OFS Capital (OFS) Q4 2025 Earnings Call Transcript

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DATE

Tuesday, March 3, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Bilal Rashid
• Chief Financial Officer — Kyle Spina

TAKEAWAYS

• Net Investment Income -- $0.20 per share, down from $0.22 per share in the prior quarter, due to lower net interest margin from higher rates on new unsecured notes and Fed benchmark rate reductions.
• Net Asset Value (NAV) -- $9.19 per share at quarter-end, representing a $0.98 or 10% decrease, led by write-downs on nonperforming loans and unrealized CLO equity depreciation.
• Quarterly Distribution -- Maintained at $0.17 per share for 2026, resulting in a 14.3% annualized yield on the closing market price.
• Loan Portfolio Composition -- 95% first-lien positions by fair value, with 100% of the loan portfolio senior secured at quarter-end.
• CLO Equity Holdings -- Recorded unrealized depreciation due to spread tightening in underlying collateral, partly offset by $3.2 million in net unrealized appreciation during the quarter.
• Fansteel Equity Position -- Valued at $79.4 million at quarter-end, with management actively seeking monetization after generating $4.2 million in distributions since a $200,000 initial investment.
• Nonaccrual Loans -- One loan placed on nonaccrual (1.2% of portfolio); one previously nonaccrual loan returned to accrual (1.1% of portfolio); number of issuers on nonaccrual status unchanged quarter over quarter.
• Debt Maturity Profile -- All near-term maturities pushed out, with no debt maturing before 2028; new $80 million Natixis credit facility matures in 2031, replacing BNP facility.
• Total Expenses -- Decreased by 12% quarter over quarter to $6.7 million, mainly from a $607,000 drop in the incentive fee.
• Weighted Average Yield -- Performing investment income yield increased to 13.5%, up 0.2% quarter over quarter, led by higher earned yields from structured finance deal resets.
• Investment Portfolio Breakdown -- At quarter-end, comprised of 65% senior secured loans, 24% structured finance securities, and 11% equity securities (by amortized cost).
• Unfunded Commitments -- $13.2 million in unfunded commitments to portfolio companies as of quarter-end.
• Asset Coverage Ratio -- 156%, down one percentage point from the prior quarter.

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RISKS

• Management warns that "further rate cuts could put additional pressure on our net investment income." due to the predominance of floating-rate loans.
• Net asset value per share fell 10%, primarily from markdowns of nonperforming loans and CLO equity depreciation, signaling portfolio valuation pressure.
• Total investment income decreased approximately 11% sequentially to $9.4 million, driven by declines in nonrecurring income and impact from a nonaccrual loan.

SUMMARY

OFS Capital Corporation (NASDAQ:OFS) emphasized operational discipline through balance sheet strengthening and extension of debt maturities, with all near-term maturities now deferred to 2028 or later. The company cited active efforts to monetize its significant equity stake in Fansteel, with management viewing a potential exit as a key long-term driver for improved net investment income and reduced portfolio concentration. Strategic actions included a new $80 million Natixis credit facility with a longer maturity and tighter coupon, as well as continued focus on first-lien, senior secured lending and portfolio diversification.

• Management highlighted adviser alignment, noting a 23% BDC ownership stake and a $4 billion credit platform affiliated with a $32 billion asset manager.
• Since 2011, the business has invested over $2 billion, realizing net annualized portfolio losses of only 0.25% according to the call.
• Management stated, "Our corporate credit platform has gone through multiple credit cycles over the last 25-plus years," underscoring historical experience and resilience.
• Portfolio exposure to add-on originations and M&A was described as cautious, with deployment focused on supporting current portfolio companies amid a slow external deal environment.

INDUSTRY GLOSSARY

• Nonaccrual: Loans that have stopped accruing interest income, typically due to borrower financial distress or missed payments.
• First-lien loan: A secured loan holding senior position in a borrower's capital structure, entitling the holder to be repaid first in liquidation.
• CLO (Collateralized Loan Obligation): A security backed by a pool of corporate loans, with tranches distributing loan cash flows to investors based on specified priority.
• Unfunded commitment: Contracted, yet undisbursed, capital that a lender is obligated to provide to portfolio companies when requested.

Full Conference Call Transcript

Bilal Rashid: Thank you, Stephen. Yesterday, we announced our fourth quarter earnings. Net investment income totaled $0.20 per share, down from $0.22 per share in the prior quarter. The decline was primarily driven by a lower net interest margin resulting from higher interest rates on our new unsecured notes. These notes refinanced our existing debt that was issued in a historically low interest rate environment. In doing so, we were able to meaningfully extend the maturity of our debt. In addition, the interest rates on our loan portfolio have been impacted by the Fed's continued reduction in benchmark rates, which also had an effect on our interest margin.

Our net asset value at December 31 was $9.19 per share compared to $10.17 per share in the prior quarter. The decline was primarily due to further markdowns of a couple of nonperforming loans. In addition, we experienced unrealized depreciation on our CLO equity holdings due to spread tightening in the underlying loan collateral. Overall, we believe our credit portfolio is stable. During the quarter, we placed one loan on nonaccrual; however, we placed one loan back on accrual status following the completion of a restructuring transaction. While we remain committed to preserving capital, we continue to be focused on improving our net investment income over the long term.

This includes our efforts to monetize our minority equity position in Fansteel, our largest position in the portfolio, with a fair value of approximately $79,400,000 at quarter end. We are encouraged by the company's continued operational momentum and, in our view, believe its long-term outlook remains compelling. A successful exit could improve net investment income and reduce portfolio concentration. At the same time, we remain disciplined in balancing the timing of a potential exit with the realization value of the asset in order to maximize our overall returns. Since our initial $200,000 investment in 2014, our position in Fansteel has generated approximately $4,200,000 in distributions to date, representing roughly a 19x return on our cost.

As we look ahead, the macroeconomic environment remains uncertain. From a monetary standpoint, the Fed held rates steady in January following three cuts in 2025; however, there remains potential for additional reductions in the near term. Because most of our loan portfolio is floating rate, further rate cuts could put additional pressure on our net investment income. On the other hand, further cuts would continue to reduce the interest burden on our portfolio companies and help improve their cash flows. We have deliberately constructed our loan portfolio to be resilient by avoiding highly cyclical industries and maintaining strong diversification.

Our loan portfolio is entirely composed of first- and second-lien senior secured loans, with 95% of our loan holdings in first-lien positions based on fair value, reflecting our commitment to positioning higher in the capital structure. As for new originations, middle market M&A activity this year has remained below expectations. However, we remain actively engaged with our existing portfolio companies and are prepared to deploy additional capital if needed. As discussed on prior calls, we continue to pursue efforts to strengthen our balance sheet by extending our debt maturities and reducing our outstanding debt. We have successfully pushed out all near-term maturities of our debt so that the earliest remaining maturity is in 2028.

We have also lowered our total debt balance by $18,800,000 to further deleverage the balance sheet. Last month, we fully repaid our unsecured notes that were scheduled to mature in February 2026. In addition, in early January, we extended the maturity of our $25,000,000 Banc of California facility to February 2028. Last month, we also entered into a credit facility with Natixis, which allowed us to refinance our existing facility with BNP. We believe that this new facility, which matures in 2031, further strengthens our balance sheet positioning. As we continue to operate in an uncertain environment, we remain confident in the experience and capabilities of our adviser.

With approximately $4,000,000,000 in assets under management across the loan and structured credit markets, deep expertise across industries, and a track record spanning more than 25 years and multiple credit cycles, we believe we are well positioned to navigate the current landscape and respond to evolving conditions. With that, I will turn the call over to Kyle Spina, our Chief Financial Officer, to give you more details and color for the quarter.

Kyle Spina: Thanks, Bilal. Good morning, everyone. As Bilal mentioned, OFS Capital Corporation posted net investment income of $2,700,000, or $0.20 per share, for the fourth quarter. It was down $0.02 per share from the third quarter. Top line income decreased $1,200,000 quarter over quarter, partially offset by a $937,000 decrease in total expenses, resulting in the decline in net investment income. We announced that we are maintaining our quarterly distribution at $0.17 per share for 2026. At December 31, the quarterly distribution rate represented a 14.3% annualized yield based on the market price of our common stock.

While we concentrate on preserving capital, we remain focused on improving our long-term returns as we continue exploring avenues to monetize our equity investment in Fansteel. Our net asset value per share decreased by approximately 10% ($0.98) this quarter to $9.19. As Bilal described, the decline in our investment portfolio at fair value was most pronounced in a few loans performing below expectations. We also observed more meaningful net unrealized appreciation in our CLO equity holdings, totaling $3,200,000, attributable to spread tightening in the underlying loan collateral. We placed one loan on nonaccrual status during the quarter, representing 1.2% of the total portfolio at fair value.

However, we placed one loan back on accrual status during the quarter, representing 1.1% of the total portfolio at fair value, following the completion of a restructuring transaction. Additionally, after quarter end, we exited one of our long-time nonaccrual loans for a partial recovery. Overall, our loan portfolio at fair value was relatively stable quarter over quarter based on our internal credit ratings. At quarter end, our regulatory asset coverage ratio was 156%, a decrease of one percentage point from the prior quarter. As Bilal described, during the quarter, we continued the repayment of our 4.75% unsecured notes, which were scheduled to mature in February 2026.

We repaid $15,000,000 in late December and completed the final $16,000,000 redemption in early February. Additionally, shortly after quarter end in early January, we executed a two-year maturity extension of our $25,000,000 credit facility with Banc of California to February 2028. Last month, we also entered into a credit facility with Natixis, which provides for borrowings of up to $80,000,000. This new facility has a three-year reinvestment period and a five-year maturity. In addition, the coupon interest rate on the new financing is 30 basis points tighter than our prior facility with BNP. In connection with the closing of the Natixis facility, we fully repaid our credit facility with BNP.

Following the completion of these various transactions, we have extended our debt maturities and improved operational flexibility, with our earliest maturity now standing at February 2028. Turning to the income statement, total investment income decreased approximately 11% to $9,400,000 this quarter. This was primarily driven by a decrease in nonrecurring dividend, fee, and certain interest income recognized during the prior quarter, totaling approximately $800,000. Interest income was also impacted by the new nonaccrual loan investment and a smaller interest-bearing portfolio. Total expenses decreased by approximately 12% during the period to $6,700,000. The decrease was primarily attributable to a $607,000 decrease in the incentive fee.

Looking ahead, we anticipate further net interest margin compression attributable to lower reference rates on the Fed's aggregate 50 basis point rate cuts in 2025, with 175 basis points cumulative rate cuts dating back to September 2024. We expect this will impact yields on our predominantly floating rate loan portfolio. In addition, we continue to observe net interest margin compression following the partial redemption of our February 2026 unsecured notes completed in 2025. Turning to our investments, we believe the majority of our loan portfolio remains solid, while we continue to closely monitor certain borrowers performing below our expectations.

As mentioned, overall, the number of issuers with loans on nonaccrual status was unchanged quarter over quarter, with one loan placed on nonaccrual status and one loan placed back on accrual status during the fourth quarter. With respect to our loan portfolio, we are committed to being senior in the capital structure and selective in our underwriting, with 95% of our loan holdings being in first-lien positions based on fair value. From a deployment perspective, we continue to focus on add-on opportunities for growth with our existing issuers and, as of quarter end, had $13,200,000 in unfunded commitments to our portfolio companies.

The majority of our investments are in loans, and 100% of our loan portfolio was senior secured at quarter end. Based on amortized cost as of quarter end, our investment portfolio was comprised of approximately 65% senior secured loans, 24% structured finance securities, and 11% equity securities. At the end of the quarter, we had investments in 57 unique issuers totaling $342,000,000 at fair value. On the interest-bearing portion of the portfolio, the weighted average performing investment income yield increased modestly to 13.5%, up about 0.2% quarter over quarter. The increase in yield was primarily due to an increase in earned yields on our structured finance securities, attributable to certain deal reset transactions executed during the quarter.

This metric includes all interest, prepayment fees, and amortization of deferred loan fee income, but excludes syndication fee income, if applicable. With that, I will turn the call back over to Bilal for concluding remarks.

Bilal Rashid: Thank you, Kyle. In today's uncertain economic environment, we remain focused on preserving capital and strengthening our balance sheet. As we mentioned, we have extended the maturities of our debt, which now matures between 2028 and 2031. We expect that this will give us operational flexibility over the coming years. As we look ahead, we are focused on defensively positioning our balance sheet by continuing to reduce our overall debt, building upon the $18,800,000 in debt reduction during the quarter. We believe our loan portfolio remains diversified across multiple industries and is well positioned to withstand this market. We continue to maintain our focus on investing higher in the capital structure.

As with prior quarters, we remain focused on increasing our net investment income over the long term, specifically through our efforts to monetize certain noninterest-earning equity positions, including our investment in Fansteel. Our team's long-standing experience and investment discipline has driven consistent results. Since 2011, the BDC has invested more than $2,000,000,000 with an annualized net realized loss of just 0.25%, while continuing to generate attractive risk-adjusted returns on our portfolio. As always, we will continue to rely on the size, experience, and reputation of our adviser. With a $4,000,000,000 corporate credit platform and affiliation with a $32,000,000,000 asset management group, our adviser brings deep credit experience and long-standing banking and capital markets relationships.

Our corporate credit platform has gone through multiple credit cycles over the last 25-plus years. Our adviser and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the BDC. With that, operator, please open up the call for questions.

Operator: Thank you. We will now begin the question and answer session. Showing no questions. This will conclude our question and answer session as well as the conference call. Thank you for attending today's presentation. You may now disconnect.

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