OFS Capital Corp. 10-Q Summary: Period Ended September 30, 2020
Business Context and Reporting Period
OFS Capital Corporation (OFS) is an externally managed, closed-end, non-diversified management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). The company invests primarily in debt and, to a lesser extent, equity of middle-market and larger U.S. companies. This report covers the quarterly period ended September 30, 2020, and the nine months ended on that date.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total Investment Income | $10.5 million | $13.9 million | $34.3 million | $39.1 million |
| Net Investment Income | $2.7 million | $4.9 million | $9.3 million | $14.5 million |
| Net Increase (Decrease) in Net Assets | $16.8 million | $1.8 million | $(7.7) million | $8.8 million |
| Net Asset Value (NAV) per Share | $11.18 | $12.74 | $11.18 | $12.74 |
| Total Assets | $481.7 million | — | — | — |
| Total Liabilities | $331.8 million | — | — | — |
| Cash and Cash Equivalents | $18.3 million | — | — | — |
| Weighted Average Yield on Total Investments | 8.99% | 10.51% | — | — |
| Asset Coverage Ratio | 174% | — | — | — |
Material Changes vs. Prior Period
- Net Investment Income Decline: Net investment income per share decreased to $0.20 in Q3 2020 from $0.36 in Q3 2019. This was primarily driven by a decline in net interest margin due to lower LIBOR rates and the placement of significant loans (Online Tech Stores, LLC and 3rd Rock Gaming Holdings, LLC) on non-accrual status.
- Portfolio Valuation Volatility: While the portfolio experienced a net gain of $15.3 million in Q3 2020 (driven by appreciation in Pfanstiehl Holdings, Inc. and broadly syndicated loans), the nine-month period ended with a net loss of $15.6 million due to the economic impact of the COVID-19 pandemic and a $9.1 million realized loss on the restructuring of Constellis Holdings, LLC.
- Goodwill Impairment: The company recognized a full impairment of goodwill totaling $1.1 million in Q3 2020 due to the discount at which its stock traded relative to NAV.
- Debt Structure: The company issued $25.0 million in Unsecured Notes due 2023 in September 2020. It also prepaid $21.1 million of SBA debentures during the nine-month period.
Guidance, Outlook, and Risks
- COVID-19 Impact: Management highlights significant uncertainty regarding the duration and severity of the pandemic. Risks include increased defaults, potential shifts from cash to payment-in-kind (PIK) interest, and continued volatility in fair value estimates.
- Liquidity: As of September 30, 2020, the company held $18.3 million in cash and had $175.4 million in unused commitments across its PWB Credit Facility and BNP Facility. Management believes liquidity is sufficient to support portfolio companies and deploy capital selectively.
- Valuation Methodology: The company adjusted its fair value models during the quarter, reverting to an equal weighting of Reunderwriting Analysis and Synthetic Rating Analysis methods as market correlations normalized.
- Dividends: The Board declared a distribution of $0.18 per share for Q4 2020. The company maintains a variable dividend policy targeting 90-100% of taxable income.
Key Facts for Investor Verification
- Non-Accrual Status: Verify the status and fair value of loans placed on non-accrual, specifically Online Tech Stores, LLC and 3rd Rock Gaming Holdings, LLC, which impacted yields and income recognition.
- Goodwill Impairment: Confirm the $1.1 million charge-off of goodwill and its impact on the balance sheet and future expense ratios.
- Debt Maturities: Review the schedule of debt maturities, noting that approximately 88% of total debt matures in 2024 or beyond, providing operational flexibility.
- PIK Interest Exposure: Assess the level of Payment-in-Kind (PIK) interest income, which increased due to borrower concessions during the pandemic, and its impact on cash flow versus reported income.
- Asset Coverage Ratio: Monitor the 174% asset coverage ratio to ensure continued compliance with the 150% minimum requirement under the 1940 Act.