OFS Capital Corp. 10-Q Summary: Period Ended September 30, 2021
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) under the Investment Company Act of 1940. 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, 2021, and the nine months ended September 30, 2021.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | As of Sep 30, 2021 |
|---|---|---|---|
| Total Investment Income | $10.6 million | $32.5 million | - |
| Net Investment Income | $3.2 million | $9.0 million | - |
| Net Increase in Net Assets (Operations) | $13.2 million | $39.8 million | - |
| Net Asset Value (NAV) per Share | - | - | $14.16 |
| Total Assets | - | - | $537.2 million |
| Total Liabilities | - | - | $347.2 million |
| Total Net Assets | - | - | $190.0 million |
| Weighted Average Yield (Total Debt & Structured Finance) | - | - | 8.87% |
| Asset Coverage Ratio | - | - | 176% |
Material Changes vs. Prior Period
- Portfolio Performance: The portfolio experienced net gains of $10.2 million in the third quarter and $33.3 million for the nine months ended September 30, 2021. This contrasts with a net loss of $15.6 million for the nine months ended September 30, 2020. The 2021 gains were driven by a $19.4 million unrealized appreciation in the common equity of Pfanstiehl Holdings, Inc., and a $4.2 million improvement in the subordinated debt of Eblens Holdings, Inc.
- Investment Activity: During the nine months ended September 30, 2021, the company invested approximately $163 million in new and add-on portfolio company investments, primarily in lower-yielding, first-lien senior secured loans to larger borrowers. This represents a significant increase in deployment compared to the $67 million invested in the same period in 2020.
- Debt Management: The company redeemed $98.5 million of unsecured notes and prepaid $35.4 million of SBA debentures during the nine months ended September 30, 2021, resulting in a $2.5 million loss on extinguishment of debt. Concurrently, the company issued $121.8 million in new unsecured notes.
- Non-Accrual Status: The aggregate amortized cost of loans on non-accrual status decreased to $38.2 million (fair value $7.7 million) from $48.1 million (fair value $12.1 million) at December 31, 2020.
Guidance, Outlook, and Risks
- Outlook: Management believes it has sufficient liquidity to support existing portfolio companies and deploy capital in new opportunities. The company continues to focus on lower-yielding, first-lien senior secured loans to larger borrowers to improve its risk profile.
- Distributions: On November 2, 2021, the Board declared a distribution of $0.25 per share for the fourth quarter of 2021, payable December 31, 2021.
- LIBOR Transition: A significant risk factor is the decommissioning of LIBOR. The company notes that if LIBOR-based borrowings are converted to the Secured Overnight Financing Rate (SOFR), differences in rates and spreads could result in higher interest costs, potentially adversely affecting operating results.
- COVID-19 Impact: While market volatility has subsided, the company continues to monitor the pandemic's impact on portfolio companies, noting potential for prolonged economic disruption and supply chain issues.
- Subsequent Events: Following the quarter-end, the company announced the redemption of $25 million in Unsecured Notes Due September 2023 and $54.3 million in Unsecured Notes Due October 2026. It also closed a public offering of $53.5 million in Unsecured Notes Due October 2028.
Investor Verification Checklist
- Concentration Risk: Verify the impact of Pfanstiehl Holdings, Inc., which represents 29.3% of total net assets and 10.6% of the total portfolio at fair value.
- Debt Maturity Wall: Review the schedule of debt maturities, noting that $70.9 million is due within 1-3 years and $194.9 million within 4-5 years, alongside the recent redemptions and new issuances.
- Non-Accrual Assets: Monitor the $38.2 million in amortized cost of loans on non-accrual status and the potential for further credit deterioration in the current economic environment.
- LIBOR Exposure: Assess the company's specific transition plan for the 97% of its debt portfolio indexed to LIBOR and the potential cost implications of moving to SOFR.
- Asset Coverage: Confirm the company's ability to maintain the 150% asset coverage ratio required under the 1940 Act, particularly given the recent debt refinancing activities.