OFS Capital Corporation 2026 Q3 Earnings Call

Please go ahead. 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's 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. Except as required by applicable law, OFS Capital has no obligation 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.

Thank you, Steve. Yesterday afternoon, we reported our third quarter results. On October 6, we announced the sale of approximately 57% of the limited partnership interests in one of our subsidiaries, OFS SBIC I, LP, for gross proceeds of $52.3 million. SBIC I, LP holds our common equity investment in Pfanstiehl. The BDC is retaining the remaining 43% limited partnership interests and remains the general partner of the partnership. We believe that this transaction represents a strategic step towards strengthening our balance sheet, improving liquidity, and reducing portfolio concentration risk. In addition, it provides us with a meaningful amount of capital for redeployment into investments in accordance with the BDC's primary investment objectives. We believe that this potential investment deployment into primarily income-generating investments presents an opportunity to enhance our net investment income over the coming quarters and the long term.

As we discussed on prior calls, Pfanstiehl has been the largest position in our investment portfolio, representing approximately 35% of our portfolio at fair value as of September 30. We expect the completion of this transaction to be a significant step toward our long-stated objective of monetizing certain non-interest-bearing equity investments. I also want to emphasize that we believe that the success of our investment in Pfanstiehl reflects a component of our investment strategy that has served us well. While our focus is on current income and capital preservation by primarily investing in senior secured loans, we selectively make equity investments in borrowers where there is a significant growth potential. These equity investments can provide potential opportunities for capital appreciation to enhance the value of our BDC. Pfanstiehl is a compelling example of this.

What began as a relatively modest equity investment of approximately $200,000 in 2014 has generated substantial value for our shareholders over time. We intend to continue pursuing these types of opportunities selectively while maintaining our focus on income-generating investments and capital preservation. That said, on October 26, Pfanstiehl filed a complaint in Delaware Chancery Court to, among other things, challenge the transaction. We believe the claim is meritless, and we intend to defend the matter vigorously. Turning to our financial results for the quarter, net investment income totaled $0.05 per share compared to $0.08 per share in the prior quarter.

While this remains below our quarterly distribution of $0.17 per share, we believe the steps we have taken in the past several quarters to strengthen our financial position, together with the significant proceeds from the SBIC equity transaction, have created an opportunity to improve our earnings going forward. As we seek to prudently redeploy this capital primarily into new income-generating investments, over time, we expect to see a corresponding improvement in net investment income. Our net asset value at quarter end was $7.38 per share compared to $8.41 per share in the prior quarter. The decline was primarily driven by a reduction in the valuation of certain investments, including Pfanstiehl and our CLO equity investments.

With respect to credit quality, loans to one borrower that was previously on non-accrual were resolved during the quarter, while loans to two additional borrowers were placed on non-accrual status. Importantly, the new non-accruals represent relatively small positions within our overall portfolio, totaling $2.1 million at fair value, and the investments had already been on our radar for heightened credit risk monitoring. It's important to note that one of these borrowers continues to make its contractual interest payments, but was placed on non-accrual based on our internal assessment of credit risk. We continue to work closely with our borrowers and other stakeholders to maximize recoveries and preserve value across the portfolio. Our portfolio remains diversified, with limited exposure to highly cyclical industries.

We also benefit from the senior secured nature of our loan portfolio, which is entirely composed of first and second lien senior secured loans, with 97% of our loan holdings in first-lien positions based on fair value. This underscores our ongoing emphasis of maintaining a senior position in the capital structure and to help protect our invested capital. We also continued to make progress on strengthening our balance sheet during the quarter, including the repayment of $31.4 million of outstanding debt and an improvement in our asset coverage ratio of 3 percentage points to 164%. For the past several quarters, we have been focused on extending our debt maturities, reducing leverage, and improving operational flexibility. Over the past 12 months, we have reduced our total outstanding debt balance by approximately $84.8 million, with our earliest maturity occurring in 2028.

Having made substantial progress on these objectives, we believe we are now in a much stronger position to focus on new investment deployment and growing net investment income. In addition, during the quarter, we completed a partial refinancing of our higher coupon unsecured notes through the use of our lower-cost credit facility, which we expect will generate net interest expense savings going forward. We also anticipate the recent increase in base rates will be accretive to our earnings on a going-forward basis. Looking ahead, we are focused on deploying the capital generated from the SBIC equity transaction in a disciplined manner, with an emphasis on generating attractive risk-adjusted returns and improving our net investment income. While we continue to evaluate opportunities in traditional middle market lending, we also benefit from the breadth of investment capabilities and expertise across our broader platform.

This includes access to opportunities in infrastructure credit, real estate credit, asset-backed finance, liquid credit, and structured credit investments. We are actively evaluating opportunities across these markets and believe this flexibility provides us with a broader universe of potential investments as we seek to identify the most compelling risk-adjusted return mix. Importantly, our approach remains grounded in disciplined underwriting, capital preservation, and a focus on investments that we believe can generate sustainable income for our shareholders. We continue to navigate an environment of macroeconomic uncertainty, evolving interest rates, and changing market conditions. We believe our ability to invest across a broad range of credit opportunities, supported by the experience and capabilities of our adviser, provides an important competitive advantage.

With approximately $3.8 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 capitalize on opportunities as they arise. We believe the SBIC equity transaction marks an important inflection point for OFS Capital. We have meaningfully reduced a significant portfolio concentration, strengthened our financial flexibility, and generated investable capital that can now be redeployed into income-producing investments. We believe these developments provide a strong foundation for improving net investment income and creating long-term value for our shareholders. 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.

Thanks, Bilal, and good morning, everyone. As Bilal mentioned, we posted net investment income of $719,000 or $0.05 per share for the third quarter of 2026, a decline of $0.03 per share from the second quarter. Top-line income decreased $899,000 quarter-over-quarter, partially offset by a $612,000 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 fourth quarter of 2026. at September 30, our quarterly distribution rate represented an 18.7% annualized yield based on the market price of our common stock.