UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020 or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number 814-00813
OFS CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | | 46-1339639 |
State or Other Jurisdiction of | | I.R.S. Employer Identification No. |
Incorporation or Organization | | |
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10 S. Wacker Drive, Suite 2500, Chicago, Illinois | | 60606 |
Address of Principal Executive Offices | | Zip Code |
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| (847) 734-2000 | |
Registrant’s Telephone Number, Including Area Code |
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | OFS | The Nasdaq Global Select Market |
6.25% Notes due 2023 | OFSSG | The Nasdaq Global Select Market |
6.375% Notes due 2025 | OFSSL | The Nasdaq Global Select Market |
6.50% Notes due 2025 | OFSSZ | The Nasdaq Global Select Market |
5.95% Notes due 2026 | OFSSI | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ¨ | Accelerated filer | ý |
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Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
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Emerging growth company | ¨ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of November 4, 2020 was 13,406,402.
OFS CAPITAL CORPORATION
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2 | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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Defined Terms
We have used "we," "us," "our," "our company" and "the Company" to refer to OFS Capital Corporation in this report. We also have used several other terms in this report, which are explained or defined below:
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Term | Explanation or Definition |
1940 Act | Investment Company Act of 1940, as amended |
Administration Agreement | Administration Agreement between the Company and OFS Services dated November 7, 2012 |
Affiliated Account | Another account managed by OFS Advisor or an affiliate of OFS Advisor |
ASC | Accounting Standards Codification, as issued by the FASB |
ASU | Accounting Standards Updates, as issued by the FASB |
BDC | Business Development Company under the 1940 Act |
BLA | Business Loan Agreement, as amended, with Pacific Western Bank, as lender, which provides the Company with a senior secured revolving credit facility |
BNP Facility | A secured revolving credit facility that provides for borrowings in an aggregate principal amount up to $150,000,000 issued pursuant to a Revolving Credit and Security Agreement by and among OFSCC-FS, the lenders from time to time parties thereto, BNP Paribas, as administrative agent, OFSCC-FS Holdings, LLC, a wholly owned subsidiary of the Company, as equityholder, the Company, as servicer, Citibank, N.A., as collateral agent and Virtus Group, LP, as collateral administrator
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Board | The Company's board of directors |
CLO | Collateralized loan obligation |
Code | Internal Revenue Code of 1986, as amended |
Company | OFS Capital Corporation and its consolidated subsidiaries |
DRIP | Distribution reinvestment plan |
EBITDA | Earnings before interest, taxes, depreciation and amortization |
Exchange Act | Securities Exchange Act of 1934, as amended |
FASB | Financial Accounting Standards Board |
GAAP | Accounting principles generally accepted in the United States |
HPCI | Hancock Park Corporate Income, Inc., a Maryland corporation and non-traded BDC for whom OFS Advisor serves as investment adviser |
ICTI | Investment company taxable income, which is generally net ordinary income plus net short-term capital gains in excess of net long-term capital losses |
Indicative Prices | Market quotations, prices from pricing services or bids from brokers or dealers |
Investment Advisory Agreement | Investment Advisory and Management Agreement between the Company and OFS Advisor dated November 7, 2012 |
LIBOR | London Interbank Offered Rate |
NBIP | Non-binding indicative price |
Net Loan Fees | The cumulative amount of fees, such as discounts, premiums and amendment fees that are deferred and recognized as income over the life of the loan |
OCCI | OFS Credit Company, Inc., a Delaware corporation and a non-diversified, closed-end management investment company for whom OFS Advisor serves as investment adviser |
OFS Advisor | OFS Capital Management, LLC, a wholly owned subsidiary of OFSAM and registered investment advisor under the Investment Advisers Act of 1940, as amended |
OFS Services | OFS Capital Services, LLC, a wholly owned subsidiary of OFSAM and affiliate of OFS Advisor |
OFSAM | Orchard First Source Asset Management, LLC, a full-service provider of capital and leveraged finance solutions to U.S. corporations |
OFSCC-FS | OFSCC-FS, LLC, an indirect wholly owned subsidiary of the Company |
OFSCC-FS Assets | Assets held by the Company through OFSCC-FS |
OFSCC-MB | OFSCC-MB, Inc., a wholly owned subsidiary taxed under subchapter C of the Code that generally holds the equity investments of the Company that are taxed as pass-through entities |
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Term | Explanation or Definition |
OID | Original issue discount |
Order | An exemptive relief order from the SEC to permit us to co-invest in portfolio companies with certain funds managed by OFS Advisor in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions |
Parent | OFS Capital Corporation |
PIK | Payment-in-kind, non-cash interest or dividends payable as an addition to the loan or equity security producing the income. |
Portfolio Company Investment | A debt or equity investment in a portfolio company. Portfolio Company Investments exclude Structured Finance Notes |
Prime Rate | United States Prime interest rate |
PWB Credit Facility | Senior secured revolving credit facility between the Company and Pacific Western Bank, as lender |
Reunderwriting Analysis | A discount rate method based upon a hypothetical recapitalization of the entity given its current operating performance and current market condition |
RIC | Regulated investment company under the Code |
SBA | U.S. Small Business Administration |
SBCAA | Small Business Credit Availability Act |
SBIC | A fund licensed under the SBA small business investment company program |
SBIC Acquisition | The Company's acquisition of the remaining ownership interests in SBIC I LP and OFS SBIC I GP, LLC on December 4, 2013 |
SBIC Act | Small Business Investment Act of 1958, as amended |
SBIC I LP | OFS SBIC I, LP, a wholly owned SBIC subsidiary of the Company |
SEC | U.S. Securities and Exchange Commission |
Securities Act | Securities Act of 1933, as amended |
Secured Revolver Amendment | The amended Business Loan Agreement with Pacific Western Bank, as lender, dated October 7, 2020 |
Stock Repurchase Program | The open market stock repurchase program for shares of the Company’s common stock under Rule 10b-18 of the Exchange Act |
Structured Finance Notes | CLO mezzanine debt and CLO subordinated debt positions |
Synthetic Rating Analysis | A discount rate method that assigns a surrogate debt rating to the entity based on known industry standards for assigning such ratings and then estimates the discount rate based on observed market yields for actual rated debt |
Transaction Price | The cost of an arm's length transaction occurring in the same security |
Unsecured Notes | The combination of the Unsecured Notes Due September 2023, Unsecured Notes Due April 2025, Unsecured Notes Due October 2025 and Unsecured Notes Due October 2026 |
Unsecured Notes Due April 2025 | The Company’s $50.0 million aggregate principal amount of 6.375% notes due April 30, 2025 |
Unsecured Notes Due October 2025 | The Company’s $46.0 million aggregate principal amount of 6.5% notes due October 30, 2025 |
Unsecured Notes Due October 2026 | The Company's $54.3 million aggregate principal amount of 5.95% notes due October 31, 2026 |
Unsecured Notes Due September 2023 | The Company’s $25.0 million aggregate principal amount of 6.25% notes due September 30, 2023 |
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
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• | our ability and experience operating a BDC or an SBIC, or maintaining our tax treatment as a RIC under Subchapter M of the Code; |
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• | our dependence on key personnel; |
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• | our ability to maintain or develop referral relationships; |
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• | our ability to replicate historical results; |
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• | the ability of OFS Advisor to identify, invest in and monitor companies that meet our investment criteria; |
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• | the belief that the carrying amounts of our financial instruments, such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments and that such financial instruments are held with high credit quality institutions to mitigate the risk of loss due to credit risk; |
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• | actual and potential conflicts of interest with OFS Advisor and other affiliates of OFSAM; |
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• | constraint on investment due to access to material nonpublic information; |
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• | restrictions on our ability to enter into transactions with our affiliates; |
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• | our ability to comply with SBA regulations and requirements; |
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• | the use of borrowed money to finance a portion of our investments; |
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• | our ability to incur additional leverage pursuant to the SBCAA and the impact of such leverage on our net investment income and results of operations; |
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• | competition for investment opportunities; |
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• | our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers and the impact on our risk profile, including our belief that the seniority of such loans in a borrower's capital structure may provide greater downside protection against the impact of the coronavirus ("COVID-19") pandemic; |
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• | the percentage of investments that will bear interest on a floating rate or fixed rate basis; |
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• | interest rate volatility, including the decommissioning of LIBOR; |
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• | the ability of SBIC I LP to make distributions enabling us to meet RIC requirements; |
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• | plans by SBIC I LP to repay its outstanding SBA debentures; |
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• | our ability to raise debt or equity capital as a BDC; |
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• | the timing, form and amount of any distributions from our portfolio companies; |
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• | the impact of a protracted decline in the liquidity of credit markets on our business; |
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• | the general economy and its impact on the industries in which we invest; |
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• | changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including with respect to changes from the impact of the COVID-19 pandemic; the length and duration of the COVID-19 pandemic in the United States as well as worldwide and the magnitude of the economic impact of the outbreak; the effect of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows and those of our portfolio companies (including the expectation that a shift from cash interest to PIK interest will result from concessions granted to borrowers due to the COVID-19 pandemic), including our and their ability to achieve our respective objectives; the effect of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business (including our belief that new loan activity in the market in which we operate has slowed) and on the availability of equity and debt capital and our use of borrowed money to finance a portion of our investments; |
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• | the belief that we have sufficient levels of liquidity to support our existing portfolio companies and deploy capital in new investment opportunities; |
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• | the belief that one or more of our investments can be restored to accrual status in the near term, or otherwise; |
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• | uncertain valuations of our portfolio investments, including our belief that reverting back to an equal weighting of the Reunderwriting Analysis method and Synthetic Rating Analysis method more accurately captures certain data related to the observed return of market liquidity and the historic correlative relationship between these markets; and |
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• | the effect of new or modified laws or regulations governing our operations. |
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include, among others, those described or identified in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in "Part II, Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
We have based the forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The forward-looking statements and projections contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 21E of the Exchange Act.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities
(Dollar amounts in thousands, except per share data)
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| September 30, 2020 |
| December 31, 2019 |
| (unaudited) |
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Assets |
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Investments, at fair value: |
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Non-control/non-affiliate investments (amortized cost of $359,108 and $396,201, respectively) | $ | 324,059 |
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| $ | 372,535 |
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Affiliate investments (amortized cost of $114,141 and $131,950, respectively) | 124,185 |
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| 135,679 |
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Control investment (amortized cost of $10,811 and $10,520, respectively) | 8,084 |
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| 8,717 |
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Total investments at fair value (amortized cost of $484,060 and $538,671, respectively) | 456,328 |
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| 516,931 |
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Cash | 18,297 |
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| 13,447 |
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Interest receivable | 2,790 |
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| 3,349 |
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Receivable for investments sold | 1,453 |
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| — |
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Prepaid expenses and other assets | 2,807 |
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| 4,461 |
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Total assets | $ | 481,675 |
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| $ | 538,188 |
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Liabilities |
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Revolving lines of credit | $ | 24,650 |
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| $ | 56,450 |
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SBA debentures (net of deferred debt issuance costs of $1,415 and $1,904, respectively) | 127,355 |
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| 147,976 |
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Unsecured notes (net of deferred debt issuance costs of $5,168 and $4,798 respectively) | 172,682 |
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| 148,052 |
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Interest payable | 2,055 |
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| 3,505 |
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Payable to adviser and affiliates (Note 3) | 2,773 |
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| 4,106 |
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Payable for investments purchased | 1,494 |
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| 10,264 |
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Accrued professional fees | 426 |
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| 621 |
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Other liabilities | 328 |
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| 587 |
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Total liabilities | 331,763 |
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| 371,561 |
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Commitments and contingencies (Note 6) |
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Net assets |
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Preferred stock, par value of $0.01 per share, 2,000,000 shares authorized, -0- shares issued and outstanding as of September 30, 2020, and December 31, 2019, respectively | $ | — |
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| $ | — |
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Common stock, par value of $0.01 per share, 100,000,000 shares authorized, 13,406,402 and 13,376,836 shares issued and outstanding as of September 30, 2020, and December 31, 2019, respectively | 134 |
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| 134 |
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Paid-in capital in excess of par | 186,979 |
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| 187,305 |
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Total distributable earnings (losses) | (37,201 | ) |
| (20,812 | ) |
Total net assets | 149,912 |
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| 166,627 |
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Total liabilities and net assets | $ | 481,675 |
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| $ | 538,188 |
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Number of shares outstanding | 13,406,402 |
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| 13,376,836 |
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Net asset value per share | $ | 11.18 |
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| $ | 12.46 |
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See Notes to Consolidated Financial Statements.
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
(Dollar amounts in thousands, except per share data)
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| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
Investment income |
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Interest income: |
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Non-control/non-affiliate investments | $ | 8,014 |
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| $ | 10,181 |
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| $ | 25,319 |
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| $ | 28,110 |
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Affiliate investments | 1,708 |
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| 2,647 |
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| 5,794 |
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| 7,640 |
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Control investment | 201 |
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| 262 |
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| 606 |
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| 784 |
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Total interest income | 9,923 |
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| 13,090 |
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| 31,719 |
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| 36,534 |
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Payment-in-kind interest and dividend income: |
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Non-control/non-affiliate investments | 275 |
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| 96 |
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| 800 |
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| 289 |
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Affiliate investments | 72 |
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| 347 |
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| 532 |
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| 899 |
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Control investment | 91 |
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| 28 |
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| 278 |
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| 83 |
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Total payment-in-kind interest and dividend income | 438 |
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| 471 |
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| 1,610 |
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| 1,271 |
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Dividend income: |
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Affiliate investments | — |
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| — |
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| 100 |
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| 173 |
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Control investment | — |
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| — |
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| — |
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| 89 |
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Total dividend income | — |
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| — |
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| 100 |
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| 262 |
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Fee income: |
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Non-control/non-affiliate investments | 80 |
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| 285 |
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| 844 |
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| 781 |
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Affiliate investments | 3 |
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| 6 |
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| 16 |
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| 216 |
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Control investment | 43 |
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| 6 |
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| 49 |
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| 39 |
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Total fee income | 126 |
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| 297 |
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| 909 |
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| 1,036 |
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Total investment income | 10,487 |
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| 13,858 |
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| 34,338 |
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| 39,103 |
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Expenses |
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Interest expense | 4,448 |
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| 4,464 |
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| 14,301 |
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| 11,564 |
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Management fee | 1,871 |
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| 2,164 |
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| 5,759 |
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| 6,062 |
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Incentive fee | 234 |
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| 1,214 |
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| 1,332 |
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| 3,622 |
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Professional fees | 422 |
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| 510 |
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| 1,530 |
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| 1,413 |
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Administration fee | 436 |
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| 396 |
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| 1,456 |
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| 1,250 |
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Other expenses | 364 |
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| 257 |
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| 1,110 |
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| 651 |
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Total expenses before incentive fee waiver | 7,775 |
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| 9,005 |
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| 25,488 |
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| 24,562 |
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Incentive fee waiver (see Note 3) | — |
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| — |
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| (441 | ) |
| — |
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Total expenses, net of incentive fee waiver | 7,775 |
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| 9,005 |
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| 25,047 |
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| 24,562 |
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Net investment income | 2,712 |
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| 4,853 |
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| 9,291 |
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| 14,541 |
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Net realized and unrealized gain (loss) on investments |
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Net realized gain (loss) on non-control/non-affiliate investments | (33 | ) |
| 51 |
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| (10,046 | ) |
| (843 | ) |
Net unrealized appreciation (depreciation) on non-control/non-affiliate investments, net of taxes | 4,649 |
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| (6,534 | ) |
| (10,965 | ) |
| (9,506 | ) |
Net unrealized appreciation on affiliate investments | 10,120 |
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| 4,765 |
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| 6,316 |
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| 5,305 |
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Net unrealized appreciation (depreciation) on control investment | 577 |
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| (1,373 | ) |
| (924 | ) |
| (650 | ) |
Net gain (loss) on investments | 15,313 |
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| (3,091 | ) |
| (15,619 | ) |
| (5,694 | ) |
Loss on extinguishment of debt | (187 | ) |
| — |
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| (336 | ) |
| — |
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Loss on impairment of goodwill | (1,077 | ) |
| — |
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| (1,077 | ) |
| — |
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Net increase (decrease) in net assets resulting from operations | $ | 16,761 |
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| $ | 1,762 |
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| $ | (7,741 | ) |
| $ | 8,847 |
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Net investment income per common share – basic and diluted | $ | 0.20 |
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| $ | 0.36 |
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| $ | 0.69 |
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| $ | 1.09 |
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Net increase (decrease) in net assets resulting from operations per common share – basic and diluted | $ | 1.25 |
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| $ | 0.13 |
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| $ | (0.58 | ) |
| $ | 0.66 |
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Distributions declared per common share | $ | 0.17 |
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| $ | 0.34 |
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| $ | 0.68 |
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| $ | 1.02 |
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Basic and diluted weighted average shares outstanding | 13,399,767 |
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| 13,366,515 |
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| 13,389,830 |
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| 13,361,757 |
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See Notes to Consolidated Financial Statements.
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets (unaudited)
(Dollar amounts in thousands)
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| Preferred Stock | | Common Stock | | Paid-in capital in excess of par | | Total distributable earnings (losses) | | Total net assets |
| Number of shares | | Par value | | Number of shares | | Par value |
Balances at January 1, 2019 | — |
| | $ | — |
| | 13,357,337 |
|
| $ | 134 |
|
| $ | 187,540 |
|
| $ | (12,651 | ) |
| $ | 175,023 |
|
Net increase in net assets resulting from operations: | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
|
| — |
|
| — |
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| 14,541 |
| | 14,541 |
|
Net realized loss on investments | — |
| | — |
| | — |
|
| — |
|
| — |
|
| (843 | ) | | (843 | ) |
Net unrealized depreciation on investments, net of taxes | — |
| | — |
| | — |
|
| — |
|
| — |
|
| (4,851 | ) |
| (4,851 | ) |
Tax reclassifications of permanent differences | — |
| | — |
| | — |
| | — |
| | 183 |
|
| (183 | ) |
| — |
|
Distributions to stockholders: | | | | | | | | | | | | | |
Common stock issued from reinvestment of stockholder distributions | — |
| | — |
| | 14,114 |
| | — |
| | 167 |
| | — |
| | 167 |
|
Dividends declared | — |
| | — |
| | — |
|
| — |
|
| — |
|
| (13,631 | ) |
| (13,631 | ) |
Net increase (decrease) for the period ended September 30, 2019 | — |
| | — |
| | 14,114 |
| | — |
| | 350 |
| | (4,967 | ) | | (4,617 | ) |
Balances at September 30, 2019 | — |
| | $ | — |
| | 13,371,451 |
| | $ | 134 |
| | $ | 187,890 |
| | $ | (17,618 | ) | | $ | 170,406 |
|
| | | | | | | | | | | | | |
Balances at June 30, 2019 | — |
| | $ | — |
| | 13,366,461 |
|
| $ | 134 |
|
| $ | 187,814 |
|
| $ | (14,816 | ) | | $ | 173,132 |
|
Net increase in net assets resulting from operations: | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
|
| — |
|
| — |
|
| 4,853 |
|
| 4,853 |
|
Net realized gain on investments | — |
| | — |
| | — |
|
| — |
|
| — |
|
| 51 |
|
| 51 |
|
Net unrealized depreciation on investments, net of taxes | — |
| | — |
| | — |
|
| — |
|
| — |
|
| (3,142 | ) | | (3,142 | ) |
Tax reclassifications of permanent differences | — |
| | — |
| | — |
| | — |
| | 18 |
|
| (18 | ) |
| — |
|
Distributions to stockholders: | | | | | | | | | | | | | |
Common stock issued from reinvestment of stockholder distributions | — |
| | — |
| | 4,990 |
|
| — |
|
| 58 |
|
| — |
|
| 58 |
|
Dividends declared | — |
| | — |
| | — |
|
| — |
|
| — |
|
| (4,546 | ) |
| (4,546 | ) |
Net increase (decrease) for the period ended September 30, 2019 | — |
| | — |
| | 4,990 |
| | — |
| | 76 |
| | (2,802 | ) | | (2,726 | ) |
Balances at September 30, 2019 | — |
| | $ | — |
| | 13,371,451 |
| | $ | 134 |
| | $ | 187,890 |
| | $ | (17,618 | ) | | $ | 170,406 |
|
| | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets (unaudited)
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Paid-in capital in excess of par | | Total distributable earnings (losses) | | Total net assets |
| Number of shares | | Par value | | Number of shares | | Par value |
Balances at January 1, 2020 | — |
| | $ | — |
| | 13,376,836 |
|
| $ | 134 |
|
| $ | 187,305 |
|
| $ | (20,812 | ) |
| $ | 166,627 |
|
Net decrease in net assets resulting from operations: | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | 9,291 |
| | 9,291 |
|
Net realized loss on investments | — |
| | — |
| | — |
| | — |
| | — |
| | (10,046 | ) | | (10,046 | ) |
Loss on extinguishment of debt | — |
| | — |
| | — |
| | — |
| | — |
| | (336 | ) | | (336 | ) |
Loss on impairment of goodwill | — |
| | — |
| | — |
| | — |
| | — |
| | (1,077 | ) | | (1,077 | ) |
Net unrealized depreciation on investments, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | (5,573 | ) | | (5,573 | ) |
Tax reclassifications of permanent differences | — |
| | — |
| | — |
| | — |
| | (454 | ) |
| 454 |
|
| — |
|
Distributions to stockholders: | | | | | | | | | | | | | |
Common stock issued from reinvestment of stockholder distributions | — |
| | — |
| | 29,566 |
| | — |
| | 128 |
| | — |
| | 128 |
|
Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (9,102 | ) | | (9,102 | ) |
Net increase (decrease) for the period ended September 30, 2020 | — |
| | — |
| | 29,566 |
| | — |
| | (326 | ) | | (16,389 | ) | | (16,715 | ) |
Balances at September 30, 2020 | — |
| | $ | — |
| | 13,406,402 |
| | $ | 134 |
| | $ | 186,979 |
| | $ | (37,201 | ) | | $ | 149,912 |
|
| | | | | | | | | | | | | |
Balances at June 30, 2020 | — |
| | $ | — |
| | 13,399,694 |
|
| $ | 134 |
|
| $ | 187,437 |
|
| $ | (52,174 | ) |
| $ | 135,397 |
|
Net increase in net assets resulting from operations: | | | | | | | | | | | | | |
Net investment income | — |
| | — |
| | — |
|
| — |
|
| — |
|
| 2,712 |
|
| 2,712 |
|
Net realized loss on investments | — |
| | — |
| | — |
|
| — |
|
| — |
|
| (33 | ) |
| (33 | ) |
Loss on extinguishment of debt | — |
| | — |
| | — |
| | — |
| | — |
| | (187 | ) | | (187 | ) |
Loss on impairment of goodwill | — |
| | — |
| | — |
| | — |
| | — |
| | (1,077 | ) | | (1,077 | ) |
Net unrealized appreciation on investments, net of taxes | — |
| | — |
| | — |
|
| — |
|
| — |
|
| 15,346 |
|
| 15,346 |
|
Tax reclassifications of permanent differences | — |
| | — |
| | — |
|
| — |
|
| (490 | ) |
| 490 |
|
| — |
|
Distributions to stockholders: | | | | | | | | | | | | | |
Common stock issued from reinvestment of stockholder distributions | — |
| | — |
| | 6,708 |
|
| — |
|
| 32 |
|
| — |
|
| 32 |
|
Dividends declared | — |
| | — |
| | — |
|
| — |
|
| — |
|
| (2,278 | ) |
| (2,278 | ) |
Net increase for the period ended September 30, 2020 | — |
| | — |
| | 6,708 |
| | — |
| | (458 | ) | | 14,973 |
| | 14,515 |
|
Balances at September 30, 2020 | — |
| | $ | — |
| | 13,406,402 |
| | $ | 134 |
| | $ | 186,979 |
| | $ | (37,201 | ) | | $ | 149,912 |
|
See Notes to Consolidated Financial Statements.
OFS Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(Dollar amounts in thousands)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Cash flows from operating activities | | | |
Net increase (decrease) in net assets resulting from operations | $ | (7,741 | ) |
| $ | 8,847 |
|
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: |
|
|
|
|
|
Net realized loss on investments | 10,046 |
|
| 843 |
|
Loss on impairment of goodwill | 1,077 |
| | — |
|
Loss on extinguishment of debt | 336 |
| | — |
|
Net unrealized depreciation on investments, net of taxes | 5,573 |
|
| 4,851 |
|
Amortization of Net Loan Fees | (1,006 | ) |
| (788 | ) |
Amendment fees collected | 54 |
|
| 103 |
|
Payment-in-kind interest and dividend income | (1,610 | ) |
| (1,271 | ) |
Accretion of interest income on structured finance notes | (4,141 | ) | | (2,001 | ) |
Amortization of debt issuance costs | 1,258 |
|
| 942 |
|
Amortization of intangible asset | 152 |
|
| 146 |
|
Purchase and origination of portfolio investments | (80,990 | ) |
| (169,638 | ) |
Proceeds from principal payments on portfolio investments | 60,071 |
|
| 30,750 |
|
Proceeds from sale or redemption of portfolio investments | 67,409 |
|
| 30,368 |
|
Proceeds from distributions received from structured finance notes | 4,614 |
|
| 1,976 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
Interest receivable | 559 |
|
| (511 | ) |
Interest payable | (1,450 | ) |
| (746 | ) |
Payable to adviser and affiliates | (1,333 | ) |
| 349 |
|
Receivable for investment sold | (1,453 | ) | | — |
|
Payable for investments purchased | (8,770 | ) | | 924 |
|
Other assets and liabilities | (160 | ) |
| (493 | ) |
Net cash provided by (used in) operating activities | 42,495 |
|
| (95,349 | ) |
| | | |
Cash flows from financing activities | | | |
Distributions paid to stockholders | (8,974 | ) |
| (13,464 | ) |
Borrowings under revolving lines of credit | 78,800 |
|
| 128,675 |
|
Repayments under revolving lines of credit | (110,600 | ) |
| (48,200 | ) |
Proceeds from unsecured notes offering, net of discounts | 24,250 |
| | — |
|
Repayments of SBA debentures | (21,110 | ) |
| — |
|
Payment of deferred financing costs | (11 | ) |
| (1,857 | ) |
Repurchases of common stock under Stock Repurchase Program | — |
| | (3 | ) |
Net cash provided by (used in) financing activities | (37,645 | ) |
| 65,151 |
|
Net increase (decrease) in cash | 4,850 |
|
| (30,198 | ) |
Cash at beginning of period | 13,447 |
|
| 38,172 |
|
Cash at end of period | $ | 18,297 |
|
| $ | 7,974 |
|
| | | |
Supplemental Disclosure of Cash Flow Information: | | | |
Cash paid for interest | $ | 14,494 |
|
| $ | 11,368 |
|
Reinvestment of distributions to stockholders | 128 |
|
| 167 |
|
See Notes to Consolidated Financial Statements.
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Non-control/Non-affiliate Investments | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and Equity Investments | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Star Auto Lights, Inc. (4) |
| Motor Vehicle Parts (Used) Merchant Wholesalers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.50% |
| (L +7.50%) |
| 12/19/2019 |
| 8/20/2024 |
| $ | 14,328 |
|
| $ | 14,194 |
|
| $ | 13,633 |
|
| 9.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Bath Group, LLC (14) (15) |
| Plastics Plumbing Fixture Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 5.00% |
| (L +4.00%) |
| 6/24/2019 |
| 9/30/2023 |
| 1,478 |
|
| 1,473 |
|
| 1,479 |
|
| 1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A&A Transfer, LLC |
| Construction and Mining (except Oil Well) Machinery and Equipment Merchant Wholesalers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (15) |
|
|
| 8.25% |
| (L +6.50%) |
| 2/7/2020 |
| 2/7/2025 |
| 16,848 |
|
| 16,628 |
|
| 17,091 |
|
| 11.5 |
|
Senior Secured Loan (Revolver) (5) |
|
|
| n/m (18) |
| (L +6.50%) |
| 2/7/2020 |
| 2/7/2025 |
| — |
|
| (38 | ) |
| 31 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| 16,848 |
|
| 16,590 |
|
| 17,122 |
|
| 11.5 |
|
Bass Pro Group, LLC (14) (15) |
| Sporting Goods Stores |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 5.75% |
| (L +5.00%) |
| 6/24/2019 |
| 9/25/2024 |
| 2,962 |
|
| 2,911 |
|
| 2,942 |
|
| 2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baymark Health Services, Inc. |
| Outpatient Mental Health & Sub. Abuse Centers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 9.25% |
| (L +8.25%) |
| 3/22/2018 |
| 3/1/2025 |
| 4,000 |
|
| 3,975 |
|
| 3,951 |
|
| 2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina Lubes, Inc. |
| Automotive Oil Change and Lubrication Shops |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (4) (8) |
|
|
| 8.64% |
| (L +7.64%) |
| 8/23/2017 |
| 8/23/2022 |
| 19,840 |
|
| 19,773 |
|
| 19,609 |
|
| 13.2 |
|
Senior Secured Loan (Revolver) (5) |
|
|
| n/m (18) |
| (L +7.25%) |
| 8/23/2017 |
| 8/23/2022 |
| — |
|
| (6 | ) |
| (34 | ) |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| 19,840 |
| | 19,767 |
| | 19,575 |
| | 13.2 |
|
Community Intervention Services, Inc. (4) (6) (11) |
| Outpatient Mental Health and Substance Abuse Centers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Loan |
|
|
| 7.0% cash / 6.0% PIK |
| N/A |
| 7/16/2015 |
| 1/16/2021 |
| 10,071 |
|
| 7,639 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confie Seguros Holdings II Co. |
| Insurance Agencies and Brokerages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.66% |
| (L +8.50%) |
| 7/7/2015 |
| 11/1/2025 |
| 9,678 |
|
| 9,537 |
|
| 8,951 |
|
| 6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connect U.S. Finco LLC (14) (15) |
| Taxi Service |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 5.50% |
| (L +4.50%) |
| 11/20/2019 |
| 12/11/2026 |
| 1,990 |
|
| 1,981 |
|
| 1,934 |
|
| 1.3 |
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Constellis Holdings, LLC (10) |
| Other Justice, Public Order, and Safety Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity (20,628 common shares) |
|
|
|
|
|
|
| 3/27/2020 |
|
|
|
|
|
| $ | 703 |
|
| $ | 696 |
|
| 0.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convergint Technologies Holdings, LLC |
| Security Systems Services (except Locksmiths) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 7.50% |
| (L +6.75%) |
| 9/28/2018 |
| 2/2/2026 |
| 3,481 |
|
| 3,439 |
|
| 3,287 |
|
| 2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Truck One Source (14) (15) |
| Construction, Mining, and Forestry Machinery and Equipment Rental and Leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 4.40% |
| (L +4.25%) |
| 9/30/2020 |
| 4/18/2025 |
| 500 |
|
| 499 |
|
| 497 |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Davis Vision, Inc. |
| Direct Health and Medical Insurance Carriers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 7.75% |
| (L +6.75%) |
| 10/31/2019 |
| 12/1/2025 |
| 405 |
|
| 396 |
|
| 405 |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diamond Sports Group, LLC (14) (15) |
| Television Broadcasting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 3.40% |
| (L +3.25%) |
| 11/19/2019 |
| 8/24/2026 |
| 1,980 |
|
| 1,982 |
|
| 1,554 |
|
| 1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DuPage Medical Group (15) |
| Offices of Physicians, Mental Health Specialists |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 7.75% |
| (L +7.00%) |
| 8/22/2017 |
| 8/15/2025 |
| 10,098 |
|
| 10,162 |
|
| 9,916 |
|
| 6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eblens Holdings, Inc. |
| Shoe Store |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Loan (11) |
|
|
| 12.50% cash / 1.50% PIK |
| N/A |
| 7/13/2017 |
| 1/13/2023 |
| 9,086 |
|
| 9,029 |
|
| 5,351 |
|
| 3.6 |
|
Common Equity (71,250 Class A units) (10) |
|
|
|
|
|
|
| 7/13/2017 |
|
|
|
|
|
| 713 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| 9,086 |
|
| 9,742 |
|
| 5,351 |
|
| 3.6 |
|
Envocore Holding, LLC (F/K/A LRI Holding, LLC) (4) |
| Electrical Contractors and Other Wiring Installation Contractors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 6.75% cash / 4.25% PIK |
| N/A |
| 6/30/2017 |
| 6/30/2022 |
| 16,998 |
|
| 16,887 |
|
| 13,960 |
|
| 9.3 |
|
Preferred Equity (238,095 Series B units) (10) |
|
|
|
|
|
|
| 6/30/2017 |
|
|
|
|
|
| 300 |
|
| — |
|
| — |
|
Preferred Equity (13,315 Series C units) (10) |
|
|
|
|
|
|
| 8/13/2018 |
|
|
|
|
|
| 13 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| 16,998 |
|
| 17,200 |
|
| 13,960 |
|
| 9.3 |
|
Excelin Home Health, LLC |
| Home Health Care Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 11.50% |
| (L +9.50%) |
| 10/25/2018 |
| 4/25/2024 |
| 4,250 |
|
| 4,195 |
|
| 4,250 |
|
| 2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
GGC Aerospace Topco L.P. |
| Other Aircraft Parts and Auxiliary Equipment Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 9.75% |
| (L +8.75%) |
| 12/29/2017 |
| 9/8/2024 |
| $ | 5,000 |
|
| $ | 4,926 |
|
| $ | 4,456 |
|
| 2.9 | % |
Common Equity (368,852 Class A units) (10) |
|
|
|
|
|
|
| 12/29/2017 |
|
|
|
|
|
| 450 |
|
| 231 |
|
| 0.2 |
|
Common Equity (40,984 Class B units) (10) |
|
|
|
|
|
|
| 12/29/2017 |
|
|
|
|
|
| 50 |
|
| 9 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| 5,000 |
|
| 5,426 |
|
| 4,696 |
|
| 3.1 |
|
Inergex Holdings, LLC |
| Other Computer Related Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.00% |
| (L +7.00%) |
| 10/1/2018 |
| 10/1/2024 |
| 16,464 |
|
| 16,296 |
|
| 15,368 |
|
| 10.2 |
|
Senior Secured Loan (Revolver) (5) |
|
|
| 8.00% |
| (Prime + 7.00%) |
| 10/1/2018 |
| 10/1/2024 |
| 469 |
|
| 450 |
|
| 438 |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| 16,933 |
|
| 16,746 |
|
| 15,806 |
|
| 10.5 |
|
Institutional Shareholder Services, Inc. |
| Administrative Management and General Management Consulting Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.72% |
| (L +8.50%) |
| 3/4/2019 |
| 3/5/2027 |
| 6,244 |
|
| 6,093 |
|
| 6,046 |
|
| 4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intouch Midco Inc. (15) |
| All Other Professional, Scientific, and Technical Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 4.90% |
| (L +4.75%) |
| 12/20/2019 |
| 8/24/2025 |
| 1,985 |
|
| 1,923 |
|
| 1,830 |
|
| 1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milrose Consultants, LLC (4) (8) |
| Administrative Management and General Management Consulting Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 7.74% |
| (L +6.74%) |
| 7/16/2019 |
| 7/16/2025 |
| 19,167 |
|
| 19,041 |
|
| 19,049 |
|
| 12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
My Alarm Center, LLC (10) |
| Security Systems Services (except Locksmiths) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity (335 Class Z units) (13) |
|
|
|
|
|
|
| 9/12/2018 |
|
|
|
|
|
| $ | 325 |
|
| $ | 1,136 |
|
| 0.8 | % |
Preferred Equity (1,485 Class A units), 8% PIK (4) (13) |
|
|
|
|
|
|
| 7/14/2017 |
|
|
|
|
|
| 1,571 |
|
| 229 |
|
| 0.2 |
|
Preferred Equity (1,198 Class B units) (4) |
|
|
|
|
|
|
| 7/14/2017 |
|
|
|
|
|
| 1,198 |
|
| 5 |
|
| — |
|
Common Equity (64,149 units) (4) (13) |
|
|
|
|
|
|
| 7/14/2017 |
|
|
|
|
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,094 |
|
| 1,370 |
|
| 1.0 |
|
Online Tech Stores, LLC (4) (6) |
| Stationary & Office Supply Merchant Wholesaler |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Loan |
|
|
| 13.50% PIK |
| N/A |
| 2/1/2018 |
| 8/1/2023 |
| 18,058 |
|
| 16,129 |
|
| 7,093 |
|
| 4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
OnSite Care, PLLC (4) (8) |
| Home Health Care Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.70% |
| (L +7.70%) |
| 8/10/2018 |
| 8/10/2023 |
| $ | 9,516 |
|
| $ | 9,441 |
|
| $ | 9,516 |
|
| 6.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Panther BF Aggregator 2 LP (14) (15) |
| Other Commercial and Service Industry Machinery Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 3.65% |
| (L +3.50%) |
| 11/19/2019 |
| 4/30/2026 |
| 1,980 |
|
| 1,965 |
|
| 1,934 |
|
| 1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parfums Holding Company, Inc. |
| Cosmetics, Beauty Supplies, and Perfume Stores |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (14) (15) |
|
|
| 4.26% |
| (L +4.00%) |
| 6/25/2019 |
| 6/30/2024 |
| 1,537 |
|
| 1,536 |
|
| 1,507 |
|
| 1.0 |
|
Senior Secured Loan |
|
|
| 9.75% |
| (L +8.75%) |
| 11/16/2017 |
| 6/30/2025 |
| 6,320 |
|
| 6,332 |
|
| 6,289 |
|
| 4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
| 7,857 |
|
| 7,868 |
|
| 7,796 |
|
| 5.2 |
|
Pelican Products, Inc. |
| Unlaminated Plastics Profile Shape Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.75% |
| (L +7.75%) |
| 9/24/2018 |
| 5/1/2026 |
| 6,055 |
|
| 6,059 |
|
| 5,835 |
|
| 3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pike Corp. (14) (15) |
| Electrical Contractors and Other Wiring Installation Contractors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 3.15% |
| (L +3.00%) |
| 9/17/2020 |
| 7/24/2026 |
| 500 |
|
| 500 |
|
| 497 |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PM Acquisition LLC |
| All Other General Merchandise Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 11.50% cash / 2.5% PIK |
| N/A |
| 9/30/2017 |
| 10/29/2021 |
| 4,828 |
|
| 4,793 |
|
| 4,615 |
|
| 3.1 |
|
Common Equity (499 units) (10) (13) |
|
|
|
|
|
|
| 9/30/2017 |
|
|
|
|
|
| 499 |
|
| 165 |
|
| 0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
| 4,828 |
|
| 5,292 |
|
| 4,780 |
|
| 3.2 |
|
Quest Software US Holdings Inc. (14) (15) |
| Computer and Computer Peripheral Equipment and Software Merchant Wholesalers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 4.51% |
| (L +4.25%) |
| 6/25/2019 |
| 5/16/2025 |
| 1,975 |
|
| 1,959 |
|
| 1,939 |
|
| 1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resource Label Group, LLC |
| Commercial Printing (except Screen and Books) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 9.50% |
| (L +8.50%) |
| 6/7/2017 |
| 11/26/2023 |
| 4,821 |
|
| 4,786 |
|
| 4,549 |
|
| 3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocket Software, Inc. (15) |
| Software Publishers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.51% |
| (L +8.25%) |
| 11/20/2018 |
| 11/28/2026 |
| 6,275 |
|
| 6,186 |
|
| 5,959 |
|
| 4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
RPLF Holdings, LLC (10) (13) |
| Software Publishers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity (254,110 Class A units) |
|
|
|
|
|
|
| 1/17/2018 |
|
|
|
|
|
| $ | 254 |
|
| $ | 418 |
|
| 0.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sentry Centers Holdings, LLC (10) (13) |
| Convention and Trade Show Organizers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity (2,248 Series A units) |
|
|
|
|
|
|
| 9/4/2020 |
|
|
| — |
|
| 51 |
|
| 47 |
|
| — |
|
Preferred Equity (1,603 Series B units) |
|
|
|
|
|
|
| 9/4/2020 |
|
|
| — |
|
| 160 |
|
| 160 |
|
| 0.1 |
|
Common Equity (269 units) |
|
|
|
|
|
|
| 9/4/2020 |
|
|
| — |
|
| 3 |
|
| 3 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
| 214 |
|
| 210 |
|
| 0.1 |
|
SkyMiles IP Ltd. and Delta Air Lines, Inc. (14) (15) |
| Scheduled Passenger Air Transportation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 4.75% |
| (L +3.75%) |
| 9/15/2020 |
| 9/16/2027 |
| 500 |
|
| 495 |
|
| 504 |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SourceHOV Tax, Inc. (4) (8) |
| Other Accounting Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 7.87% |
| (L +6.37%) |
| 3/16/2020 |
| 3/17/2025 |
| 12,915 |
|
| 12,832 |
|
| 13,172 |
|
| 8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern Technical Institute, LLC (4) (10) |
| Colleges, Universities, and Professional Schools |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity appreciation rights |
|
|
|
|
|
|
| 6/27/2018 |
|
|
|
|
|
| — |
|
| 3,356 |
|
| 2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spring Education Group, Inc. (F/K/A SSH Group Holdings, Inc.,) |
| Child Day Care Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.47% |
| (L +8.25%) |
| 7/26/2018 |
| 7/30/2026 |
| 5,216 |
|
| 5,180 |
|
| 4,948 |
|
| 3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSJA Bariatric Management LLC (15) |
| Offices of Physicians, Mental Health Specialists |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 6.00% |
| (L +5.00%) |
| 8/26/2019 |
| 8/26/2024 |
| 9,975 |
|
| 9,897 |
|
| 9,605 |
|
| 6.5 |
|
Senior Secured Loan (Revolver) (5) |
|
|
| 5.25% |
| (L +4.00%) |
| 8/26/2019 |
| 8/26/2024 |
| 667 |
|
| 662 |
|
| 642 |
|
| 0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
| 10,642 |
|
| 10,559 |
|
| 10,247 |
|
| 6.9 |
|
Stancor, L.P. (4) |
| Pump and Pumping Equipment Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity (1,250,000 Class A units), 8% PIK (10) |
|
|
|
|
|
|
| 8/19/2014 |
|
|
|
|
|
| 1,501 |
|
| 1,220 |
|
| 0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staples, Inc. (14) (15) |
| Business to Business Electronic Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 5.25% |
| (L +5.00%) |
| 6/24/2019 |
| 4/16/2026 |
| 2,967 |
|
| 2,895 |
|
| 2,768 |
|
| 1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
STS Operating, Inc. |
| Industrial Machinery and Equipment Merchant Wholesalers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (14) (15) |
|
|
| 5.25% |
| (L +4.25%) |
| 5/16/2018 |
| 12/11/2024 |
| $ | 627 |
|
| $ | 626 |
|
| $ | 599 |
|
| 0.4 | % |
Senior Secured Loan |
|
|
| 9.00% |
| (L +8.00%) |
| 5/15/2018 |
| 4/30/2026 |
| 9,073 |
|
| 9,070 |
|
| 8,461 |
|
| 5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
| 9,700 |
|
| 9,696 |
|
| 9,060 |
|
| 6.0 |
|
Sunshine Luxembourg VII SARL (14) (15) |
| Pharmaceutical Preparation Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 4.47% |
| (L +4.25%) |
| 11/20/2019 |
| 9/25/2026 |
| 1,985 |
|
| 1,994 |
|
| 1,978 |
|
| 1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tank Holding Corp. (14) (15) |
| Unlaminated Plastics Profile Shape Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 4.93% |
| (L +3.50%) |
| 6/24/2019 |
| 3/26/2026 |
| 1,980 |
|
| 1,987 |
|
| 1,960 |
|
| 1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Escape Game, LLC (4) |
| Other amusement and recreation industries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 9.75% |
| (L +8.75%) |
| 12/22/2017 |
| 12/22/2022 |
| 7,000 |
|
| 6,969 |
|
| 6,549 |
|
| 4.4 |
|
Senior Secured Loan |
|
|
| 9.75% |
| (L +8.75%) |
| 2/14/2020 |
| 12/31/2020 |
| 2,333 |
|
| 2,323 |
|
| 2,183 |
|
| 1.5 |
|
Senior Secured Loan |
|
|
| 8.00% |
| (L +7.00%) |
| 7/18/2019 |
| 12/31/2020 |
| 4,667 |
|
| 4,661 |
|
| 4,392 |
|
| 2.9 |
|
Senior Secured Loan (Delayed Draw) |
|
|
| 9.75% |
| (L +8.75%) |
| 7/20/2018 |
| 12/22/2022 |
| 7,000 |
|
| 7,000 |
|
| 6,549 |
|
| 4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
| 21,000 |
|
| 20,953 |
|
| 19,673 |
|
| 13.2 |
|
Truck Hero, Inc. (15) |
| Truck Trailer Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 9.25% |
| (L +8.25%) |
| 5/30/2017 |
| 4/21/2025 |
| 7,014 |
|
| 6,987 |
|
| 6,915 |
|
| 4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Biologics Holdings, LLC (4) (10) |
| Medical Laboratories |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity (151,787 units) |
|
|
|
|
|
|
| 4/16/2013 |
|
|
|
|
|
| 9 |
|
| 30 |
|
| — |
|
Warrants (29,374 units) |
|
|
|
|
|
|
| 7/26/2012 |
| 3/5/2022 (12) |
|
|
|
| 82 |
|
| 14 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 91 |
|
| 44 |
|
| — |
|
United Natural Foods (14) (15) |
| General Line Grocery Merchant Wholesalers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 4.40% |
| (L +4.25%) |
| 6/9/2020 |
| 10/22/2025 |
| 478 |
|
| 460 |
|
| 468 |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wastebuilt Environmental Solutions, LLC (4) |
| Industrial Supplies Merchant Wholesalers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 10.25% |
| (L +8.75%) |
| 10/11/2018 |
| 10/11/2024 |
| 7,000 |
|
| 6,901 |
|
| 5,402 |
|
| 3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Weight Watchers International, Inc. (14) (15) |
| Diet and Weight Reducing Centers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 5.50% |
| (L +4.75%) |
| 6/10/2020 |
| 11/29/2024 |
| $ | 485 |
|
| $ | 485 |
|
| $ | 485 |
|
| 0.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xperi (14) (15) |
| Semiconductor and Related Device Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 4.15% |
| (L +4.00%) |
| 6/1/2020 |
| 6/1/2025 |
| 514 |
|
| 471 |
|
| 502 |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt and Equity Investments |
|
|
|
|
|
|
|
|
|
|
| $ | 321,583 |
|
| $ | 322,848 |
|
| $ | 291,528 |
|
| 194.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Finance Note Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dryden 76 CLO, Ltd. (7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Notes |
|
|
| 19.80% (9) |
|
|
| 9/27/2019 |
| 10/20/2032 (17) |
| 2,750 |
|
| 2,320 (16) |
|
| 2,038 |
|
| 1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elevation CLO 2017-7, Ltd. (7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Notes |
|
|
| 12.26% (9) |
|
|
| 2/6/2019 |
| 7/15/2030 (17) |
| 10,000 |
|
| 7,165 (16) |
|
| 5,754 |
|
| 3.8 |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
Flatiron CLO 18, Ltd. (7) |
|
|
| |
|
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
Subordinated Notes |
|
|
| 21.27% (9) |
|
|
| 1/2/2019 |
| 4/17/2031 (17) |
| 9,680 |
|
| 7,306 (16) |
|
| 6,839 |
|
| 4.6 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Madison Park Funding XXIII, Ltd. (7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Notes |
|
|
| 19.45% (9) |
|
|
| 1/8/2020 |
| 7/27/2047 (17) |
| 10,000 |
|
| 6,819 (16) |
|
| 6,743 |
|
| 4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monroe Capital MML CLO X, LTD. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine bond - Class E |
|
|
| 9.08% (9) |
| (L +8.85%) |
| 8/7/2020 |
| 8/20/2031 (17) |
| 863 |
|
| 799 |
|
| 797 |
|
| 0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Octagon Investment Partners 39, Ltd. (7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Notes |
|
|
| 21.01% (9) |
|
|
| 1/23/2020 |
| 10/20/2030 (17) |
| 7,000 |
|
| 5,277 (16) |
|
| 4,904 |
|
| 3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Park Avenue Institutional Advisers CLO 2017-1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine bond - Class D |
|
|
| 6.48% (9) |
| (L +6.22%) |
| 6/5/2020 |
| 11/14/2029 (17) |
| 100 |
|
| 82 |
|
| 89 |
|
| 0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Regatta II Funding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine bond - Class DR2 |
|
|
| 7.23% (9) |
| (L +6.95%) |
| 6/5/2020 |
| 1/15/2029 (17) |
| $ | 800 |
|
| $ | 685 |
|
| $ | 720 |
|
| 0.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THL Credit Wind River 2019‐3 CLO Ltd (7) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Notes |
|
|
| 15.73% (9) |
|
|
| 4/5/2019 |
| 4/15/2031 (17) |
| 7,000 |
|
| 5,807 (16) |
|
| 4,647 |
|
| 3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Structured Finance Note Investments |
|
|
|
|
|
|
|
|
|
|
| $ | 48,193 |
|
| $ | 36,260 |
|
| $ | 32,531 |
|
| 21.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-control/Non-affiliate Investments |
|
|
|
|
|
|
|
|
|
|
| $ | 369,776 |
|
| $ | 359,108 |
|
| $ | 324,059 |
|
| 216.3 | % |
Affiliate Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd Rock Gaming Holdings, LLC |
| Software Publishers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (6) |
|
|
| 8.50% cash / 1.0% PIK |
| (L +7.50%) |
| 3/13/2018 |
| 3/12/2023 |
| 21,285 |
|
| 20,993 |
|
| 11,664 |
|
| 7.8 |
|
Common Equity (2,547,250 units) (10) (13) |
|
|
|
|
|
|
| 3/13/2018 |
|
|
|
|
|
| 2,547 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| 21,285 |
|
| 23,540 |
|
| 11,664 |
|
| 7.8 |
|
Chemical Resources Holdings, Inc. |
| Custom Compounding of Purchased Resins |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (4) (8) |
|
|
| 9.22% |
| (L +7.72%) |
| 1/25/2019 |
| 1/25/2024 |
| 13,743 |
|
| 13,620 |
|
| 13,857 |
|
| 9.2 |
|
Common Equity (1,832 Class A shares) (10) (13) |
|
|
|
|
|
|
| 1/25/2019 |
|
|
|
|
|
| 1,813 |
|
| 2,475 |
|
| 1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
| 13,743 |
|
| 15,433 |
|
| 16,332 |
|
| 10.9 |
|
Contract Datascan Holdings, Inc. (4) |
| Office Machinery and Equipment Rental and Leasing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Loan |
|
|
| 12.00% |
| N/A |
| 8/5/2015 |
| 2/5/2021 |
| 8,022 |
|
| 8,012 |
|
| 7,706 |
|
| 5.1 |
|
Preferred Equity (3,061 Series A shares), 10% PIK |
|
|
|
|
|
|
| 8/5/2015 |
|
|
|
|
|
| 5,848 |
|
| 2,523 |
|
| 1.7 |
|
Common Equity (11,273 shares) (10) |
|
|
|
|
|
|
| 6/28/2016 |
|
|
|
|
|
| 104 |
|
| 36 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| 8,022 |
|
| 13,964 |
|
| 10,265 |
|
| 6.8 |
|
DRS Imaging Services, LLC |
| Data Processing, Hosting, and Related Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (4) (8) |
|
|
| 10.12% |
| (L +9.12%) |
| 3/8/2018 |
| 11/20/2023 |
| 10,626 |
|
| 10,570 |
|
| 10,626 |
|
| 7.1 |
|
Common Equity (1,135 units) (10) (13) |
|
|
|
|
|
|
| 3/8/2018 |
|
|
|
|
|
| 1,135 |
|
| 1,694 |
|
| 1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
| 10,626 |
|
| 11,705 |
|
| 12,320 |
|
| 8.2 |
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Master Cutlery, LLC (4) (10) |
| Sporting and Recreational Goods and Supplies Merchant Wholesalers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Loan (6) (11) |
|
|
| 13.00% |
| N/A |
| 4/17/2015 |
| 7/20/2022 |
| $ | 6,546 |
|
| $ | 4,764 |
|
| $ | — |
|
| — | % |
Preferred Equity (3,723 Series A units), 8% PIK |
|
|
|
|
|
|
| 4/17/2015 |
|
|
|
|
|
| 3,483 |
|
| — |
|
| — |
|
Common Equity (15,564 units) |
|
|
|
|
|
|
| 4/17/2015 |
|
|
|
|
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| 6,546 |
|
| 8,247 |
|
| — |
|
| — |
|
NeoSystems Corp. (4) |
| Other Accounting Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity (521,962 convertible shares), 10% PIK |
|
|
|
|
|
|
| 8/14/2014 |
|
|
|
|
|
| 1,831 |
|
| 2,250 |
|
| 1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pfanstiehl Holdings, Inc. (4) |
| Pharmaceutical Preparation Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Loan |
|
|
| 10.50% |
| N/A |
| 1/1/2014 |
| 9/27/2024 |
| 3,788 |
|
| 3,788 |
|
| 3,788 |
|
| 2.5 |
|
Common Equity (400 Class A shares) |
|
|
|
|
|
|
| 1/1/2014 |
|
|
|
|
|
| 217 |
|
| 31,932 |
|
| 21.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| 3,788 |
|
| 4,005 |
|
| 35,720 |
|
| 23.8 |
|
Professional Pipe Holdings, LLC |
| Plumbing, Heating, and Air-Conditioning Contractors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan |
|
|
| 8.90% cash / 1.50% PIK |
| (L +8.75%) |
| 3/23/2018 |
| 3/23/2023 |
| 7,180 |
|
| 7,111 |
|
| 6,849 |
|
| 4.6 |
|
Common Equity (1,414 Class A units) (10) |
|
|
|
|
|
|
| 3/23/2018 |
|
|
|
|
|
| 1,414 |
|
| 1,011 |
|
| 0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
| 7,180 |
|
| 8,525 |
|
| 7,860 |
|
| 5.3 |
|
TalentSmart Holdings, LLC |
| Professional and Management Development Training |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (4) |
|
|
| 8.50% |
| (L +6.75%) |
| 10/11/2019 |
| 10/11/2024 |
| 9,813 |
|
| 9,674 |
|
| 9,901 |
|
| 6.6 |
|
Senior Secured Loan (Revolver) (5) |
|
|
| 8.50% |
| (L +6.75%) |
| 10/11/2019 |
| 10/11/2024 |
| 500 |
|
| 493 |
|
| 504 |
|
| 0.3 |
|
Common Equity (1,595 Class A shares) (10) (13) |
|
|
|
|
|
|
| 10/11/2019 |
|
|
|
|
|
| 1,595 |
|
| 900 |
|
| 0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
| 10,313 |
|
| 11,762 |
|
| 11,305 |
|
| 7.5 |
|
TRS Services, LLC (4) (10) |
| Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity (2,088,305 Class A units), 11% PIK |
|
|
|
|
|
|
| 12/10/2014 |
|
|
|
|
|
| 279 |
|
| 811 |
|
| 0.5 |
|
Common Equity (3,000,000 units) |
|
|
|
|
|
|
| 12/10/2014 |
|
|
|
|
|
| 572 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
| 851 |
|
| 811 |
|
| 0.5 |
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
TTG Healthcare, LLC |
| Diagnostic Imaging Centers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Loan (4) |
|
|
| 10.00% |
| (L +9.00%) |
| 3/1/2019 |
| 3/1/2024 |
| $ | 12,103 |
|
| $ | 11,969 |
|
| $ | 12,194 |
|
| 8.1 | % |
Preferred Equity ( 2,309 Class B units) (10) (13) |
|
|
|
|
|
|
| 3/1/2019 |
|
|
|
|
|
| 2,309 |
|
| 3,464 |
|
| 2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| 12,103 |
|
| 14,278 |
|
| 15,658 |
|
| 10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments |
|
|
|
|
|
|
|
|
|
|
| $ | 93,606 |
|
| $ | 114,141 |
|
| $ | 124,185 |
|
| 82.7 | % |
Control Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTE Holding Corp. (4) |
| Travel Trailer and Camper Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Loan (to Mirage Trailers, LLC, a controlled, consolidated subsidiary of MTE Holding Corp.) |
|
|
| 11.00% cash / 5.00% PIK |
| (L +8.50%) |
| 11/25/2015 |
| 11/25/2021 |
| 7,742 |
|
| 7,742 |
|
| 7,626 |
|
| 5.1 |
|
Common Equity (554 shares) (10) |
|
|
|
|
|
|
| 11/25/2015 |
|
|
|
|
|
| 3,069 |
|
| 458 |
|
| 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| 7,742 |
|
| 10,811 |
|
| 8,084 |
|
| 5.4 |
|
Total Control Investment |
|
|
|
|
|
|
|
|
|
|
| $ | 7,742 |
|
| $ | 10,811 |
|
| $ | 8,084 |
|
| 5.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
|
|
|
|
|
|
|
|
|
| $ | 471,124 |
|
| $ | 484,060 |
|
| $ | 456,328 |
|
| 304.4 | % |
| |
(1) | Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144. |
| |
(2) | Substantially all of the investments that bear interest at a variable rate are indexed to LIBOR (L) at September 30, 2020, and reset monthly, quarterly, or semi-annually. Variable-rate loans with an aggregate cost of $342,661 include LIBOR reference rate floor provisions of generally 0.75% to 1.75%; at September 30, 2020, the reference rate on such instruments was generally below the stated floor provisions. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at September 30, 2020. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision. |
| |
(3) | Unless otherwise noted with footnote 14, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP. See Note 5 for further details. |
| |
(4) | Investments (or portion thereof) held by SBIC I LP. These assets are pledged as collateral of the SBA debentures and cannot be pledged under any debt obligation of the Company. |
| |
(5) | Subject to unfunded commitments. See Note 6 for further details. |
| |
(6) | Investment was on non-accrual status as of September 30, 2020, meaning the Company has suspended recognition of all or a portion of income on the investment. See Note 4 for further details. |
| |
(7) | CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying securities less contractual payments to debt holders and fund expenses. |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued (unaudited)
September 30, 2020
(Dollar amounts in thousands)
| |
(8) | The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The table below provides additional details as of September 30, 2020: |
|
| | | | | | |
Portfolio Company | | Reported Interest Rate | | Interest Rate per Credit Agreement | | Additional Interest per Annum |
Carolina Lubes, Inc. | | 8.64% | | 8.25% | | 0.39% |
Chemical Resources Holdings, Inc. | | 9.22% | | 7.50% | | 1.72% |
DRS Imaging Services, LLC | | 10.12% | | 9.00% | | 1.12% |
Milrose Consultants, LLC | | 7.74% | | 7.00% | | 0.74% |
OnSite Care, PLLC | | 8.70% | | 7.25% | | 1.45% |
SourceHOV Tax, Inc. | | 7.87% | | 7.00% | | 0.87% |
| |
(9) | The rate disclosed is the estimated effective yield, generally established at purchase and re-evaluated upon receipt of distributions, and based upon projected amounts and timing of future distributions and the projected amount and timing of terminal principal payments at the time of estimation. The estimated yield and investment cost may ultimately not be realized. |
| |
(10) | Non-income producing. |
(11)The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed as of September 30, 2020: |
| | | | | | | | |
Portfolio Company | | Investment Type | | Range of PIK Option | | Range of Cash Option | | Maximum PIK Rate Allowed |
Community Intervention Services, Inc. |
| Subordinated Loan |
| 0% to 6.00% |
| 13.00% to 7.00% |
| 6.00% |
Eblens Holdings, Inc. |
| Subordinated Loan |
| 0% or 1.50% |
| 14.00% or 12.50% |
| 1.50% |
Master Cutlery, LLC |
| Senior Secured Loan |
| 0% to 13.00% |
| 13.00% to 0% |
| 13.00% |
| |
(12) | Represents expiration date of the warrants. |
| |
(13) | All or portion of investment held by a wholly-owned subsidiary subject to income tax. |
| |
(14) | Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details. |
| |
(15) | Investments (or portion thereof) held by OFSCC-FS. These assets are pledged as collateral of the BNP Facility and cannot be pledged under any debt obligation of the Company. |
| |
(16) | Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO subordinated debt investments. |
| |
(17) | Maturity date represents the contractual maturity date of the structured finance notes. Projected cash flows, including the projected amount and timing of terminal principal payments which may be projected to occur prior to the contractual maturity date, were utilized in deriving the effective yield of the investments. |
| |
(18) | Not meaningful as there is no outstanding balance on the revolver. The Company earns unfunded commitment fees on undrawn revolving lines of credit balances, which are reported in fee income. |
See Notes to Consolidated Financial Statements.
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Non-control/Non-affiliate Investments | | | | | | | | | | | | | | |
Acrisure, LLC (14) (15) | | Insurance Agencies and Brokerages | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.19% | | (L +4.25%) | | 10/29/2019 | | 11/15/2023 | | $ | 1,995 |
| | $ | 1,971 |
| | $ | 2,004 |
| | 1.2 | % |
| | | | | | | | | | | | | | | | | | |
AHP Health Partners (14) (15) | | General Medical and Surgical Hospitals | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.30% | | (L +4.50%) | | 6/27/2019 | | 6/30/2025 | | 2,607 |
| | 2,612 |
| | 2,632 |
| | 1.6 |
|
| | | | | | | | | | | | | | | | | | |
Albertson's Holdings LLC (14) (15) | | Supermarkets and Other Grocery (except Convenience) Stores | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.55% | | (L +2.75%) | | 6/24/2019 | | 11/17/2025 | | 1,082 |
| | 1,081 |
| | 1,094 |
| | 0.7 |
|
| | | | | | | | | | | | | | | | | | |
All Star Auto Lights, Inc. (4) | | Motor Vehicle Parts (Used) Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.24% | | (L +7.50%) | | 12/19/2019 | | 8/20/2024 | | 13,250 |
| | 13,119 |
| | 13,119 |
| | 7.9 |
|
| | | | | | | | | | | | | | | | | | |
American Bath Group, LLC (14) (15) | | Plastics Plumbing Fixture Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.05% | | (L +4.25%) | | 6/24/2019 | | 9/30/2023 | | 1,489 |
| | 1,484 |
| | 1,498 |
| | 0.9 |
|
| | | | | | | | | | | | | | | | | | |
AppLovin Corporation (14) (15) | | Advertising Agencies | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.30% | | (L +3.50%) | | 6/24/2019 | | 8/15/2025 | | 1,985 |
| | 1,987 |
| | 2,001 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Asurion, LLC (14) (15) | | Communication Equipment Repair and Maintenance | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.80% | | (L +3.00%) | | 6/24/2019 | | 11/3/2024 | | 1,985 |
| | 1,985 |
| | 1,998 |
| | 1.2 |
|
Senior Secured Loan | | | | 4.80% | | (L +3.00%) | | 7/24/2019 | | 11/3/2023 | | 995 |
| | 997 |
| | 1,002 |
| | 0.6 |
|
Senior Secured Loan | | | | 8.30% | | (L +6.50%) | | 11/19/2019 | | 8/24/2025 | | 1,500 |
| | 1,511 |
| | 1,511 |
| | 0.9 |
|
| | | | | | | | | | | | 4,480 |
| | 4,493 |
| | 4,511 |
| | 2.7 |
|
Athenahealth, Inc. (14) (15) | | Software Publishers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.40% | | (L +4.50%) | | 6/24/2019 | | 2/11/2026 | | 1,985 |
| | 1,990 |
| | 1,998 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Bass Pro Group, LLC (14) (15) | | Sporting Goods Stores | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.80% | | (L +5.00%) | | 6/24/2019 | | 9/25/2024 | | 1,985 |
| | 1,921 |
| | 1,983 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
BayMark Health Services, Inc. | | Outpatient Mental Health and Substance Abuse Centers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.21% | | (L +8.25%) | | 3/22/2018 | | 3/1/2025 | | $ | 4,000 |
| | $ | 3,970 |
| | $ | 4,000 |
| | 2.4 | % |
| | | | | | | | | | | | | | | | | | |
Blackhawk Network Holdings, Inc. (14) (15) | | Computer and Computer Peripheral Equipment and Software Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.80% | | (L +3.00%) | | 10/30/2019 | | 6/15/2025 | | 1,995 |
| | 1,982 |
| | 1,999 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
BrightSpring Health Services (14) (15) | | Residential Intellectual and Developmental Disability Facilities | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.21% | | (L +4.50%) | | 6/24/2019 | | 3/5/2026 | | 2,985 |
| | 2,991 |
| | 3,006 |
| | 1.8 |
|
| | | | | | | | | | | | | | | | | | |
Brookfield WEC Holdings Inc. (14) (15) | | Business to Business Electronic Markets | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.67% | | (L +3.00%) | | 7/25/2019 | | 8/1/2025 | | 1,990 |
| | 2,000 |
| | 2,000 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Carolina Lubes, Inc. | | Automotive Oil Change and Lubrication Shops | | | | | | | | | | | | | | | | |
Senior Secured Loan (4) (8) | | | | 9.83% | | (L +7.73%) | | 8/23/2017 | | 8/23/2022 | | 20,268 |
| | 20,172 |
| | 20,466 |
| | 12.3 |
|
Senior Secured Loan (Revolver) (5) | | | | n/m (18) | | (L +7.25%) | | 8/23/2017 | | 8/23/2022 | | — |
| | (8 | ) | | (8 | ) | | — |
|
| | | | | | | | | | | | 20,268 |
| | 20,164 |
| | 20,458 |
| | 12.3 |
|
Charter NEX US, Inc. (14) (15) | | Unlaminated Plastics Profile Shape Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.30% | | (L +3.50%) | | 10/30/2019 | | 5/16/2024 | | 2,000 |
| | 1,985 |
| | 1,985 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
CHG Healthcare Services, Inc. (15) | | All Other Outpatient Care Centers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.80% | | (L +3.00%) | | 7/24/2019 | | 6/7/2023 | | 1,999 |
| | 2,001 |
| | 2,015 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Cirrus Medical Staffing, Inc. (4) | | Temporary Help Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.19% | | (L +8.25%) | | 3/5/2018 | | 10/19/2022 | | 12,564 |
| | 12,458 |
| | 12,358 |
| | 7.4 |
|
Senior Secured Loan (Revolver) | | | | 10.19% | | (L +8.25%) | | 3/5/2018 | | 10/19/2022 | | 1,408 |
| | 1,408 |
| | 1,384 |
| | 0.8 |
|
| | | | | | | | | | | | 13,972 |
| | 13,866 |
| | 13,742 |
| | 8.2 |
|
Community Intervention Services, Inc. (4) (6) (10) (11) | | Outpatient Mental Health and Substance Abuse Centers | | | | | | | | | | | | | | | | |
Subordinated Loan | | | | 7.00% cash / 6.00% PIK | | N/A | | 7/16/2015 | | 1/16/2021 | | 9,624 |
| | 7,639 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Confie Seguros Holdings II Co. (14) | | Insurance Agencies and Brokerages | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.41% | | (L +8.50%) | | 7/7/2015 | | 11/1/2025 | | $ | 9,678 |
| | $ | 9,515 |
| | $ | 9,382 |
| | 5.6 | % |
| | | | | | | | | | | | | | | | | | |
Connect U.S. Finco LLC (14) (15) | | Taxi Service | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.29% | | (L +4.50%) | | 11/20/2019 | | 12/11/2026 | | 2,000 |
| | 1,990 |
| | 1,990 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Constellis Holdings, LLC (6) | | Other Justice, Public Order, and Safety Activities | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.93% | | (L +9.00%) | | 4/28/2017 | | 4/21/2025 | | 9,950 |
| | 9,846 |
| | 407 |
| | 0.2 |
|
| | | | | | | | | | | | | | | | | | |
Convergint Technologies Holdings, LLC | | Security Systems Services (except Locksmiths) | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 8.55% | | (L +6.75%) | | 9/28/2018 | | 2/2/2026 | | 3,481 |
| | 3,430 |
| | 3,424 |
| | 2.1 |
|
| | | | | | | | | | | | | | | | | | |
Curium BidCo S.A R.L. (14) (15) | | Pharmaceutical and Medicine Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.94% | | (L +4.00%) | | 10/29/2019 | | 7/1/2026 | | 848 |
| | 853 |
| | 853 |
| | 0.5 |
|
| | | | | | | | | | | | | | | | | | |
Davis Vision, Inc. | | Direct Health and Medical Insurance Carriers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 8.55% | | (L +6.75%) | | 10/31/2019 | | 12/1/2025 | | 405 |
| | 395 |
| | 405 |
| | 0.2 |
|
| | | | | | | | | | | | | | | | | | |
Dexko Global Inc. (14) (15) | | Motor Vehicle Body Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.30% | | (L +3.50%) | | 10/30/2019 | | 7/24/2024 | | 1,995 |
| | 1,970 |
| | 1,997 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Diamond Sports Group, LLC (14) (15) | | Television Broadcasting | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.03% | | (L +3.25%) | | 11/19/2019 | | 8/24/2026 | | 1,995 |
| | 1,997 |
| | 1,997 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
DuPage Medical Group (15) | | Offices of Physicians, Mental Health Specialists | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 8.80% | | (L +7.00%) | | 8/22/2017 | | 8/15/2025 | | 10,098 |
| | 10,170 |
| | 10,098 |
| | 6.1 |
|
| | | | | | | | | | | | | | | | | | |
Eblens Holdings, Inc. | | Shoe Store | | | | | | | | | | | | | | | | |
Subordinated Loan (11) | | | | 12.00% cash / 1.00% PIK | | | | 7/13/2017 | | 1/13/2023 | | 9,010 |
| | 8,962 |
| | 9,025 |
| | 5.4 |
|
Common Equity (71,250 Class A units) (10) | | | | | | | | 7/13/2017 | | | | | | 713 |
| | 892 |
| | 0.5 |
|
| | | | | | | | | | | | 9,010 |
| | 9,675 |
| | 9,917 |
| | 5.9 |
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Endo International PLC (14) (15) | | Pharmaceutical Preparation Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.06% | | (L +4.25%) | | 6/24/2019 | | 4/29/2024 | | $ | 1,985 |
| | $ | 1,897 |
| | $ | 1,906 |
| | 1.1 | % |
| | | | | | | | | | | | | | | | | | |
Envocore Holding, LLC (F/K/A LRI Holding, LLC) (4) | | Electrical Contractors and Other Wiring Installation Contractors | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.00% cash / 5.00% PIK | | (L +6.00%) | | 6/30/2017 | | 6/30/2022 | | 16,367 |
| | 16,207 |
| | 14,639 |
| | 8.8 |
|
Preferred Equity (238,095 Series B units) (10) | | | | | | | | 6/30/2017 | | | | | | 300 |
| | — |
| | — |
|
Preferred Equity (13,315 Series C units) (10) | | | | | | | | 8/13/2018 | | | | | | 13 |
| | — |
| | — |
|
| | | | | | | | | | | | 16,367 |
| | 16,520 |
| | 14,639 |
| | 8.8 |
|
Excelin Home Health, LLC | | Home Health Care Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 11.50% | | (L +9.50%) | | 10/25/2018 | | 4/25/2024 | | 4,250 |
| | 4,183 |
| | 4,070 |
| | 2.4 |
|
| | | | | | | | | | | | | | | | | | |
Explorer Holdings, Inc. (14) (15) | | Testing Laboratories | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.60% | | (L +3.75%) | | 6/25/2019 | | 5/2/2023 | | 1,985 |
| | 1,987 |
| | 2,004 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Garda World Security (14) (15) | | Security Systems Services (except Locksmiths) | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.66% | | (L +4.75%) | | 10/24/2019 | | 10/30/2026 | | 1,667 |
| | 1,634 |
| | 1,680 |
| | 1.0 |
|
| | | | | | | | | | | | | | | | | | |
GGC Aerospace Topco L.P. | | Other Aircraft Parts and Auxiliary Equipment Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.65% | | (L +8.75%) | | 12/29/2017 | | 9/8/2024 | | 5,000 |
| | 4,912 |
| | 4,084 |
| | 2.5 |
|
Common Equity (368,852 Class A units) (10) | | | | | | | | 12/29/2017 | | | | | | 450 |
| | 124 |
| | 0.1 |
|
Common Equity (40,984 Class B units) (10) | | | | | | | | 12/29/2017 | | | | | | 50 |
| | 5 |
| | — |
|
| | | | | | | | | | | | 5,000 |
| | 5,412 |
| | 4,213 |
| | 2.6 |
|
Hyland Software, Inc. | | Software Publishers | | | | | | | | | | | | | | | | |
Senior Secured Loan (14) (15) | | | | 5.30% | | (L +3.50%) | | 10/24/2018 | | 7/1/2024 | | 1,660 |
| | 1,655 |
| | 1,672 |
| | 1.0 |
|
Senior Secured Loan | | | | 8.80% | | (L +7.00%) | | 10/24/2018 | | 7/7/2025 | | 2,601 |
| | 2,614 |
| | 2,617 |
| | 1.6 |
|
| | | | | | | | | | | | 4,261 |
| | 4,269 |
| | 4,289 |
| | 2.6 |
|
Inergex Holdings, LLC | | Other Computer Related Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 8.94% | | (L +7.00%) | | 10/1/2018 | | 10/1/2024 | | 16,590 |
| | 16,389 |
| | 16,489 |
| | 9.9 |
|
Senior Secured Loan (Revolver) (5) (18) | | | | 6.05% | | (L +7.00%) | | 10/1/2018 | | 10/1/2024 | | 1,875 |
| | 1,853 |
| | 1,864 |
| | 1.1 |
|
| | | | | | | | | | | | 18,465 |
| | 18,242 |
| | 18,353 |
| | 11.0 |
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Institutional Shareholder Services, Inc. | | Administrative Management and General Management Consulting Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.44% | | (L +8.50%) | | 3/4/2019 | | 3/5/2027 | | $ | 6,244 |
| | $ | 6,075 |
| | $ | 6,098 |
| | 3.7 | % |
| | | | | | | | | | | | | | | | | | |
Intouch Midco Inc. (15) | | All Other Professional, Scientific, and Technical Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.05% | | (L +4.25%) | | 12/20/2019 | | 8/24/2025 | | 1,995 |
| | 1,925 |
| | 1,925 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Kindred Healthcare, Inc. (F/K/A Kindred at Home) (14) (15) | | Home Health Care Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.56% | | (L +3.75%) | | 6/25/2019 | | 7/2/2025 | | 2,985 |
| | 2,998 |
| | 3,004 |
| | 1.8 |
|
| | | | | | | | | | | | | | | | | | |
McAfee, LLC (14) (15) | | Software Publishers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.55% | | (L +3.75%) | | 6/25/2019 | | 9/30/2024 | | 1,985 |
| | 1,987 |
| | 1,996 |
| | 1.2 |
|
Senior Secured Loan | | | | 10.30% | | (L +8.50%) | | 11/15/2019 | | 9/29/2025 | | 2,000 |
| | 2,002 |
| | 2,018 |
| | 1.2 |
|
| | | | | | | | | | | | 3,985 |
| | 3,989 |
| | 4,014 |
| | 2.4 |
|
Micro Holding Corp (14) (15) | | Internet Publishing and Broadcasting and Web Search Portals | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.55% | | (L +3.75%) | | 6/25/2019 | | 9/13/2024 | | 1,985 |
| | 1,969 |
| | 1,991 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Milrose Consultants, LLC (4) (8) | | Administrative Management and General Management Consulting Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 8.14% | | (L +6.20%) | | 7/16/2019 | | 7/16/2025 | | 11,500 |
| | 11,420 |
| | 11,394 |
| | 6.7 |
|
| | | | | | | | | | | | | | | | | | |
My Alarm Center, LLC (4) (10) (13) | | Security Systems Services (except Locksmiths) | | | | | | | | | | | | | | | | |
Preferred Equity (1,485 Class A units), 8% PIK | | | | | | | | 7/14/2017 | | | | | | 1,571 |
| | 984 |
| | 0.6 |
|
Preferred Equity (1,198 Class B units) | | | | | | | | 7/14/2017 | | | | | | 1,198 |
| | — |
| | — |
|
Preferred Equity (335 Class Z units) 25% PIK | | | | | | | | 9/12/2018 | | | | | | 325 |
| | 1,136 |
| | 0.7 |
|
Common Equity (64,149 units) | | | | | | | | 7/14/2017 | | | | | | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | 3,094 |
| | 2,120 |
| | 1.3 |
|
Online Tech Stores, LLC (4) | | Stationery and Office Supplies Merchant Wholesalers | | | | | | | | | | | | | | | | |
Subordinated Loan | | | | 10.50% cash / 3.00% PIK | | N/A | | 2/1/2018 | | 8/1/2023 | | 16,323 |
| | 16,113 |
| | 14,559 |
| | 8.7 |
|
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
OnSite Care, PLLC (4) (8) | | Home Health Care Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.09% | | (L +7.78%) | | 8/10/2018 | | 8/10/2023 | | $ | 9,541 |
| | $ | 9,446 |
| | $ | 9,162 |
| | 5.5 | % |
| | | | | | | | | | | | | | | | | | |
Panther BF Aggregator 2 LP (14) (15) | | Other Commercial and Service Industry Machinery Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.30% | | (L +3.50%) | | 11/19/2019 | | 4/30/2026 | | 1,995 |
| | 1,978 |
| | 2,006 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Parfums Holding Company, Inc. | | Cosmetics, Beauty Supplies, and Perfume Stores | | | | | | | | | | | | | | | | |
Senior Secured Loan (14) (15) | | | | 6.16% | | (L +4.25%) | | 6/25/2019 | | 6/30/2024 | | 87 |
| | 87 |
| | 87 |
| | 0.1 |
|
Senior Secured Loan | | | | 10.70% | | (L +8.75%) | | 11/16/2017 | | 6/30/2025 | | 6,320 |
| | 6,332 |
| | 6,276 |
| | 3.8 |
|
| | | | | | | | | | | | 6,407 |
| | 6,419 |
| | 6,363 |
| | 3.9 |
|
Pelican Products, Inc. | | Unlaminated Plastics Profile Shape Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.49% | | (L +7.75%) | | 9/24/2018 | | 5/1/2026 | | 6,055 |
| | 6,059 |
| | 5,969 |
| | 3.6 |
|
| | | | | | | | | | | | | | | | | | |
Performance Team LLC (4) | | General Warehousing and Storage | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 11.80% | | (L +10.00%) | | 5/24/2018 | | 11/24/2023 | | 13,889 |
| | 13,790 |
| | 14,165 |
| | 8.4 |
|
| | | | | | | | | | | | | | | | | | |
PM Acquisition LLC | | All Other General Merchandise Stores | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 11.50% cash / 2.50% PIK | | N/A | | 9/30/2017 | | 10/29/2021 | | 4,963 |
| | 4,903 |
| | 4,800 |
| | 2.9 |
|
Common Equity (499 units) (10) (13) | | | | | | | | 9/30/2017 | | | | | | 499 |
| | 220 |
| | 0.1 |
|
| | | | | | | | | | | | 4,963 |
| | 5,402 |
| | 5,020 |
| | 3.0 |
|
Quest Software US Holdings Inc. (14) (15) | | Computer and Computer Peripheral Equipment and Software Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.18% | | (L +4.25%) | | 6/25/2019 | | 5/16/2025 | | 1,990 |
| | 1,973 |
| | 1,978 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Refinitiv (14) (15) | | Public Finance Activities | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.05% | | (L +4.25%) | | 6/24/2019 | | 10/1/2025 | | 1,987 |
| | 1,941 |
| | 2,007 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Resource Label Group, LLC | | Commercial Printing (except Screen and Books) | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.60% | | (L +8.50%) | | 6/7/2017 | | 11/26/2023 | | 4,821 |
| | 4,777 |
| | 4,591 |
| | 2.8 |
|
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Restaurant Technologies, Inc. (15) | | Other Grocery and Related Products Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.05% | | (L +3.25%) | | 8/8/2019 | | 10/1/2025 | | $ | 1,990 |
| | $ | 1,994 |
| | $ | 2,003 |
| | 1.2 | % |
| | | | | | | | | | | | | | | | | | |
Rocket Software, Inc. (15) | | Software Publishers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.05% | | (L +4.25%) | | 11/20/2018 | | 11/28/2025 | | 665 |
| | 663 |
| | 649 |
| | 0.4 |
|
Senior Secured Loan | | | | 10.05% | | (L +8.25%) | | 11/20/2018 | | 11/28/2026 | | 6,275 |
| | 6,167 |
| | 6,094 |
| | 3.7 |
|
| | | | | | | | | | | | 6,940 |
| | 6,830 |
| | 6,743 |
| | 4.1 |
|
RPLF Holdings, LLC (10) (13) | | Software Publishers | | | | | | | | | | | | | | | | |
Common Equity (254,110 Class A units) | | | | | | | | 1/17/2018 | | | | | | 254 |
| | 186 |
| | 0.1 |
|
| | | | | | | | | | | | | | | | | | |
Sentry Centers Holdings, LLC (10) (13) | | Convention and Trade Show Organizers | | | | | | | | | | | | | | | | |
Common Equity (5,000 Series C units) | | | | | | | | 3/31/2014 | | | | — |
| | 500 |
| | 1,490 |
| | 0.9 |
|
| | | | | | | | | | | | | | | | | | |
Southern Technical Institute, LLC (4) (6) (10) | | Colleges, Universities, and Professional Schools | | | | | | | | | | | | | | | | |
Subordinated Loan | | | | 6.00% PIK | | N/A | | 6/27/2018 | | 12/31/2021 | | 1,611 |
| | — |
| | — |
| | — |
|
Other | | | | | | | | 6/27/2018 | | | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | 1,611 |
| | — |
| | — |
| | — |
|
Spring Education Group, Inc. (F/K/A SSH Group Holdings, Inc.) | | Child Day Care Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.19% | | (L +4.25%) | | 7/26/2018 | | 7/30/2025 | | 972 |
| | 970 |
| | 978 |
| | 0.6 |
|
Senior Secured Loan | | | | 10.19% | | (L +8.25%) | | 7/26/2018 | | 7/30/2026 | | 7,216 |
| | 7,157 |
| | 7,288 |
| | 4.4 |
|
| | | | | | | | | | | | 8,188 |
| | 8,127 |
| | 8,266 |
| | 5.0 |
|
Sprint Communications, Inc. (14) (15) | | Wired Telecommunications Carriers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.81% | | (L +3.00%) | | 6/24/2019 | | 2/2/2024 | | 1,985 |
| | 1,972 |
| | 1,980 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
SSJA Bariatric Management LLC (15) | | Offices of Physicians, Mental Health Specialists | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.94% | | (L +5.00%) | | 8/26/2019 | | 8/26/2024 | | 9,975 |
| | 9,883 |
| | 9,861 |
| | 5.9 |
|
Senior Secured Loan (Revolver) (5) | | | | n/m (18) | | (L +5.00%) | | 8/26/2019 | | 8/26/2024 | | — |
| | (6 | ) | | (14 | ) | | — |
|
| | | | | | | | | | | | 9,975 |
| | 9,877 |
| | 9,847 |
| | 5.9 |
|
Stancor, L.P. (4) (10) | | Pump and Pumping Equipment Manufacturing | | | | | | | | | | | | | | | | |
Preferred Equity (1,250,000 Class A units), 8% PIK | | | | | | | | 8/19/2014 | | | | — |
| | 1,501 |
| | 1,607 |
| | 1.0 |
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Staples, Inc. (14) (15) | | Business to Business Electronic Markets | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.69% | | (L +5.00%) | | 6/24/2019 | | 4/16/2026 | | $ | 1,990 |
| | $ | 1,920 |
| | $ | 1,960 |
| | 1.1 | % |
| | | | | | | | | | | | | | | | | | |
STS Operating, Inc. | | Industrial Machinery and Equipment Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan (14) (15) | | | | 6.05% | | (L +4.25%) | | 5/16/2018 | | 12/11/2024 | | 632 |
| | 631 |
| | 632 |
| | 0.4 |
|
Senior Secured Loan | | | | 9.80% | | (L +8.00%) | | 5/15/2018 | | 4/30/2026 | | 9,073 |
| | 9,070 |
| | 9,030 |
| | 5.4 |
|
| | | | | | | | | | | | 9,705 |
| | 9,701 |
| | 9,662 |
| | 5.8 |
|
Sunshine Luxembourg VII SARL (14) (15) | | Pharmaceutical Preparation Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.19% | | (L +4.25%) | | 11/20/2019 | | 9/25/2026 | | 2,000 |
| | 2,010 |
| | 2,021 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
Tank Holding Corp. (14) (15) | | Unlaminated Plastics Profile Shape Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.41% | | (L +4.00%) | | 6/24/2019 | | 3/26/2026 | | 1,995 |
| | 2,002 |
| | 2,005 |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | |
The Escape Game, LLC (4) | | Other amusement and recreation industries | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 8.80% | | (L +7.00%) | | 7/18/2019 | | 3/31/2020 | | 4,667 |
| | 4,642 |
| | 4,648 |
| | 2.8 |
|
Senior Secured Loan | | | | 10.55% | | (L +8.75%) | | 12/22/2017 | | 12/22/2022 | | 7,000 |
| | 6,969 |
| | 6,972 |
| | 4.2 |
|
Senior Secured Loan | | | | 10.55% | | (L +8.75%) | | 7/20/2018 | | 12/22/2022 | | 7,000 |
| | 7,000 |
| | 6,972 |
| | 4.2 |
|
| | | | | | | | | | | | 18,667 |
| | 18,611 |
| | 18,592 |
| | 11.2 |
|
Truck Hero, Inc. (15) | | Truck Trailer Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.05% | | (L +8.25%) | | 5/30/2017 | | 4/21/2025 | | 7,014 |
| | 6,990 |
| | 6,690 |
| | 4.0 |
|
| | | | | | | | | | | | | | | | | | |
United Biologics Holdings, LLC (4) (10) | | Medical Laboratories | | | | | | | | | | | | | | | | |
Preferred Equity (151,787 units) | | | | | | | | 4/16/2013 | | | | — |
| | 9 |
| | 15 |
| | — |
|
Warrants (29,374 units) | | | | | | | | 7/26/2012 | | 3/5/2022 | | — |
| | 82 |
| | 7 |
| | — |
|
| | | | | | | | | | | | — |
| | 91 |
| | 22 |
| | — |
|
U.S. Anesthesia Partners (14) (15) | | Freestanding Ambulatory Surgical and Emergency Centers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.80% | | (L +3.00%) | | 6/24/2019 | | 6/23/2024 | | 2,980 |
| | 2,950 |
| | 2,976 |
| | 1.8 |
|
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Verifone Intermediate Holdings, Inc. (14) (15) | | Other Commercial and Service Industry Machinery Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.90% | | (L +4.00%) | | 6/24/2019 | | 8/20/2025 | | $ | 258 |
| | $ | 252 |
| | $ | 256 |
| | 0.2 | % |
| | | | | | | | | | | | | | | | | | |
Wastebuilt Environmental Solutions, LLC (4) | | Industrial Supplies Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.69% | | (L +8.75%) | | 10/11/2018 | | 10/11/2024 | | 7,000 |
| | 6,883 |
| | 6,584 |
| | 4.0 |
|
| | | | | | | | | | | | | | | | | | |
Total Debt and Equity Investments | | | | | | | | | | | | $ | 372,094 |
| | $ | 373,074 |
| | $ | 350,925 |
| | 210.7 | % |
| | | | | | | | | | | | | | | | | | |
Structured Finance Note Investments (7) | | | | | | | | | | | | | | | | | | |
Dryden 76 CLO, Ltd. | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 15.37% (9) | | | | 9/27/2019 | | 10/20/2032 | | 2,750 |
| | 2,491 |
| | 2,509 |
| | 1.5 |
|
| | | | | | | | | | | | | | | | | | |
Elevation CLO 2017-7, Ltd. | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 15.71% (9) | | | | 2/6/2019 | | 7/15/2030 | | 10,000 |
| | 7,485 |
| | 6,559 |
| | 3.9 |
|
| | | | | | | | | | | | | | | | | | |
Flatiron CLO 18, Ltd. | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 16.68% (9) | | | | 1/2/2019 | | 4/17/2031 | | 9,680 |
| | 7,355 |
| | 7,345 |
| | 4.4 |
|
| | | | | | | | | | | | | | | | | | |
THL Credit Wind River 2019‐3 CLO Ltd. | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 12.33% (9) | | | | 4/5/2019 | | 4/15/2031 | | 7,000 |
| | 5,796 |
| | 5,197 |
| | 3.1 |
|
| | | | | | | | | | | | | | | | | | |
Total Structured Finance Note Investments | | | | | | | | | | | | $ | 29,430 |
| | $ | 23,127 |
| | $ | 21,610 |
| | 12.9 | % |
| | | | | | | | | | | | | | | | | | |
Total Non-control/Non-affiliate Investments | | | | | | | | | | | | $ | 401,524 |
| | $ | 396,201 |
| | $ | 372,535 |
| | 223.6 | % |
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Affiliate Investments | | | | | | | | | | | | | | | | | | |
3rd Rock Gaming Holdings, LLC | | Software Publishers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.44% cash / 1.00% PIK | | (L +7.50%) | | 3/13/2018 | | 3/12/2023 | | $ | 21,373 |
| | $ | 21,176 |
| | $ | 20,099 |
| | 12.1 | % |
Common Equity (2,547,250 units) (10) (13) | | | | | | | | 3/13/2018 | | | | — |
| | 2,547 |
| | 1,044 |
| | 0.6 |
|
| | | | | | | | | | | | 21,373 |
| | 23,723 |
| | 21,143 |
| | 12.7 |
|
Chemical Resources Holdings, Inc. | | Custom Compounding of Purchased Resins | | | | | | | | | | | | | | | | |
Senior Secured Loan (4)(8) | | | | 9.82% | | (L +7.89%) | | 1/25/2019 | | 1/25/2024 | | 13,743 |
| | 13,592 |
| | 13,746 |
| | 8.2 |
|
Common Equity (1,832 Class A shares) (10) (13) | | | | | | | | 1/25/2019 | | | | | | 1,813 |
| | 2,662 |
| | 1.6 |
|
| | | | | | | | | | | | 13,743 |
| | 15,405 |
| | 16,408 |
| | 9.8 |
|
Contract Datascan Holdings, Inc. (4) | | Office Machinery and Equipment Rental and Leasing | | | | | | | | | | | | | | | | |
Subordinated Loan | | | | 12.00% | | N/A | | 8/5/2015 | | 2/5/2021 | | 8,000 |
| | 7,995 |
| | 8,000 |
| | 4.8 |
|
Preferred Equity (3,061 Series A shares) 10% PIK (10) | | | | | | | | 8/5/2015 | | | | | | 5,599 |
| | 5,671 |
| | 3.4 |
|
Common Equity (11,273 shares) (10) | | | | | | | | 6/28/2016 | | | | | | 104 |
| | 671 |
| | 0.4 |
|
| | | | | | | | | | | | 8,000 |
| | 13,698 |
| | 14,342 |
| | 8.6 |
|
DRS Imaging Services, LLC | | Data Processing, Hosting, and Related Services | | | | | | | | | | | | | | | | |
Senior Secured Loan (4) (8) | | | | 11.21% | | (L +9.27%) | | 3/8/2018 | | 11/20/2023 | | 10,741 |
| | 10,670 |
| | 10,569 |
| | 6.3 |
|
Common Equity (1,135 units) (10) (13) | | | | | | | | 3/8/2018 | | | | | | 1,135 |
| | 1,331 |
| | 0.8 |
|
| | | | | | | | | | | | 10,741 |
| | 11,805 |
| | 11,900 |
| | 7.1 |
|
Master Cutlery, LLC (4) (6) (10) | | Sporting and Recreational Goods and Supplies Merchant Wholesalers | | | | | | | | | | | | | | | | |
Subordinated Loan (11) | | | | 13.00% | | N/A | | 4/17/2015 | | 4/17/2020 | | 5,947 |
| | 4,764 |
| | 255 |
| | 0.2 |
|
Preferred Equity (3,723 Series A units), 8% PIK | | | | | | | | 4/17/2015 | | | | — |
| | 3,483 |
| | — |
| | — |
|
Common Equity (15,564 units) | | | | | | | | 4/17/2015 | | | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | 5,947 |
| | 8,247 |
| | 255 |
| | 0.2 |
|
NeoSystems Corp. (4) (10) | | Other Accounting Services | | | | | | | | | | | | | | | | |
Preferred Equity (521,962 convertible shares) 10% PIK | | | | | | | | 8/14/2014 | | | | — |
| | 1,698 |
| | 2,250 |
| | 1.4 |
|
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Pfanstiehl Holdings, Inc. (4) | | Pharmaceutical Preparation Manufacturing | | | | | | | | | | | | | | | | |
Subordinated Loan | | | | 10.50% | | N/A | | 1/1/2014 | | 9/29/2022 | | $ | 3,788 |
| | $ | 3,807 |
| | $ | 3,788 |
| | 2.3 | % |
Common Equity (400 Class A shares) | | | | | | | | 1/1/2014 | | | | — |
| | 217 |
| | 11,979 |
| | 7.2 |
|
| | | | | | | | | | | | 3,788 |
| | 4,024 |
| | 15,767 |
| | 9.5 |
|
Professional Pipe Holdings, LLC | | Plumbing, Heating, and Air-Conditioning Contractors | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.55% cash / 1.50% PIK | | (L +9.27%) | | 3/23/2018 | | 3/23/2023 | | 7,099 |
| | 7,008 |
| | 7,170 |
| | 4.3 |
|
Common Equity (1,414 Class A units) (10) | | | | | | | | 3/23/2018 | | | | — |
| | 1,414 |
| | 2,413 |
| | 1.4 |
|
| | | | | | | | | | | | 7,099 |
| | 8,422 |
| | 9,583 |
| | 5.7 |
|
TalentSmart Holdings, LLC | | Professional and Management Development Training | | | | | | | | | | | | | | | | |
Senior Secured Loan (4) | | | | 8.50% | | (L +6.75%) | | 10/11/2019 | | 10/11/2024 | | 10,000 |
| | 9,833 |
| | 9,833 |
| | 5.9 |
|
Senior Secured Loan (Revolver) (5) (18) | | | | 8.50% | | (L +6.75%) | | 10/11/2019 | | 10/11/2024 | | 250 |
| | 242 |
| | 242 |
| | 0.1 |
|
Common Equity (1,500 Class A shares) (10) (13) | | | | | | | | 10/11/2019 | | | | — |
| | 1,500 |
| | 1,500 |
| | 0.9 |
|
| | | | | | | | | | | | 10,250 |
| | 11,575 |
| | 11,575 |
| | 6.9 |
|
TRS Services, LLC (4) (11) | | Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.55% cash / 1.00% PIK | | (L +8.75%) | | 12/10/2014 | | 3/16/2020 | | 14,624 |
| | 14,615 |
| | 14,623 |
| | 8.8 |
|
Preferred Equity (329,266 Class AA units), 15% PIK (10) | | | | | | | | 6/30/2016 | | | | — |
| | 545 |
| | 547 |
| | 0.3 |
|
Preferred Equity (3,000,000 Class A units), 11% PIK (10) | | | | | | | | 12/10/2014 | | | | — |
| | 3,374 |
| | 3,095 |
| | 1.9 |
|
Common Equity (3,000,000 units) (10) | | | | | | | | 12/10/2014 | | | | — |
| | 572 |
| | — |
| | — |
|
| | | | | | | | | | | | 14,624 |
| | 19,106 |
| | 18,265 |
| | 11.0 |
|
TTG Healthcare, LLC | | Diagnostic Imaging Centers | | | | | | | | | | | | | | | | |
Senior Secured Loan (4) | | | | 10.71% | | (L +9.00%) | | 3/1/2019 | | 3/1/2024 | | 12,103 |
| | 11,938 |
| | 11,767 |
| | 7.1 |
|
Preferred Equity ( 2,309 Class B units) (10) (13) | | | | | | | | 3/1/2019 | | | | | | 2,309 |
| | 2,424 |
| | 1.5 |
|
| | | | | | | | | | | | 12,103 |
| | 14,247 |
| | 14,191 |
| | 8.6 |
|
| | | | | | | | | | | | | | | | | | |
Total Affiliate Investments | | | | | | | | | | | | $ | 107,668 |
| | $ | 131,950 |
| | $ | 135,679 |
| | 81.5 | % |
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Control Investment | | | | | | | | | | | | | | | | | | |
MTE Holding Corp. (4) | | Travel Trailer and Camper Manufacturing | | | | | | | | | | | | | | | | |
Subordinated Loan (to Mirage Trailers, LLC, a controlled, consolidated subsidiary of MTE Holding Corp.) | | | | 10.26% cash / 4.50% PIK | | (L +8.50%) | | 11/25/2015 | | 11/25/2020 | | $ | 7,464 |
| | $ | 7,451 |
| | $ | 7,464 |
| | 4.5 | % |
Common Equity (554 shares) | | | | | | | | 11/25/2015 | | | | — |
| | 3,069 |
| | 1,253 |
| | 0.8 |
|
| | | | | | | | | | | | 7,464 |
| | 10,520 |
| | 8,717 |
| | 5.3 |
|
Total Control Investment | | | | | | | | | | | | $ | 7,464 |
| | $ | 10,520 |
| | $ | 8,717 |
| | 5.3 | % |
| | | | | | | | | | | | | | | | | | |
Total Investments | | | | | | | | | | | | $ | 516,656 |
| | $ | 538,671 |
| | $ | 516,931 |
| | 310.4 | % |
| |
(1) | Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144. |
| |
(2) | Substantially all of the investments that bear interest at a variable rate are indexed to LIBOR (L), generally between 1.7% and 2.1% at December 31, 2019, and reset monthly, quarterly, or semi-annually. Variable-rate loans with an aggregate cost of $420,410 include LIBOR reference rate floor provisions of generally 1% to 2%; at December 31, 2019, the reference rate on all such instruments was above the stated floors. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at December 31, 2019. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision. |
| |
(3) | Unless otherwise noted with footnote 14, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP. See Note 5 for further details. |
| |
(4) | Investments (or portion thereof) held by SBIC I LP. These assets (or a portion thereof) are held to support the SBA debentures and cannot be pledged under any debt obligation of the Company. |
| |
(5) | Subject to unfunded commitments. See Note 6 for further details. |
| |
(6) | Investment was on non-accrual status as of December 31, 2019, meaning the Company has suspended recognition of all or a portion of income on the investment. See Note 4 for further details. |
| |
(7) | Structured Finance Notes are considered CLO subordinated debt positions. CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying securities less contractual payments to debt holders and fund expenses. |
| |
(8) | The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The table below provides additional details as of December 31, 2019: |
|
| | | | | |
Portfolio Company | Reported Interest Rate | | Interest Rate per Credit Agreement | | Additional Interest per Annum |
Carolina Lubes, Inc. | 9.83% | | 9.35% | | 0.48% |
Chemical Resources Holdings, Inc. | 9.82% | | 7.93% | | 1.89% |
DRS Imaging Services, LLC | 11.21% | | 9.94% | | 1.27% |
Milrose Consultants, LLC | 8.14% | | 7.44% | | 0.70% |
OnSite Care, PLLC | 9.49% | | 7.96% | | 1.53% |
| |
(9) | The rate disclosed is the estimated effective yield, generally established at purchase and re-evaluated upon receipt of distributions, and based upon projected amounts and timing of future distributions the projected amount and timing of terminal principal payments at time of estimation. The estimated yield and investment cost may ultimately not be realized. |
| |
(10) | Non-income producing. |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2019
(Dollar amounts in thousands)
(11)The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed as of December 31, 2019: |
| | | | | | | | |
Portfolio Company | | Investment Type | | Range of PIK Option | | Range of Cash Option | | Maximum PIK Rate Allowed |
Community Intervention Services, Inc. | | Subordinated Loan | | 0% or 6.00% | | 13.00% or 7.00% | | 6.00% |
Eblens Holdings, Inc. | | Subordinated Loan | | 0% or 1.00% | | 13.00% or 12.00% | | 1.00% |
Master Cutlery, LLC | | Senior Secured Loan | | 0% to 13.00% | | 13.00% to 0% | | 13.00% |
TRS Services, LLC | | Senior Secured Loan | | 0% or 1.00% | | 12.65% or 1.00% | | 1.00% |
| |
(12) | Represents expiration date of the warrants. |
| |
(13) | All or portion of investment held by OFSCC-MB. |
| |
(14) | Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details. |
| |
(15) | Investments (or portion thereof) held by OFSCC-FS. These assets are pledged as collateral of the BNP Facility and cannot be pledged under any other debt obligation of the Company. |
| |
(16) | Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO Structured Finance Note investments. |
| |
(17) | Maturity date represents the contractual maturity date of the structured finance notes. Projected cash flows, including the projected amount and timing of terminal principal payments which may be projected to occur prior to the contractual maturity date, were utilized in deriving the effective yield of the investments. |
| |
(18) | Not meaningful as there is no outstanding balance on the revolver. The Company earns unfunded commitment fees on undrawn revolving lines of credit balances, which are reported in fee income. |
See Notes to Financial Statements.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 1. Organization
OFS Capital Corporation, a Delaware corporation, is an externally managed, closed-end, non-diversified management investment company. The Company has elected to be regulated as a BDC under the 1940 Act. In addition, for income tax purposes, the Company has elected to be treated as a RIC under Subchapter M of the Code.
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. OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.
In addition, OFS Advisor serves as the investment adviser for HPCI, a non-traded BDC with an investment strategy and objective similar to that of the Company. OFS Advisor also serves as the investment adviser for OCCI, a non-diversified, externally managed, closed-end management investment company that has registered as an investment company under the 1940 Act that primarily invests in the equity tranche of CLOs.
The Company may make investments directly or through one of its subsidiaries: SBIC I LP, OFSCC-FS or OFSCC-MB.
The Company is limited to follow-on investments in current portfolio companies held through SBIC I LP. SBIC I LP is subject to SBA regulatory requirements, including: limitations on the businesses and industries in which it can invest; requirements to invest at least 25% of its regulatory capital in eligible smaller businesses, as defined under the SBIC Act; limitations on the financing terms of investments; and capitalization thresholds that may limit distributions to the Company. SBIC I LP is subject to periodic audits and examinations of its financial statements. SBIC I LP intends, over time, to repay its outstanding SBA debentures prior to their scheduled maturity dates.
OFSCC-FS is a special-purpose vehicle formed in April 2019 for the purpose of acquiring senior secured loan investments. OFSCC-FS has debt financing through its BNP Facility which provides OFSCC-FS with borrowing capacity of up to $150 million.
OFSCC-MB is a wholly-owned subsidiary taxed under subchapter C of the Code and generally holds the Company's equity investments in portfolio companies that are taxed as pass-through entities.
Note 2. Summary of Significant Accounting Policies
Basis of presentation: The Company is an investment company as defined in the accounting and reporting guidance under ASC Topic 946, Financial Services–Investment Companies. The accompanying interim consolidated financial statements of the Company and related financial information have been prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. However, in the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal and recurring accruals and adjustments, necessary for fair presentation as of and for the periods presented. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
Significant Accounting Policies: The following information supplements the description of significant accounting policies contained in Note 2 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation in the consolidated financial statements and the accompanying notes thereto. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total net assets, or consolidated statements of changes in net assets and consolidated statements of cash flows classifications.
Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Concentration of credit risk: Aside from its debt instruments, including investments in Structured Finance Notes of CLOs, financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. The Company
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
places cash deposits only with high credit quality institutions which OFS Advisor believes will mitigate the risk of loss due to credit risk. The amount of loss due to credit risk from debt investments if borrowers fail to perform according to the terms of the contracts, is equal to the Company's recorded investment in debt instruments and the unfunded loan commitments as disclosed in Note 6. The collateral or other security for those instruments proved to be of no value to the Company.
Goodwill: The decline in the price of the Company’s common stock and the level at which it continues to trade relative to the broader stock indices for the BDC industry, led management to conclude in the third quarter of 2020 that an impairment in the value of the Company’s goodwill was more likely than not. Moreover, the discount at which the Company’s stock traded to its net asset value resulted in management's conclusion on the impairment of goodwill equal to the full amount of its carrying value of $1,077 was appropriate.
Intangible asset: On December 4, 2013, in connection with the SBIC Acquisition, the Company recorded an intangible asset of $2,500 attributable to the SBIC license. The Company amortizes this intangible asset on a straight-line basis over its estimated useful life, initially 154 months ended September 30, 2026. Accumulated amortization recognized through June 30, 2020 was $1,284. The Company changed its estimate on the useful life to terminate on December 31, 2025. The Company recognized $54 for the three months ended September 30, 2020, which equates to $216 annually, and which the Company currently anticipates recognizing on a quarterly basis through December 31, 2025.
New accounting pronouncement issued: In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 840): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates (e.g., LIBOR) that are expected to be discontinued. ASU 2020-04 allows, among other things, certain contract modifications, such as those within the scope of Topic 310 on receivables, to be accounted as a continuation of the existing contract. This ASU was effective upon the issuance and its optional relief can be applied through December 31, 2022. The Company will consider this optional guidance prospectively, if applicable.
Note 3. Related Party Transactions
Investment Advisory and Management Agreement: OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company pursuant to the Investment Advisory Agreement. The continuation of the Investment Advisory Agreement was most recently approved by the Board on April 2, 2020. Under the terms of the Investment Advisory Agreement, which are in accordance with the 1940 Act and subject to the overall supervision of the Board, OFS Advisor is responsible for sourcing potential investments, conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring investments, and monitoring investments and portfolio companies on an ongoing basis.
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to the Company and OFS Advisor is free to furnish similar services to other entities, including other funds affiliated with OFS Advisor, so long as its services to the Company are not impaired. OFS Advisor also serves as the investment adviser or collateral manager to CLO funds and other companies, including HPCI and OCCI.
OFS Advisor receives fees for providing services, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% and based on the average value of the Company’s total assets (other than cash but including assets purchased with borrowed amounts and assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters, adjusted for any share issuances or repurchases during the quarter. OFS Advisor has elected to exclude the value of the intangible asset and goodwill resulting from the SBIC Acquisition from the base management fee calculation.
OFS Advisor agreed to reduce a portion of its base management fee by reducing the portion of such fee from 0.4375% per quarter (1.75% annualized) to 0.25% per quarter (1.00% annualized) of the average value of the portion of the OFSCC-FS Assets, at the end of the two most recently completed calendar quarters to the extent that such portion of the OFSCC-FS Assets are financed using leverage (also calculated on an average basis) that causes the Company’s statutory asset coverage ratio to fall below 200%. When calculating its statutory asset coverage ratio, the Company excludes its SBA guaranteed debentures from its total outstanding senior securities as permitted pursuant to exemptive relief granted by the SEC dated November 26, 2013. Effective January 1, 2020, OFS Advisor agreed to further reduce the base management fee to 0.25% per quarter (1.00% annualized) of the average value of the portion of the OFSCC-FS Assets at the end of the two most recently completed calendar quarters without regard to the statutory asset coverage ratio. The base management fee reduction by OFS Advisor is renewable on an annual basis and the amount of the base management fee reduced with respect to the OFSCC-FS Assets shall not be subject to recoupment by OFS Advisor.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The incentive fee has two parts. The first part ("Income Incentive Fee") is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination and sourcing, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement (defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest or dividend feature (such as OID, debt instruments with PIK interest, equity investments with accruing or PIK dividend and zero coupon securities), accrued income that the Company has not yet received in cash.
Pre-incentive fee net investment income is expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter and adjusted for any share issuances or repurchases during such quarter.
The incentive fee with respect to pre-incentive fee net income is 20.0% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 2.0% hurdle rate (which is 8.0% annualized) and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, OFS Advisor receives no incentive fee until the net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100.0% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, OFS Advisor will receive 20.0% of the pre-incentive fee net investment income.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the base management fee. These calculations are appropriately prorated for any period of less than three months.
The second part of the incentive fee (the “Capital Gain Fee”) is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.0% of the Company’s aggregate realized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the Capital Gain Fee.
The Company accrues 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. If, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) decreases during a period, the Company will reverse any excess Capital Gain Fee previously accrued such that the amount of Capital Gains Fee accrued is no more than 20% of the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation).
On May 4, 2020, OFS Advisor agreed to irrevocably waive the receipt of $441 in Income Incentive Fees (based on net investment income) 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, 2020. As a result of the voluntary fee waiver, the Company incurred Income Incentive Fee expense of $442 for the three months ended March 31, 2020, which is equal to half the Income Incentive Fee expense the Company would have incurred for the three months ended March 31, 2020. The voluntary fee waiver did not include Capital Gain Fees, which was $0 for the three months ended March 31, 2020.
License Agreement: The Company is party to a license agreement with OFSAM under which OFSAM has granted the Company a non-exclusive, royalty-free license to use the name “OFS.”
Administration Agreement: OFS Services furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions, and clerical, bookkeeping and record keeping services at such facilities pursuant to the Administration Agreement. Under the Administration Agreement, OFS Services performs, or oversees the performance of, the Company’s required administrative services, which include being responsible for the financial records that the Company is required to maintain and preparing reports to its stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS Services assists the Company in determining and publishing its net
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports to its stockholders, and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Under the Administration Agreement, OFS Services also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted the Company’s offer to provide such assistance. Payment under the Administration Agreement is equal to an amount based upon the Company’s allocable portion of OFS Services’s overhead in performing its obligations under the Administration Agreement, including, but not limited to, rent, information technology services and the Company’s allocable portion of the cost of its officers, including its chief executive officer, chief financial officer, chief compliance officer, chief accounting officer and their respective staffs. To the extent that OFS Services outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without profit to OFS Services.
Equity Ownership: As of September 30, 2020, affiliates of OFS Advisor held 2,946,474 shares of common stock, which is approximately 22% of the Company's outstanding shares of common stock.
Distributions paid to affiliates and expenses recognized under agreements with OFS Advisor and OFS Services for the three and nine months ended September 30, 2020 and 2019 are presented below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Base management fees | $ | 1,871 |
|
| $ | 2,164 |
|
| $ | 5,759 |
|
| $ | 6,062 |
|
Incentive fees: | | | | | | | |
Income Incentive Fee | 234 |
| | 1,214 |
| | 1,332 |
| | 3,622 |
|
Incentive fee waiver | — |
|
| — |
|
| (441 | ) |
| — |
|
Administration fee expense | 436 |
| | 396 |
| | 1,456 |
| | 1,250 |
|
Distributions paid to affiliates | 501 |
|
| 1,002 |
|
| 2,004 |
|
| 3,005 |
|
Note 4. Investments
As of September 30, 2020, the Company had loans to 56 portfolio companies, of which 91% were senior secured loans and 9% were subordinated loans, at fair value, as well as equity investments in 14 of these portfolio companies. The Company also held equity investments in nine portfolio companies in which it did not hold a debt investment and nine investments in Structured Finance Notes. At September 30, 2020, the Company's investments consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
| | | Percentage of Total | | | | Percentage of Total |
| Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Senior secured debt investments (1) | $ | 356,599 |
|
| 73.7 | % | | 237.9 | % | | $ | 336,960 |
| | 73.8 | % | | 224.7 | % |
Subordinated debt investments | 57,103 |
|
| 11.8 |
| | 38.1 |
| | 31,564 |
| | 6.9 |
| | 21.1 |
|
Preferred equity | 18,878 |
|
| 3.9 |
| | 12.6 |
| | 11,875 |
| | 2.6 |
| | 7.9 |
|
Common equity, warrants and other | 15,220 |
|
| 3.1 |
| | 10.2 |
| | 43,398 |
| | 9.5 |
| | 28.9 |
|
Total debt and equity investments | 447,800 |
| | 92.5 |
| | 298.8 |
| | 423,797 |
| | 92.8 |
| | 282.6 |
|
Structured Finance Notes | 36,260 |
| | 7.5 |
| | 24.2 |
| | 32,531 |
| | 7.2 |
| | 21.8 |
|
Total investments | $ | 484,060 |
|
| 100.0 | % | | 323.0 | % | | $ | 456,328 |
| | 100.0 | % | | 304.4 | % |
| |
(1) | Includes debt investments, typically referred to as unitranche, in which the Company has entered into contractual arrangements with co‑lenders whereby, subject to certain conditions, the Company has agreed to receive its principal payments after the repayment of certain co‑lenders pursuant to a payment waterfall. Amortized cost and fair value of these investments were $82,880 and $83,413, respectively. |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Geographic composition is determined by the location of the corporate headquarters of the portfolio company. As of September 30, 2020, the Company's investment portfolio was domiciled as follows:
|
| | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
United States of America | $ | 441,902 |
| | $ | 418,055 |
| | $ | 505,235 |
| | $ | 484,946 |
|
Canada | 1,923 |
| | 1,830 |
| | 3,559 |
| | 3,605 |
|
Cayman Islands1 | 36,260 |
| | 32,531 |
| | 23,127 |
| | 21,610 |
|
Ireland | — |
| | — |
| | 1,897 |
| | 1,906 |
|
Luxembourg | 1,981 |
| | 1,934 |
| | 2,843 |
| | 2,843 |
|
Switzerland | 1,994 |
| | 1,978 |
| | 2,010 |
| | 2,021 |
|
Total investments | $ | 484,060 |
| | $ | 456,328 |
| | $ | 538,671 |
| | $ | 516,931 |
|
(1) Cayman Island investments represent Structured Finance Notes held by the Company. These investments generally hold underling portfolios of investments in companies domiciled in the United States of America.
As of September 30, 2020, the industry composition of the Company’s investment portfolio was as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Administrative and Support and Waste Management and Remediation Services |
|
|
|
|
| | |
|
| |
|
| | |
Convention and Trade Show Organizers |
| $ | 214 |
|
| — | % | | 0.1 | % | | $ | 210 |
|
| — | % | | 0.1 | % |
Security Systems Services (except Locksmiths) |
| 6,533 |
|
| 1.3 | % |
| 4.4 |
| | 4,657 |
| | 1.0 |
| | 3.2 |
|
Arts, Entertainment, and Recreation |
|
|
|
|
|
| |
| |
| |
|
Other Amusement and Recreation Industries |
| 20,953 |
|
| 4.3 |
| | 14.0 |
| | 19,673 |
|
| 4.3 |
| | 13.2 |
|
Construction |
|
|
|
|
|
| |
| |
| |
|
Electrical Contractors and Other Wiring Installation Contractors |
| 17,700 |
|
| 3.7 |
|
| 11.8 |
| | 14,457 |
| | 3.2 |
| | 9.6 |
|
Plumbing, Heating, and Air-Conditioning Contractors |
| 8,525 |
|
| 1.8 |
| | 5.7 |
| | 7,860 |
|
| 1.7 |
| | 5.2 |
|
Education Services |
|
|
|
|
|
| |
| |
| |
|
Colleges, Universities, and Professional Schools |
| — |
|
| — |
|
| — |
| | 3,356 |
| | 0.7 |
| | 2.2 |
|
Professional and Management Development Training |
| 11,762 |
|
| 2.4 |
| | 7.8 |
| | 11,305 |
|
| 2.5 |
| | 7.5 |
|
Finance and Insurance |
|
|
|
|
|
| |
| |
| |
|
Direct Health and Medical Insurance Carriers |
| 396 |
|
| 0.1 |
| | 0.3 |
| | 405 |
| | 0.1 |
| | 0.3 |
|
Insurance Agencies and Brokerages |
| 9,537 |
|
| 2.0 |
|
| 6.4 |
| | 8,951 |
| | 2.0 |
| | 6.0 |
|
Health Care and Social Assistance |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Child Day Care Services |
| 5,180 |
|
| 1.1 |
| | 3.5 |
| | 4,948 |
| | 1.1 |
| | 3.3 |
|
Diagnostic Imaging Centers |
| 14,278 |
|
| 2.9 |
|
| 9.5 |
| | 15,658 |
|
| 3.4 |
| | 10.4 |
|
Home Health Care Services |
| 13,636 |
|
| 2.8 |
| | 9.1 |
| | 13,766 |
| | 3.0 |
| | 9.1 |
|
Medical Laboratories |
| 91 |
|
| — |
|
| 0.1 |
| | 44 |
| | — |
| | — |
|
Offices of Physicians, Mental Health Specialists |
| 20,721 |
|
| 4.3 |
|
| 13.8 |
| | 20,163 |
| | 4.4 |
| | 13.5 |
|
Outpatient Mental Health and Substance Abuse Centers |
| 11,614 |
|
| 2.4 |
|
| 7.7 |
| | 3,951 |
| | 0.9 |
| | 2.6 |
|
Information |
|
|
|
|
|
|
|
|
| |
|
| | | |
|
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Data Processing, Hosting, and Related Services |
| 11,705 |
|
| 2.4 |
| | 7.8 |
| | 12,320 |
|
| 2.7 |
| | 8.2 |
|
Software Publishers |
| 29,980 |
|
| 6.2 |
|
| 19.9 |
| | 18,041 |
| | 4.0 |
| | 12.1 |
|
Television Broadcasting |
| 1,982 |
|
| 0.4 |
| | 1.3 |
| | 1,554 |
|
| 0.3 |
| | 1.0 |
|
Manufacturing |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Commercial Printing (except Screen and Books) |
| 4,786 |
|
| 1.0 |
|
| 3.2 |
| | 4,549 |
| | 1.0 |
| | 3.0 |
|
Custom Compounding of Purchased Resins |
| 15,433 |
|
| 3.2 |
|
| 10.3 |
| | 16,332 |
|
| 3.6 |
| | 10.9 |
|
Other Aircraft Parts and Auxiliary Equipment Manufacturing |
| 5,426 |
|
| 1.1 |
|
| 3.6 |
| | 4,696 |
| | 1.0 |
| | 3.1 |
|
Other Commercial and Service Industry Machinery Manufacturing |
| 1,965 |
|
| 0.4 |
| | 1.3 |
| | 1,934 |
|
| 0.4 |
| | 1.3 |
|
Pharmaceutical Preparation Manufacturing |
| 5,999 |
|
| 1.2 |
|
| 4.0 |
| | 37,698 |
| | 8.3 |
| | 25.2 |
|
Plastics Plumbing Fixture Manufacturing |
| 1,473 |
|
| 0.3 |
| | 1.0 |
| | 1,479 |
|
| 0.3 |
| | 1.0 |
|
Pump and Pumping Equipment Manufacturing |
| 1,501 |
|
| 0.3 |
|
| 1.0 |
| | 1,220 |
| | 0.3 |
| | 0.8 |
|
Semiconductor and Related Device Manufacturing |
| 471 |
|
| 0.1 |
| | 0.3 |
| | 502 |
|
| 0.1 |
| | 0.3 |
|
Travel Trailer and Camper Manufacturing |
| 10,811 |
|
| 2.2 |
|
| 7.2 |
| | 8,084 |
| | 1.8 |
| | 5.4 |
|
Truck Trailer Manufacturing |
| 6,987 |
|
| 1.4 |
|
| 4.7 |
| | 6,915 |
| | 1.5 |
| | 4.6 |
|
Unlaminated Plastics Profile Shape Manufacturing |
| 8,046 |
|
| 1.7 |
| | 5.4 |
| | 7,795 |
| | 1.7 |
| | 5.2 |
|
Other Services (except Public Administration) |
|
|
|
|
|
| |
| |
| |
|
Automotive Oil Change and Lubrication Shops |
| 19,767 |
|
| 4.1 |
|
| 13.2 |
| | 19,575 |
| | 4.3 |
| | 13.2 |
|
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance |
| 851 |
|
| 0.2 |
|
| 0.6 |
| | 811 |
| | 0.2 |
| | 0.5 |
|
Diet and Weight Reducing Centers |
| 485 |
|
| 0.1 |
| | 0.3 |
| | 485 |
|
| 0.1 |
| | 0.3 |
|
Professional, Scientific, and Technical Services |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Administrative Management and General Management Consulting Services |
| 25,134 |
|
| 5.2 |
|
| 16.8 |
| | 25,095 |
|
| 5.5 |
| | 16.8 |
|
All Other Professional, Scientific, and Technical Services |
| 1,923 |
|
| 0.4 |
| | 1.3 |
| | 1,830 |
|
| 0.4 |
| | 1.2 |
|
Other Accounting Services |
| 14,663 |
|
| 3.0 |
|
| 9.8 |
| | 15,422 |
| | 3.4 |
| | 10.3 |
|
Other Computer Related Services |
| 16,746 |
|
| 3.5 |
|
| 11.2 |
| | 15,806 |
| | 3.5 |
| | 10.6 |
|
Public Administration |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Other Justice, Public Order, and Safety Activities |
| 703 |
|
| 0.1 |
|
| 0.5 |
| | 696 |
| | 0.2 |
| | 0.5 |
|
Real Estate and Rental and Leasing |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Construction, Mining, and Forestry Machinery and Equipment Rental and Leasing |
| 499 |
|
| 0.1 |
| | 0.3 |
| | 497 |
|
| 0.1 |
| | 0.3 |
|
Office Machinery and Equipment Rental and Leasing |
| 13,964 |
|
| 2.9 |
|
| 9.3 |
| | 10,265 |
| | 2.2 |
| | 6.8 |
|
Retail Trade |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Cosmetics, Beauty Supplies, and Perfume Stores | | 7,868 |
|
| 1.6 |
| | 5.2 |
| | 7,796 |
|
| 1.7 |
| | 5.2 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Shoe store |
| 9,742 |
|
| 2.0 |
|
| 6.5 |
| | 5,351 |
|
| 1.2 |
| | 3.6 |
|
Sporting Goods Stores |
| 2,911 |
|
| 0.6 |
| | 1.9 |
| | 2,942 |
|
| 0.6 |
| | 2.0 |
|
All Other General Merchandise Stores |
| 5,292 |
|
| 1.1 |
|
| 3.5 |
| | 4,780 |
|
| 1.0 |
| | 3.2 |
|
Transportation and Warehousing |
|
|
|
|
|
|
| | | | | | | |
Scheduled Passenger Air Transportation |
| 495 |
|
| 0.1 |
| | 0.3 |
| | 504 |
|
| 0.1 |
| | 0.3 |
|
Taxi Service |
| 1,981 |
|
| 0.4 |
| | 1.3 |
| | 1,934 |
|
| 0.4 |
| | 1.3 |
|
Wholesale Trade |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Business to Business Electronic Markets |
| 2,895 |
|
| 0.6 |
|
| 1.9 |
| | 2,768 |
|
| 0.6 |
| | 1.8 |
|
Computer and Computer Peripheral Equipment and Software Merchant Wholesalers |
| 1,959 |
|
| 0.4 |
| | 1.3 |
| | 1,939 |
|
| 0.4 |
| | 1.3 |
|
Construction and Mining (except Oil Well) Machinery and Equipment Merchant Wholesalers |
| 16,590 |
|
| 3.4 |
| | 11.1 |
| | 17,122 |
|
| 3.8 |
| | 11.5 |
|
General Line Grocery Merchant Wholesalers |
| 460 |
|
| 0.1 |
| | 0.3 |
| | 468 |
|
| 0.1 |
| | 0.3 |
|
Industrial Machinery and Equipment Merchant Wholesalers |
| 9,696 |
|
| 2.0 |
|
| 6.5 |
| | 9,060 |
|
| 2.0 |
| | 6.0 |
|
Industrial Supplies Merchant Wholesalers |
| 6,901 |
|
| 1.4 |
|
| 4.6 |
| | 5,402 |
|
| 1.2 |
| | 3.6 |
|
Motor Vehicle Parts (Used) Merchant Wholesalers |
| 14,194 |
|
| 2.9 |
| | 9.5 |
| | 13,633 |
|
| 3.0 |
| | 9.1 |
|
Sporting and Recreational Goods and Supplies Merchant Wholesalers |
| 8,247 |
|
| 1.7 |
|
| 5.5 |
| | — |
| | — |
| | — |
|
Stationary & Office Supply Merchant Wholesaler | | 16,129 |
|
| 3.3 |
| | 10.8 |
| | 7,093 |
|
| 1.6 |
| | 4.7 |
|
Total debt and equity investments |
| $ | 447,800 |
|
| 92.2 | % |
| 298.7 | % | | $ | 423,797 |
| | 92.9 | % | | 282.7 | % |
Structured Finance Notes | | 36,260 |
| | 7.8 |
| | 24.2 |
| | 32,531 |
| | 7.1 |
| | 21.7 |
|
Total investments | | $ | 484,060 |
| | 100.0 | % | | 322.9 | % | | $ | 456,328 |
|
| 100.0 | % | | 304.4 | % |
As of December 31, 2019, the Company had loans to 79 portfolio companies, of which 90% were senior secured loans and 10% were subordinated loans, at fair value, as well as equity investments in 15 of these portfolio companies. The Company also held an equity investment in six portfolio companies in which it did not hold a debt investment, as well as four investments in Structured Finance Notes. At December 31, 2019, investments consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
| | | Percentage of Total | | | | Percentage of Total |
| Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Senior secured debt investments | $ | 421,970 |
| | 78.3 | % | | 253.2 | % | | $ | 408,724 |
| | 79.1 | % | | 245.3 | % |
Subordinated debt investments | 56,731 |
| | 10.5 |
| | 34.0 |
| | 43,091 |
| | 8.3 |
| | 25.9 |
|
Preferred equity | 21,925 |
| | 4.1 |
| | 13.2 |
| | 17,729 |
| | 3.4 |
| | 10.6 |
|
Common equity, warrants and other | 14,919 |
| | 2.8 |
| | 9.0 |
| | 25,777 |
| | 5.0 |
| | 15.5 |
|
Total debt and equity investments | 515,545 |
| | 95.7 | % | | 309.4 | % | | 495,321 |
| | 95.8 | % | | 297.3 | % |
Structured Finance Notes | 23,126 |
| | 4.3 |
| | 14.0 |
| | 21,610 |
| | 4.2 |
| | 12.9 |
|
Total | $ | 538,671 |
| | 100.0 | % | | 323.4 | % | | $ | 516,931 |
| | 100.0 | % | | 310.2 | % |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
At December 31, 2019, the Company had international domiciled debt investments, all denominated in US dollars, with an amortized cost and fair value of $10,309 and $10,374, respectively, and debt and equity investments with an amortized cost and fair value of $505,232 and $484,945, respectively, domiciled in the United States. The industry compositions of the Company’s debt and equity investment portfolio were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Administrative and Support and Waste Management and Remediation Services | | | | | | | | | | | | |
Convention and Trade Show Organizers | | $ | 500 |
| | 0.1 | % | | 0.3 | % | | $ | 1,490 |
| | 0.3 | % | | 0.9 | % |
Security Systems Services (except Locksmiths) | | 8,158 |
| | 1.5 |
| | 4.9 |
| | 7,224 |
| | 1.4 |
| | 4.3 |
|
Temporary Help Services | | 13,866 |
| | 2.6 |
| | 8.3 |
| | 13,742 |
| | 2.7 |
| | 8.2 |
|
Arts, Entertainment, and Recreation | | | |
|
| | | | | |
|
| | |
Other Amusement and Recreation Industries | | 18,611 |
| | 3.5 |
| | 11.2 |
| | 18,592 |
| | 3.6 |
| | 11.2 |
|
Construction | | | |
|
| | | | | |
|
| | |
Electrical Contractors and Other Wiring Installation Contractors | | 16,520 |
| | 3.1 |
| | 9.9 |
| | 14,639 |
| | 2.8 |
| | 8.8 |
|
Plumbing, Heating, and Air-Conditioning Contractors | | 8,422 |
| | 1.6 |
| | 5.1 |
| | 9,583 |
| | 1.9 |
| | 5.8 |
|
Education Services | | | |
|
| | | | | |
|
| | |
Colleges, Universities, and Professional Schools | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Professional and Management Development Training | | 11,574 |
| | 2.1 |
| | 6.9 |
| | 11,575 |
| | 2.2 |
| | 6.9 |
|
Finance and Insurance | | | |
|
| | | | | |
|
| | |
Direct Health and Medical Insurance Carriers | | 395 |
| | 0.1 |
| | 0.2 |
| | 405 |
| | 0.1 |
| | 0.2 |
|
Insurance Agencies and Brokerages | | 11,487 |
| | 2.1 |
| | 6.9 |
| | 11,386 |
| | 2.2 |
| | 6.8 |
|
Health Care and Social Assistance | | | |
|
| | | | | |
|
| | |
All Other Outpatient Care Centers | | 2,001 |
| | 0.4 |
| | 1.2 |
| | 2,015 |
| | 0.4 |
| | 1.2 |
|
Child Day Care Services | | 8,126 |
| | 1.5 |
| | 4.9 |
| | 8,266 |
| | 1.6 |
| | 5.0 |
|
Diagnostic Imaging Centers | | 14,247 |
| | 2.6 |
| | 8.6 |
| | 14,191 |
| | 2.7 |
| | 8.5 |
|
Freestanding Ambulatory Surgical and Emergency Centers | | 2,950 |
| | 0.5 |
| | 1.8 |
| | 2,976 |
| | 0.6 |
| | 1.8 |
|
General Medical and Surgical Hospitals | | 2,612 |
| | 0.5 |
| | 1.6 |
| | 2,632 |
| | 0.5 |
| | 1.6 |
|
Home Health Care Services | | 16,627 |
| | 3.1 |
| | 10.0 |
| | 16,236 |
| | 3.1 |
| | 9.7 |
|
Medical Laboratories | | 91 |
| | — |
| | 0.1 |
| | 22 |
| | — |
| | — |
|
Offices of Physicians, Mental Health Specialists | | 20,047 |
| | 3.6 |
| | 12.0 |
| | 19,945 |
| | 3.8 |
| | 12.0 |
|
Outpatient Mental Health and Substance Abuse Centers | | 11,609 |
| | 2.2 |
| | 7.0 |
| | 4,000 |
| | 0.8 |
| | 2.4 |
|
Residential Intellectual and Developmental Disability Facilities | | 2,991 |
| | 0.6 |
| | 1.8 |
| | 3,006 |
| | 0.6 |
| | 1.8 |
|
Information | | | |
|
| | | | | |
|
| | |
Data Processing, Hosting, and Related Services | | 11,805 |
| | 2.2 |
| | 7.1 |
| | 11,900 |
| | 2.3 |
| | 7.1 |
|
Internet Publishing and Broadcasting and Web Search Portals | | 1,969 |
| | 0.4 |
| | 1.2 |
| | 1,992 |
| | 0.4 |
| | 1.2 |
|
Software Publishers | | 41,054 |
| | 7.5 |
| | 24.5 |
| | 38,373 |
| | 7.3 |
| | 22.9 |
|
Television Broadcasting | | 1,997 |
| | 0.4 |
| | 1.2 |
| | 1,997 |
| | 0.4 |
| | 1.1 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Wired Telecommunications Carriers | | 1,972 |
| | 0.4 |
| | 1.2 |
| | 1,980 |
| | 0.4 |
| | 1.2 |
|
Manufacturing | | | | | | | | | |
|
| | |
Commercial Printing (except Screen and Books) | | $ | 4,778 |
| | 0.9 | % | | 2.9 | % | | $ | 4,591 |
| | 0.9 | % | | 2.8 | % |
Custom Compounding of Purchased Resins | | 15,405 |
| | 2.9 |
| | 9.2 |
| | 16,408 |
| | 3.2 |
| | 9.8 |
|
Motor Vehicle Body Manufacturing | | 1,970 |
| | 0.4 |
| | 1.2 |
| | 1,997 |
| | 0.4 |
| | 1.2 |
|
Other Aircraft Parts and Auxiliary Equipment Manufacturing | | 5,412 |
| | 1.0 |
| | 3.2 |
| | 4,213 |
| | 0.8 |
| | 2.5 |
|
Other Commercial and Service Industry Machinery Manufacturing | | 2,229 |
| | 0.4 |
| | 1.3 |
| | 2,262 |
| | 0.4 |
| | 1.4 |
|
Pharmaceutical and Medicine Manufacturing | | 853 |
| | 0.2 |
| | 0.5 |
| | 853 |
| | 0.2 |
| | 0.5 |
|
Pharmaceutical Preparation Manufacturing | | 7,931 |
| | 1.5 |
| | 4.8 |
| | 19,694 |
| | 3.8 |
| | 11.8 |
|
Plastics Plumbing Fixture Manufacturing | | 1,484 |
| | 0.3 |
| | 0.9 |
| | 1,498 |
| | 0.3 |
| | 0.9 |
|
Pump and Pumping Equipment Manufacturing | | 1,501 |
| | 0.3 |
| | 0.9 |
| | 1,607 |
| | 0.3 |
| | 1.0 |
|
Travel Trailer and Camper Manufacturing | | 10,520 |
| | 2.0 |
| | 6.3 |
| | 8,717 |
| | 1.7 |
| | 5.2 |
|
Truck Trailer Manufacturing | | 6,990 |
| | 1.3 |
| | 4.2 |
| | 6,690 |
| | 1.3 |
| | 4.0 |
|
Unlaminated Plastics Profile Shape Manufacturing | | 10,046 |
| | 1.9 |
| | 6.0 |
| | 9,959 |
| | 1.9 |
| | 6.0 |
|
Other Services (except Public Administration) | | | |
|
| | | | | |
|
| | |
Automotive Oil Change and Lubrication Shops | | 20,165 |
| | 3.6 |
| | 12.1 |
| | 20,458 |
| | 3.9 |
| | 12.3 |
|
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance | | 19,106 |
| | 3.4 |
| | 11.5 |
| | 18,265 |
| | 3.5 |
| | 11.0 |
|
Communication Equipment Repair and Maintenance | | 4,493 |
| | 0.8 |
| | 2.7 |
| | 4,512 |
| | 0.9 |
| | 2.7 |
|
Professional, Scientific, and Technical Services | | | |
|
| | | | | |
|
| | |
Administrative Management and General Management Consulting Services | | 17,496 |
| | 3.2 |
| | 10.5 |
| | 17,492 |
| | 3.4 |
| | 10.5 |
|
Advertising Agencies | | 1,987 |
| | 0.4 |
| | 1.2 |
| | 2,001 |
| | 0.4 |
| | 1.2 |
|
All Other Professional, Scientific, and Technical Services | | 1,925 |
| | 0.4 |
| | 1.2 |
| | 1,925 |
| | 0.4 |
| | 1.2 |
|
Other Accounting Services | | 1,698 |
| | 0.3 |
| | 1.0 |
| | 2,250 |
| | 0.4 |
| | 1.4 |
|
Other Computer Related Services | | 18,242 |
| | 3.4 |
| | 10.9 |
| | 18,353 |
| | 3.6 |
| | 11.0 |
|
Testing Laboratories | | 1,987 |
| | 0.4 |
| | 1.2 |
| | 2,004 |
| | 0.4 |
| | 1.2 |
|
Public Administration | | | |
|
| | | | | |
|
| | |
Other Justice, Public Order, and Safety Activities | | 9,846 |
| | 1.8 |
| | 5.9 |
| | 407 |
| | 0.1 |
| | 0.2 |
|
Public Finance Activities | | 1,941 |
| | 0.4 |
| | 1.2 |
| | 2,007 |
| | 0.4 |
| | 1.2 |
|
Real Estate and Rental and Leasing | | | |
|
| | | | | |
|
| | |
Office Machinery and Equipment Rental and Leasing | | 13,698 |
| | 2.5 |
| | 8.2 |
| | 14,342 |
| | 2.8 |
| | 8.6 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Retail Trade | | | |
|
| | | | | |
|
| | |
Cosmetics, Beauty Supplies, and Perfume Stores | | $ | 6,419 |
| | 1.2 | % | | 3.9 | % | | $ | 6,363 |
| | 1.2 | % | | 3.8 | % |
Shoe Store | | 9,675 |
| | 1.8 |
| | 5.8 |
| | 9,917 |
| | 1.9 |
| | 6.0 |
|
Sporting Goods Stores | | 1,921 |
| | 0.4 |
| | 1.2 |
| | 1,983 |
| | 0.4 |
| | 1.2 |
|
Supermarkets and Other Grocery (except Convenience) Stores | | 1,081 |
| | 0.2 |
| | 0.6 |
| | 1,094 |
| | 0.2 |
| | 0.7 |
|
All Other General Merchandise Stores | | 5,402 |
| | 1.0 |
| | 3.2 |
| | 5,020 |
| | 1.0 |
| | 3.0 |
|
Transportation and Warehousing | | | |
|
| | | | | |
|
| | |
General Warehousing and Storage | | 13,790 |
| | 2.6 |
| | 8.3 |
| | 14,165 |
| | 2.7 |
| | 8.5 |
|
Taxi Service | | 1,990 |
| | 0.4 |
| | 1.2 |
| | 1,990 |
| | 0.4 |
| | 1.2 |
|
Wholesale Trade | | | |
|
| | | | | |
|
| | |
Business to Business Electronic Markets | | 3,920 |
| | 0.7 |
| | 2.4 |
| | 3,960 |
| | 0.8 |
| | 2.4 |
|
Computer and Computer Peripheral Equipment and Software Merchant Wholesalers | | 3,955 |
| | 0.7 |
| | 2.4 |
| | 3,976 |
| | 0.8 |
| | 2.4 |
|
Industrial Machinery and Equipment Merchant Wholesalers | | 9,700 |
| | 1.8 |
| | 5.8 |
| | 9,662 |
| | 1.9 |
| | 5.8 |
|
Industrial Supplies Merchant Wholesalers | | 6,883 |
| | 1.3 |
| | 4.1 |
| | 6,584 |
| | 1.3 |
| | 4.0 |
|
Motor Vehicle Parts (Used) Merchant Wholesalers | | 13,119 |
| | 2.4 |
| | 7.9 |
| | 13,119 |
| | 2.5 |
| | 7.9 |
|
Other Grocery and Related Products Merchant Wholesalers | | 1,995 |
| | 0.4 |
| | 1.2 |
| | 2,003 |
| | 0.4 |
| | 1.2 |
|
Sporting and Recreational Goods and Supplies Merchant Wholesalers | | 8,247 |
| | 1.5 |
| | 4.9 |
| | 255 |
| | — |
| | 0.2 |
|
Stationery and Office Supplies Merchant Wholesalers | | 16,113 |
| | 3.0 |
| | 9.7 |
| | 14,559 |
| | 2.8 |
| | 8.7 |
|
Total debt and equity investments | | $ | 515,545 |
| | 95.7 | % | | 309.4 | % | | $ | 495,321 |
| | 95.8 | % | | 297.3 | % |
Structured Finance Notes | | 23,126 |
| | 4.3 |
| | 14.0 |
| | 21,610 |
| | 4.2 |
| | 12.9 |
|
Total investments | | $ | 538,671 |
| | 100.0 | % | | 323.4 | % | | $ | 516,931 |
| | 100.0 | % | | 310.2 | % |
When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal. The aggregate amortized cost and fair value of loans on non-accrual status with respect to all interest and Net Loan Fee amortization was $49,525 and $18,757, respectively, at September 30, 2020, and $22,249 and $662, respectively, at December 31, 2019.
On March 27, 2020, the Company's debt investment in Constellis Holdings, LLC was restructured, pursuant to which the Company converted its non-accrual debt investment into 20,628 common shares of equity. The cost and fair value of the common shares received were $703 and $703, respectively, as of March 31, 2020. The Company recognized a realized loss on the restructuring of $9,145 for the nine months ended September 30, 2020, which was fully recognized as an unrealized loss as of December 31, 2019.
On September 4, 2020, the Company's equity investment in Sentry Centers Holdings, LLC was restructured, pursuant to which the Company converted its 500 Series C units into 269 shares of common equity. In addition, the Company invested $160 in a capital raise and received Series A and Series B preferred units. Accordingly, during the three months ended September 30, 2020, the Company recognized a realized loss of $446.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
On September 30, 2020, the Company's debt investment in Southern Technical Institute, LLC was restructured, pursuant to which the Company received proceeds of $529, in full satisfaction of contractually due interest of $215 and principal of $1,660. This investment was carried at a cost of $-0-. Accordingly, during the three and nine months ended September 30, 2020, the Company fully recognized a realized gain of $314 as the investment was carried at cost as of December 31, 2019. As of September 30, 2020, the Company holds equity appreciation rights with a cost and fair value of $-0- and $3,356, respectively.
On January 31, 2019, Maverick Healthcare Equity, LLC was acquired in a purchase transaction. Proceeds from this transaction were insufficient to redeem the class of equity held by the Company. Accordingly, during the nine months ended September 30, 2019, the Company recognized a net loss of $89, which is comprised of $900 realized loss net of $811 unrealized loss reversal.
Note 5. Fair Value of Financial Instruments
The Company’s investments are carried at fair value as determined by the Board. These fair values are determined in accordance with a documented valuation policy and a consistently applied valuation process.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions that market participants would use in pricing the subject asset or liability. Valuation inputs are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities quoted in active markets (Level 1) and the lowest priority to fair values based on unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived principally from or corroborated by observable market data.
Level 3: Unobservable inputs for the asset or liability, and situations where there is little, if any, market activity for the asset or liability at the measurement date.
The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant judgment or estimation by management. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The Company generally categorizes its investment portfolio into Level 2 and Level 3 of the hierarchy.
The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the measurement date. Senior securities with a fair value of $3,585 and $599 were transferred from Level 3 to Level 2 during the three and nine months ended September 30, 2020, respectively. Senior securities with a fair value of $0 and $628 were transferred from Level 3 to Level 2 during the three and nine months ended September 30, 2019, respectively.
Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded. The Company’s investments are subject to market risk, which is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.
The following tables present the Company's investment portfolio measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | | | | | | | | | | | | | |
Security | | Level 1 | | Level 2 | | Level 3 | | Fair Value at September 30, 2020 |
Debt investments | | $ | — |
| | $ | 23,547 |
| | $ | 344,977 |
| | $ | 368,524 |
|
Equity investments | | — |
| | — |
| | 55,273 |
| | 55,273 |
|
Structured Finance Notes | | — |
| | — |
| | 32,531 |
| | 32,531 |
|
| | $ | — |
| | $ | 23,547 |
| | $ | 432,781 |
| | $ | 456,328 |
|
|
| | | | | | | | | | | | | | | | |
Security | | Level 1 | | Level 2 | | Level 3 | | Fair Value at December 31, 2019 |
Debt investments | | $ | — |
| | $ | 74,666 |
| | $ | 377,149 |
| | $ | 451,815 |
|
Equity investments | | — |
| | — |
| | 43,506 |
| | 43,506 |
|
Structured Finance Notes | | — |
| | — |
| | 21,610 |
| | 21,610 |
|
| | $ | — |
| | $ | 74,666 |
| | $ | 442,265 |
| | $ | 516,931 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following tables provide quantitative information about valuation techniques and the Company’s significant inputs to the Company’s Level 3 fair value measurements as of September 30, 2020 and December 31, 2019. In addition to the techniques and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The table below provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements.
|
| | | | | | | | | |
| Fair Value at September 30, 2020 | | Valuation technique | | Unobservable inputs | | Range (Weighted average) |
Debt investments: | | | | | | | |
Senior secured | $ | 287,788 |
|
| Discounted cash flow |
| Discount rates |
| 7.28% - 24.42% (10.43%) |
Senior secured | 13,961 |
| | Market approach | | EBITDA multiples | | 8.50x - 8.50x (8.50x) |
Senior secured | 11,664 |
| | Market approach | | Revenue multiples | | 1.27x - 1.27x (1.27x) |
Subordinated | 19,120 |
|
| Discounted cash flow |
| Discount rates |
| 10.92% - 24.50% (19.61%) |
Subordinated | 12,444 |
|
| Market approach |
| EBITDA multiples |
| 3.87x - 7.5x (5.94x) |
Subordinated | — |
| | Market approach | | Revenue multiples | | 0.10x - 0.18x (0.14x) |
|
|
|
|
|
|
|
|
|
Structured Finance Notes |
|
|
|
|
|
|
|
|
Subordinated notes (3) | 30,925 |
|
| Discounted cash flow |
| Discount rates |
| 20.00% - 24.50% (21.92%) |
| | | | | Constant Default Rate(1) |
| 2.00% - 2.00% (2.00%) |
| | | | | Constant Default Rate(2) | | 3.00% - 3.00% (3.00%) |
| | | | | Recovery Rate |
| 60.00% - 60.00% (60.00%) |
| | | | | | | |
Mezzanine debt | 1,606 |
|
| Discounted cash flow |
| Discount rates |
| 8.60% - 10.50% (9.79%) |
| | | | | Constant Default Rate(1) | | 0.00% - 2.00% (1.01%) |
| | | | | Constant Default Rate(2) | | 3.00% - 3.00% (3.00%) |
| | | | | Recovery Rate | | 60.00% - 60.00% (60.00%) |
| | | | | | | |
Equity investments: |
|
|
|
|
|
|
|
|
Preferred equity | 10,827 |
|
| Market approach |
| EBITDA multiples |
| 6.50x - 8.50x (7.29x) |
Preferred equity | 1,048 |
|
| Market approach |
| Revenue multiples |
| 0.18x - 1.42x (0.87x) |
Common equity, warrants and other | 43,382 |
|
| Market approach |
| EBITDA multiples |
| 3.75x - 11.00x (7.98x) |
Common equity, warrants and other | 16 |
| | Market approach | | Revenue multiples | | 0.18x - 1.42x (0.39x) |
| $ | 432,781 |
| | | | | | |
(1) Constant default rates for the next nine months.
(2) Constant default rates for the nine months following the next nine months.
(3) The cash flows utilized in the discounted cash flow calculations assume liquidation of (a) certain distressed investments and (b) all investments currently in default held by the issuing CLO at their current market prices, and redeployment of proceeds at the issuing CLO's assumed reinvestment rate.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | | | | | | |
| Fair Value at December 31, 2019 | | Valuation technique | | Unobservable inputs | | Range (Weighted average) |
Debt investments: | | | | | | | |
Senior secured | $ | 295,835 |
| | Discounted cash flow | | Discount rates | | 5.64% - 17.42% (11.17%) |
Senior secured | 15,031 |
| | Market approach | | EBITDA multiples | | 8.09x - 13.22x (13.08x) |
Senior secured | 23,193 |
| | Market approach | | Transaction Price | | |
Subordinated | 35,371 |
| | Discounted cash flow | | Discount rates | | 6.38% - 18.86% (14.32%) |
Subordinated | 7,464 |
| | Market approach | | EBITDA multiples | | 4.75x - 6.35x (6.35x) |
Subordinated | 255 |
| | Market approach | | Revenue multiple | | |
| | | | | | | |
Structured Finance Notes: | | | | | | | |
Subordinated Notes(2) | 21,610 |
| | Discounted cash flow | | Discount rates | | 14.50% - 19.50% (17.16%) |
| | | | | Constant default rate(1) | | 1.26% - 1.40% (1.33%) |
| | | | | Recovery rate | | 69.30% - 70.00% (69.70%) |
| | | | | | | |
Equity investments: | | | | | | | |
Preferred equity | 13,185 |
| | Market approach | | EBITDA multiples | | 6.25x - 13.22x (4.96x) |
Preferred equity | 2,424 |
| | Market approach | | Revenue multiples | | 0.23x - 9.58x (9.58x) |
Preferred equity | 2,120 |
| | Market approach | | Recurring monthly revenue | | 40.00x - 40.00x (40.00x) |
Common equity, warrants and other | 22,788 |
| | Market approach | | EBITDA multiples | | 4.50x - 13.22x (13.03x) |
Common equity, warrants and other | 1,489 |
| | Market approach | | Revenue multiples | | 0.23x - 7.00x (7.00x) |
Common equity, warrants and other | 1,500 |
| | Transaction Price | | | | |
| $ | 442,265 |
| | | | | | |
(1) Constant default rates for the next twelve months.
(2) The cash flows utilized in the discounted cash flow calculations assume liquidation at current market prices and redeployment of proceeds on all assets currently in default and all assets below specified fair value thresholds.
Averages in the preceding two tables were weighted by the fair value of the related instruments.
Changes in market credit spreads or events impacting the credit quality of the underlying portfolio company (both of which could impact the discount rate), as well as changes in EBITDA and/or EBITDA multiples, among other things, could have a significant impact on fair values, with the fair value of a particular debt investment susceptible to change in inverse relation to the changes in the discount rate. Changes in EBITDA and/or EBITDA multiples, as well as changes in the discount rate, could have a significant impact on fair values, with the fair value of an equity investment susceptible to change in tandem with the changes in EBITDA and/or EBITDA multiples, and in inverse relation to changes in the discount rate. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following tables present changes in investments measured at fair value using Level 3 inputs for the nine months ended September 30, 2020 and September 30, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Senior Secured Debt Investments | | Subordinated Debt Investments | | Preferred Equity | | Common Equity, Warrants and Other | | Structured Finance Notes | | Total |
Level 3 assets, January 1, 2020 | $ | 334,059 |
| | $ | 43,090 |
| | $ | 17,729 |
| | $ | 25,777 |
| | $ | 21,610 |
| | $ | 442,265 |
|
| | | | | | | | | | | |
Net realized gain (loss) on investments | (9,396 | ) | | — |
| | 51 |
| | (497 | ) | | — |
| | (9,842 | ) |
Net unrealized appreciation (depreciation) on investments | (5,039 | ) | | (11,895 | ) | | (2,808 | ) | | 17,320 |
| | (2,211 | ) | | (4,633 | ) |
Amortization of Net Loan Fees | 854 |
| | 16 |
| | — |
| | — |
| | — |
| | 870 |
|
Accretion of interest income on structured-finance notes | — |
| | — |
| | — |
| | — |
| | 4,141 |
| | 4,141 |
|
Capitalized PIK interest and dividends | 859 |
| | 375 |
| | 388 |
| | — |
| | — |
| | 1,622 |
|
Amendment fees | (9 | ) | | (22 | ) | | — |
| | — |
| | — |
| | (31 | ) |
Purchase and origination of portfolio investments | 57,261 |
| | — |
| | 160 |
| | 95 |
| | 13,605 |
| | 71,121 |
|
Proceeds from principal payments on portfolio investments | (54,157 | ) | | — |
| | — |
| | — |
| | — |
| | (54,157 | ) |
Sale and redemption of portfolio investments | (9,717 | ) | | — |
| | (3,645 | ) | | — |
| | — |
| | (13,362 | ) |
Proceeds from distributions received from portfolio investments | — |
| | — |
| | — |
| | — |
| | (4,614 | ) | | (4,614 | ) |
Conversion from debt investment to equity investment (Note 4) | (703 | ) | | — |
| | — |
| | 703 |
| | — |
| | — |
|
Transfers out of Level 3 | (599 | ) | | — |
| | — |
| | — |
| | — |
| | (599 | ) |
| | | | | | | | | | | |
Level 3 assets, September 30, 2020 | $ | 313,413 |
|
| $ | 31,564 |
|
| $ | 11,875 |
|
| $ | 43,398 |
|
| $ | 32,531 |
|
| $ | 432,781 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Senior Secured Debt Investments | | Subordinated Debt Investments | | Preferred Equity | | Common Equity, Warrants and Other | | Structured Finance Notes | | Total |
Level 3 assets, January 1, 2019 | $ | 319,017 |
| | $ | 44,540 |
| | $ | 14,613 |
| | $ | 18,627 |
| | $ | — |
| | $ | 396,797 |
|
| | | | | | | | | | | |
Net realized gain (loss) on investments | 186 |
| | — |
| | (900 | ) | | — |
| | — |
| | (714 | ) |
Net unrealized appreciation (depreciation) on investments | (7,551 | ) | | (709 | ) | | 1,885 |
| | 3,025 |
| | (1,172 | ) | | (4,522 | ) |
Amortization of Net Loan Fees | 724 |
| | 64 |
| | — |
| | — |
| | — |
| | 788 |
|
Accretion of interest income on structured-finance notes | — |
| | — |
| | — |
| | — |
| | 2,001 |
| | 2,001 |
|
Capitalized PIK interest and dividends | 338 |
| | 274 |
| | 659 |
| | — |
| | — |
| | 1,271 |
|
Amendment fees | — |
| | (90 | ) | | — |
| | — |
| | — |
| | (90 | ) |
Purchase and origination of portfolio investments | 90,782 |
| | — |
| | 2,309 |
| | 1,813 |
| | 23,341 |
| | 118,245 |
|
Proceeds from principal payments on portfolio investments | (30,750 | ) | | — |
| | — |
| | — |
| | — |
| | (30,750 | ) |
Sale and redemption of portfolio investments | (30,316 | ) | | — |
| | — |
| | — |
| | — |
| | (30,316 | ) |
Proceeds from distributions received from portfolio investments | — |
| | — |
| | — |
| | — |
| | (1,976 | ) | | (1,976 | ) |
Transfers out of Level 3 | (628 | ) | | — |
| | — |
| | — |
| | — |
| | (628 | ) |
| | | | | | | | | | | |
Level 3 assets, September 30, 2019 | $ | 341,802 |
| | $ | 44,079 |
| | $ | 18,566 |
| | $ | 23,465 |
| | $ | 22,194 |
| | $ | 450,106 |
|
The net unrealized appreciation (depreciation) reported in the Company’s consolidated statements of operations for the nine months ended September 30, 2020 and 2019, attributable to the Company’s assets still held at those respective period ends was as follows:
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Senior secured debt investments | $ | (15,145 | ) | | $ | (7,993 | ) |
Subordinated debt investments | (11,899 | ) | | (709 | ) |
Preferred equity | (2,801 | ) | | 1,074 |
|
Common equity, warrants and other | 18,310 |
| | 3,025 |
|
Structured Finance Notes | (2,212 | ) | | (1,172 | ) |
Net unrealized depreciation on investments held | $ | (13,747 | ) | | $ | (5,775 | ) |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Other Financial Assets and Liabilities
The Company provides disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments. The PWB Credit Facility and BNP Facility are variable rate instruments and fair value is approximately book value.
The following table sets forth carrying values and fair values of the Company’s debt as of September 30, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 |
Description | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
PWB Credit Facility | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
BNP Facility | 24,650 |
| | 24,650 |
| | 56,450 |
| | 56,450 |
|
Unsecured Notes Due September 2023 | 24,035 |
| | 24,500 |
| | — |
| | — |
|
Unsecured Notes Due April 2025 | 48,826 |
| | 46,260 |
| | 48,634 |
| | 50,600 |
|
Unsecured Notes Due October 2025 | 47,277 |
| | 45,749 |
| | 47,093 |
| | 49,282 |
|
Unsecured Notes Due October 2026 | 52,544 |
| | 48,262 |
| | 52,325 |
| | 54,282 |
|
SBA-guaranteed debentures | 127,355 |
| | 142,003 |
| | 147,976 |
| | 155,562 |
|
Total debt, at fair value | $ | 324,687 |
| | $ | 331,424 |
| | $ | 352,478 |
| | $ | 366,176 |
|
The following tables present the fair value measurements of the Company's debt and indicate the fair value hierarchy of the significant unobservable inputs utilized by the Company to determine such fair values as of September 30, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | |
| September 30, 2020 |
Description | Level 1 | | Level 2 | | Level 3 (1) | | Total |
PWB Credit Facility | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
BNP Facility | — |
| | — |
| | 24,650 |
| | 24,650 |
|
Unsecured Notes Due September 2023 | 24,500 |
| | — |
| | — |
| | 24,500 |
|
Unsecured Notes Due April 2025 | 46,260 |
| | — |
| | — |
| | 46,260 |
|
Unsecured Notes Due October 2025 | 45,749 |
| | — |
| | — |
| | 45,749 |
|
Unsecured Notes Due October 2026 | 48,262 |
| | — |
| | — |
| | 48,262 |
|
SBA-guaranteed debentures | — |
| | — |
| | 142,003 |
| | 142,003 |
|
Total debt, at fair value | $ | 164,771 |
| | $ | — |
| | $ | 166,653 |
| | $ | 331,424 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2019 |
Description | Level 1 | | Level 2 | | Level 3 (1) | | Total |
PWB Credit Facility | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
BNP Facility | — |
| | — |
| | 56,450 |
| | 56,450 |
|
Unsecured Notes Due April 2025 | 50,600 |
| | — |
| | — |
| | 50,600 |
|
Unsecured Notes Due October 2025 | 49,282 |
| | — |
| | — |
| | 49,282 |
|
Unsecured Notes Due October 2026 | 54,282 |
| | — |
| | — |
| | 54,282 |
|
SBA-guaranteed debentures | — |
| | — |
| | 155,562 |
| | 155,562 |
|
Total debt, at fair value | $ | 154,164 |
| | $ | — |
| | $ | 212,012 |
| | $ | 366,176 |
|
(1) For Level 3 measurements, fair value is estimated by discounting remaining payments at current market rates for similar instruments at the measurement date and considering such factors as the legal maturity date.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following table sets forth the carrying values and fair values of the Company’s debt as of September 30, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | |
| As of September 30, 2020 | | As of December 31, 2019 |
Description | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
PWB Credit Facility | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
BNP Facility | 24,650 |
| | 24,650 |
| | 56,450 |
| | 56,450 |
|
Unsecured Notes Due September 2023 | 24,035 |
| | 24,500 |
| | — |
| | — |
|
Unsecured Notes Due April 2025 | 48,826 |
| | 46,260 |
| | 48,634 |
| | 50,600 |
|
Unsecured Notes Due October 2025 | 47,277 |
| | 45,749 |
| | 47,093 |
| | 49,282 |
|
Unsecured Notes Due October 2026 | 52,544 |
| | 48,262 |
| | 52,325 |
| | 54,282 |
|
SBA-guaranteed debentures | 127,355 |
| | 142,003 |
| | 147,976 |
| | 155,562 |
|
Total debt, at fair value | $ | 324,687 |
| | $ | 331,424 |
| | $ | 352,478 |
| | $ | 366,176 |
|
Note 6. Commitments and Contingencies
The Company has the following unfunded commitments to portfolio companies as of September 30, 2020: |
| | | | | | |
Name of Portfolio Company | | Investment Type | | Commitment |
A&A Transfer, LLC |
| Senior Secured Loan (Revolver) |
| $ | 2,136 |
|
Carolina Lubes, Inc. |
| Senior Secured Loan (Revolver) |
| 2,920 |
|
Inergex Holdings, LLC |
| Senior Secured Loan (Revolver) |
| 2,344 |
|
| | | | $ | 7,400 |
|
From time to time, the Company is involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any certainty, management is of the opinion, based on the advice of legal counsel, that final disposition of any litigation should not have a material adverse effect on the financial position of the Company as of September 30, 2020.
Additionally, the Company is subject to periodic inspection by regulators to assess compliance with applicable BDC regulations and SBIC I LP is subject to periodic inspections by the SBA.
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide for general indemnification. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company believes the risk of any material obligation under these indemnifications to be low.
Note 7. Borrowings
SBA Debentures: The SBA debentures issued by SBIC I LP and other SBA regulations generally restrict assets held by SBIC I LP. On a stand-alone basis, SBIC I LP held $239,575 and $249,576 in assets at September 30, 2020, and December 31, 2019, respectively, which accounted for approximately 50% and 49% of the Company’s total consolidated assets, respectively. The average dollar amount of borrowings outstanding during the nine months ended September 30, 2020 and 2019, were $136,130 and $149,880, respectively. These assets cannot be pledged under any debt obligation of the Company.
During the nine months ended September 30, 2020, SBIC I LP prepaid $21,110 of SBA debentures that were contractually due September 1, 2023, March 1, 2024 and September 1, 2024. The Company recognized losses on extinguishment of debt of $236 related to the charge-off of deferred borrowing costs on the prepaid debentures. As of September 30, 2020, SBIC I LP had outstanding SBA debentures of $128,770.
BNP Facility: OFSCC-FS has up to $150,000 of available credit, subject to borrowing base requirements, under the BNP Facility maturing on June 20, 2024, of which $24,650 was drawn as of September 30, 2020. The effective interest rate on the BNP Facility was 6.66% at September 30, 2020. The average dollar amount of borrowings outstanding during the nine months ended September 30, 2020 and 2019, were $43,675 and $9,879, respectively. Borrowings under the BNP Facility are secured by
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
substantially all of the assets held by OFSCC-FS, which were $64,785, or 13%, of the Company's total consolidated assets at September 30, 2020. The unused commitment under the BNP Facility was $125,350 as of September 30, 2020.
PWB Credit Facility: The Company has up to $50,000 of available credit, subject to borrowing base requirements, under its PWB Credit Facility maturing February 28, 2021, of which $-0- was drawn as of September 30, 2020. The average dollar amount of borrowings outstanding during the nine months ended September 30, 2020 and 2019, were $20,237 and $35,158, respectively. The effective interest rate on the PWB Credit Facility was 5.62% at September 30, 2020. As of September 30, 2020 the unused commitment under the PWB Credit Facility was $50,000.
In June and July 2020, the BLA was amended to, among other things: modify certain financial performance covenants and reduce the total commitment from $100,000 to $50,000. The Company recognized a loss on extinguishment of debt of $100 related to the charge-off of deferred borrowing costs on the commitment reduction.
On October 7, 2020, the BLA was amended to reduce the total commitment under the PWB Credit Facility from $50,000 to $20,000. In October 2020, the Company expects to recognize a loss on extinguishment of debt of $42 related to the charge-off of deferred borrowing costs on this commitment reduction.
Unsecured Notes: As of September 30, 2020, the Company had Unsecured Notes with an aggregate outstanding principal of $177,850. The average dollar amount of borrowings under the Unsecured Notes outstanding during the nine months ended September 30, 2020 and 2019, were $154,036 and $98,525, respectively. The weighted average effective interest rate on the Unsecured Notes was 6.89% at September 30, 2020.
In September 2020, the Company closed the public offering of the Unsecured Notes Due September 2023. The total net proceeds to the Company from the Unsecured Notes Due September 2023, after deducting underwriting discounts of $750 and estimated offering expenses of $226, were approximately $24,024. The Unsecured Notes Due September 2023 will mature on September 30, 2023 and bear an effective interest rate, including amortization of deferred debt issuance costs, of 7.54%. The Unsecured Notes Due September 2023 may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after September 30, 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 September 2023 contains covenants substantially identical to the other Unsecured Notes.
The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all current and future unsecured indebtedness of the Company. Because the Unsecured Notes are not secured by any of the Company's assets, they are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which the Company subsequently grants a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility.
Interest expense for the three and nine months ended September 30, 2020 and 2019 on the Company's outstanding borrowings is presented below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
SBA Debentures | $ | 1,068 |
|
| $ | 1,295 |
|
| $ | 3,406 |
|
| $ | 3,843 |
|
PWB Credit Facility | 285 |
|
| 802 |
|
| 1,276 |
|
| 1,896 |
|
Unsecured Notes | 2,662 |
|
| 1,726 |
|
| 7,867 |
|
| 5,178 |
|
BNP Facility | 433 |
|
| 641 |
|
| 1,752 |
|
| 647 |
|
Total interest expense | $ | 4,448 |
|
| $ | 4,464 |
|
| $ | 14,301 |
|
| $ | 11,564 |
|
| | | | | | | |
Average dollar borrowings | $ | 332,733 |
| | $ | 325,127 |
| | $ | 354,078 |
| | $ | 293,442 |
|
Weighted average interest rate | 5.36 | % | | 4.93 | % | | 5.36 | % | | 4.92 | % |
Interest expense includes the stated interest on the outstanding balance, commitment fees on undrawn amounts, and the amortization of deferred financing costs.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following table shows the scheduled maturities of the principal balances of the Company's outstanding borrowings as of September 30, 2020:
|
| | | | | | | | | | | | | | | | | | | | |
|
| Payments due by period |
|
| Total |
| Less than year |
| 1-3 years (1) | | 4-5 years (1) | | After 5 years (1) |
PWB Credit Facility |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Unsecured Notes | | 177,850 |
| | — |
| | 25,000 |
| | 50,000 |
| | 102,850 |
|
SBA Debentures |
| 128,770 |
| | — |
| | 14,000 |
| | 114,770 |
| | — |
|
BNP Facility | | 24,650 |
| | — |
| | — |
| | 24,650 |
| | — |
|
Total |
| $ | 331,270 |
| | $ | — |
| | $ | 39,000 |
| | $ | 189,420 |
| | $ | 102,850 |
|
| |
(1) | The SBA debentures are scheduled to mature between September 2022 and September 2025. The Unsecured Notes are scheduled to mature between October 2023 and October 2026. |
Note 8. Federal Income Tax
The Company has elected to be taxed as a RIC under Subchapter M of the Code. The determination of the tax attributes of the Company's distributions is made annually as of the end of its fiscal year based on its ICTI and distributions for the full year.
The Company records reclassifications to its capital accounts for permanent and temporary differences between the GAAP and tax treatment of components of income and the bases of assets and liabilities.
The tax-basis cost of investments and associated tax-basis gross unrealized appreciation (depreciation) inherent in the fair value of investments as of September 30, 2020 and December 31, 2019, were as follows:
|
| | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Tax-basis amortized cost of investments | $ | 478,907 |
| | $ | 531,781 |
|
Tax-basis gross unrealized appreciation on investments | 41,994 |
| | 24,326 |
|
Tax-basis gross unrealized depreciation on investments | (64,573 | ) | | (39,176 | ) |
Tax-basis net unrealized depreciation on investments | (22,579 | ) | | (14,850 | ) |
Fair value of investments | $ | 456,328 |
| | $ | 516,931 |
|
For further information, see the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 9. Financial Highlights
The following is a schedule of financial highlights for the three and nine months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 |
| 2019 | | 2020 |
| 2019 |
Per share operating performance: | | | | | | | |
Net asset value per share at beginning of period | $ | 10.10 |
| | $ | 12.95 |
| | $ | 12.46 |
| | $ | 13.10 |
|
Net investment income (4) | 0.20 |
| | 0.36 |
| | 0.69 |
| | 1.09 |
|
Net realized loss on non-control/non-affiliate investments (4) | — |
|
| — |
|
| (0.74 | ) |
| (0.06 | ) |
Net unrealized appreciation (depreciation) on non-control/non-affiliate investments, net of taxes (4) | 0.35 |
|
| (0.49 | ) |
| (0.82 | ) |
| (0.72 | ) |
Net unrealized appreciation on affiliate investments (4) | 0.75 |
|
| 0.36 |
|
| 0.47 |
|
| 0.40 |
|
Net unrealized appreciation (depreciation) on control investment (4) | 0.04 |
|
| (0.10 | ) |
| (0.07 | ) |
| (0.05 | ) |
Loss on extinguishment of debt (4) | (0.01 | ) | | — |
| | (0.03 | ) | | — |
|
Loss on impairment of goodwill (4) | (0.08 | ) | | — |
| | (0.08 | ) | | — |
|
Total from operations | 1.25 |
| | 0.13 |
| | (0.58 | ) | | 0.66 |
|
Distributions | (0.17 | ) | | (0.34 | ) | | (0.68 | ) | | (1.02 | ) |
Issuance of common stock (10) | — |
| | — |
| | (0.02 | ) | | — |
|
Net asset value per share at end of period | $ | 11.18 |
|
| $ | 12.74 |
|
| $ | 11.18 |
|
| $ | 12.74 |
|
| | | | | | | |
Per share market value, end of period | $ | 4.71 |
| | $ | 11.61 |
| | $ | 4.71 |
| | $ | 11.61 |
|
Total return based on market value (1)(9) | 8.0 | % | | (0.4 | )% | | (50.9 | )% | | 19.3 | % |
Total return based on net asset value (2)(9) | 14.7 | % | | 1.3 | % | | 4.5 | % | | 5.9 | % |
Shares outstanding at end of period | 13,406,402 |
| | 13,371,451 |
| | 13,406,402 |
| | 13,371,451 |
|
Weighted average shares outstanding | 13,399,767 |
| | 13,366,515 |
| | 13,389,830 |
| | 13,361,757 |
|
Ratio/Supplemental Data (in thousands except ratios) |
|
| |
|
| |
|
| |
|
|
Average net asset value (3) | $ | 142,655 |
| | $ | 171,769 |
| | $ | 145,480 |
| | $ | 173,211 |
|
Net asset value at end of period | $ | 149,912 |
| | $ | 170,406 |
| | $ | 149,912 |
| | $ | 170,406 |
|
Net investment income | $ | 2,712 |
| | $ | 4,853 |
| | $ | 9,291 |
| | $ | 14,541 |
|
Ratio of total expenses, net to average net assets (5)(7) | 21.8 | % | | 21.0 | % | | 23.0 | % | | 18.9 | % |
Ratio of total expenses, and losses on impairment of goodwill and extinguishment of debt to average net assets(5) | 22.7 | % | | — | % | | 23.9 | % | | — | % |
Ratio of net investment income to average net assets (5)(8) | 7.6 | % | | 11.3 | % | | 8.5 | % | | 11.2 | % |
Ratio of goodwill impairment loss to average net assets(9) | 0.8 | % | | — | % | | 0.7 | % | | — | % |
Ratio of loss on extinguishment of debt to average net assets(9) | 0.1 | % | | — | % | | 0.2 | % | | — | % |
Portfolio turnover (6) | 1.6 | % | | 4.5 | % | | 17.3 | % | | 13.9 | % |
| |
(1) | Calculated as ending market value less beginning market value, adjusted for distributions reinvested at prices based on the Company’s dividend reinvestment plan for the respective distributions. |
| |
(2) | Calculated as ending net asset value less beginning net asset value, adjusted for distributions reinvested at the Company’s dividend reinvestment plan for the respective distributions. |
| |
(3) | Based on the average of the net asset value at the beginning and end of the indicated period and if applicable the preceding calendar quarters. |
| |
(4) | Calculated on the average share method. |
| |
(6) | Portfolio turnover rate is calculated using the lesser of period-to-date sales, Structured Finance Note distributions and principal payments or period-to-date purchases over the average of the invested assets at fair value. |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| |
(7) | Ratio of total expenses before incentive fee waiver to average net assets was 23.4% for the nine months ended September 30, 2020. |
| |
(8) | Ratio of net investment income before incentive fee waiver to average net assets was 8.1% for the nine months ended September 30, 2020. |
| |
(10) | Common stock issued through DRIP. |
Note 10. Capital Transactions
Distributions: The Company intends to distribute to stockholders, on a quarterly basis, substantially all of its net investment income. In addition, although the Company intends to distribute at least annually net realized capital gains, net of taxes if any, out of assets legally available for such distribution, the Company may also retain such capital gains for investment through a deemed distribution.
The Company may be limited in its ability to make distributions due to the BDC asset coverage requirements of the 1940 Act. The Company’s ability to make distributions may be affected by SBIC I LP's distributions to the Company, which are governed by SBA regulations and currently require the prior approval of the SBA. In addition, distributions from OFSCC-FS to the Company are restricted by the terms and conditions of the BNP Facility. Net assets of SBIC I LP were $111,773, and consolidated cash at September 30, 2020 includes $5,102 held by SBIC I LP, of which $4,889 was available for distribution to the Company with the prior consent of the SBA. Net Assets of OFSCC-FS were $38,516, and consolidated cash at September 30, 2020 includes $945 held by OFSCC-FS, of which $-0- was available for distribution to the Company.
The following table summarizes distributions declared and paid for the nine months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | | | | | | | | | |
Date Declared | | Record Date | | Payment Date | | Amount Per Share | | Cash Distribution | | DRIP Shares Issued | | DRIP Shares Value |
Nine Months Ended September 30, 2019 | | | | | | | | | | |
March 5, 2019 | | March 22, 2019 | | March 29, 2019 | | $ | 0.34 |
| | $ | 4,497 |
| | 3,797 |
| | $ | 45 |
|
April 30, 2019 | | June 21, 2019 | | June 28, 2019 | | 0.34 |
| | 4,479 |
| | 5,327 |
| | 64 |
|
August 2, 2019 | | September 23, 2019 | | September 30, 2019 | | 0.34 |
| | 4,488 |
| | 4,990 |
| | 58 |
|
| | | | | | $ | 1.02 |
| | $ | 13,464 |
| | $ | 14,114 |
|
| $ | 167 |
|
Nine Months Ended September 30, 2020 | | | | | | | | | | |
March 11, 2020 | | March 24, 2020 | | March 31, 2020 | | $ | 0.34 |
| | $ | 4,484 |
| | 15,693 |
| | $ | 64 |
|
May 4, 2020 |
| June 23, 2020 |
| June 30, 2020 |
| 0.17 |
|
| 2,244 |
|
| 7,165 |
|
| 32 |
|
July 28, 2020 |
| September 23, 2020 |
| September 30, 2020 |
| 0.17 |
|
| 2,246 |
|
| 6,708 |
|
| 32 |
|
| | | | | | $ | 0.68 |
| | $ | 8,974 |
| | $ | 29,566 |
| | $ | 128 |
|
Distributions in excess of the Company’s current and accumulated ICTI would be treated first as a return of capital to the extent of the stockholder’s adjusted tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of the Company’s distributions is made annually as of the end of its fiscal year based upon its ICTI for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. Each year, a statement on Form 1099-DIV identifying the tax character of distributions is mailed to the Company’s stockholders.
Stock repurchase program:
The Company maintains a Stock Repurchase Program under which the Company may acquire up to $10.0 million of its outstanding common stock. No shares of common stock were repurchased under the Stock Repurchase Program during the nine months ended September 30, 2020 and 2019, respectively.
On May 4, 2020, the Board extended the Stock Repurchase Program for an additional two-year period ending May 22, 2022, or until the approved dollar amount has been used to repurchase shares.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 11. Consolidated Schedule of Investments In and Advances To Affiliates |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Period Ended September 30, 2020 | | | | | | | | |
Name of Portfolio Company | | Investment Type (1) | | Net Realized Gain (Loss) | | Net change in unrealized appreciation/(depreciation) | | Interest & PIK Interest | | Dividends | | Fees | | Total Income (2) | | December 31, 2019, Fair Value | | Gross Additions (3) | | Gross Reductions (4) | | September 30, 2020, Fair Value (5) |
Control Investment | | | | | | | | | | | | | | | | | | | | | | |
MTE Holding Corp. | | Subordinated Loan | | $ | — |
| | $ | (129 | ) | | $ | 884 |
| | $ | — |
| | $ | 49 |
| | $ | 933 |
| | $ | 7,464 |
| | $ | 291 |
| | $ | (129 | ) | | $ | 7,626 |
|
| | Common Equity | | — |
| | (795 | ) | | — |
| | — |
| | — |
| | — |
| | 1,253 |
| | — |
| | (795 | ) | | 458 |
|
| | | | — |
| | (924 | ) | | 884 |
| | — |
| | 49 |
| | 933 |
| | 8,717 |
| | 291 |
| | (924 | ) | | 8,084 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Total Control Investment | | | | — |
| | (924 | ) | | 884 |
| | — |
| | 49 |
| | 933 |
| | 8,717 |
| | 291 |
| | (924 | ) | | 8,084 |
|
Affiliate Investments | | | | | | | | | | | | | | | | | | | | | | |
3rd Rock Gaming Holdings, LLC | | Senior Secured Loan | | — |
| | (8,252 | ) | | 572 |
| | — |
| | — |
| | 572 |
| | 20,099 |
| | 70 |
| | (8,505 | ) | | 11,664 |
|
| | Common Equity (6) | | — |
| | (1,044 | ) | | — |
| | — |
| | — |
| | — |
| | 1,044 |
| | — |
| | (1,044 | ) | | — |
|
| | | | — |
| | (9,296 | ) | | 572 |
| | — |
| | — |
| | 572 |
| | 21,143 |
| | 70 |
| | (9,549 | ) | | 11,664 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Chemical Resources Holdings, Inc. | | Senior Secured Loan | | — |
| | 83 |
| | 1,024 |
| | — |
| | — |
| | 1,024 |
| | 13,746 |
| | 111 |
| |
|
| | 13,857 |
|
| | Common Equity (6) | | — |
| | (187 | ) | | — |
| | — |
| | — |
| | — |
| | 2,662 |
| | — |
| | (187 | ) | | 2,475 |
|
| | | | — |
| | (104 | ) | | 1,024 |
| | — |
| | — |
| | 1,024 |
| | 16,408 |
| | 111 |
| | (187 | ) | | 16,332 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Contract Datascan Holdings, Inc. | | Subordinated Loan | | — |
| | (311 | ) | | 783 |
| | — |
| | — |
| | 783 |
| | 8,000 |
| | 17 |
| | (311 | ) | | 7,706 |
|
| | Preferred Equity (7) | | — |
| | (3,397 | ) | | 250 |
| | — |
| | — |
| | 250 |
| | 5,671 |
| | 250 |
| | (3,398 | ) | | 2,523 |
|
| | Common Equity (6) | | — |
| | (635 | ) | | — |
| | — |
| | — |
| | — |
| | 671 |
| | — |
| | (635 | ) | | 36 |
|
| | | | — |
| | (4,343 | ) | | 1,033 |
| | — |
| | — |
| | 1,033 |
| | 14,342 |
| | 267 |
| | (4,344 | ) | | 10,265 |
|
| | | | | | | | | | | | | | | | | | | | | | |
DRS Imaging Services, LLC | | Senior Secured Loan | | — |
| | 157 |
| | 884 |
| | — |
| | — |
| | 884 |
| | 10,569 |
| | 172 |
| | (115 | ) | | 10,626 |
|
| | Common Equity (6) | | — |
| | 363 |
| | — |
| | — |
| | — |
| | — |
| | 1,331 |
| | 363 |
| |
|
| | 1,694 |
|
| | | | — |
| | 520 |
| | 884 |
| | — |
| | — |
| | 884 |
| | 11,900 |
| | 535 |
| | (115 | ) | | 12,320 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Master Cutlery, LLC | | Subordinated Loan (6) | | — |
| | (255 | ) | | — |
| | — |
| | — |
| | — |
| | 255 |
| | — |
| | (255 | ) | | — |
|
| | Preferred Equity (6) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Common Equity (6) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | — |
| | (255 | ) | | — |
| | — |
| | — |
| | — |
| | 255 |
| | — |
| | (255 | ) | | — |
|
| | | | | | | | | | | | | | | | | | | | | | |
NeoSystems Corp. | | Preferred Equity (7) | | — |
| | (133 | ) | | 133 |
| | — |
| | — |
| | 133 |
| | 2,250 |
| | 133 |
| | (133 | ) | | 2,250 |
|
| | | | | | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Period Ended September 30, 2020 | | | | | | | | |
Name of Portfolio Company | | Investment Type (1) | | Net Realized Gain (Loss) | | Net change in unrealized appreciation/(depreciation) | | Interest & PIK Interest | | Dividends | | Fees | | Total Income (2) | | December 31, 2019, Fair Value | | Gross Additions (3) | | Gross Reductions (4) | | September 30, 2020, Fair Value (5) |
Pfanstiehl Holdings, Inc | | Subordinated Loan | | $ | — |
| | $ | 19 |
| | $ | 168 |
| | $ | — |
| | $ | — |
| | $ | 168 |
| | $ | 3,788 |
| | $ | 21 |
| | $ | (21 | ) | | $ | 3,788 |
|
| | Common Equity | | — |
| | 19,953 |
| | 100 |
| | 100 |
| | — |
| | 200 |
| | 11,979 |
| | 19,953 |
| | — |
| | 31,932 |
|
| | | | — |
| | 19,972 |
| | 268 |
| | 100 |
| | — |
| | 368 |
| | 15,767 |
| | 19,974 |
| | (21 | ) | | 35,720 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Professional Pipe Holdings, LLC | | Senior Secured Loan | | — |
| | (424 | ) | | 643 |
| |
|
| |
|
| | 643 |
| | 7,170 |
| | 103 |
| | (424 | ) | | 6,849 |
|
| | Common Equity (6) | | — |
| | (1,402 | ) | | — |
| | — |
| | — |
| | — |
| | 2,413 |
| | — |
| | (1,402 | ) | | 1,011 |
|
| | | | — |
| | (1,826 | ) | | 643 |
| | — |
| | — |
| | 643 |
| | 9,583 |
| | 103 |
| | (1,826 | ) | | 7,860 |
|
| | | | | | | | | | | | | | | | | | | | | | |
TalentSmart Holdings, LLC | | Senior Secured Loan | | — |
|
| 227 |
|
| 668 |
|
| — |
|
| — |
|
| 668 |
|
| 9,833 |
|
| 256 |
|
| (188 | ) |
| 9,901 |
|
| | Senior Secured Loan (Revolver) | | — |
|
| 11 |
|
| 33 |
|
| — |
|
| — |
|
| 33 |
|
| 242 |
|
| 262 |
|
|
|
|
| 504 |
|
| | Common Equity (6) | | — |
|
| (695 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| 1,500 |
|
| 95 |
|
| (695 | ) |
| 900 |
|
| | | | — |
|
| (457 | ) |
| 701 |
|
| — |
|
| — |
|
| 701 |
|
| 11,575 |
|
| 613 |
|
| (883 | ) |
| 11,305 |
|
| | | | | | | | | | | | | | | | | | | | | | |
TRS Services, Inc. | | Senior Term Loan | | — |
| | (8 | ) | | 81 |
| | — |
| | 7 |
| | 88 |
| | 14,623 |
| | 9 |
| | (14,632 | ) | | — |
|
| | Preferred Equity (Class AA units) (7) | | — |
| | (2 | ) | | 6 |
| | — |
| | — |
| | 6 |
| | 547 |
| | 5 |
| | (552 | ) | | — |
|
| | Preferred Equity (Class A units) (6) | | — |
| | 811 |
| | — |
| | — |
| | — |
| | — |
| | 3,095 |
| | 811 |
| | (3,095 | ) | | 811 |
|
| | Common Equity (6) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
| | — |
|
| | | | — |
| | 801 |
| | 87 |
| | — |
| | 7 |
| | 94 |
| | 18,265 |
| | 825 |
| | (18,279 | ) | | 811 |
|
| | | | | | | | | | | | | | | | | | | | | | |
TTG Healthcare, LLC | | Senior Secured Loan | | — |
| | 397 |
| | 981 |
| | — |
| | 9 |
| | 990 |
| | 11,767 |
| | 427 |
| | — |
| | 12,194 |
|
| | Preferred Equity (6) | | — |
| | 1,040 |
| | — |
| | — |
| | — |
| | — |
| | 2,424 |
| | 1,040 |
| | — |
| | 3,464 |
|
| | | | — |
| | 1,437 |
| | 981 |
| | — |
| | 9 |
| | 990 |
| | 14,191 |
| | 1,467 |
| | — |
| | 15,658 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Total Affiliate Investments | | | | — |
| | 6,316 |
| | 6,326 |
| | 100 |
| | 16 |
| | 6,442 |
| | 135,679 |
| | 24,098 |
| | (35,592 | ) | | 124,185 |
|
Total Control and Affiliate Investments | | | | $ | — |
| | $ | 5,392 |
| | $ | 7,210 |
| | $ | 100 |
| | $ | 65 |
| | $ | 7,375 |
| | $ | 144,396 |
| | $ | 24,389 |
| | $ | (36,516 | ) | | $ | 132,269 |
|
| |
(1) | Principal balance, interest rate and maturity of debt investments, and ownership detail for equity investments are presented in the consolidated schedule of investments. The Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144. |
| |
(2) | Represents the total amount of interest, fees or dividends included in income for the nine months ended September 30, 2020, during which an investment was included in the Control Investment or Affiliate Investment categories. |
| |
(3) | Gross additions include increases in cost basis resulting from a new portfolio investment; PIK interest, fees and dividends; accretion of OID; and net positive change in unrealized appreciation or depreciation. |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| |
(4) | Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales, if any, and net negative change in unrealized appreciation or depreciation. |
| |
(5) | Fair value was determined using significant unobservable inputs. See Note 5 for further details. |
| |
(7) | Dividends credited to income include dividends contractually earned but not declared. |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 12. Subsequent Events Not Disclosed Elsewhere
On November 3, 2020, the Board declared a distribution of $0.18 per share for the fourth quarter of 2020, payable on December 31, 2020 to stockholders of record as of December 24, 2020.
On October 7, 2020, the Company executed an amendment to its BLA with Pacific Western Bank in order to reduce the total commitment under the PWB Credit Facility from $50,000 to $20,000. In October 2020, the Company expects to recognize a loss on extinguishment of debt of $42 related to the charge-off of deferred borrowing costs on this commitment reduction.
COVID-19
The Company evaluated events subsequent to September 30, 2020 through November 5, 2020. On March 11, 2020, the World Health Organization declared the novel coronavirus as a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to the COVID-19 pandemic. The outbreak of the COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The COVID-19 pandemic and the preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, cancellations of events and travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions, and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. The outbreak could have a continued adverse impact on economic and market conditions on a global scale. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic. Nevertheless, the ongoing COVID-19 pandemic presents material uncertainty and risks with respect to the underlying value of the Company’s portfolio companies, the Company’s business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Further, the operational and financial performance of the portfolio companies in which the Company makes investments have been, and may continue to be, significantly impacted by the COVID-19 pandemic, which in turn has, and may continue to have, an impact on the valuation of the Company’s investments.
Accordingly, the Company cannot predict the extent to which its business, financial condition, results of operations and cash flows will be affected at this time. The potential impact to the Company’s results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond the Company’s control.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. For additional overview information on the Company, see "Item 1. Business" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Overview
Key performance metrics are presented below:
|
| | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Net asset value per common share | | $ | 11.18 |
| | $ | 12.46 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net investment income per common share | | $ | 0.20 |
| | $ | 0.36 |
| | $ | 0.69 |
|
| $ | 1.09 |
|
Net increase (decrease) in net assets resulting from operations per common share | | 1.25 |
| | 0.13 |
| | (0.58 | ) |
| 0.66 |
|
Distributions paid per common share | | 0.17 |
| | 0.34 |
| | 0.68 |
|
| 1.02 |
|
Net investment income per share declined $0.16 from the corresponding quarter in the prior year primarily due to an approximate $0.24 decline in net interest margin—total interest income less interest expense—per share. Weighted average yield on debt and Structured Finance Notes for the three months ended September 30, 2020, declined to 8.99% from 10.51% in the quarter ended September 30, 2019, due to the Company's continuing shift to lower-yielding, first lien senior secured loans of larger borrowers, as well as the placement of our loans to Online Tech Stores, LLC and 3rd Rock Gaming Holding, LLC, with an aggregate cost of $37.1 million, on non-accrual status. The decline in net interest margin was partially offset by declines in management and incentive fees of $0.10 per share as a result of the declines in our net interest margin and the fair value of our portfolio. For the three months ended September 30, 2020, our weighted-average interest costs increased to 5.36% from 4.93% in the quarter ended September 30, 2019, principally due to borrowings under our Unsecured Notes Due October 2026 and the BNP Facility, as well as an increase in uninvested cash. As of September 30, 2020, approximately 93% of our debt is fixed rate.
Our portfolio experienced net gains of $15.3 million, or $1.14 per share, during the three months ended September 30, 2020, principally on the strength of improvement in the fair values of $10.3 million, or 3.2%, on our directly originated debt and equity investments. We also had net appreciation of $5.0 million in our Structured Finance Note and broadly syndicated loan investments, due in part, to the continued increase in liquidity in the broadly syndicated market. The net appreciation in our directly originated investments was primarily due to our investment in the common equity of Pfanstiehl Holdings, Inc., a pharmaceutical ingredients manufacturer, which appreciated $7.9 million in the quarter as a result of performance improvements and expansion of the valuation multiple. Excluding Pfanstiehl Holdings, Inc., the remainder of or equity investments experienced net appreciation of $3.3 million, led by Southern Technical Institute, LLC, which appreciated $2.4 million. These investment valuation increases were partially offset by a decrease in the fair value of our subordinated debt investment in Eblens Holdings, Inc. of $3.4 million. Despite the continued recovery from the first quarter, our portfolio declined $13.7 million, or $1.0 per share, for the nine months ended September 30, 2020.
Since OFS Advisor implemented its business continuity plan in mid-March 2020, the entire team has effectively transitioned to remote work and we are currently capable of maintaining our normal functionality to complete our operational requirements.
We have actively monitored our portfolio companies throughout this period of economic uncertainty, which has included assessments of our portfolio companies' operational and liquidity outlook. During the three months ended September 30, 2020, we extended the maturity date on one subordinated debt investment, rescheduled the due date of one portfolio company's third quarter 2020 interest payment until the fourth quarter of 2020, and amended three debt investments that resulted in increased all-in interest rates. However, 98% of our performing loans as of June 30, 2020, satisfied their third quarter 2020 interest payments. As of September 30, 2020, we have unfunded commitments of $7.4 million. We believe new loan activity in the market in which we operate is below historical levels and we observed a decrease in origination and underwriting activity during the second and third quarters; however, the number of deals currently being reviewed and
evaluated has increased to its highest level since the beginning of the COVID-19 pandemic. During the three months ended September 30, 2020, we purchased three broadly syndicated loans and a Structured Finance Note for an aggregate cost of $2.3 million and completed a $7.6 million add-on in a Portfolio Company Investment.
At September 30, 2020, our asset coverage ratio of 174% was within minimum asset coverage requirements under the 1940 Act, and we remained in compliance with all applicable financial thresholds under our outstanding debt. On June 26, 2020, we amended the PWB Credit Facility to provide greater flexibility with financial covenants and thresholds. On October 7, 2020, we executed an amendment to our BLA with Pacific Western Bank in order to reduce the total commitment under the PWB Credit Facility from $50.0 million to $20.0 million. As of September 30, 2020, we had an unused commitment of $50.0 million under our PWB Credit Facility, as well as an unused commitment of $125.4 million under our BNP Facility, both subject to a borrowing base and other covenants. Based on fair values and equity capital at September 30, 2020, we could access these available lines of credit for $100 million and remain in compliance with our asset coverage requirements. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and will continue to selectively deploy capital in new investment opportunities in this challenging environment. As of November 5, 2020, after giving effect to the reduction, our PWB Credit Facility had an unused commitment of $20.0 million, subject to a borrowing base and other covenants.
On November 3, 2020, the Board declared a distribution of $0.18 per share for the fourth quarter of 2020, payable on December 31, 2020 to stockholders of record as of December 24, 2020.
We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide, and the magnitude of the economic impact of the outbreak, including the impact of travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our portfolio companies’ operating results, or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will experience financial distress and possibly default on their financial obligations to us and their other capital providers. We also expect that some of our portfolio companies may significantly curtail business operations, furlough or lay-off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our investment in any such portfolio company.
We are also subject to financial risks, including changes in market interest rates. As of September 30, 2020, approximately $346 million (principal amount) of our debt investments bore interest at variable rates, which are generally LIBOR-based, and many of which are subject to reference-rate floors. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased, primarily in the second quarter of 2020. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on our portfolio investments, a decrease in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities indexed to LIBOR. As of September 30, 2020, the majority of our variable rate debt investments are subject to the base rate floor, partially mitigating the impact of the recent decrease in LIBOR on our gross investment income.
We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future. However, to the extent our portfolio companies continue to be adversely impacted by the COVID-19 pandemic, our future net investment income, financial condition, results of operations and the fair value of our portfolio investments may be materially adversely impacted.
Critical Accounting Policies and Significant Estimates
Our critical accounting policies and estimates are those relating to revenue recognition and fair value estimates. Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board. For descriptions of our revenue recognition and fair value policies, see "Item 8. Financial Statements - Notes to Financial Statements - Note 2" and "Management's Discussion and Analysis - Critical Accounting Policies and Significant Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Fair value estimates. Our approach to fair value estimates was significantly adjusted in response to the economic uncertainty associated with the spread of the COVID-19 pandemic. Our use of NBIP includes an assessment of whether a sufficient number of market quotations are available or whether a sufficient number of indicative prices from pricing services
or brokers or dealers have been received, and whether the depth of the markets from which those quotes were received is sufficient to transact at those prices in amounts approximating our positions in such assets. Moreover, these assessments are generally based on a 90-day moving average of our depth and liquidity metrics. The 90-day moving average generally counters the effects of intermittent quoting activity observed at month- and quarter-ends, irregular quoting activity that tends to artificially inflate our market depth and liquidity metrics. We observed significant declines in market liquidity beginning in the middle of March and concluded the 90-day moving average was not representative of current market conditions given the significant market dislocation during this period. Accordingly, we adjusted our depth and liquidity assessment to one based on a 5-day moving average of the metrics in our liquidity assessments as of March 31, 2020, and partially reverted, utilizing a 60-day moving average, in our September 30, 2020, assessments, as liquidity continued to return to the loan market. One measure of liquidity in the broadly syndicated loan market is the average bid-ask spread on the Refinitiv Market Overall (North America) Loan Index which narrowed to 1.53 points at September 30, 2020, from 3.41 points at March 31, 2020, but has not yet returned to its long-term historic average of 1.0. These changes to our depth and liquidity metrics, as well as changes in the level of the metrics themselves, led to the transfer of three instruments with an aggregate amortized cost of $3.6 million from a fair value estimate based on models and Level 3 inputs to estimates based on NBIP inputs to estimates based on models and Level 3 inputs for the three months ended September 30, 2020.
We also adjusted our Level 3 fair value models throughout this period of heightened economic uncertainty. Our processes included assessments of the impact of the COVID-19 pandemic on the financial condition, results of operations or cash flows of our portfolio companies. Initially, such forward-looking assessments were fragmentary; however as such forward-looking estimates became more reliable, such information was directly incorporated into our fair value models. In circumstances in which reliable forward-looking information was unavailable, we considered the market impact on performance-metric multiples and related impact on enterprise values. Additionally, management observed a decrease in the historic correlation between market spreads used in our synthetic debt rating method and those used in our reunderwriting analysis. These market spreads, though highly correlated before the on set of COVID-19, relate to different segments of the lending market primarily on the basis of borrower size. The synthetic debt rating method is based on market spreads for larger borrowers with rated debt, while the reunderwring analysis market spreads are used for what are considered middle-market borrowers. Management concluded, given the break-down in this relationship, the relative weight given to each of these methods required adjustment to correspond to the market most closely associated with the subject investment. Accordingly, we decreased the weighting for the synthetic debt rating method and increased the weighting for the reunderwriting analysis in the current period year, from a weighting of 50/50 to a weighting of 10/90, at March 31, 2020, and partially reverted to generally 25/75 at June 30, 2020. We believed the overweighting to the reunderwriting analysis during this period more accurately captured the market in which these instruments are exchanged. As of September 30, 2020, we have fully reverted to an equal weighting of these models as we have observed a return, in all significant respects, of the historic correlative relationship between these markets.
The following table illustrates the impact of our fair value measures if we selected the low or high end of the range of values for all investments at September 30, 2020 (dollar amounts in thousands):
|
| | | | | | | | | | | | |
Investment Type | | Fair Value at September 30, 2020 | | Range of Fair Value |
| | Low-end | | High-end |
Debt investments: | | |
| | |
| | |
|
Senior secured | | $ | 336,960 |
| | $ | 331,668 |
| | $ | 342,307 |
|
Subordinated | | 31,564 |
| | 29,486 |
| | 33,725 |
|
| | | | | | |
Structured Finance Notes: | | | | | | |
Subordinated notes | | 30,925 |
| | $ | 28,914 |
| | 32,936 |
|
Mezzanine debt | | 1,606 |
| | 1,564 |
| | 1,648 |
|
| | | | | | |
Equity investments: | | | | | | |
Preferred equity | | 11,875 |
| | 10,555 |
| | 13,005 |
|
Common equity, warrants and other | | 43,398 |
| | 39,635 |
| | 47,330 |
|
| | $ | 456,328 |
| | $ | 441,822 |
| | $ | 470,951 |
|
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
| |
• | The Investment Advisory Agreement with OFS Advisor to manage our operating and investment activities. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) as well as an incentive fee based on our investment performance. See “Item 1–Financial Statements–Note 3”. |
| |
• | The Administration Agreement with OFS Services, an affiliate of OFS Advisor, to provide us with the office facilities and administrative services necessary to conduct our operations. See “Item 1–Financial Statements–Note 3. |
| |
• | A license agreement with OFSAM, the parent company of OFS Advisor, under which OFSAM has agreed to grant us a non-exclusive, royalty-free license to use the name “OFS.” Under this agreement, we have a right to use the “OFS” name for so long as OFS Advisor or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “OFS” name. This license agreement will remain in effect for so long as the Investment Advisory Agreement with OFS Advisor is in effect. |
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other funds affiliated with OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including HPCI and OCCI. Additionally, OFS Advisor provides sub-advisory services to CMFT Securities Investments, LLC, a wholly owned subsidiary of CIM Real Estate Finance Trust, Inc., a corporation that qualifies as a real estate investment trust. Additionally, OFS Advisor serves as sub-adviser to CIM Real Assets & Credit Fund, a newly organized externally managed registered investment company that operates as an interval fund that invests primarily in a combination of real estate, credit and related investments.
OFS Advisor agreed to reduce a portion of its base management fee by reducing the portion of such fee from 0.4375% per quarter (1.75% annualized) to 0.25% per quarter (1.00% annualized) of the OFSCC-FS Assets at the end of the two most recently completed quarters to the extent that such portion of the OFSCC-FS Assets are financed using leverage (also calculated on an average basis) that causes the Company’s statutory asset coverage ratio to fall below 200%. When calculating its statutory asset coverage ratio, the Company excludes its SBA guaranteed debentures from its total outstanding senior securities as permitted pursuant to exemptive relief granted by the SEC dated November 26, 2013. Effective January 1, 2020, OFS Advisor agreed to further reduce the base management fee to 0.25% per quarter (1.00% annualized) of the average value of the portion of OFSCC-FS Assets at the end of the two most recently completed calendar quarters without regard to the statutory asset coverage ratio. The base management fee reduction by OFS Advisor is renewable on an annual basis and the amount of the base management fee reduction with respect to the OFSCC-FS Assets shall not be subject to recoupment by OFS Advisor.
The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On August 4, 2020, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain other funds, including other BDCs and registered investment companies, managed by OFS Advisor (the “Affiliated Funds”) in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions (the “Order”). The Order superseded a previous order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. Pursuant to the Order, we are generally permitted to co-invest with Affiliated Funds if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.
In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through at least December 31, 2020, the Company may, subject to the satisfaction of certain conditions, co-invest in its existing portfolio companies with certain other funds managed by the Advisor or its affiliates, even if such other fund has not previously invested in such existing portfolio company. Without this order, the Company generally would not be able to participate in such co-investments unless the affiliated fund had previously acquired securities of the portfolio company in a co-investment transaction with the Company.
Conflicts may arise when we make an investment in conjunction with an investment being made by an Affiliated Account, or in a transaction where an Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments, particularly where these accounts may invest in
different types of securities in a single portfolio company. Potential conflicts arise when addressing, among other things, questions as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced. For a discussion of the risks associated with conflicts of interest, see "Item 1A. Business — Conflicts of Interest", "Item 1A. Risk Factors — Risks Related to OFS Advisor and its Affiliates —We have potential conflicts of interest related to the purchases and sales that OFS Advisor makes on our behalf and/or on behalf of Affiliated Accounts" and "Item 1A. Risk Factors — Regulations — Conflicts of Interest - Conflicts Related to Portfolio Investments" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Portfolio Composition and Investment Activity
Portfolio Composition
As of September 30, 2020, the fair value of our debt investment portfolio totaled $368.5 million in 56 portfolio companies, of which 91% and 9% were senior secured loans and subordinated loans, respectively. As of September 30, 2020, we had equity investments in 23 portfolio companies with a fair value of approximately $55.3 million. We also have nine investments in Structured Finance Notes with a fair value of $32.5 million. We had unfunded commitments of $7.4 million to three portfolio companies at September 30, 2020. Set forth in the tables and charts below is selected information with respect to our portfolio as of September 30, 2020 and December 31, 2019.
The following table presents our investment portfolio by each wholly owned legal entity within the consolidated group as of September 30, 2020, and December 31, 2019 (dollar amounts in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
OFS Capital Corporation (Parent) | $ | 175,926 |
| | $ | 152,578 |
|
| $ | 181,980 |
| | $ | 169,230 |
|
SBIC I LP | 235,639 |
| | 232,218 |
|
| 256,858 |
| | 246,371 |
|
OFSCC-FS | 61,525 |
| | 61,090 |
|
| 88,458 |
| | 88,936 |
|
OFSCC-MB | 10,970 |
| | 10,442 |
| | 11,375 |
| | 12,394 |
|
Total investments | $ | 484,060 |
| | $ | 456,328 |
| | $ | 538,671 |
| | $ | 516,931 |
|
Portfolio Yields
The weighted average yield on total investments1 was 8.39% and 9.59% at September 30, 2020 and December 31, 2019, respectively. The following table displays the composition of our performing debt investment and Structured Finance Note portfolio by yield range and its weighted average yields as of September 30, 2020, and December 31, 2019:
|
| | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Yield Range | Senior Secured | Subordinated | Structured Finance | | | Senior Secured | Subordinated | Structured Finance | |
Debt | Debt | Notes | Total | | Debt | Debt | Notes | Total |
Less than 8% | 15.0 | % | — | % | — | % | 12.6 | % | | 20.1 | % | — | % | — | % | 17.3 | % |
8% - 10% | 62.2 |
| — |
| 4.3 |
| 52.5 |
| | 21.5 |
| — |
| — |
| 18.5 |
|
10% - 12% | 20.2 |
| 13.3 |
| — |
| 17.8 |
| | 48.8 |
| 8.6 |
| — |
| 42.7 |
|
12% - 14% | 1.2 |
| 59.6 |
| 19.8 |
| 7.1 |
| | 8.4 |
| 38.3 |
| 25.1 |
| 12.0 |
|
Greater than 14% | 1.4 |
| 27.1 |
| 75.9 |
| 10.0 |
| | 1.2 |
| 53.1 |
| 74.9 |
| 9.5 |
|
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Weighted average yield - performing debt and Structured Finance Note investments (2) | 9.05 | % | 12.97 | % | 17.62 | % | 10.10 | % | | 9.80 | % | 13.52 | % | 15.13 | % | 10.40 | % |
Weighted average yield - total debt and Structured Finance Note investments (3) | 8.51 | % | 6.49 | % | 17.62 | % | 8.99 | % | | 9.57 | % | 10.57 | % | 15.13 | % | 9.94 | % |
(1) Weighted average yield on total investments is computed as (a) the sum of (i) the annual stated accruing interest on our debt investments at the balance sheet date plus the annualized accretion of Net Loan Fees, (ii) the effective yield on our performing preferred equity investments, and (iii) the annual effective yield on Structured Finance Notes, divided by (b) amortized cost of our total investment portfolio, including assets in non-accrual status as of the balance sheet date.
(2) 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 debt investments plus the annualized accretion of Net Loan Fees; and (ii) the annual effective yield on Structured Finance Notes divided by (b) amortized cost of our debt and Structured Finance Note investments, excluding debt investments in non-accrual status as of the balance sheet date.
(3) 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 Net Loan Fees and (ii) plus the annual effective yield on Structured Finance Notes divided by (b) amortized cost of our debt and Structured Finance Note investments, including debt investments in non-accrual status as of the balance sheet date.
The weighted average yield on performing portfolio company debt securities, including Structured Finance Notes, decreased to 10.10% at September 30, 2020 from 10.40% at December 31, 2019, primarily due to the recent decrease in LIBOR, offset by the 11.4% weighted average yield on new debt investments and Structured Finance Notes. The weighted average yield on total debt, including Structured Finance Notes, decreased to 8.99% at September 30, 2020 from 9.94% at December 31, 2019, primarily due to the change to non-accrual status of our investments in Online Tech Stores, LLC and 3rd Rock Gaming Holding, LLC.
As of September 30, 2020, and December 31, 2019, floating rate loans at fair value were 88% and 93% of our debt portfolio, excluding Structured Finance Notes, respectively, and fixed rate loans at fair value were 12% and 7% of this portfolio, respectively.
The weighted average yield of our investments is not the same as a return on investment for our stockholders, but rather the gross investment income from our investment portfolio before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will remain at its current level.
Portfolio Company Investments
The following table summarizes the composition of our Portfolio Company Investments as of September 30, 2020 and December 31, 2019 (dollar amounts in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Senior secured debt investments (1) | $ | 356,599 |
|
| $ | 336,960 |
| | $ | 421,970 |
| | $ | 408,724 |
|
Subordinated debt investments | 57,103 |
|
| 31,564 |
| | 56,731 |
| | 43,091 |
|
Preferred equity | 18,878 |
|
| 11,875 |
| | 21,925 |
| | 17,729 |
|
Common equity, warrants and other | 15,220 |
|
| 43,398 |
| | 14,919 |
| | 25,777 |
|
Total Portfolio Company Investments | $ | 447,800 |
| | $ | 423,797 |
| | $ | 515,545 |
| | $ | 495,321 |
|
Total number of portfolio companies | 65 |
| | 65 |
| | 85 |
| | 85 |
|
| |
(1) | Includes debt investments in which we have entered into contractual arrangements with co‑lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co‑lenders pursuant to a payment waterfall. The aggregate amortized cost and fair value of these investments was $82,880 and $83,413, respectively, at September 30, 2020, and $66,300 and $65,337, respectively, at December 31, 2019. |
Approximately 80% of our Portfolio Company Investments at fair value are senior securities of the borrower, rather than in the subordinated securities, preferred equity or common equity. We believe the seniority of our debt investments in the borrowers' capital structures may provide greater downside protection against the impact of the COVID-19 pandemic.
As of September 30, 2020, the three largest industries of our Portfolio Company Investments by fair value, were (1) Manufacturing (21.5%), (2) Health Care and Social Assistance (13.8%), and (3) Professional, Scientific, and Technical Services (13.7%), totaling approximately 49.1% of the investment portfolio. We have limited exposure to the Retail Trade industry (4.9%), which has been significantly impacted by the COVID-19 pandemic. For a full summary of our investment portfolio by industry, see “Item 1–Financial Statements–Note 4."
The following table presents our debt investment portfolio by investment size as of September 30, 2020 and December 31, 2019 (dollar amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Fair Value |
| September 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
Up to $4,000 | $ | 35,578 |
| | 8.6 | % | | $ | 77,809 |
| | 16.3 | % | | $ | 34,702 |
| | 9.4 | % | | $ | 75,033 |
| | 16.6 | % |
$4,001 to $7,000 | 60,870 |
| | 14.7 |
| | 71,558 |
| | 14.9 |
| | 65,175 |
| | 17.7 |
| | 68,806 |
| | 15.2 |
|
$7,001 to $10,000 | 76,075 |
| | 18.4 |
| | 95,567 |
| | 20.0 |
| | 67,664 |
| | 18.4 |
| | 77,978 |
| | 17.3 |
|
$10,001 to $13,000 | 66,259 |
| | 16.0 |
| | 54,273 |
| | 11.3 |
| | 55,136 |
| | 15.0 |
| | 53,903 |
| | 11.9 |
|
Greater than $13,000 | 174,920 |
| | 42.3 |
| | 179,494 |
| | 37.5 |
| | 145,847 |
| | 39.5 |
| | 176,095 |
| | 39.0 |
|
Total | $ | 413,702 |
| | 100.0 | % | | $ | 478,701 |
| | 100.0 | % | | $ | 368,524 |
| | 100.0 | % | | $ | 451,815 |
| | 100.0 | % |
Investment Activity
The following is a summary of our Portfolio Company Investment activity for the three and nine months ended September 30, 2020 (dollar amounts in millions):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 |
| | Debt Investments | | Equity Investments | | Debt Investments | | Equity Investments |
Investments in new portfolio companies | | $ | 1.5 |
| | $ | — |
| | $ | 43.8 |
| | $ | — |
|
Investments in existing portfolio companies | |
|
| |
|
| |
|
| |
|
|
Follow-on investments | | 7.6 |
| | — |
| | 17.7 |
| | 0.1 |
|
Restructured investments | | — |
| | 0.2 |
| | — |
| | 0.9 |
|
Delayed draw and revolver funding | | — |
| | — |
| | 5.7 |
| | — |
|
Total investments in existing portfolio companies | | 7.6 |
| | 0.2 |
| | 23.4 |
| | 1.0 |
|
Total investments in new and existing portfolio companies | | $ | 9.1 |
| | $ | 0.2 |
| | $ | 67.2 |
| | $ | 1.0 |
|
Number of new portfolio company investments | | 3 |
| | — |
| | 13 |
| | — |
|
Number of existing portfolio company investments | | 1 |
| | 3 |
| | 16 |
| | 6 |
|
| | | | | | | | |
Proceeds/redemptions from principal payments/ equity investments | | 3.8 |
| | — |
| | 60.1 |
| | — |
|
Proceeds from investments sold or redeemed | | 1.9 |
| | — |
| | 63.8 |
| | 3.6 |
|
Total proceeds from principal payments, equity distributions and investments sold | | $ | 5.7 |
| | $ | — |
| | $ | 123.9 |
| | $ | 3.6 |
|
Notable investments in new portfolio companies during the nine months ended September 30, 2020, include A&A Transfer, LLC ($23.7 million senior secured loan and $1.6 million revolver) and SourceHOV Tax, Inc. ($12.8 million senior secured loan).
The weighted-average yield of new debt in Portfolio Company Investment companies during the nine months ended September 30, 2020 was 8.4%.
We also invested $13.6 million in Structured Finance Notes with a weighted average annual effective yield of 18.9% during the nine months ended September 30, 2020.
Non-cash investment activity
On March 27, 2020, our debt investment in Constellis Holdings, LLC was restructured. We converted our non-accrual debt investment into 20,628 common shares of equity. The cost and fair value of the 20,628 common shares of equity received was $0.7 million and $0.7 million, respectively, which we recognized as the investment's cost.
The following is a summary of our Portfolio Company Investment activity for the three and nine months ended September 30, 2019 (dollar amounts in millions):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| | Debt Investments | | Equity Investments | | Debt Investments | | Equity Investments |
Investments in new portfolio companies | | $ | 25.5 |
| | $ | — |
| | $ | 97.7 |
| | $ | 4.1 |
|
Investments in existing portfolio companies | | | | | | | | |
Follow-on investments | | 13.2 |
| | — |
| | 36.1 |
| | — |
|
Delayed draw and revolver funding | | 0.2 |
| | — |
| | 8.4 |
| | — |
|
Total investments in existing portfolio companies | | 13.4 |
| | — |
| | 44.5 |
| | — |
|
Total investments in new and existing portfolio companies | | $ | 38.9 |
| | $ | — |
| | $ | 142.2 |
| | $ | 4.1 |
|
Number of new portfolio company investments | | 4 |
| | — |
| | 29 |
| | 2 |
|
Number of existing portfolio company investments | | 10 |
| | — |
| | 24 |
| | — |
|
| | | | | | | | |
Proceeds/distributions from principal payments/ equity investments | | 21.5 |
| | — |
| | 30.8 |
| | — |
|
Proceeds from investments sold or redeemed | | 0.1 |
| | — |
| | 30.4 |
| | — |
|
Total proceeds from principal payments, equity distributions and investments sold | | $ | 21.6 |
| | $ | — |
| | $ | 61.2 |
| | $ | — |
|
Notable investments in new portfolio companies during the nine months ended September 30, 2019, included Chemical Resources Holdings, Inc. ($13.6 million senior secured loan and $1.8 million in common equity), TTG Healthcare, LLC ($11.9 million senior secured loan and $2.3 million preferred equity). Notable investments in new portfolio companies during the three months ended September 30, 2019 included Milrose Consultants, LLC ($11.5 million senior secured loan) and SSJA Bariatric ($10.1 million senior secured loan).
The weighted-average yield of direct debt investments in new portfolio companies was 8.5% during the nine months ended September 30, 2019.
We also invested $23.4 million in Structured Finance Notes with a weighted average annual effective yield of 15.94% during the nine months ended September 30, 2019.
Our level of investment activity may vary substantially from period to period depending on various factors, including, but not limited to, the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make. We believe new loan activity in the market in which we operate is below historical levels and we observed a decrease in origination and underwriting activity during the second and third quarters. However, the number of deals currently being reviewed and evaluated has increased since the beginning of the COVID-19 pandemic.
Risk Monitoring
We categorize direct investments in the debt securities of portfolio companies into seven risk categories based on relevant information about the ability of borrowers to service their debt. For additional information regarding our risk categories, see “Item 1. Business–Portfolio Review/Risk Monitoring” in our Annual Report on Form 10-K for the year ended December 31, 2019. The following table shows the classification of our debt securities of portfolio companies, excluding Structured Finance Notes, by credit risk rating as of September 30, 2020, and December 31, 2019 (dollar amounts in thousands):
|
| | | | | | | | | | | | | | |
| | Debt Investments, at Fair Value |
Risk Category | | September 30, 2020 | | December 31, 2019 |
1 (Low Risk) | | $ | — |
| | — | % | | $ | — |
| | — | % |
2 (Below Average Risk) | | 3,788 |
| | 1.0 |
| | 17,953 |
| | 4.0 |
|
3 (Average) | | 290,014 |
| | 78.7 |
| | 387,654 |
| | 85.8 |
|
4 (Special Mention) | | 55,965 |
| | 15.2 |
| | 45,546 |
| | 10.1 |
|
5 (Substandard) | | 18,757 |
| | 5.1 |
| | — |
| | — |
|
6 (Doubtful) | | — |
| | — |
| | 662 |
| | 0.1 |
|
7 (Loss) | | — |
| | — |
| | — |
| | — |
|
| | $ | 368,524 |
| | 100.0 | % | | $ | 451,815 |
| | 100.0 | % |
Changes in the distribution of our debt investments across risk categories were a result of new debt investments, the receipt of amortization payments on existing debt investments, repayment of certain debt investments in full, changes in the fair value of our existing debt investments, realized gains on the sale of investments, as well as changes in risk categories. Debt investments with a cost and fair value of $31,053 and $25,308, respectively, had risk rating downgrades from risk category 3 to risk category 4 during the nine months ended September 30, 2020. Debt investments with a cost and fair value of $37,122 and $18,757, respectively, had a risk rating downgrade from risk category 4 to risk category 5 during the nine months ended September 30, 2020.
Non-Accrual Loans
When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal. During the nine months ended September 30, 2020, our debt investments in Online Tech Stores, LLC and 3rd Rock Gaming Holding, LLC were placed on non-accrual status due to the reasonable doubt that principal and interest will be collected, while our debt investments in Constellis Holdings, LLC and Southern Technical Institute, LLC were restructured and removed from non-accrual status. The aggregate amortized cost and fair value of loans on non-accrual status with respect to all interest and Net Loan Fee amortization was $49,525 and $18,757, respectively, at September 30, 2020, and $22,249 and $662, respectively, at December 31, 2019.
On March 27, 2020, our debt investment in Constellis Holdings, LLC was restructured. We converted our non-accrual debt investment into 20,628 common shares of equity. The cost and fair value of the common shares received were $0.7 million and $0.7 million, respectively as of September 30, 2020. We recognized a realized loss on the restructuring of $9.1 million for the nine months ended September 30, 2020, which was fully recognized as unrealized losses as of December 31, 2019.
On September 30, 2020, our debt investment in Southern Technical Institute, LLC was restructured, pursuant to which we received proceeds of $529, in full satisfaction of contractually due interest of $215 and principal of $1,660. The investment was carried at a cost of $-0-. Accordingly, during the three months ended September 30, 2020, we recognized a realized gain of $314. As of September 30, 2020, we hold equity appreciation rights with a cost and fair value of $-0- and $3,356, respectively.
Structured Finance Notes
The following table summarizes the composition of our Structured Finance Notes as of September 30, 2020 and December 31, 2019 (dollar amounts in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Subordinated notes | $ | 34,694 |
| | $ | 30,925 |
| | $ | 23,127 |
| | $ | 21,610 |
|
Mezzanine bonds | 1,566 |
| | 1,606 |
| | — |
| | — |
|
Total Structured Finance Notes | $ | 36,260 |
| | $ | 32,531 |
| | $ | 23,127 |
| | $ | 21,610 |
|
The weighted average yield on Structured Finance Notes increased to 17.62% at September 30, 2020, from 15.13% at December 31, 2019 primarily due to investments of $13.6 million in Structured Finance Notes with a weighted average annual effective yield of 18.9% during the nine months ended September 30, 2020.
Results of Operations
Our key financial measures are described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations–Key Financial Measures" in our Annual Report on Form 10-K for the year ended December 31, 2019. The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations.
We do not believe that our historical operating performance is necessarily indicative of our future results of operations. We are primarily focused on debt investments in middle-market and larger companies in the United States and, to a lesser extent, equity investments, including warrants and other minority equity securities and Structured Finance Notes, which differs to some degree from our historical investment concentration, in that we now also focus on the debt of larger U.S. companies and Structured Finance Notes. Moreover, as a BDC and a RIC, we will also be subject to certain constraints on our operations, including, but not limited to, limitations imposed by the 1940 Act and the Code. In addition, SBIC I LP is subject to regulation and oversight by SBA. For the reasons described above, the results of operations described below may not necessarily be indicative of the results we expect to report in future periods.
Net increase (decrease) in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase (decrease) in net assets resulting from operations may not be meaningful.
Comparison of the three and nine months ended September 30, 2020 and 2019
Consolidated operating results for the three and nine months ended September 30, 2020 and 2019 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Investment income | | | | | | | |
Interest income: | | | | | | | |
Cash interest income (including accretion of interest on Structured Finance Notes) | $ | 9,781 |
|
| $ | 12,698 |
|
| $ | 30,706 |
|
| $ | 35,639 |
|
Net Loan Fee amortization | 142 |
|
| 382 |
|
| 959 |
|
| 788 |
|
Other interest income | — |
|
| 10 |
|
| 54 |
|
| 107 |
|
Total interest income | 9,923 |
|
| 13,090 |
|
| 31,719 |
|
| 36,534 |
|
PIK income: |
|
|
|
|
|
|
|
|
|
|
|
PIK interest income | 393 |
|
| 245 |
|
| 1,222 |
|
| 611 |
|
Preferred equity PIK dividends | 45 |
|
| 226 |
|
| 388 |
|
| 660 |
|
Total PIK income | 438 |
|
| 471 |
|
| 1,610 |
|
| 1,271 |
|
Dividend income: |
|
|
|
|
|
|
|
|
|
|
|
Common and preferred equity cash dividends | — |
|
| — |
|
| 100 |
|
| 262 |
|
Total dividend income | — |
|
| — |
|
| 100 |
|
| 262 |
|
Fee income: |
|
|
|
|
|
|
|
|
|
|
|
Management and syndication | 89 |
|
| 122 |
|
| 467 |
|
| 772 |
|
Prepayment and other fees | 37 |
|
| 175 |
|
| 442 |
|
| 264 |
|
Total fee income | 126 |
|
| 297 |
|
| 909 |
|
| 1,036 |
|
Total investment income | 10,487 |
|
| 13,858 |
|
| 34,338 |
|
| 39,103 |
|
Total expenses, net incentive fee waiver | 7,775 |
|
| 9,005 |
|
| 25,047 |
|
| 24,562 |
|
Net investment income | 2,712 |
|
| 4,853 |
|
| 9,291 |
|
| 14,541 |
|
Net gain (loss) on investments | 15,313 |
|
| (3,091 | ) |
| (15,619 | ) |
| (5,694 | ) |
Loss on extinguishment of debt | (187 | ) | | — |
| | (336 | ) | | — |
|
Loss on impairment of goodwill | (1,077 | ) | | — |
| | (1,077 | ) | | — |
|
Net increase (decrease) in net assets resulting from operations | $ | 16,761 |
|
| $ | 1,762 |
|
| $ | (7,741 | ) |
| $ | 8,847 |
|
Interest and PIK income by debt investment type for the three and nine months ended September 30, 2020 and 2019, is summarized below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Interest income and PIK interest income: | | | | | | | |
Senior secured debt investments | $ | 7,583 |
|
| $ | 11,013 |
|
| $ | 25,667 |
|
| $ | 30,946 |
|
Subordinated debt investments | 1,181 |
|
| 1,418 |
|
| 3,092 |
|
| 4,198 |
|
Structured Finance Notes | 1,553 |
| | 904 |
| | 4,183 |
| | 2,001 |
|
Total interest income and PIK interest income | 10,317 |
| | 13,335 |
| | 32,942 |
| | 37,145 |
|
Plus purchased premiums (less Net Loan Fees) accelerations | 38 |
| | (130 | ) | | (196 | ) | | (118 | ) |
Recurring interest income and PIK interest income | $ | 10,355 |
| | $ | 13,205 |
| | $ | 32,746 |
| | $ | 37,027 |
|
Investment Income
We consider our interest income on direct debt investments to portfolio companies—other than acceleration of Net Loan Fees recognized upon the repayment of a loan—PIK interest income, and the accretable yield on Structured Finance Notes to be recurring in nature. Such recurring interest income and PIK interest income decreased by $2.8 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to a $1.8 million decrease in the average outstanding performing loan balance, and a $1.0 million decrease resulting from a 100 basis point reduction in the recurring earned yield on our portfolio primarily due to declines in LIBOR.
Due to the COVID-19 pandemic and the impact to our borrowers, we experienced a partial shift from cash interest to PIK interest resulting from concessions granted to support the borrowers' liquidity. Total PIK income on debt securities was $1.2 million and $0.6 million for the nine months ended September 30, 2020, and September 30, 2019, respectively. During the three months ended September 30, 2020, we amended two loans to increase the PIK rate, and amended one loan to convert third quarter cash interest due of $0.5 million to PIK interest; however, this interest was not recognized in income in the third quarter due to reasonable doubt whether it will be collected. We collected approximately $41,000 in fees related to the aforementioned amendments.
Syndication fees, prepayment fees and the acceleration of Net Loan Fees generally result from periodic transactions rather than from holding portfolio investments and are considered non-recurring. Syndication fees, which are recognized when OFS Advisor sources, structures, and arranges the lending group, and for which we were additionally compensated declined to $0.1 million for the three months ended September 30, 2020, compared to $0.4 million in the first six months of 2020. This decline is attributable to the decrease in direct loan originations from approximately $33.4 million in the first six months of 2020 to $2.0 million in the third quarter of 2020, primarily due to the impacts of the COVID-19 pandemic. Total fee income for the nine months ended September 30, 2020, compared to the corresponding period in the prior year, remained consistent due to an increase in prepayment fees, which offset a decrease in syndication fees.
Expenses
Operating expenses for the three and nine months ended September 30, 2020 and 2019, are presented below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Interest expense | $ | 4,448 |
|
| $ | 4,464 |
| | $ | 14,301 |
| | $ | 11,564 |
|
Management fee | 1,871 |
|
| 2,164 |
| | 5,759 |
| | 6,062 |
|
Incentive fee | 234 |
|
| 1,214 |
| | 1,332 |
| | 3,622 |
|
Professional fees | 422 |
|
| 510 |
| | 1,530 |
| | 1,413 |
|
Administration fee | 436 |
|
| 396 |
| | 1,456 |
| | 1,250 |
|
Other expenses | 364 |
|
| 257 |
| | 1,110 |
| | 651 |
|
Total expenses before incentive fee waiver | $ | 7,775 |
|
| $ | 9,005 |
|
| $ | 25,488 |
|
| $ | 24,562 |
|
Incentive fee waiver | — |
| | — |
| | (441 | ) | | — |
|
Total expenses, net of incentive fee waiver | $ | 7,775 |
| | $ | 9,005 |
| | $ | 25,047 |
| | $ | 24,562 |
|
Interest expense for the three months ended September 30, 2020, remained consistent over the corresponding prior year period. Interest expense for the nine months ended September 30, 2020, increased over the corresponding prior year period due to an increase in our average borrowings related to the issuance of the Unsecured Notes Due October 2026 and borrowings under the BNP Facility. Interest expense incurred on our debt during the three and nine months ended September 30, 2020 and 2019, is summarized below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
SBA Debentures | $ | 1,068 |
| | $ | 1,295 |
| | $ | 3,406 |
| | $ | 3,843 |
|
PWB Credit Facility | 285 |
| | 802 |
| | 1,276 |
| | 1,896 |
|
Unsecured Notes | 2,662 |
| | 1,726 |
| | 7,867 |
| | 5,178 |
|
BNP Facility | 433 |
| | 641 |
| | 1,752 |
| | 647 |
|
Total interest expense (1) | $ | 4,448 |
| | $ | 4,464 |
| | $ | 14,301 |
| | $ | 11,564 |
|
(1) Interest expense is inclusive of interest on the outstanding balance, commitment fees on undrawn amounts, and the amortization of deferred financing costs.
Management fee expense for the three and nine months ended September 30, 2020, decreased $0.3 million and $0.3 million, respectively, over the corresponding prior year period due to a decrease in the size of our portfolio.
The $1.0 million decrease in incentive fee expense during the three months ended September 30, 2020, and the $2.3 million decrease in incentive fee expense prior to the Income Incentive Fee waiver of $0.4 million during the nine months ended September 30, 2020, compared to the prior year corresponding periods were attributable to a decrease in net investment income resulting from a decline in net interest margin. On May 4, 2020, OFS Advisor agreed to irrevocably waive the receipt of
$0.4 million in Income Incentive Fees (based on net investment income) 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, 2020. As a result of the voluntary fee waiver, we incurred Income Incentive Fee expense of $0.4 million for the three months ended March 31, 2020, which is equal to half the Income Incentive Fee expense we would have incurred for such period.
The $0.1 million decrease in professional fees for the three months ended September 30, 2020, compared to the corresponding prior year period was attributable to a reduction in valuation and accounting services. The $0.1 million increase in professional fees for the nine months ended September 30, 2020, compared to the corresponding prior year period was attributable to additional costs related to the prior year audit.
Administration fee expense for the three and nine months ended September 30, 2020, increased $40,000 and $0.2 million, respectively, over the corresponding prior year periods, due to an increase in our allocable portion of OFS Services’s personnel and software costs.
Other expenses for the nine months ended September 30, 2020, increased $0.5 million, over the corresponding prior year period, primarily due to the write-off of deferred offering costs relating to our prior shelf registration and an excise tax accrual, as well as a reversal of an excise tax accrual in the first quarter of 2019.
Net realized and unrealized gain (loss) on investments
Net gain (loss) by investment type for the three and nine months ended September 30, 2020 and 2019, were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Senior secured debt | $ | 7,066 |
|
| $ | (3,981 | ) |
| $ | (16,428 | ) |
| $ | (7,364 | ) |
Subordinated debt | (3,995 | ) |
| (921 | ) |
| (11,585 | ) |
| (709 | ) |
Preferred equity, net of taxes | (88 | ) |
| 2,396 |
|
| (2,336 | ) |
| 804 |
|
Common equity, warrants and other | 10,837 |
|
| 797 |
|
| 16,942 |
|
| 2,747 |
|
Structured Finance Notes | 1,495 |
| | (1,382 | ) | | (2,212 | ) | | (1,172 | ) |
Total net gain (loss) on investments | $ | 15,315 |
| | $ | (3,091 | ) | | $ | (15,619 | ) | | $ | (5,694 | ) |
Three and nine months ended September 30, 2020
Our portfolio experienced net gains of $15.3 million in the third quarter of 2020 primarily as a result of performance improvements and expansion of the valuation multiple at Pfanstiehl Holdings, Inc., which appreciated $7.9 million. We also experienced net gains from the return of liquidity to the broadly syndicated loan market, which contributed to the improvement in the fair values of $5.0 million of our Structured Finance Note investments and our broadly syndicated loan investments. One measure of liquidity in the broadly syndicated loan market is the average bid-ask spread on the Refinitiv Market Overall (North America) Loan Index which narrowed to 1.53 points at September 30, 2020, from 1.98 points at June 30, 2020, but has not yet returned to its long-term historic average of 1.0. These net gains were partially offset by $5.7 million in net unrealized losses on our debt investments in Envocore Holding, LLC, Inc., Eblens Holdings, Inc., and 3rd Rock Gaming Holding, LLC.
During the nine months ended September 30, 2020, our portfolio experienced net losses of $15.6 million, primarily due to the adverse economic effects of the COVID-19 pandemic on market conditions and the overall economy, and the related declines in quoted loan prices that have not yet fully recovered from their pre-pandemic levels. Additionally, we incurred realized losses of $10.0 million, primarily due to the loss of $9.1 million on the restructuring of our debt investment in Constellis Holdings, LLC, which was fully recognized as an unrealized loss as of December 31, 2019.
During the three months ended September 30, 2020, we recognized net gains of $7.1 million on our senior debt investments, primarily as a result of unrealized appreciation of $3.5 million and $3.4 million on broadly syndicated loans and directly originated loans, respectively.
During the three months ended September 30, 2020, we recognized net losses of $4.0 million on our subordinated debt investments, primarily as a result of unrealized depreciation of $3.4 million on our investment in Eblens Holdings, Inc.
For the three months ended September 30, 2020, we recognized net gains of $10.8 million on our common equity, warrants and other investments, primarily as a result of unrealized appreciation of $7.8 million on Pfanstiehl Holdings, Inc. and $2.4 million on our equity appreciation rights in Southern Technical Institute, LLC.
For the three months ended September 30, 2020, we recognized unrealized appreciation of $1.5 million on our Structured Finance Note investments, primarily due to the continued return of liquidity to the broadly syndicated loan market.
Three and nine months ended September 30, 2019
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 the 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. Additional net unrealized losses on senior secured debt of $3.4 million for the nine months ended September 30, 2019, were primarily a result of additional unrealized depreciation on Constellis Holdings, LLC and MAI Holdings, Inc. We also recognized a realized gain of $0.2 million primarily as a result of the partial sale of our investment in Cenexel Clinical Research Holdings, Inc. and the sale of our investment in Davis Vision, Inc.
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. Net gains of $0.2 million for the nine months ended September 30, 2019 were primarily a result of net positive impact of portfolio company-specific performance factors.
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 preferred equity securities for the nine months ended September 30, 2019, primarily due to unrealized appreciation of $1.7 million on our preferred equity portfolio as a result of net positive impact of portfolio company-specific performance factors, offset by a realized loss of $0.9 million on Maverick Healthcare Equity, LLC.
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 Corp. We recognized net gains of $2.7 million on common equity and warrant investments for the nine months ended September 30, 2019, primarily due to unrealized appreciation of $6.1 million across several portfolio company investments from the positive impact of portfolio company-specific performance factors, offset primarily by unrealized depreciation of $2.3 million in Contract Datascan Holdings, Inc. as a result of negative portfolio company-specific performance factors.
We recognized unrealized depreciation of $1.4 million on Structured Finance Notes for the three months ended September 30, 2019, and unrealized depreciation of $1.2 million for the nine months ended September 30, 2019, primarily as a result of negative impact of mark-to-market adjustments since our investment purchases.
Loss on Impairment of Goodwill
The decline in the price of our common stock and the level at which it continues to trade relative to the broader stock indices for the BDC industry, led us to conclude in the third quarter of 2020 that an impairment in the value of our goodwill was more likely than not. Moreover, the discount at which our stock traded to its net asset value resulted in our conclusion on the impairment of goodwill equal to the full amount of its carrying value of $1.1 million was appropriate. The loss on impairment of goodwill did not impact our third quarter management or incentive fees.
Loss on Extinguishment of Debt
During the nine months ended September 30, 2020, we prepaid $21.1 million of SBA debentures that were contractually due September 1, 2023, March 1, 2024 and September 1, 2024. We recognized losses on extinguishment of debt of $0.24 million related to the charge-off of deferred borrowing costs on the prepaid debentures.
During the three months ended September 30, 2020, the BLA was amended to reduce the total commitment from $100.0 million to $50.0 million. We recognized a loss on extinguishment of debt of $0.1 million related to the charge-off of deferred borrowing costs on the commitment reduction.
Liquidity and Capital Resources
At September 30, 2020, we held cash of $18.3 million, which includes $5.1 million held by SBIC I LP, our wholly owned SBIC, and $0.9 million held by OFSCC-FS. Our use of cash held by SBIC I LP may be restricted by SBA regulation, including limitations on the amount of cash SBIC I LP can distribute to the Parent. Any such distributions to the Parent from SBIC I LP are generally restricted under SBA regulations to a statutory measure of undistributed accumulated earnings or regulatory capital of SBIC I LP and require the prior approval of the SBA. During the nine months ended September 30, 2020, the Parent received distributions of $8.1 million from SBIC I LP. Distributions from OFSCC-FS to the Parent are restricted by the terms and conditions of the BNP Facility. During the nine months ended September 30, 2020, the Parent received $1.7 million in cash distributions from OFSCC-FS. As of September 30, 2020, cash available to be distributed from SBIC I LP and OFSCC-FS were $4.9 million and $-0-, respectively.
At September 30, 2020, we had an unused commitment of $50.0 million under our PWB Credit Facility, as well as an unused commitment of $125.4 million under our BNP Facility, both subject to a borrowing base requirements and other covenants. The Parent may make unsecured loans to SBIC I LP, the aggregate which cannot exceed $35 million at any given time, and no interest may be charged on the unpaid principal balance. There were no intercompany loans between the Parent and SBIC I LP as of September 30, 2020. On October 7, 2020, we amended our BLA with Pacific Western Bank to reduce the total commitment under the PWB Credit Facility from $50.0 million to $20.0 million. As of November 5, 2020, after giving effect to the reduction, our PWB Credit Facility had an unused commitment of $20.0 million, subject to a borrowing base requirements and other covenants.
Based on fair values and equity capital at September 30, 2020, we could access available lines of credit for $100 million and remain in compliance with our asset coverage requirements. As of November 4, 2020, we had cash on hand of approximately $48.5 million. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and selectively deploy capital in new investment opportunities in this challenging environment.
Sources and Uses of Cash
We generate operating cash flows from net investment income and the net liquidation of portfolio investments, and use cash in our operations in the net purchase of portfolio investments and payment of expenses. Significant variations may exist between net investment income and cash from net investment income, primarily due to the recognition of non-cash investment income, including certain Net Loan Fee amortization, PIK interest, and PIK dividends, which generally will not be fully realized in cash until we exit the investment. As discussed in "Item 1.–Financial Statements–Note 3," we pay OFS Advisor a quarterly incentive fee with respect to our pre-incentive fee net investment income, which may include investment income that we have not received in cash. In addition, we must distribute substantially all of our taxable income, which approximates, but will not always equal, the cash we generate from net investment income to maintain our RIC tax treatment. Historically, our distributions have been in excess of taxable income, and we have limited history of net taxable gains. We also obtain cash to fund investments or general corporate activities from the issuance of securities and our revolving line of credit. These principal sources and uses of cash and liquidity are presented below (in thousands):
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
Cash from net investment income | | $ | 1,614 |
| | $ | 10,270 |
|
Net (purchases and originations)/repayments and sales of portfolio investments | | 40,881 |
| | (105,619 | ) |
Net cash provided by (used in) operating activities | | 42,495 |
| | (95,349 | ) |
| | | | |
Distributions paid to stockholders(1) | | (8,974 | ) | | (13,464 | ) |
Net borrowings under lines of credit | | (31,800 | ) | | 80,475 |
|
Repayment of SBA debentures | | (21,110 | ) | | — |
|
Proceeds from unsecured notes offering, net of discounts | | 24,250 |
| | — |
|
Other financing activities | | (11 | ) | | (1,860 | ) |
Net cash provided by (used in) financing activities | | (37,645 | ) | | 65,151 |
|
Increase (decrease) in cash | | $ | 4,850 |
| | $ | (30,198 | ) |
| |
(1) | The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our ICTI for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. See "Item 1–Financial Statements–Note 10." |
Cash from net investment income
Cash from net investment income decreased $8.7 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, principally due to an decrease in collected net interest and fee income of $7.5 million and an increase in interest expense paid of $3.1 million, offset by an decrease in fees paid to OFS Advisor and affiliates of $1.1 million, as well as a decrease in other expenses paid of $0.4 million.
Cash flow from net investment income was reduced by $2.8 million during the nine months ended September 30, 2020 as a result of amendments that converted cash interest to PIK interest, loans that have been placed on non-accrual status and deferrals of interest payments to the fourth quarter of 2020. However, 98% of our performing loans as of September 30, 2020 paid interest for the third quarter of 2020.
Net (purchases and originations)/repayments and sales of portfolio investments
During the nine months ended September 30, 2020, net purchases and originations of portfolio investments of $40.9 million were primarily due to $89.8 million of cash we used to purchase portfolio investments, offset by $130.6 million of cash we received from amortized cost repayments, which includes $41.1 in the full loan repayments on TRS Services, LLC, Performance Team LLC, and Cirrus Medical Staffing, Inc., as well as sales on our portfolio investments. During the nine months ended September 30, 2019, net purchases of $105.6 million were due to $168.7 million of cash we used to purchase portfolio investments, offset by $63.1 million of cash we received from principal payments and sales on our portfolio investments. See "—Portfolio Composition and Investment Activity–Investment Activity."
Borrowings
SBA Debentures
SBIC I LP has a SBIC license that allowed it to obtain leverage by issuing SBA-guaranteed debentures, subject to issuance of a capital commitment by the SBA and customary procedures. These debentures are non-recourse to us, and bear interest payable semi-annually, and each debenture has a maturity date that is ten years following issuance. The interest rate was fixed at the first pooling date after issuance, which was March and September of each year, at a market-driven spread over U.S. Treasury Notes with ten-year maturities. As of September 30, 2020 and 2019, SBIC I LP had outstanding debentures of $128.8 million and $149.9 million, respectively.
On a stand-alone basis, SBIC I LP held $239.6 million, and $249.6 million in total assets at September 30, 2020 and December 31, 2019, respectively, which accounted for approximately 50% and 46% of the Company’s total consolidated assets, respectively.
As part of our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers, which we believe will improve our overall risk profile, SBIC I LP intends, over time, to repay its outstanding SBA debentures prior to the scheduled maturity dates of its debentures. Under a plan approved by the SBA, we will only make follow-on investments in current portfolio companies held by SBIC I LP. We believe that investing in more senior loans to larger borrowers is consistent with our view of the private loan market and will reduce our overall leverage on a consolidated basis. During the nine months ended September 30, 2020, SBIC I LP prepaid $21.1 million of SBA debentures that were contractually due September 1, 2023, March 1, 2024 and September 1, 2024. We recognized losses on extinguishment of debt of $0.24 million related to the charge-off of deferred borrowing costs on the prepaid debentures.
SBIC I LP is periodically examined and audited by the SBA’s staff to determine its compliance with SBA regulations. If SBIC I LP fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit SBIC I LP’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit SBIC I LP from making distributions.
We have received exemptive relief from the SEC effective November 26, 2013, which permits us to exclude SBA guaranteed debentures from the definition of senior securities in the statutory 150% asset coverage ratio under the 1940 Act.
PWB Credit Facility
We are party to a BLA with Pacific Western Bank, as lender, to provide us with a senior secured revolving credit facility, or the PWB Credit Facility, which is available for general corporate purposes including investment funding. The maximum availability of the PWB Credit Facility is equal to 50% of the aggregate outstanding principal amount of eligible loans included in the borrowing base, which excludes subordinated loan investments (as defined in the BLA) and as otherwise specified in the BLA. The PWB Credit Facility is guaranteed by OFSCC-MB, Inc. and secured by all of our current and future assets, excluding assets held by SBIC I LP, OFSCC-FS and the Company’s partnership interests in SBIC I LP and OFS SBIC I, GP.
In June and July 2020, the BLA was amended to, among other things, modify certain financial performance covenants and reduce the total commitment from $100.0 million to $50.0 million. We recognized a loss on extinguishment of debt of $0.1 million related to the charge-off of deferred borrowing costs on the commitment reduction. On October 7, 2020, we executed an amendment to our BLA with Pacific Western Bank in order to reduce the total commitment under the PWB Credit Facility from $50.0 million to $20.0 million. In October 2020, the Company expects to recognize a loss on extinguishment of debt of $42,000 related to the charge-off of deferred borrowing costs on this commitment reduction.
As of September 30, 2020, we had no outstanding balance and an unused commitment of $50.0 million under the PWB Credit Facility. As of November 5, 2020, after giving effect to the reduction, our PWB Credit Facility had an unused commitment of $20.0 million, subject to a borrowing base and other covenants.
The BLA contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income
after incentive fees, a debt/worth ratio and a net loss restriction. The BLA also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material adverse change in our financial condition. As of September 30, 2020, we were in compliance with the applicable covenants under the PWB Credit Facility.
Unsecured Notes
In October and November 2019, we publicly offered the Unsecured Notes Due October 2026 with an aggregate principal of $54.3 million, 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 and offering costs of $2.0 million were $52.3 million. In September 2020, we publicly offered the Unsecured Notes Due September 2023 with aggregate principal of $25.0 million. The total net proceeds to us from the Unsecured Notes Due September 2023, after deducting underwriting discounts and offering costs of approximately $1.0 million, were approximately $24.0. The issuance of the Unsecured Notes totaled $177.9 million in aggregate principal debt, with net proceeds of $171.4 million to us.
The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all of our current and future unsecured indebtedness. Because the Unsecured Notes 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.
In order to, among other things, reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, purchase the Unsecured Notes for cash in open market purchases and/or privately negotiated transactions. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity, prospects for future access to capital, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.
BNP Facility
On June 20, 2019, OFSCC-FS entered into the BNP Facility, which provides for borrowings in an aggregate principal amount up to $150.0 million, of which $24.7 million was drawn as of September 30, 2020. Borrowings under the BNP Facility bear interest based on LIBOR for the relevant interest period, plus an applicable spread. The effective interest rate on the BNP Facility was 6.66% at September 30, 2020. The BNP Facility will mature on the earlier of June 20, 2024 or upon certain other events defined in the credit agreement which result in accelerated maturity. Borrowings under the BNP Facility are secured by substantially all of the assets held by OFSCC-FS. The unused commitment under the BNP Facility was $125.4 million as of September 30, 2020. As of September 30, 2020, we were in compliance with the applicable covenants.
On a stand-alone basis, OFSCC-FS held approximately $64.8 million and $92.5 million in total assets at September 30, 2020 and December 31, 2019, respectively, which accounted for approximately 13.4% and 17% of our total consolidated assets, respectively.
Other Liquidity Matters
We expect to fund the growth of our investment portfolio utilizing our current borrowings, follow-on equity offerings, and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments or make additional investments in our portfolio companies. The illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
In addition, as a BDC, we generally will be required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities (including SBIC I LP’s SBA-guaranteed debt), to total senior securities, which include all of our borrowings (excluding SBA-guaranteed debt) and any outstanding preferred stock (of which we had none at September 30, 2020), of at least 150%. We received an exemptive order from the SEC to permit us to exclude the debt of SBIC I LP guaranteed by the SBA from the definition of Senior Securities in the statutory asset coverage ratio under the 1940 Act. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate the need to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.
On May 3, 2018, our Board, including a required majority (as such term is defined in Section 57(o) of the 1940 Act) thereof, 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, our minimum required asset coverage ratio decreased from 200% to 150%, effective May 3, 2019.
On May 22, 2018, the Board authorized the Stock Repurchase Program under which we could acquire up to $10.0 million of our outstanding common stock through the two-year period ending May 22, 2020. On May 4, 2020, the Board extended the Stock Repurchase Program for an additional two-year period. Under the extended Stock Repurchase Program, we are authorized to repurchase shares in open-market transactions, including through block purchases, depending on prevailing market conditions and other factors. We expect the Stock Repurchase Program to be in place through May 22, 2022, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases. The Stock Repurchase Program may be extended, modified or discontinued at any time for any reason. We have provided our stockholders with notice of our intention to repurchase shares of our common stock in accordance with 1940 Act requirements. We retire all shares of common stock that we purchased in connection with the Stock Repurchase Program. No shares of common stock were repurchased during the three months ended September 30, 2020.
As of September 30, 2020, the aggregate amount outstanding of the senior securities issued by us was $202.5 million, for which our asset coverage was 174%. The Small Business Administration Debentures are not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC effective November 26, 2013. The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness.
As a BDC, we are generally not permitted to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if the Board determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale. On June 23, 2020, our stockholders approved a proposal to authorize us, with approval of our Board, to sell or otherwise issue shares of our common stock (during a twelve-month period) at a price below our then-current net asset value per share in one or more offerings, subject to certain limitations (including that the cumulative number of shares sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale).
Contractual Obligations and Off-Balance Sheet Arrangements
The following table shows our contractual obligations as of September 30, 2020 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
|
| Payments due by period |
Contractual Obligation (1) |
| Total |
| Less than year |
| 1-3 years (2) |
| 4-5 years (2) |
| After 5 years (2) |
PWB Credit Facility |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Unsecured Notes | | 177,850 |
| | — |
| | 25,000 |
| | 50,000 |
| | 102,850 |
|
SBA Debentures |
| 128,770 |
| | — |
| | 14,000 |
| | 114,770 |
| | — |
|
BNP Facility | | 24,650 |
| | — |
| | — |
| | 24,650 |
| | — |
|
Total |
| $ | 331,270 |
| | $ | — |
| | $ | 39,000 |
| | $ | 189,420 |
| | $ | 102,850 |
|
| |
(1) | Excludes commitments to extend credit to our portfolio companies. |
| |
(2) | The PWB Credit Facility is scheduled to mature on February 28, 2021. The SBA debentures are scheduled to mature between September 2022 and September 2025. SBIC I LP intends, over time, to repay outstanding SBA debentures prior to the scheduled maturity dates of its debentures. The Unsecured Notes are scheduled to mature between October 2023 and October 2026. The BNP Facility is scheduled to mature on June 20, 2024. |
We continue to believe our long-dated financing, with approximately 88% of our total debt contractually maturing in 2024 and beyond, affords us operational flexibility.
We have entered into contracts with third parties under which we have material future commitments—the Investment Advisory Agreement, pursuant to which OFS Advisor has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which OFS Services has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations.
We may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. We had $7.4 million in unfunded commitments to three portfolio companies at September 30, 2020. We continue to believe that we have
sufficient levels of liquidity to support our existing portfolio companies and will meet these unfunded commitments by using our cash on hand or utilizing our available borrowings under the PWB Credit Facility.
Distributions
We are taxed as a RIC under the Code. In order to maintain our status as a RIC, we are required to distribute annually to our stockholders at least 90% of our ICTI, as defined by the Code. Additionally, to avoid a 4% excise tax on undistributed earnings we are required to distribute each calendar year the sum of (i) 98% of our ordinary income for such calendar year (ii) 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year, and (iii) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax. Maintenance of our RIC status also requires adherence to certain source of income and asset diversification requirements. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense.
Our Board maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount not less than 90-100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend, or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income to a following year. Each year, a statement on Form 1099-DIV identifying the source of the distribution is mailed to the Company’s stockholders. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense.
Recent Developments
On November 3, 2020, our Board declared a distribution of $0.18 per share for the fourth quarter of 2020, payable on December 31, 2020 to stockholders of record as of December 24, 2020.
We evaluated events subsequent to September 30, 2020 through November 5, 2020. On March 11, 2020, the World Health Organization declared the novel coronavirus as a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to the COVID-19 pandemic. The outbreak of the COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The COVID-19 pandemic and the preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, cancellations of events and travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions, and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. The outbreak could have a continued adverse impact on economic and market conditions on a global scale. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the ongoing COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risks with respect to the underlying value of our portfolio companies, our business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Further, the operational and financial performance of the portfolio
companies in which we make investments have been, and may continue to be, significantly impacted by the COVID-19 pandemic, which in turn has, and may continue to have, an impact on the valuation of our investments.
Accordingly, we cannot predict the extent to which our business, financial condition, results of operations and cash flows will be affected at this time. The potential impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets. The U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. In addition, in a prolonged low interest rate environment, including a reduction of LIBOR to zero, our net interest margin will be compressed and adversely affect our operating results. For additional information concerning the COVID-19 outbreak and its potential impact on our business and our operating results, see Part II - Other information, Item 1A. Risk Factors.
As of September 30, 2020, 88% of our debt investments bore interest at floating interest rates, at fair value. The interest rates on our debt investments bearing floating interest rates are usually based on a floating LIBOR, and the debt investments typically contain interest rate re-set provisions that adjust applicable interest rates to current market rates on a periodic basis. A significant portion of our loans that are subject to the floating LIBOR rates are also subject to a minimum base rate, or floor, that we charge on our loans if the current market rates are below the respective floors. As of September 30, 2020, a majority of our floating rate loans were based on a floating LIBOR, subject to its floor.
Our outstanding SBA debentures and Unsecured Notes bear interest at fixed rates. Our PWB Credit Facility and BNP Facility have floating interest rate provisions based on the Prime Rate and LIBOR, respectively, with effective interest rates of 5.62% and 6.66%, respectively, as of September 30, 2020.
Assuming that the interim and unaudited consolidated balance sheet as of September 30, 2020 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following tables show the annualized impact of hypothetical changes in interest rate indices (in thousands).
|
| | | | | | | | | | | | |
Basis point increase |
| Interest income |
| Interest expense |
| Net change |
25 |
| $ | 16 |
|
| $ | (58 | ) |
| $ | (42 | ) |
50 |
| 123 |
|
| (121 | ) |
| 2 |
|
75 |
| 262 |
|
| (183 | ) |
| 79 |
|
100 |
| 821 |
|
| (246 | ) |
| 575 |
|
125 |
| 1,476 |
|
| (308 | ) |
| 1,168 |
|
|
| | | | | | | | | | | | |
Basis point decrease |
| Interest income |
| Interest expense |
| Net change |
25 |
| $ | (518 | ) |
| $ | 63 |
|
| $ | (455 | ) |
50 |
| n/m (1) |
|
| n/m (1) |
|
| n/m (1) |
|
75 |
| n/m (1) |
|
| n/m (1) |
|
| n/m (1) |
|
100 |
| n/m (1) |
|
| n/m (1) |
|
| n/m (1) |
|
125 |
| n/m (1) |
|
| n/m (1) |
|
| n/m (1) |
|
(1) Not meaningful.
Item 4. Controls and Procedures
Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020. The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the foregoing evaluation of our disclosure controls and procedures as of September 30, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We, OFS Advisor and OFS Services, are not currently subject to any material pending legal proceedings threatened against us as of September 30, 2020. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition, results of operations or cash flows.
Item 1A. Risk Factors
Investing in our common stock may be speculative and involves a high degree of risk. In addition to the other information contained in this Quarterly Report on Form 10-Q, including our financial statements, and the related notes, schedules and exhibits, you should carefully consider the risk factors described in "Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
Other than the risks described below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. However, the risks below and disclosed in our Annual Report on Form 10-K, may be, and will continue to be, heightened or exacerbated by the COVID-19 pandemic and any worsening of the economic environment. The risks previously disclosed in our Annual Report on Form 10-K should be read together with the other information disclosed elsewhere in this Quarterly Report on Form 10-Q and our other reports filed with the SEC.
Events outside of our control, including public health crises such as the COVID-19 pandemic, have and will continue to negatively affect the results of our operations.
Periods of market volatility may continue in response to pandemics, such as the COVID-19 pandemic, or other events outside of our control. These types of events have and will continue to adversely affect our operating results. In December 2019, COVID-19, caused by a novel strain of the coronavirus, surfaced in Wuhan, China. In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread globally and in the United States, including in the markets in which we operate. We have been and continue to assess the effects of the COVID-19 pandemic on our borrowers and are taking steps to help mitigate the adverse consequences to each of their businesses. As a result of the COVID-19 pandemic, we have and may continue to experience difficulty collecting timely interest and principal payments from our borrowers, our asset values have and may continue to decline, and certain of our outstanding loans may need to be extended or restructured. We have held discussions with our borrowers and they have expressed their general concern about the uncertain economic condition. The impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the COVID-19 pandemic or treat its impact, all of which are beyond our control. Though the magnitude of the impact remains to be seen, our borrowers and by extension our operating results will be adversely impacted by the COVID-19 pandemic.
In addition to adverse United States domestic and global macroeconomic effects, including the adverse impacts on our portfolio companies and investment assets, the COVID-19 pandemic has caused, and will continue to cause, a reduction in our ability to access capital through the capital markets and through our credit facilities, and has otherwise adversely impacted, and will continue to impact, the operation of our business. The COVID-19 pandemic has also caused, and will continue to cause, substantial disruption to our employees, investors, business partners, referral sources, borrowers and prospective borrowers through self-isolation, travel limitations, business restrictions, and otherwise. Many areas within the United States have imposed mandatory closures for businesses not deemed to be essential, and it is currently unclear for how long such closures will last. Though all of OFS Advisor's employees are able to work remotely, these closures have nevertheless affected many of our borrowers and many businesses through which we seek new borrowers, resulting in significant declines in new loans and investments. These effects, individually or in the aggregate, have, and will continue to, adversely impact our business, financial condition, operating results and cash flows and such adverse impacts may be material.
Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our investment income and damage our results of operations and our liquidity position, possibly to a significant degree. The duration of any such impacts cannot be predicted.
The effects of the outbreak of COVID-19 have negatively affected the global economy, the United States economy and the global financial markets, and have and may continue to disrupt our operations and our borrowers' operations, which have and may continue to adversely impact our business, financial condition and results of operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. A majority of states, including Illinois, where we are headquartered, have declared states of emergency. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the beginning of the COVID-19 pandemic, more than 55 million people have filed claims for unemployment, and stock markets have experienced increased volatility and, in particular, BDC stocks have significantly declined in value. In response to the COVID-19 pandemic, the Federal Reserve Board has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused OFS Advisor to modify its business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. OFS Advisor may take further actions as may be required by government authorities or that it determines are in the best interests of its employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.
As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
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• | demand for our services may decline, making it difficult to grow assets and income; |
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• | if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase, resulting in increased charges and reduced income; |
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• | collateral for loans may decline in value, which could cause loan losses to increase; |
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• | our fair values may continue to decrease if borrowers experience financial difficulties, which will adversely affect our net income; |
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• | increased amendments and/or restructuring to the terms or our portfolio company loan agreements, which may increase the amount of PIK interest, and defer the collection of cash interest and/or increase the risk of default; |
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• | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; |
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• | as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; |
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• | a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; |
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• | we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and |
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• | reduction in our ability to access the capital markets or credit facilities may cause a distressed liquidity position and result in a decrease or inability to pay dividends. |
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of our executive officers or directors or key employees of OFS Advisor due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above has and could continue to negatively impact our business, financial condition and results of operations and prospects.
Our investments in Structured Finance Notes are more likely to suffer a loss of all or a portion of their value in the event of a default.
From time to time, we invest in Structured Finance Notes that comprise the equity tranche of CLOs, which are junior in priority of payment and are subject to certain payment restrictions generally set forth in an indenture governing the notes. In addition, Structured Finance Notes generally do not benefit from any creditors’ rights or ability to exercise remedies under the indenture governing the notes. Structured Finance Notes are not guaranteed by another party and are subject to greater risk than the secured notes issued by the CLO. CLOs are typically highly levered, utilizing up to approximately 9-13 times leverage, and therefore Structured Finance Notes are subject to a risk of total loss. There can be no assurance that distributions on the assets held by the CLO will be sufficient to make any distributions or that the yield on the Structured Finance Notes will meet our expectations.
CLOs generally may make payments on Structured Finance Notes only to the extent permitted by the payment priority provisions of an indenture governing the notes issued by the CLO. CLO indentures generally provide that principal payments on Structured Finance Notes may not be made on any payment date unless all amounts owing under secured notes are paid in full. In addition, if a CLO does not meet the asset coverage tests or the interest coverage test set forth in the indenture governing the notes issued by the CLO, cash would be diverted from the Structured Finance Notes to first pay the secured notes in amounts sufficient to cause such tests to be satisfied.
We will have no influence on management of underlying investments managed by non-affiliated third-party CLO collateral managers.
We are not responsible for, and have no influence over, the asset management of the portfolios underlying the Structured Finance Notes we hold as those portfolios are managed by non-affiliated third-party CLO collateral managers. Similarly, we are not responsible for and have no influence over the day-to-day management, administration or any other aspect of the issuers of the individual securities. As a result, the values of the portfolios underlying our Structured Finance Notes could decrease as a result of decisions made by third-party CLO collateral managers.
Due to the COVID-19 pandemic or other disruptions in the economy, we may not be able to increase our dividends and may reduce or defer our dividends and choose to incur US federal excise tax in order preserve cash and maintain flexibility.
As a BDC, we are not required to make any distributions to stockholders other than in connection with our election to be taxed as a RIC under subchapter M of the Code. In order to maintain our tax treatment as a RIC, we must distribute to stockholders for each taxable year at least 90% of our investment company taxable income (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses). If we qualify for taxation as a RIC, we generally will not be subject to corporate-level US federal income tax on our investment company taxable income and net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we timely distribute to stockholders. We will be subject to a 4% US federal excise tax on undistributed earnings of a RIC unless we distribute each calendar year at least the sum of (i) 98.0% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.
Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current year. In particular, if we pay a distribution in January of the following year that was declared in October, November, or December of the current year and is payable to stockholders of record in the current year, the dividend will be treated for all US federal tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends, referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain our qualification for taxation as a RIC and eliminate our liability for corporate-level U.S. federal income tax. Under these spillover dividend procedures, we may defer distribution of income earned during the current year until December of the following year. For example, we may defer distributions of income earned during 2020 until as late as December 31, 2021. However, if we choose to pay a spillover dividend, we will still incur the 4% U.S. federal excise tax on some or all of the distribution.
Due to the COVID-19 pandemic or other disruptions in the economy, we anticipate that we may take certain actions with respect to the timing and amounts of our distributions in order to preserve cash and maintain flexibility. For example, we anticipate that we will not be able to increase our dividends. In addition, we may reduce our dividends and/or defer our dividends to the following taxable year. If we defer our dividends, we may choose to utilize the spillover dividend rules discussed above and incur the 4% U.S. federal excise tax on such amounts. To further preserve cash, we may combine these reductions or deferrals of dividends with one or more distributions that are payable partially in our stock as discussed above under the risk factor “We may in the future choose to pay distributions in our own stock, in which case stockholders may be
required to pay tax in excess of the cash they receive” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
We have been, and will continue to be, adversely impacted by the outbreak of COVID-19 and a potential worsening of the pandemic.
The COVID-19 pandemic has caused a sharp global slowdown of economic activity resulting in a recession, a steep increase in unemployment in the U.S., and significant volatility and disruption of financial markets. Health advisors warn that “subsequent waves” of the pandemic are possible if reopening is pursued too soon or in the wrong manner or if measures to contain the COVID-19 pandemic are inadequate, which may negatively affect or exacerbate the global economy, the U.S. economy and the global financial markets. The pandemic had a significant adverse impact on us during the first and second quarters of 2020, continued to have an adverse impact on us during the third quarter of 2020 and is expected to continue to adversely impact our company beyond third-quarter 2020. Because the pandemic is unprecedented in recent history, and its severity, duration and future economic consequences are difficult to predict, we cannot predict or assess its future impact on us with any certainty.
Uncertainty relating to the LIBOR calculation process and transition timing may adversely affect the value of any portfolio of LIBOR-indexed, floating-rate debt securities.
Uncertainty relating to the LIBOR calculation process may adversely affect the value of any portfolio of LIBOR-indexed, floating-rate debt securities. Concerns have been publicized that some of the member banks surveyed by the British Bankers' Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing. Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined. Uncertainty as to the nature of such potential changes may adversely affect the market for LIBOR-based securities, including our potential portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our potential portfolio of LIBOR indexed, floating-rate debt securities.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next several years. As a result of this transition, interest rates on financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our financial instruments tied to LIBOR rates. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities, called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain.
Additionally, on July 12, 2019 the Staff of the SEC’s Division of Corporate Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant issued a statement about the potentially significant effects on financial markets and market participants when LIBOR is discontinued in 2021 and no longer available as a reference benchmark rate. The Staff encouraged all market participants to identify contracts that reference LIBOR and begin transitions to alternative rates. On December 30, 2019, the SEC’s Chairman, Division of Corporate Finance and Office of the Chief Accountant issued a statement to encourage audit committees in particular to understand management’s plans to identify and address the risks associated with the elimination of LIBOR, and, specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR, as the risks associated with the discontinuation of LIBOR and transition to an alternative reference rate will be exacerbated if the work is not completed in a timely manner.
In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of the COVID-19 pandemic on transition timelines and
update the marketplace as soon as possible. It is unclear if after 2021 LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021.
The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, or on our overall financial condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three month period ended September 30, 2020, we issued 6,708 shares of common stock to stockholders in connection with our DRIP. These issuances were not subject to the registration requirements of the Securities Act. The aggregate value of the shares of our common stock issued under our distribution reinvestment plan was approximately $31,593.
Issuer Purchases of Equity Securities
On May 22, 2018, the Board authorized the Company to initiate the Stock Repurchase Program under which the Company could acquire up to $10.0 million of its outstanding common stock through the two-year period ending May 22, 2020.
On May 4, 2020, the Board extended the Stock Repurchase Program for an additional two-year period. Under the extended Stock Repurchase Program, the Company is authorized to repurchase shares in open-market transactions, including through block purchases, depending on prevailing market conditions and other factors. The Company expects the Stock Repurchase Program to be in place through May 22, 2022, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not obligate the Company to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases. The Stock Repurchase Program may be extended, modified or discontinued at any time for any reason. The Company retires all shares of common stock that it purchases in connection with the Stock Repurchase Program.
During the three months ended September 30, 2020, we repurchased -0- shares of common stock on the open market for under the Stock Repurchase Program. The following table provides information regarding the Stock Repurchase Program (amount in thousands except shares):
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Period | | Total Number of Shares Purchased (1) | | Cost of Shares Purchased | | Average Price Paid Per Share | | Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Stock Repurchase Program |
May 22, 2018 through June 30, 2018 | | — |
| | $ | — |
| | $ | — |
| | $ | 10,000 |
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July 1, 2018 through September 30, 2018 | | — |
| | $ | — |
| | $ | — |
| | $ | 10,000 |
|
October 1, 2018 through December 31, 2018 | | 300 |
| | $ | 3 |
| | $ | 10.29 |
| | $ | 9,997 |
|
January 1, 2019 through March 31, 2019 | | — |
| | $ | — |
| | $ | — |
| | $ | 9,997 |
|
April 1, 2019 through June 30, 2019 | | — |
| | $ | — |
| | $ | — |
| | $ | 9,997 |
|
July 1, 2019 through September 30, 2019 | | — |
| | $ | — |
| | $ | — |
| | $ | 9,997 |
|
October 1, 2019 through December 31, 2019 | | — |
| | $ | — |
| | $ | — |
| | $ | 9,997 |
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January 1, 2020 through March 31, 2020 | | — |
| | $ | — |
| | $ | — |
| | $ | 9,997 |
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April 1, 2020 through June 30, 2020 | | — |
| | $ | — |
| | $ | — |
| | $ | 9,997 |
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July 1, 2020 through September 30, 2020 | | — |
| | $ | — |
| | $ | — |
| | $ | 9,997 |
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(1) | Excludes shares purchased on the open market and reissued in order to satisfy the DRIP obligation. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Listed below are the exhibits that are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
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| | | Incorporated by Reference | |
Exhibit Number | | Description | Form and SEC File No. | Filing Date with SEC | Filed with this 10-Q |
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4.1 | | | Form 8-K 814-00813 | September 18, 2020 | |
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4.2 | | | Form 8-K 814-00813 | September 18, 2020 | |
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10.1 | | | Form 8-K 814-00813 | October 9, 2020 | |
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31.1 | | | | | * |
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31.2 | | | | | * |
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32.1 | | | | | † |
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32.2 | | | | | † |
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* | Filed herewith |
† | Furnished herewith |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Dated: November 6, 2020 | OFS CAPITAL CORPORATION |
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| By: | /s/ Bilal Rashid |
| Name: | Bilal Rashid |
| Title: | Chief Executive Officer |
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| By: | /s/ Jeffrey A. Cerny |
| Name: | Jeffrey A. Cerny |
| Title: | Chief Financial Officer |