OFS Capital (NASDAQ:OFS) released first-quarter financial results and hosted an earnings call on Friday. Read the complete transcript below.

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The full earnings call is available at https://event.choruscall.com/mediaframe/webcast.html?webcastid=yklVOILv

Summary

OFS Capital reported a net investment income of $0.18 per share for Q1 2026, covering the distribution of $0.17 per share, despite a $0.02 decline from the previous quarter due to lower net interest margins.

The company's net asset value decreased to $8.16 per share from $9.19, primarily due to unrealized depreciation in CLO equity holdings and market sentiment affecting loan prices.

OFS Capital has extended its debt maturities to 2028 and beyond, reducing its total debt by $45.6 million over the last four quarters, and entered a new credit facility with Natixis.

The company is focused on monetizing its equity position in Fansteel, which has yielded substantial returns, to improve net investment income and reduce portfolio concentration.

Despite macroeconomic uncertainties, OFS Capital maintains a resilient loan portfolio with a focus on senior secured loans and limited exposure to sectors affected by AI disruptions.

Full Transcript

OPERATOR

Good day and welcome to the OFS Capital Corporation First Quarter 2026 Earnings Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Steve Altobrando. Please go ahead.

Steve Altobrando

Good morning everyone and thank you for joining us. Also on the call today are Bilal Rashid, our Chairman and Chief Executive Officer, and Kyle Spina, the company's Chief Financial Officer and Treasurer. Before we begin, please note that the statements made on this call and webcast may constitute forward looking statements as defined under applicable SECurities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital Management concerning anticipated results, are not guarantees of future performance, and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from such statements. The uncertainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the SEC. Although we believe these assumptions are reasonable, any of those assumptions could prove incorrect and as a result the forward looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward looking statements. OFS Capital undertakes no duty to update any forward looking statements made herein and all forward looking statements speak only as of the date of this call. With that, I'll turn the call over to Chairman and Chief Executive Officer.

Bilal Rashid (Chairman and Chief Executive Officer)

Thank you Steve. Yesterday afternoon we reported our first quarter results. Net investment income totaled $0.18 per share, covering our distribution of $0.17 per share. Despite being down $0.02 per share from the prior quarter. The decline was again primarily driven by a lower net interest margin. This reflects the higher interest costs on our unsecured notes issued last year, which replaced debt issued in a historically low rate environment. That said, this new debt has allowed us to meaningfully extend our debt maturities. In addition, benchmark rate reductions by the Fed last year have lowered yields across our loan portfolio, further impacting our net interest margin. Our net asset value at quarter end was $8.16 per share, compared to $9.19 per share in the prior quarter. The decrease was primarily due to unrealized depreciation on our CLO equity holdings driven by spread tightening in the underlying loan collateral as well as a decrease in loan prices due to overall market sentiment. Overall, our non accrual investments as a percentage of our total portfolio at fair value decreased slightly quarter over quarter by 0.7% during the quarter we exited one of our long time non accrual loans. In addition, we placed one small loan representing just 0.3% of the total portfolio at fair value on non accrual status. Despite this borrower remaining current on its interest payments, the loan was placed on non accrual status due to an internal credit rating downgrade. We remain focused on improving our net investment income over the long term. As discussed on prior calls. This includes our ongoing efforts to monetize our minority equity position in Fansteel, the largest position in our portfolio which had a fair value of approximately $80.4 million at quarter end. We continue to be encouraged by the company's operational momentum and believe its long term outlook remains compelling. A successful exit could increase the likelihood of improved net investment income and reduced portfolio concentration. At the same time, we remain disciplined in balancing the timing of a potential exit with the realization value of the asset in order to maximize our overall returns. Since our initial $200,000 investment in 2014, our position in Fansteel has generated approximately $5.1 million in distributions to date, representing roughly a 23 times return on our cost. Looking ahead, the macroeconomic environment remains uncertain. However, we believe we have constructed our loan portfolio to be resilient. We maintain diversification and avoid highly cyclical industries. We continue to monitor potential disruptions related to AI and at this time have not observed material impacts on our loan portfolio. We have limited direct enterprise software exposure and no reliance on annual recurring revenue or ARR based lending in our loan portfolio. Instead, we are focused on originating loans based on profitability of the borrowers. We are closely watching geopolitical developments, specifically the conflicts in the Middle east and their potential implications for inflation and interest rates. However, we have not seen direct effects on our loan portfolio today. Importantly, our disciplined underwriting approach remains unchanged. Our loan portfolio is entirely composed of first and second lien senior secured loans with 98% of our loan holdings in first lien positions based on fair value, underscoring our focus on maintaining a senior position in the capital structure. Turning to originations, middle market M&A activity has remained below expectations to start the year. However, we remain actively engaged with our existing portfolio companies and stand ready to deploy additional capital where appropriate. We have also continued to strengthen our balance sheet. Over the past several months. We have extended all near term debt maturities with our earliest remaining maturity in 2028. In addition, we have reduced our total debt balance by $45.6 million over the last four quarters, further deleveraging the balance sheet during the quarter. We fully repaid the remaining balance on our unsecured notes that were scheduled to mature in February 2026. In early January, we extended the maturity of our bank of California facility to February 2028. In February, we entered into a new credit facility with Natixis, refinancing our prior facility with BNP. We believe that this new facility, which matures in 2031, further enhances our balance sheet positioning as we navigate an uncertain environment. We remain confident in the experience and capabilities of our Advisor. With approximately $4.2 billion in assets under management across the loan and structured credit markets, deep expertise across industries, and a track record spanning more than 25 years and multiple credit cycles, we believe we are well positioned to navigate the current landscape and respond to evolving conditions. With that, I'll turn the call over to Kyle Spina, our Chief Financial Officer, to give you more details and color for the quarter.

Kyle Spina (Chief Financial Officer and Treasurer)

Thanks, Bilal and good morning everyone. As Bilal mentioned, we posted net investment income of $2.5 million or $0.18 per share for the first quarter of 2026, covering our quarterly distribution of $0.17 per share for the second consecutive quarter. Despite the decline of $0.02 per share from the fourth quarter of 2025, top flight income decreased $465,000 quarter over quarter, partially offset by a $233,000 decrease in total expenses resulting in the decline in net investment income. We announced that we are maintaining our quarterly distribution at $0.17 per share for the second quarter of 2026. At March 31, our quarterly distribution rate represented a 19.2% annualized yield based on the market price of our common stock. We remain focused on improving our long term returns, portfolio diversification and leverage position as we continue exploring avenues to monetize our equity investment in Fansteel. Our net asset value per share decreased by approximately 11% or $1.03 this quarter to $8.16. As Bilal described, the decline in our NAV was largely related to net unrealized depreciation in our CLO holdings totaling $9.1 million, which was attributable to spread tightening in the underlying loan collateral and declines in loan prices driven by overall market sentiment. We also recognized unrealized depreciation of $2.3 million on one existing non accrual loan. As Bilal mentioned, during the quarter we exited one of our long time non accrual loans. We also placed one small loan on non accrual status representing just 0.3% of the total portfolio at fair value. While the issuer remains current on its interest, we felt it prudent to place the loan on non accrual status following an internal credit rating downgrade. Overall, our loan portfolio at fair value was relatively stable quarter over quarter based on our internal credit ratings. At quarter end, our regulatory asset coverage ratio was 154%, a decrease of 2 percentage points from the prior quarter. As Bilal described, during the quarter we completed the final $16 million repayment of our 4.75% unsecured notes which were scheduled to mature in February. We also reduced our net exposure outstanding on our revolving lines of credit by $2 million, totaling $18 million of aggregate debt repayments from the prior quarter end. In February we entered into a credit facility with Natixis which provides for borrowings of up to $80 million. This new facility has a three year reinvestment period and five year maturity. In addition, the coupon interest rate on the new financing is 30 basis points tighter than our prior facility with BMP. Connection with the closing of the Natixis facility, we fully repaid our credit facility with BNP. We also executed two amendments to our credit facility with Bank of California during the quarter, extending the maturity by two years to February 2028 while also reducing our total commitment from $25 million to $15 million to better align with the current size of our balance sheet. Following the completion of these various transactions, we've extended our debt maturities and operational flexibility with our earliest maturity now standing at February 2028, we continue to closely monitor our leverage position in consideration of the market backdrop and valuation pressures. Turning to the income statement, total investment income decreased approximately 5% to $8.9 million this quarter. This was primarily driven by a decrease in interest income attributable to lower yields on our CLO equity securities due to underlying loan spread compression. In addition, we also had lower interest income on our loan portfolio due to a decrease in portfolio size and the impact of lower base rates stemming from the Fed's 50 basis points of rate cuts in Q4 2025. This was partially offset by the accrual of a non recurring dividend of $874,000 from our equity investment in fansteel. Total expenses decreased by approximately 3% during the period to $6.4 million. The decrease was primarily attributable to a $379,000 decrease in interest expense related to lower outstanding debt balances. Looking ahead, we continue to observe net interest margin compression following the final redemption of our February 2026 unsecured notes completed during the quarter which had carried a low 4.75% coupon rate priced during the near zero rate environment in early 2021. In addition, we anticipate further overall top line attrition due to our ongoing efforts to delever our balance sheet. We also do not expect to benefit from the heightened level of dividend income we recognized this quarter due to the non recurring nature of the dividend received from fansteel. Turning to our investments, most of our loan portfolio investments continue to perform to expectations. However, we continue to closely monitor certain borrowers experiencing idiosyncratic stresses. Overall, our non accrual investments as a percentage of our total portfolio at fair value decreased slightly quarter over quarter by 0.7%. With respect to our loan portfolio, we remain committed to being senior in the capital structure with 98% of our loan holdings being in first lien positions based on fair value. Additionally, as Bilal noted, much of the observed broader market price decline in loans during the quarter was heavily concentrated in the enterprise software sector driven by AI disruption fears. As we evaluate that risk, we note that we have limited sector exposure in our loan portfolio with just 2.7% of our total loan portfolio at fair value whose primary business is in enterprise software sales. In addition, we have no reliance on annual recurring revenue or ARR based lending in our loan portfolio. From a deployment perspective, we continue to focus on add on opportunities for growth with our existing issuers while selectively evaluating new opportunities and as of quarter end had $7.8 million in unfunded commitments to our portfolio companies based on amortized cost. As a quarter end, our investment portfolio was comprised of approximately 64% senior secured loans, 25% structured finance securities at 11% equity securities. the end of the quarter we had investments in 56 unique issuers totaling $308.1 million at fair value. On the interest bearing portion of the portfolio, the weighted average performing investment income Yield decreased approximately 1% to 12.5% quarter over quarter. The decrease in yield was primarily due to decline in earned yields on our structured finance securities attributable to the aforementioned spread compression dynamics pressuring cash flows to the equity tranche. This metric includes all interest prepayment fee and amortization of deferred loan fee income but excludes syndication fee income if applicable. With that, I'll turn the call back over to Bilal for concluding remarks.

Bilal Rashid (Chairman and Chief Executive Officer)

Thank you Kyle as we continue to navigate today's uncertain economic environment, we remain firmly focused on preserving capital and strengthening our balance sheet. As discussed, we have extended our debt maturities which span from 2028 to 2031, providing us with enhanced operational flexibility in the years ahead. We are also focused on defensively positioning our balance sheet by continuing to reduce our overall debt which has already been lowered by $45.6 million over the past year. We believe our loan portfolio remains well diversified across multiple industries and we continue to emphasize investing higher in the capital structure. We believe this positioning supports resilience across a range of market conditions. We remain focused on driving growth in net investment income over time. A key component of this effort is the monetization of select non interest earning equity positions including our investment in Fansteel. As we look to redeploy capital into income generating assets, our team's long standing experience and investment discipline has driven consistent results. Since 2011, the BDC has invested more than $2.1 billion with an annualized net realized loss of just 0.28% while continuing to deliver attractive risk adjusted returns on our portfolio. Finally, we continue to benefit from the scale and capabilities of our Advisor. With a $4.2 billion corporate credit platform and affiliation with a $32 billion asset management group, our Advisor provides deep credit experience and long standing banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the last 25 plus years. Importantly, our Advisor and affiliates remain strongly aligned with shareholders as they maintain an approximately 23% ownership in the BDC. With that operator, please open up the call for questions.

OPERATOR

We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.