Market Overview

OFS Capital Corporation Announces Second Quarter 2018 Financial Results

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Declares a $0.34 Per Share Distribution

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.

 

HIGHLIGHTS

($ in millions, except for per share data)

 
Portfolio Overview At June 30, 2018
Total assets $ 392.7
Investment portfolio, at fair value $ 362.8
Net assets $ 182.9
Net asset value per share $ 13.70
Weighted average yield on performing debt investments (1) 12.26%
Weighted average yield on total debt investments (2) 11.80%
Weighted average yield on total investments (3) 11.06%

(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.

  Quarter Ended June 30,
Operating Results 2018   2017
Total investment income $ 10.3 $ 8.0
Net investment income $ 4.6 $ 4.3
Net investment income per common share, basic and diluted $ 0.34 $ 0.33
Adjusted net investment income (a Non-GAAP measure described below) $ 4.6 $ 4.0
Adjusted net investment income (a Non-GAAP measure described below)
per share, basic and diluted
$ 0.34 $ 0.31
Net increase in net assets resulting from operations $ 5.0 $ (2.3 )
  Quarter Ended June 30,
Portfolio Activity 2018   2017
Number of new portfolio companies 5 9
Investments in new portfolio companies $ 44.2 $ 59.1
Investments in existing portfolio companies $ 2.8 $ 7.0
Number of portfolio companies at end of period 42 42

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.

 

OFS Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(Dollar amounts in thousands, except per share data)

 
June 30,
2018
December 31,
2017
(unaudited)
Assets
Investments, at fair value:
Non-control/non-affiliate investments (amortized cost of $249,111
and $209,360, respectively)
$ 241,071 $ 197,374
Affiliate investments (amortized cost of $106,689 and $70,402,
respectively)
111,017 69,557
Control investments (amortized cost of $10,275 and $10,213,
respectively)
10,744   10,568  
Total investments at fair value (amortized cost of $366,075 and
$289,975, respectively)
362,832 277,499
Cash and cash equivalents 22,665 72,952
Interest receivable 2,919 2,734
Prepaid expenses and other assets 4,257   4,593  
Total assets $ 392,673   $ 357,778  
 
Liabilities
Revolving line of credit $ 8,000 $ 17,600
SBA debentures (net of deferred debt issuance costs of $2,470 and
$2,657, respectively)
147,410 147,223
Unsecured notes (net of deferred debt issuance costs of $1,701 and
$0, respectively)
48,299
Interest payable 2,260 1,596
Management and incentive fees payable 2,683 1,987
Administration fee payable 478 476
Accrued professional fees 444 433
Other liabilities 170   127  
Total liabilities 209,744   169,442  
 
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 June 30, 2018,
and December 31, 2017, respectively
$ $
Common stock, par value of $0.01 per share, 100,000,000 shares
authorized, 13,350,458 and 13,340,217 shares issued and outstanding
as of June 30, 2018, and December 31, 2017, respectively
134 133
Paid-in capital in excess of par 187,549 187,398
Accumulated undistributed net investment income 7,088 9,404
Accumulated undistributed net realized gain (loss) (8,497 ) 3,881
Net unrealized depreciation on investments (3,345 ) (12,480 )
Total net assets 182,929   188,336  
 
Total liabilities and net assets $ 392,673   $ 357,778  
 
Number of shares outstanding 13,350,458   13,340,217  
Net asset value per share $ 13.70   $ 14.12  
 

OFS Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(Dollar amounts in thousands, except per share data)

 
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
Investment income
Interest income:
Non-control/non-affiliate investments $ 6,326 $ 4,446 $ 12,084 $ 9,058
Affiliate investments 2,768 1,646 4,853 3,477
Control investment 250   542   489   1,066  
Total interest income 9,344 6,634 17,426 13,601
Payment-in-kind interest and dividend income:
Non-control/non-affiliate investments 122 319 346 626
Affiliate investments 285 374 746 726
Control investment 27   39   54   77  
Total payment-in-kind interest and dividend income 434 732 1,146 1,429
Dividend income:
Non-control/non-affiliate investments 45 50
Affiliate investments 130 85
Control investments 94   137   127   170  
Total dividend income 94 182 257 305
Fee income:
Non-control/non-affiliate investments 387 169 413 325
Affiliate investments 3 176 5 234
Control investments 16   85   34   118  
Total fee income 406   430   452   677  
Total investment income 10,278   7,978   19,281   16,012  
Expenses
Interest expense 2,169 1,339 3,803 2,726
Management fee 1,548 1,224 2,908 2,416
Incentive fee 1,135 (22 ) 1,872 1,159
Professional fees 200 293 401 556
Administration fee 358 307 941 708
Other expenses 310   521   1,005   791  
Total expenses before incentive fee waiver 5,720 3,662 10,929 8,356
Incentive fee waiver     (22 )  
Total expenses, net of incentive fee waiver 5,720   3,662   10,907   8,356  
Net investment income 4,558 4,316 8,374 7,656
 
Net realized and unrealized gain (loss) on investments
Net realized gain (loss) on non-control/non-affiliate investments (5,464 ) 163 (5,003 ) 163
Net realized gain (loss) on affiliate investments (3,477 ) 874 (4,018 ) 874
Net unrealized appreciation (depreciation) on
non-control/non-affiliate investments
5,411 (5,505 ) 3,848 (8,546 )
Net unrealized appreciation (depreciation) on affiliate investments 3,928 (3,366 ) 5,173 658
Net unrealized appreciation on control investment 39   1,237   114   1,780  
 
Net gain (loss) on investments 437   (6,597 ) 114   (5,071 )
 
Net increase (decrease) in net assets resulting from operations $ 4,995   $ (2,281 ) $ 8,488   $ 2,585  
 
Net investment income per common share – basic and diluted $ 0.34   $ 0.33   $ 0.63   $ 0.67  
Net increase (decrease) in net assets resulting from operations per
common share – basic and diluted
$ 0.37 $ (0.17 ) $ 0.64 $ 0.23
Distributions declared per common share $ 0.34   $ 0.34   $ 1.05   $ 0.68  
Basic and diluted weighted average shares outstanding 13,348,793   13,197,759   13,344,670   11,458,706  
 

Non-GAAP Financial Measure – Adjusted Net
Investment Income ("Adjusted NII")

On a supplemental basis, we disclose Adjusted NII (including on a per
share basis), which is a financial measure calculated and presented on a
non-GAAP basis. Adjusted NII represents net investment income excluding
the net capital gains incentive fee (fee adjustments) in periods in
which they occur. Our management agreement with our investment adviser
provides that a capital gains incentive fee is determined and paid
annually with respect to realized capital gains (but not unrealized
capital gains) to the extent such realized capital gains exceed realized
and unrealized capital losses for such year. Management believes that
Adjusted NII is a useful indicator of operations exclusive of any net
capital gains incentive fee, as net investment income does not include
gains associated with the capital gains incentive fee. In addition,
management believes that providing Adjusted NII may facilitate a more
complete analysis and greater transparency into OFS Capital's ongoing
operations, particularly in comparing underlying results from period to
period, and afford investors a view of results that may be more easily
compared to those of other companies.

The following table provides a reconciliation from net investment income
(the most comparable GAAP measure) to Adjusted NII for the periods
presented (dollar amounts in thousands, except per share data):

   
Quarter Ended June 30,
2018   2017
Net investment income $ 4,558 $ 4,316
 
Capital gains incentive fee (283 )
 
Adjusted net investment income $ 4,558   $ 4,033  
 
Adjusted net investment income per common share:
Basic and diluted $ 0.34   $ 0.31  
 
Weighted average shares outstanding:
Basic and diluted 13,348,793   13,197,759  

ABOUT OFS CAPITAL

The Company is an externally managed, closed-end, non-diversified
management investment company that has elected to be regulated as a
business development company. The Company'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. The Company invests primarily in privately held
middle-market companies in the United States, including
lower-middle-market companies, targeting investments of $3 to $20
million in companies with annual EBITDA between $3 million and $50
million. The Company 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. The Company'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.

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 beliefs regarding the performance of the portfolio
and expectations regarding future portfolio performance in a rising rate
environment; management's view that OFS Capital has experienced strong
performance (whether measured through total return, or otherwise) and
the factors that have impacted such performance; 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, 2017 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.

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