Declares a $0.34 Per Share
Distribution
Closed Investments of $98.2 million in First
Quarter of 2018
OFS Capital Corporation (Nasdaq: OFS) (“OFS Capital”, the
"Company", “we”, “us”, or “our”) today announced its financial
results for the fiscal quarter ended March 31, 2018.
FINANCIAL HIGHLIGHTS
- Net investment income of $3.8 million,
or $0.29 per share, which includes $0.5 million, or $0.04 per share
of expenses related to a debt transaction the Company elected not
to pursue.
- Declared distributions of $1.05 per
share in the first half of 2018, including a $0.37 per share
special dividend.
- Closed investments of $98.2 million in
first quarter of 2018.
- 78% and 76% of the fair value of our
loan portfolio was senior and floating rate, respectively, and the
weighted average yield of our performing loan portfolio was 12.57%
as of March 31, 2018(1).
- 100% of our debt is fixed rate with a
weighted average cost of approximately 4.30% as of May 4, 2018; all
maturities in 2022 through 2025.
- On May 1, 2018, OFS Capital's Board of
Directors declared a distribution of $0.34 per share for the second
quarter of 2018, payable on June 29, 2018 to stockholders of record
as of June 22, 2018.
"The first quarter of 2018 was a productive quarter and we
believe positions us for significant income growth beginning in the
second quarter," said Bilal Rashid, OFS
Capital's Chairman and Chief Executive Officer. "We deployed
$98 million in the first quarter, which we funded with cash on hand
and our revolving credit facility. In April 2018, we issued $50
million of bonds locking in fixed rate, unsecured financing for
seven years. We used a portion of the proceeds to repay our
revolving credit facility. We believe that our commitment to
capital preservation, and strong long-term performance is enhanced
by the alignment of interests of our stockholders and our external
manager, which owns approximately 22% of the outstanding OFS
Capital common stock."
(1) See Highlights contained in this press release for
further information on our weighted average yield. Including assets
on non-accrual, the weighted average yield of our debt investment
portfolio was 12.12% at March 31, 2018.
HIGHLIGHTS($ in millions,
except for per share data)
Portfolio Overview At March 31,
2018 Total assets $ 374.7 Investment portfolio, at fair value $
335.5 Net assets $ 182.5 Net asset value per share $ 13.67 Weighted
average yield on performing debt investments (1) 12.57 % Weighted
average yield on total debt investments (2) 12.12 % Weighted
average yield on total investments (3) 10.91 % (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 March 31, Operating
Results 2018 2017 Total investment
income $ 9.0 $ 8.0 Net investment income $ 3.8 $ 3.3 Net investment
income per common share, basic and diluted $ 0.29 $ 0.34
Adjusted net investment income (a Non-GAAP
measuredescribed below)
$ 3.8 $ 3.6
Adjusted net investment income (a Non-GAAP
measuredescribed below) per share, basic and diluted
$ 0.29 $ 0.37 Net increase in net assets resulting from osperations
$ 3.5 $ 4.9
Quarter ended March
31, Portfolio Activity 2018
2017 Number of new portfolio companies 7 — Investments in
new portfolio companies $ 73.0 $ — Investments in existing
portfolio companies $ 25.2 $ 6.1 Number of portfolio companies at
end of period 39 38
PORTFOLIO AND INVESTMENT ACTIVITIES
During the first quarter of 2018, OFS Capital closed $47.4
million of senior secured debt investments, including a delayed
draw funding of $0.5 million, in five new portfolio companies, as
well as $1.9 million and $2.5 million of common and preferred
equity investments, respectively, in three of these new portfolio
companies. In addition, we made $20.9 million of subordinated debt
investments in two new portfolio companies, as well as a $0.3
million common equity investment in one of these new portfolio
companies, and $24.9 million of new senior secured debt investments
in existing portfolio companies, including a new revolver funding
of $1.4 million, and a common equity investment of $0.3 million
made in connection with a senior secured debt investment.
The total fair value of OFS Capital’s investment portfolio was
$335.5 million at March 31, 2018, which was equal to approximately
96% of amortized cost. As of March 31, 2018, the fair value of OFS
Capital's debt investment portfolio totaled $299.0 million in 35
portfolio companies, of which 78% and 22% were senior secured loans
and subordinated loans, respectively. As of March 31, 2018, we also
held approximately $36.5 million in equity investments, at fair
value, in 19 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 $10.0 million to
four portfolio companies at March 31, 2018. As of March 31, 2018,
floating rate loans comprised 76% of OFS Capital’s debt investment
portfolio, with the remaining 24% 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 March 31, 2018, compared to the three months ended March 31,
2017 due to a $1.5 million increase in recurring interest income
caused by a 22% increase in the average outstanding loan balance,
offset by a decrease of $0.2 million in recurring interest income
resulting from a 35 basis point decrease 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 $0 and $0.1 million were included in interest
income for the three months ended March 31, 2018 and 2017,
respectively.
Fee Income
Fee income decreased by $0.2 million for the three months ended
March 31, 2018, compared to the three months ended March 31, 2017,
primarily due to a decrease in prepayment fees. We recorded
prepayment fees of $0.2 million resulting from $16.9 million of
unscheduled principal payments during the three months ended March
31, 2017. We did not record prepayment fees during the three months
ended March 31, 2018.
Expenses
Interest expense
Interest expense for the three months ended March 31, 2018
increased over the corresponding period in the prior year due
primarily to an increase in borrowings under our revolving line of
credit with Pacific Western Bank (the "PWB Credit Facility"). The
average dollar amount of borrowings outstanding under the PWB
Credit Facility during the three months ended March 31, 2018
and 2017 was $22.4 million and $5.7 million, respectively. There
were no borrowings under the PWB Credit Facility during the three
months ended March 31, 2017.
Management fee
Management fee expense for the three months ended March 31,
2018 increased $0.2 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 decreased by $0.4 million for the three
months ended March 31, 2018 compared to the three months ended
March 31, 2017 primarily due to a decrease in the accrued Capital
Gain Fee. 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, and was $0
and $0.3 million for the three months ended March 31, 2018 and
2017, respectively. On May 1, 2018, our investment adviser agreed
to irrevocably waive the receipt of Part One incentive fees (based
on net investment income) of $22,000 related to net investment
income, that it would otherwise be entitled to receive under the
Investment Advisory Agreement for the three months ended March 31,
2018. As a result of the voluntary fee waiver, the Company incurred
Part One incentive fee expense of $714 for the three months ended
March 31, 2018, which is equal to the Part One incentive fee
expense the Company incurred for the three months ended December
31, 2017.
Administration fee
Administration fee expense for the three months ended
March 31, 2018, increased $0.2 million over the corresponding
period in the prior year primarily due to an increase in our
allocable portion of OFS Services’s overhead in connection with a
foreign debt transaction that we elected not to pursue due to
regulatory changes and market conditions.
Other expenses
Other expenses for the three months ended March 31, 2018,
increased over the corresponding period in the prior year primarily
due to legal and other offering costs incurred during the first
quarter of 2018 in connection with a foreign debt transaction that
we elected not to pursue due to regulatory changes and market
conditions.
Net Gain (Loss) on Investments
We recognized net gains of $0.3 million on senior secured debt
during the three months ended March 31, 2018, primarily as a result
of realized gains of $0.4 million from the sale of five senior
secured loans, offset by unrealized losses of $0.2 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 $1.4 million on subordinated debt
during the three months ended March 31, 2018, primarily as a result
of the negative impact of portfolio company-specific performance
factors, including an unrealized depreciation of $1.2 million
recognized on our subordinated debt investment in Southern
Technical Institute, LLC, which was placed on non-accrual during
2017 and written down to a fair value of $0 at March 31, 2018.
We recognized net losses of $1.1 million on preferred equity
investments for the three months ended March 31, 2018, primarily as
a result of the net negative impact of portfolio company-specific
performance factors.
We recognized net gains of $1.9 million on common equity and
warrant investments for the three months ended March 31, 2018,
primarily as a result of the positive impact of portfolio
company-specific performance factors.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2018, we had $31.9 million in cash and
cash equivalents, which includes cash and cash equivalents
of $31.2 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 Corporation as
parent company. As of March 31, 2018, we had $9.0 million
available for additional borrowings under our PWB Credit Facility
and had drawn all of our available SBA-guaranteed debentures.
RECENT DEVELOPMENTS
Registered unsecured bond offering
In April 2018, we closed the public offering of approximately
$50.0 million in aggregate principal amount of our 6.375% notes due
2025 (the "Notes"). The total net proceeds to us from the Notes,
after deducting underwriting discounts of approximately $1.6
million and estimated offering expenses of $0.4 million, were
approximately $48.0 million. The Notes will mature on April 30,
2025 and bear interest at a rate of 6.375%. The Notes are unsecured
obligations of OFS Capital and rank pari-passu with our existing
and future unsecured, subordinated indebtedness; effectively
subordinated to all of our existing and future secured
indebtedness; and structurally subordinated to all existing and
future indebtedness and other obligations of any subsidiaries, with
respect to claims on the assets of any such subsidiaries, including
the SBA-guaranteed debentures. The 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 Notes is payable quarterly on January 31,
April 30, July 31, and October 31 of each year. The Notes are
listed on the Nasdaq Global Select Market under the trading symbol
“OFSSL.” We may from time to time repurchase Notes in accordance
with the Investment Company Act of 1940, as amended (the "1940 Act)
and the rules promulgated thereunder. As of May 1, 2018, the
outstanding principal balance of the Notes was approximately $50.0
million.
Modified asset coverage
On March 23, 2018, the Consolidated Appropriations Act of 2018,
which includes the Small Business Credit Availability Act (the
“SBCAA”), was signed into law. The SBCAA amends the 1940 Act to
permit a business development company (a “BDC”) to reduce the
required minimum asset coverage ratio applicable to it from 200% to
150%, subject to certain requirements described therein.
On May 3, 2018, the board of directors (the “Board”) of OFS
Capital, including a “required majority” (as such term is defined
in Section 57(o) of the 1940 Act) of the Board, approved the
application of the modified asset coverage requirements set forth
in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. As a
result, the asset coverage ratio test applicable to OFS Capital
will be decreased from 200% to 150%, effective May 3, 2019.
CONFERENCE CALL
OFS Capital will host a conference call to discuss these results
on Friday, May 4, 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
March 14, 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 #10119991.
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 first quarter ended March 31, 2018,
which will be filed with the Securities and Exchange Commission
later today.
OFS Capital Corporation and
SubsidiariesConsolidated Balance Sheets
(Dollar amounts in thousands, except
per share data)
March 31, 2018 December 31, 2017
(unaudited) Assets Investments, at fair value:
Non-control/non-affiliate investments
(amortized cost of $215,488 and $209,360, respectively)
$ 201,947 $ 197,374 Affiliate investments (amortized cost of
$122,443 and $70,402, respectively) 122,843 69,557 Control
investments (amortized cost of $10,244 and $10,213, respectively)
10,674 10,568 Total investments at fair value
(amortized cost of $348,175 and $289,975, respectively) 335,464
277,499 Cash and cash equivalents 31,926 72,952 Interest receivable
2,915 2,734 Prepaid expenses and other assets 4,396 4,593
Total assets $ 374,701 $ 357,778
Liabilities Revolving line of credit $ 40,950 $ 17,600 SBA
debentures (net of deferred debt issuance costs of $2,564 and
$2,657, respectively) 147,316 147,223 Interest payable 410 1,596
Management and incentive fees payable 2,075 1,987 Administration
fee payable 749 476 Accrued professional fees 598 433 Other
liabilities 150 127
Total liabilities 192,248
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 March 31,
2018, and December 31, 2017, respectively
$ — $ —
Common stock, par value of $0.01 per
share, 100,000,000 shares authorized, 13,348,774
and 13,340,217 shares issued and
outstanding as of March 31, 2018, and December
31, 2017, respectively
133 133 Paid-in capital in excess of par 187,512 187,398
Accumulated undistributed net investment income 7,273 9,404
Accumulated undistributed net realized gain 258 3,881 Net
unrealized depreciation on investments (12,723 ) (12,480 )
Total
net assets 182,453 188,336
Total
liabilities and net assets $ 374,701 $ 357,778
Number of shares outstanding 13,348,774 13,340,217
Net asset value per share $ 13.67 $ 14.12
OFS Capital Corporation and
SubsidiariesCondensed Consolidated Statements of Operations
(unaudited)
(Dollar amounts in thousands, except
per share data)
Three Months Ended March 31, 2018
2017 Investment income Interest income:
Non-control/non-affiliate investments $ 5,758 $ 4,612 Affiliate
investments 2,085 1,831 Control investment 239 524
Total interest income 8,082 6,967 Payment-in-kind interest and
dividend income: Non-control/non-affiliate investments 224 307
Affiliate investments 461 352 Control investment 27 38
Total payment-in-kind interest and dividend income 712 697
Dividend income: Non-control/non-affiliate investments — 5
Affiliate investments 130 85 Control investments 33 33
Total dividend income 163 123 Fee income:
Non-control/non-affiliate investments 26 156 Affiliate investments
2 58 Control investments 18 33 Total fee income 46
247
Total investment income 9,003 8,034
Expenses Interest expense 1,634 1,387 Management fee
1,360 1,192 Incentive fee, net of fee waiver 714 1,181 Professional
fee 201 263 Administration fee 583 401 Other expenses 695
270
Total expenses, net of incentive fee waiver 5,187
4,694
Net investment income 3,816 3,340
Net realized and unrealized gain (loss) on investments Net
realized gain on non-control/non-affiliate investments 461 — Net
realized loss on affiliate investments (541 ) — Net unrealized
depreciation on non-control/non-affiliate investments (1,563 )
(3,041 ) Net unrealized appreciation on affiliate investments 1,245
4,024 Net unrealized appreciation on control investment 75
543
Net gain (loss) on investments (323 )
1,526
Net increase in net assets resulting from
operations $ 3,493 $ 4,866 Net investment
income per common share – basic and diluted $ 0.29 $ 0.34
Net increase in net assets resulting from operations per
common share – basic and diluted $ 0.26 $ 0.50 Distributions
declared per common share $ 0.71 $ 0.34 Basic and
diluted weighted average shares outstanding 13,340,502
9,700,329
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 March 31, 2018
2017 Net investment income $ 3,794 $ 3,340
Capital gains incentive fee — 283 Adjusted net
investment income $ 3,794 $ 3,623 Adjusted net investment
income per common share: Basic and diluted $ 0.29 $ 0.37
Weighted average shares outstanding: Basic and diluted 13,340,502
9,700,329
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.
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; OFS Capital’s expectations regarding income growth;
management's belief that its commitment to capital preservation and
strong long-term performance is enhanced by the alignment of
interest of OFS Capital's stockholders and external manager, 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180504005180/en/
Investor Relations:Steve Altebrando, 646-652-8473saltebrando@ofsmanagement.com
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