OFS (OFS) Q1 2026 Earnings Call Transcript

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DATE

Friday, May 1, 2026 at 10 a.m. ET

CALL PARTICIPANTS

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

TAKEAWAYS

• Net Investment Income -- $2.5 million, or $0.18 per share, down $0.02 per share sequentially due to a lower net interest margin stemming from higher funding costs and reduced portfolio yields.
• Quarterly Distribution -- Maintained at $0.17 per share, yielding 19.2% annualized at the period-end market price, and covered by net investment income for the second consecutive quarter.
• Net Asset Value (NAV) -- $8.16 per share, a decline of $1.03, primarily from $9.1 million net unrealized losses on CLO equity holdings and $2.3 million unrealized depreciation on a nonaccrual loan, both driven by spread tightening and loan price declines.
• Nonaccrual Investments -- Down 0.7% as a percentage of total portfolio at fair value quarter over quarter following the exit of one long-term nonaccrual loan and the addition of one small nonaccrual loan (0.3% of portfolio) due to internal credit rating downgrade, despite the borrower's current payment status.
• Fansteel Equity Position -- Represented approximately $80.4 million at quarter end and has generated $5.1 million in distributions since inception, equating to a 23x return on original cost; management states, "A successful exit could increase the likelihood of improved net investment income and reduced portfolio concentration."
• Portfolio Composition -- 64% senior secured loans, 25% structured finance securities, and 11% equity securities by amortized cost; 98% of loan holdings at fair value are first-lien, underscoring the senior position focus.
• Investment Portfolio -- Investments in 56 unique issuers, totaling $308.1 million at fair value with $7.8 million of unfunded commitments at quarter end.
• Weighted Average Yield -- Performing investment income yield on the interest-bearing portfolio fell approximately 1% sequentially to 12.5%, mainly due to lower yields on structured finance securities from loan spread compression.
• Sector Exposure -- Only 2.7% of the loan portfolio at fair value is in enterprise software, and management confirms no annual recurring revenue (ARR) lending exposure.
• Expense Reduction -- Total expenses decreased 3% to $6.4 million, led by a $379 thousand reduction in interest expense from lower outstanding debt balances.
• Regulatory Asset Coverage -- Ended the quarter at 154%, a 2 percentage point sequential decrease.
• Debt and Liquidity Actions -- $45.6 million total debt reduction over the past four quarters, including full repayment of $16 million unsecured notes, $2 million net revolving line paydown, and extension/renegotiation of all near-term maturities: earliest is now 2028, with a new $80 million Natixis facility maturing in 2031 at a coupon 30 bps lower than the prior BNP facility.
• Dividend Income -- The period benefitted from a nonrecurring $874 thousand dividend from Fansteel; management does not expect similar dividend receipts in upcoming quarters.
• Adviser Scale and Alignment -- OFS adviser manages $4.2 billion in assets and, together with affiliates, retains a 23% ownership stake in the BDC, which management states represents "strong alignment with shareholders."

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RISKS

• Management expects "further overall top line attrition due to our ongoing efforts to delever our balance sheet" and does not anticipate benefiting from another nonrecurring dividend from Fansteel in the near term.
• Net interest margin remains pressured following replacement of low-coupon debt, as CFO Spina said, "we continue to observe net interest margin compression following the final redemption of our February 2026 unsecured notes completed during the quarter, which had carried a low 4.75% coupon rate."
• Continued monitoring is required for certain borrowers experiencing "idiosyncratic stresses," and nonaccrual investments remain an area of focus despite recent reductions.
• Management identifies macroeconomic uncertainty and ongoing "valuation pressures" as factors potentially impacting future results, although no direct loan portfolio effects have been observed yet.

SUMMARY

Management detailed balance sheet strengthening initiatives, including full repayment and extension of all near-term debt maturities, establishing earliest maturity at 2028 and adding a new long-term facility maturing in 2031. The advisor's diversified $4.2 billion corporate credit platform and multi-decade track record were positioned as core to navigating evolving market volatility. Monetization of the sizable Fansteel equity position remains a key focus for enhancing future net investment income and portfolio concentration risk. Quarter-end portfolio composition was heavily weighted to senior secured debt, with management repeatedly underscoring limited exposure to at-risk software and AI-disrupted industries.

• The $80.4 million Fansteel equity stake generated $5.1 million in distributions over its holding period, providing a 23x return on original cost, yet remains a concentrated, non-income-generating asset pending potential monetization.
• Quarterly distribution was sustained at $0.17 per share, representing a 19.2% annualized yield at market price, with explicit coverage from net investment income despite sequential top-line contraction.
• Consolidated fair value of investments in 56 issuers reached $308.1 million at period end, with unfunded commitments of $7.8 million available for potential deployment.

INDUSTRY GLOSSARY

• ARR (Annual Recurring Revenue): A metric used in enterprise software lending that refers to predictable, recurring revenue from long-term customer contracts; OFS currently has no loans based on this structure.
• CLO (Collateralized Loan Obligation): A structured finance security backed by a pool of loans, often syndicated or leveraged loans, whose equity tranches may be highly sensitive to loan spread movements and market sentiment.
• First-lien, Second-lien: Terms describing the seniority of claims in the capital structure, with first-lien loans having priority over others in the event of default.
• Nonaccrual Loan: A loan designated as nonperforming on the balance sheet, where interest income is not recognized due to underlying credit deterioration or management assessment, even if payments are current.

Full Conference Call Transcript

Bilal Rashid: Thank you, Steve. Yesterday afternoon, we reported our first quarter results. Net investment income totaled $0.18 per share, covering our distribution of $0.17 per share despite being down $0.02 per share from the prior quarter. The decline was again primarily driven by a lower net interest margin. This reflects the higher interest costs on our unsecured notes issued last year, which replaced debt issued in a historically low-rate environment. That said, this new debt has allowed us to meaningfully extend our debt maturities. In addition, benchmark rate reductions by the Fed last year have lowered yields across our loan portfolio, further impacting our net interest margin.

Our net asset value at quarter end was $8.16 per share, compared to $9.19 per share in the prior quarter. The decrease was primarily due to unrealized depreciation on our CLO equity holdings driven by spread tightening in the underlying loan collateral, as well as a decrease in loan prices due to overall market sentiment. Overall, our nonaccrual investments as a percentage of our total portfolio at fair value decreased slightly quarter over quarter by 0.7%. During the quarter, we exited one of our long-time nonaccrual loans. In addition, we placed one small loan, representing just 0.3% of the total portfolio at fair value, on nonaccrual status.

Despite this borrower remaining current on its interest payments, the loan was placed on nonaccrual status due to an internal credit rating downgrade. We remain focused on improving our net investment income over the long term. As discussed on prior calls, this includes our ongoing efforts to monetize our minority equity position in Fansteel, the largest position in our portfolio, which had a fair value of approximately $80.4 million at quarter end. We continue to be encouraged by the company’s operational momentum and believe its long-term outlook remains compelling. A successful exit could increase the likelihood of improved net investment income and reduced 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 thousand investment in 2014, our position in Fansteel has generated approximately $5.1 million in distributions to date, representing roughly a 23x return on our cost. Looking ahead, the macroeconomic environment remains uncertain. However, we believe we have constructed our loan portfolio to be resilient. We maintain diversification and avoid highly cyclical industries. We continue to monitor potential disruptions related to AI, and at this time have not observed material impacts on our loan portfolio.

We have limited direct enterprise software exposure and no reliance on annual recurring revenue, or ARR, based lending in our loan portfolio. Instead, we are focused on originating loans based on profitability of the borrowers. We are closely watching geopolitical developments, specifically the conflicts in the Middle East, and their potential implications for inflation and interest rates. However, we have not seen direct effects on our loan portfolio today. Importantly, our disciplined underwriting approach remains unchanged. Our loan portfolio is entirely composed of first- and second-lien senior secured loans, with 98% of our loan holdings in first-lien positions based on fair value, underscoring our focus on maintaining a senior position in the capital structure.

Turning to originations, middle market M&A activity has remained below expectations to start the year. However, we remain actively engaged with our existing portfolio companies and stand ready to deploy additional capital where appropriate. We have also continued to strengthen our balance sheet. Over the past several months, we have extended all near-term debt maturities, with our earliest remaining maturity in 2028. In addition, we have reduced our total debt balance by $45.6 million over the last four quarters, further deleveraging the balance sheet. During the quarter, we fully repaid the remaining balance on our unsecured notes that were scheduled to mature in February 2026.

In early January, we extended the maturity of our Bank of California facility to February 2028. In February, we entered into a new credit facility with Natixis, refinancing our prior facility with BNP. We believe that this new facility, which matures in 2031, further enhances our balance sheet positioning. As we navigate an uncertain environment, we remain confident in the experience and capabilities of our adviser. With approximately $4.2 billion in assets under management across the loan and structured credit markets, deep expertise across industries, and a track record spanning more than 25 years and multiple credit cycles, we believe we are well positioned to 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, we posted net investment income of $2.5 million, or $0.18 per share, for the first quarter of 2026, covering our quarterly distribution of $0.17 per share for the second consecutive quarter despite the decline of $0.02 per share from the fourth quarter of 2025. Top line income decreased $465 thousand quarter over quarter, partially offset by a $233 thousand decrease in total expenses, resulting in the decline in net investment income. We announced that we are maintaining our quarterly distribution at $0.17 per share for the first quarter of 2026. At March 31, our quarterly distribution rate represented a 19.2% annualized yield based on the market price of our common stock.

We remain focused on improving our long-term returns, portfolio diversification, and leverage position. We continue exploring avenues to monetize our equity investment in Fansteel. Our net asset value per share decreased by approximately 11%, or $1.03, this quarter to $8.16. As Bilal described, the decline in our NAV was largely related to net unrealized depreciation in our CLO holdings totaling $9.1 million, which was attributable to spread tightening in the underlying loan collateral and declines in loan prices driven by overall market sentiment. We also recognized unrealized depreciation of $2.3 million on one existing nonaccrual loan. As Bilal mentioned, during the quarter, we exited one of our long-time nonaccrual loans.

We also placed one small loan on nonaccrual status, representing just 0.3% of the total portfolio at fair value. While the issuer remains current on its interest, we felt it prudent to place the loan on nonaccrual status following an internal credit rating downgrade. 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 154%, a decrease of two percentage points from the prior quarter. As Bilal described, during the quarter, we completed the final $16 million repayment of our 4.75% unsecured notes, which were scheduled to mature in February.

We also reduced our net exposure outstanding on our revolving lines of credit by $2 million, totaling $18 million of aggregate debt repayments from the prior quarter end. In February, we entered into a credit facility with Natixis, which provides for borrowings of up to $80 million. This new facility has a three-year reinvestment period and 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.

We also executed two amendments to our credit facility with Bank of California during the quarter, extending the maturity by two years to February 2028 while also reducing our total commitment from $25 million to $15 million to better align with the current size of our balance sheet. Following the completion of these various transactions, we have extended our debt maturities and operational flexibility, with our earliest maturity now standing at February 2028. We continue to closely monitor our leverage position in consideration of the market backdrop and valuation pressures. Turning to the income statement, total investment income decreased approximately 5% to $8.9 million this quarter.

This was primarily driven by a decrease in interest income attributable to lower yields on our CLO equity securities due to underlying loan spread compression. In addition, we also had lower interest income on our loan portfolio due to a decrease in portfolio size and the impact of lower base rates stemming from the Fed’s 50 basis points of rate cuts in the fourth quarter of 2025. This was partially offset by the accrual of a nonrecurring dividend of $874 thousand from our equity investment in Fansteel. Total expenses decreased by approximately 3% during the period to $6.4 million. The decrease was primarily attributable to a $379 thousand decrease in interest expense related to lower outstanding debt balances.

Looking ahead, we continue to observe net interest margin compression following the final redemption of our February 2026 unsecured notes completed during the quarter, which had carried a low 4.75% coupon rate priced during the near-zero rate environment in early 2021. In addition, we anticipate further overall top line attrition due to our ongoing efforts to delever our balance sheet. We also do not expect to benefit from the heightened level of dividend income we recognized this quarter due to the nonrecurring nature of the dividend received from Fansteel. Turning to our investments, most of our loan portfolio investments continue to perform to expectations. However, we continue to closely monitor certain borrowers experiencing idiosyncratic stresses.

Overall, our nonaccrual investments as a percentage of our total portfolio at fair value decreased slightly quarter over quarter by 0.7%. With respect to our loan portfolio, we remain committed to being senior in the capital structure, with 98% of our loan holdings being in first-lien positions based on fair value. Additionally, as Bilal noted, much of the observed broader market price decline in loans during the quarter was heavily concentrated in the enterprise software sector, driven by AI disruption fears. As we evaluate that risk, we note that we have limited sector exposure in our loan portfolio, with just 2.7% of our total loan portfolio at fair value whose primary business is in enterprise software sales.

In addition, we have no reliance on annual recurring revenue, or ARR, based lending in our loan portfolio. From a deployment perspective, we continue to focus on add-on opportunities for growth with our existing issuers while selectively evaluating new opportunities and, as of quarter end, had $7.8 million in unfunded commitments for our portfolio companies. Based on amortized cost as of quarter end, our investment portfolio was comprised of approximately 64% senior secured loans, 25% structured finance securities, and 11% equity securities. At the end of the quarter, we had investments in 56 unique issuers totaling $308.1 million of fair value.

On the interest-bearing portion of the portfolio, the weighted average performing investment income yield decreased approximately 1% to 12.5% quarter over quarter. The decrease in yield was primarily due to the decline in earned yields on our structured finance securities, attributable to the aforementioned spread compression dynamics pressuring cash flows to the equity tranche. This metric includes all interest, prepayment fee, 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. As we continue to navigate today’s uncertain economic environment, we remain firmly focused on preserving capital and strengthening our balance sheet. As discussed, we have extended our debt maturities, which span from 2028 to 2031, providing us with enhanced operational flexibility in the years ahead. We are also focused on defensively positioning our balance sheet by continuing to reduce our overall debt, which has already been lowered by $45.6 million over the past year. We believe our loan portfolio remains well diversified across multiple industries, and we continue to emphasize investing higher in the capital structure. We believe this positioning supports resilience across a range of market conditions.

We remain focused on driving growth in net investment income over time. A key component of this effort is the monetization of select noninterest-earning equity positions, including our investment in Fansteel, as we look to redeploy capital into income-generating assets. Our team’s long-standing experience and investment discipline has driven consistent results. Since 2011, the BDC has invested more than $2.1 billion, with an annualized net realized loss of just 0.28%, while continuing to deliver attractive risk-adjusted returns on our portfolio. Finally, we continue to benefit from the scale and capabilities of our adviser.

With a $4.2 billion corporate credit platform and affiliation with a $32 billion asset management group, our adviser provides 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. Importantly, our adviser and affiliates remain 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: We will now open the call for questions.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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