total investment income 9,122   7,359   25,134   22,885  
 
Expenses
Interest expense 1,503 1,320 4,229 3,936
Management fees 1,310 1,120 3,726 3,324
Incentive fee 1,090 817 2,249 2,407
Professional fees 284 260 840 877
Administration fee 274 255 982 1,009
General and administrative expenses 259   290   1,050   923  
 
Total expenses 4,720   4,062   13,076   12,476  
 
Net investment income 4,402   3,297   12,058   10,409  
 
Net realized and unrealized gain (loss) on investments
Net realized gain (loss) on non-control/non-affiliate investments (5,204 ) 58 (5,041 ) 2,624
Net realized gain on affiliate investments 3,617 4,491
Net unrealized appreciation (depreciation) on
non-control/non-affiliate investments
1,196 (538 ) (7,350 ) (3,668 )
Net unrealized appreciation (depreciation) on affiliate investments (2,901 ) (363 ) (2,243 ) 79
Net unrealized appreciation (depreciation) on control investment 65   (66 ) 1,845   (439 )
 
Net loss on investments (3,227 ) (909 ) (8,298 ) (1,404 )
 
Net increase in net assets resulting from operations $ 1,175   $ 2,388   $ 3,760   $ 9,005  
 
Net investment income per common share - basic and diluted $ 0.33   $ 0.34   $ 1.00   $ 1.07  
Net increase in net assets resulting from operations per common
share - basic and diluted
$ 0.09 $ 0.25 $ 0.31 $ 0.93
Distributions declared per common share $ 0.34   $ 0.34   $ 1.02   $ 1.02  
Basic and diluted weighted average shares outstanding 13,331,690   9,694,353   12,089,895   9,692,634  
 

ABOUT OFS CAPITAL

OFS Capital Corporation is an externally managed, closed-end,
non-diversified management investment company that has elected to be
regulated as a business development company. OFS Capital's investment
objective is to provide stockholders with both current income and
capital appreciation primarily through debt investments and, to a lesser
extent, equity investments. OFS Capital invests primarily in privately
held middle-market companies in the United States, including
lower-middle-market companies, targeting investments of $3 million to
$20 million in companies with annual EBITDA between $3 million and $50
million. OFS Capital offers flexible solutions through a variety of
asset classes including senior secured loans, which includes first-lien,
second-lien and unitranche loans, as well as subordinated loans and, to
a lesser extent, warrants and other equity securities. OFS Capital's
investment activities are managed by OFS Capital Management, LLC, an
investment adviser registered under the Investment Advisers Act of 1940
and headquartered in Chicago, Illinois, with additional offices in New
York and Los Angeles.

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