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OFS Capital Corporation (NASDAQ: OFS) is a business development company that is focused on meeting the distinct capital needs of middle market companies.

Press Release

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Nov 8, 2019
OFS Capital Corporation Announces Third Quarter 2019 Financial Results

Net Investment Income of $0.36 per common share

Declares 28th Consecutive $0.34 per common share Distribution

CHICAGO--(BUSINESS WIRE)--Nov. 8, 2019-- OFS Capital Corporation (NASDAQ:OFS) ("OFS Capital," the "Company," "we," "us," or "our") today announced its financial results for the quarter ended September 30, 2019.

FINANCIAL HIGHLIGHTS

  • Net investment income of $4.85 million, or $0.36 per share, an increase of 3% year-over-year and above the $0.34 quarterly distribution.
  • Closed investments in the third quarter of 2019 totaled approximately $41.3 million, including $22.7 million of senior loans financed by the BNP credit facility.
  • Net asset value ("NAV") per share decreased to $12.74 at September 30, 2019 from $12.95 at June 30, 2019. No new non-accruals.
  • At September 30, 2019, 90% and 78% of our loan portfolio and total portfolio, respectively, consisted of senior secured loans, based on fair value.
  • On November 6, 2019, OFS Capital's Board of Directors declared a distribution of $0.34 per share for the fourth quarter of 2019, payable on December 31, 2019 to stockholders of record as of December 24, 2019.

"Our net investment income again exceeded our distribution," said Bilal Rashid, OFS Capital's Chairman and Chief Executive Officer. "We are pleased to declare our 28th consecutive quarterly distribution of $0.34 per share since our IPO in late 2012. Over the last five years, our total net investment income has exceeded our total regular distribution.

We also remain focused on capital preservation. Our $2.2 billion platform has been in existence since 1994 and navigated multiple credit cycles. As a result, we believe we are well positioned for the future.”

HIGHLIGHTS

($ in millions, except for per share data)

 

Portfolio Overview

 

At September 30, 2019

Total assets

 

$

 

518.3

 

Investment portfolio, at fair value

 

$

 

502.2

 

Net assets

 

$

 

170.4

 

Net asset value per share

 

$

 

12.74

 

Weighted average yield on performing debt investments (1)

 

 

10.78

%

Weighted average yield on total debt investments (2)

 

 

10.51

%

Weighted average yield on total investments (3)

 

 

9.96

%

(1)

The weighted average yield on our performing debt and structured finance note investments is computed as (a) the sum of (i) the annual stated accruing interest on our debt investments plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees at the balance sheet date, plus the annual effective yield on our structured finance notes at the balance sheet date divided by (b) amortized cost of our debt and structured finance note investments, excluding assets on non-accrual basis as of the balance sheet date.

(2)

The weighted average yield on our total debt and structured finance note investments is computed as (a) the sum of (i) the annual stated accruing interest plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees on our debt investments at the balance sheet date, plus the annual effective yield on our structured finance notes at the balance sheet date divided by (b) amortized cost of our debt and structured finance note 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 plus the annualized accretion of loan origination fees, original issue discount, market discount or premium, and loan amendment fees on our debt investments at the balance sheet date, plus the annual effective yield on our structured finance notes at the balance sheet date, 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 September 30,

Operating Results

2019

2018

Total investment income

$

13.9

$

11.0

Net investment income

$

4.9

$

4.7

Net investment income per common share, basic and diluted

$

0.36

$

0.35

Net increase in net assets resulting from operations

$

1.8

$

5.2

 

Quarter Ended September 30,

Portfolio Activity

2019

2018

Number of new portfolio companies

 

4

 

6

Investments in new portfolio companies

$

25.5

$

38.2

Investments in existing portfolio companies

$

13.4

$

9.1

Investments in structured finance notes

$

2.4

$

Number of portfolio companies at end of period

 

73

 

47

PORTFOLIO AND INVESTMENT ACTIVITIES

During the third quarter of 2019, OFS Capital closed $25.5 million of senior secured debt investments in four new portfolio companies. In addition, we made $13.4 million of new senior secured debt investments in existing portfolio companies and a $2.4 million investment in a new structured finance note.

The total fair value of OFS Capital’s investment portfolio was $502.2 million at September 30, 2019, which was equal to approximately 96% of amortized cost. As of September 30, 2019, the fair value of OFS Capital's debt investment portfolio totaled $437.9 million in 67 portfolio companies, of which 90% and 10% were senior secured loans and subordinated loans, respectively. As of September 30, 2019, we also held approximately $42.0 million in equity investments, at fair value, in 14 portfolio companies in which we also held debt investments, as well as six portfolio companies in which we solely held an equity investment. As of September 30, 2019, our investment portfolio also included four investments in structured finance notes with a fair value of $22.2 million. We had unfunded commitments of $4.7 million to four portfolio companies at September 30, 2019. As of September 30, 2019, floating rate loans as a percentage of fair value comprised 90% of OFS Capital’s debt investment portfolio, with the remaining 10% in fixed rate loans.

RESULTS OF OPERATIONS

Income

Investment Income

Interest income increased by $2.8 million for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, primarily due to a $3.2 million increase caused by an approximately $104 million increase in the average outstanding performing loan balance offset, in part, by a $0.4 million decrease resulting from a 33 basis point decrease in the recurring earned yield on our portfolio. We recognized fee income of $0.3 million for the three months ended September 30, 2019, primarily due to $0.2 million of prepayment fees and $0.1 million of syndication fees resulting from the $17.0 million in loan originations during the period in which OFS Capital Management, LLC sourced, structured, and arranged the lending group, and for which we were additionally compensated.

Expenses

Interest expense

Interest expense for the three months ended September 30, 2019 increased $2.1 over the corresponding period in the prior year primarily due to the issuance of $48.5 million in unsecured notes in October 2018, borrowings under the BNP credit facility during the third quarter of 2019, as well as an increase in the average dollar amount of borrowings under our senior secured revolving credit facility with Pacific Western Bank.

Management fee

Management fee expense for the three months ended September 30, 2019 increased $0.5 million over the corresponding period in the prior year due to an increase in our average total assets, resulting primarily from the deployment of the $98.5 million from the issuance of unsecured notes during April and October 2018 and the deployment of $46.7 million from the BNP credit facility.

Incentive fee

Incentive fee expense remained stable for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 as net investment income did not significantly change compared to the corresponding period.

Administration fee

Administration fee expense for the three months ended September 30, 2019 increased $0.1 million over the corresponding period in the prior year primarily due to an increase in our allocable portion of OFS Services’s overhead.

Net Gain (Loss) on Investments

We recognized net losses of $4.0 million on senior secured debt during the three months ended September 30, 2019, primarily as a result of unrealized depreciation of $4.1 million on Constellis Holdings, LLC and $0.8 million on MAI Holdings, Inc., offset by unrealized appreciation of $0.6 million on TRS Services, LLC.

We recognized net losses of $0.9 million on subordinated debt during the three months ended September 30, 2019, primarily as a result of unrealized depreciation of $0.9 million on Online Tech Stores, LLC.

We recognized net gains of $2.4 million on preferred equity investments for the three months ended September 30, 2019, primarily as a result of unrealized appreciation of $2.9 million on TRS Services, LLC Class A units, offset by unrealized depreciation of $0.5 million on Contract Datascan Series A units.

We recognized net gains of $0.8 million on common equity and warrant investments for the three months ended September 30, 2019, primarily as a result of unrealized appreciation of $1.3 million on Pfanstiehl Holdings, Inc. and $0.9 million on Professional Pipe Holdings, LLC, offset by unrealized depreciation of $1.5 million on MTE Holdings Corporation.

We recognized unrealized depreciation of $1.4 million on structured finance notes for the three months ended September 30, 2019, primarily as a result of unrealized depreciation due to net negative impact of mark-to-market adjustments in the third quarter.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2019, we had $8.0 million in cash, which includes cash of $4.0 million held by our wholly owned small business investment company OFS SBIC I, LP ("SBIC I LP"). 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 as parent company. As of September 30, 2019, we had $29.2 million available for additional borrowings under our senior secured revolving credit facility with Pacific Western Bank, as well as an unused commitment of $103.4 million under our BNP revolving credit facility.

RECENT DEVELOPMENTS

Registered unsecured bond offering

In October and November 2019, we closed the public offering of $54.3 million in aggregate principal amount of 5.95% notes due 2026 (the "Unsecured Notes Due October 2026"), which included a partial exercise of the underwriters overallotment option. The total net proceeds to us from the Unsecured Notes Due October 2026, after deducting underwriting discounts of approximately $1.7 million and estimated offering expenses of $0.3 million, were approximately $52.3 million. The Unsecured Notes Due October 2026 will mature on October 31, 2026 and bear an effective interest rate, including amortization of deferred debt issuance costs, of 6.48%. Because the Unsecured Notes Due October 2026 are not secured by any of our assets, they are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility. The Unsecured Notes Due October 2026 may be redeemed in whole or in part at any time or from time to time at our option on or after October 31, 2021 at the redemption price of 100% of the aggregate principal amount thereof plus accrued and unpaid interest. The indenture governing the Unsecured Notes Due October 2026 contain covenants substantially identical to the Unsecured Notes.

CONFERENCE CALL

OFS Capital will host a conference call to discuss these results on Friday, November 8, 2019, at 10:00 AM Eastern Time. Interested parties may participate in the call via the following:

INTERNET: Go 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 November 18, 2019 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 #10136690.

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 third quarter ended September 30, 2019, which we expect to file with the Securities and Exchange Commission later today.

OFS Capital Corporation and Subsidiaries

Consolidated Statement of Assets and Liabilities

(Dollar amounts in thousands, except per share data)

 

 

September 30,
2019

 

December 31,
2018

 

(unaudited)

 

 

Assets

 

 

 

Investments, at fair value:

 

 

 

Non-control/non-affiliate investments (amortized cost of $392,289 and $312,223,
respectively)

$

 

368,634

 

 

$

 

297,749

 

Affiliate investments (amortized cost of $120,570 and $90,751, respectively)

 

124,227

 

 

 

89,103

 

Control investments (amortized cost of $10,342 and $10,337, respectively)

 

9,300

 

 

 

9,945

 

Total investments at fair value (amortized cost of $523,201 and $413,311, respectively)

 

502,161

 

 

 

396,797

 

Cash

 

7,974

 

 

 

38,172

 

Interest receivable

 

3,298

 

 

 

2,787

 

Prepaid expenses and other assets

 

4,854

 

 

 

3,665

 

Total assets

$

 

518,287

 

 

$

 

441,421

 

 

 

 

 

Liabilities

 

 

 

Revolving lines of credit

$

 

92,475

 

 

$

 

12,000

 

SBA debentures (net of deferred debt issuance costs of $1,999 and $2,280, respectively)

 

147,881

 

 

 

147,600

 

Unsecured notes (net of deferred debt issuance costs of $2,925 and $3,299 respectively)

 

95,600

 

 

 

95,226

 

Interest payable

 

2,045

 

 

 

2,791

 

Payable to adviser and affiliates

 

4,049

 

 

 

3,700

 

Payable for investments purchased

 

5,075

 

 

 

4,151

 

Accrued professional fees

 

339

 

 

 

637

 

Other liabilities

 

417

 

 

 

293

 

Total liabilities

 

347,881

 

 

 

266,398

 

 

 

 

 

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 September 30, 2019, and December 31, 2018,
respectively

$

 

 

 

$

 

 

Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 13,371,451
and 13,357,337 shares issued and outstanding as of September 30, 2019, and
December 31, 2018, respectively

 

134

 

 

 

134

 

Paid-in capital in excess of par

 

187,890

 

 

 

187,540

 

Total distributable earnings (losses)

 

(17,618

)

 

 

(12,651

)

Total net assets

 

170,406

 

 

 

175,023

 

 

 

 

 

Total liabilities and net assets

$

 

518,287

 

 

$

 

441,421

 

 

 

 

 

Number of shares outstanding

 

13,371,451

 

 

 

13,357,337

 

Net asset value per share

$

 

12.74

 

 

$

 

13.10

 

OFS Capital Corporation and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(Dollar amounts in thousands, except per share data)

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2019

 

2018

 

2019

 

2018

Investment income

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

Non-control/non-affiliate investments

$

 

10,181

 

 

$

 

7,424

 

 

$

 

28,110

 

 

$

 

19,508

 

Affiliate investments

 

2,647

 

 

 

2,455

 

 

 

7,640

 

 

 

7,308

 

Control investment

 

262

 

 

 

255

 

 

 

784

 

 

 

744

 

Total interest income

 

13,090

 

 

 

10,134

 

 

 

36,534

 

 

 

27,560

 

Payment-in-kind interest and dividend income:

 

 

 

 

 

 

 

Non-control/non-affiliate investments

 

96

 

 

 

178

 

 

 

289

 

 

 

524

 

Affiliate investments

 

347

 

 

 

308

 

 

 

899

 

 

 

1,054

 

Control investment

 

28

 

 

 

28

 

 

 

83

 

 

 

82

 

Total payment-in-kind interest and dividend income

 

471

 

 

 

514

 

 

 

1,271

 

 

 

1,660

 

Dividend income:

 

 

 

 

 

 

 

Affiliate investments

 

 

 

 

 

173

 

 

 

130

 

Control investment

 

 

 

58

 

 

 

89

 

 

 

185

 

Total dividend income

 

 

 

58

 

 

 

262

 

 

 

315

 

Fee income:

 

 

 

 

 

 

 

Non-control/non-affiliate investments

 

285

 

 

 

251

 

 

 

781

 

 

 

664

 

Affiliate investments

 

6

 

 

 

7

 

 

 

216

 

 

 

12

 

Control investment

 

6

 

 

 

18

 

 

 

39

 

 

 

52

 

Total fee income

 

297

 

 

 

276

 

 

 

1,036

 

 

 

728

 

Total investment income

 

13,858

 

 

 

10,982

 

 

 

39,103

 

 

 

30,263

 

Expenses

 

 

 

 

 

 

 

Interest expense

 

4,464

 

 

 

2,393

 

 

 

11,564

 

 

 

6,196

 

Management fee

 

2,164

 

 

 

1,678

 

 

 

6,062

 

 

 

4,586

 

Incentive fee

 

1,214

 

 

 

1,170

 

 

 

3,622

 

 

 

3,041

 

Professional fees

 

510

 

 

 

458

 

 

 

1,413

 

 

 

859

 

Administration fee

 

396

 

 

 

311

 

 

 

1,250

 

 

 

1,252

 

Other expenses

 

257

 

 

 

282

 

 

 

651

 

 

 

1,287

 

Total expenses before incentive fee waiver

 

9,005

 

 

 

6,292

 

 

 

24,562

 

 

 

17,221

 

Incentive fee waiver

 

 

 

 

 

 

 

(22

)

Total expenses, net of incentive fee waiver

 

9,005

 

 

 

6,292

 

 

 

24,562

 

 

 

17,199

 

Net investment income

 

4,853

 

 

 

4,690

 

 

 

14,541

 

 

 

13,064

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

 

 

 

 

 

 

Net realized gain (loss) on non-control/non-affiliate investments

 

51

 

 

 

 

 

(843

)

 

 

(5,003

)

Net realized loss on affiliate investments

 

 

 

 

 

 

 

(4,018

)

Net unrealized appreciation (depreciation) on non-control/non-
affiliate investments, net of taxes

 

(6,534

)

 

 

(923

)

 

 

(9,506

)

 

 

2,925

 

Net unrealized appreciation on affiliate investments

 

4,765

 

 

 

1,223

 

 

 

5,305

 

 

 

6,396

 

Net unrealized appreciation (depreciation) on control investment

 

(1,373

)

 

 

189

 

 

 

(650

)

 

 

303

 

 

 

 

 

 

 

 

 

Net gain (loss) on investments

 

(3,091

)

 

 

489

 

 

 

(5,694

)

 

 

603

 

 

 

 

 

 

 

 

 

Net increase in net assets resulting from operations

$

 

1,762

 

 

$

 

5,179

 

 

$

 

8,847

 

 

$

 

13,667

 

 

 

 

 

 

 

 

 

Net investment income per common share – basic and diluted

$

 

0.36

 

 

$

 

0.35

 

 

$

 

1.09

 

 

$

 

0.98

 

Net increase in net assets resulting from operations per common
share – basic and diluted

$

 

0.13

 

 

$

 

0.39

 

 

$

 

0.66

 

 

$

 

1.02

 

Distributions declared per common share

$

 

0.34

 

 

$

 

0.34

 

 

$

 

1.02

 

 

$

 

1.39

 

Basic and diluted weighted average shares outstanding

 

13,366,515

 

 

 

13,350,484

 

 

 

13,361,757

 

 

 

13,346,630

 

ABOUT OFS CAPITAL

The Company is an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company. The Company'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. The Company invests primarily in privately held middle-market companies in the United States, including lower-middle-market companies, targeting investments of $3 to $20 million in companies with annual EBITDA between $3 million and $50 million. The Company 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. The Company's investment activities are managed by OFS Capital Management, LLC, an investment adviser registered under the Investment Advisers Act of 19401, as amended, 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; the belief that the Company is well positioned for the future when there can be no assurance of future results; 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, 2018 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.

1

 

Registration does not imply a certain level of skill or training

 

Source: OFS Capital Corporation

INVESTOR RELATIONS:
Steve Altebrando
646-652-8473
saltebrando@ofsmanagement.com