OFS Capital Corporation Announces First Quarter 2019 Financial Results

Net Investment Income of $0.36 per common share Increased 24%
year-over-year

Declares 26th Consecutive
$0.34 per common share Distribution

CHICAGO–(BUSINESS WIRE)–OFS Capital Corporation (NASDAQ:OFS) (“OFS Capital,” the “Company,”
“we,” “us,” or “our”) today announced its financial results for the
quarter ended March 31, 2019.

FINANCIAL HIGHLIGHTS

  • Net investment income of $4.83 million, or $0.36 per share, an
    increase of 24% year-over-year and above the $0.34 quarterly
    distribution.
  • Closed investments in the first quarter of 2019
    totaled approximately $63.6 million.
  • Net asset value (“NAV”) per share decreased to $13.04 at March 31,
    2019 from $13.10 at December 31, 2018 due to unrealized depreciation
    of the portfolio. No new non-accruals.
  • At March 31, 2019, 88% of our loan portfolio consisted of senior
    secured loans, based on fair value.
  • As of March 31, 2019, our total debt was 87% fixed rate and 87% of our
    debt matures in 2024 and beyond.
  • On April 30, 2019, OFS Capital’s Board of Directors declared a
    distribution of $0.34 per share for the second quarter of 2019,
    payable on June 28, 2019 to stockholders of record as of June 21, 2019.

“Our net investment income again exceeded our distribution,” said Bilal
Rashid, OFS Capital’s Chairman and Chief Executive Officer. “Since our
2012 IPO, we have declared 26 consecutive $0.34 per share quarterly
distributions totaling over $9 per share in regular and special
distributions.

We are working to establish an additional credit facility, which if
consummated, would enable the Company to benefit from the incremental
leverage permitted under last years’ Small Business Credit Availability
Act.”

HIGHLIGHTS

($ in millions, except for per share data)

   
Portfolio Overview At March 31, 2019
Total assets $ 460.2
Investment portfolio, at fair value $ 437.7
Net assets $ 174.3
Net asset value per share $ 13.04
Weighted average yield on performing debt investments (1) 11.80 %
Weighted average yield on total debt investments (2) 11.45 %
Weighted average yield on total investments (3) 10.74 %
 
 
(1) The weighted average yield on our performing debt and structured
finance note investments is computed as (a) the sum of (i) the
annual stated accruing interest on our debt investments plus the
annualized accretion of loan origination fees, original issue
discount, market discount or premium, and loan amendment fees at the
balance sheet date, plus the annual effective yield on our
structured finance notes at the balance sheet date divided by (b)
amortized cost of our debt and structured finance note investments,
excluding assets on non-accrual basis as of the balance sheet date.
(2) The weighted average yield on our total debt and structured finance
note investments is computed as (a) the sum of (i) the annual stated
accruing interest plus the annualized accretion of loan origination
fees, original issue discount, market discount or premium, and loan
amendment fees on our debt investments at the balance sheet date,
plus the annual effective yield on our structured finance notes at
the balance sheet date divided by (b) amortized cost of our debt and
structured finance note investments, including assets on non-accrual
basis as of the balance sheet date.
(3) The weighted average yield on total investments is computed as (a)
the annual stated accruing interest plus the annualized accretion of
loan origination fees, original issue discount, market discount or
premium, and loan amendment fees on our debt investments at the
balance sheet date, plus the annual effective yield on our
structured finance notes at the balance sheet date, plus the
effective cash yield on our performing preferred equity investments
divided by (b) amortized cost of our total investment portfolio,
including assets on non-accrual basis as of the balance sheet date.
The weighted average yield of investments is not the same as a
return on investment for our stockholders but, rather, relates to a
portion of our investment portfolio and is calculated before the
payment of all of our fees and expenses.
 
     

Quarter Ended March 31,

Operating Results     2019   2018
Total investment income $ 12.3 $ 9.0
Net investment income $ 4.8 $ 3.8
Net investment income per common share, basic and diluted $ 0.36 $ 0.29

Net increase in net assets resulting from operations

$

3.7

$

3.5

 

Quarter Ended March 31,

Portfolio Activity     2019 2018
Number of new portfolio companies 3 7
Investments in new portfolio companies $ 35.6 $ 73.0
Investments in existing portfolio companies $ 12.7 $ 25.2
Investments in structured finance notes $ 15.3 $
Number of portfolio companies at end of period 51 39
 

PORTFOLIO AND INVESTMENT ACTIVITIES

During the first quarter of 2019, OFS Capital closed $31.5 million of
senior secured debt investments in three new portfolio companies, as
well as $4.1 million of equity investments in two of these portfolio
companies. In addition, we made $12.7 million of new senior secured debt
investments in existing portfolio companies and $15.3 million of new
investments in structured finance notes.

The total fair value of OFS Capital’s investment portfolio was $437.7
million at March 31, 2019, which was equal to approximately 96% of
amortized cost. As of March 31, 2019, the fair value of OFS Capital’s
debt investment portfolio totaled $385.7 million in 46 portfolio
companies, of which 88% and 12% were senior secured loans and
subordinated loans, respectively. As of March 31, 2019, we also held
approximately $36.2 million in equity investments, at fair value, in 15
portfolio companies in which we also held debt investments, 5 portfolio
companies in which we solely held an equity investment and 2 investments
in structured finance notes with a fair value of $15.8 million. We had
unfunded commitments of $9.4 million to five portfolio companies at
March 31, 2019. As of March 31, 2019, floating rate loans as a
percentage of fair value comprised 88% of OFS Capital’s debt investment
portfolio, with the remaining 12% in fixed rate loans.

RESULTS OF OPERATIONS

Income

Investment Income

Interest income increased by $2.6 million for the three months ended
March 31, 2019, compared to the three months ended March 31, 2018, due
to a $3.6 million increase caused by an approximately $106.0 million
increase in the average outstanding performing loan balance offset, in
part, by a ($1.0) million decrease resulting from a 96 basis point
decrease in the recurring earned yield on our portfolio. Fee income
increased $0.5 million for the three months ended March 31, 2019
compared to the three months ended March 31, 2018, primarily due to an
increase in syndication fees resulting from approximately $60.5 million
in loan originations during the period in which OFS Capital Management,
LLC sourced, structured, and arranged the lending group, and for which
we were additionally compensated.

Expenses

Interest expense

Interest expense for the three months ended March 31, 2019 increased
$1.8 million over the corresponding period in the prior year due to the
issuance of $98.5 million in unsecured notes issued during 2018.

Management fee

Management fee expense for the three months ended March 31, 2019
increased $0.5 million over the corresponding period in the prior year
due to an increase in our average total assets, resulting from the
issuance of $98.5 million of unsecured notes during 2018.

Incentive fee

Incentive fee expense increased by $0.4 million for the three months
ended March 31, 2019 compared to the three months ended March 31, 2018
primarily due to additional net investment income resulting from the
increase in the size of the portfolio.

Administration fee

Administration fee expense for the three months ended March 31, 2019
decreased $0.1 million over the corresponding period in the prior year
primarily due to an decrease in our allocable portion of OFS Services’s
overhead.

Net Gain (Loss) on Investments

We recognized net losses of $0.1 million on senior secured debt during
the three months ended March 31, 2019, primarily as a result of the
unrealized depreciation of $1.9 million on MAI Holdings, Inc., offset by
unrealized appreciation of $2.2 million on broadly syndicated loans due
to net positive impact of mark-to-market adjustments in the first
quarter. Additional unrealized losses of $0.5 million for the three
months ended March 31, 2019 were primarily a result from net negative
impact of portfolio company-specific performance factors. We also
recognized a realized gain of $0.1 million as a result of the partial
sale of Cenexel Clinical Research Holdings, Inc. (f/k/a JBR Clinical
Research Holdings, Inc.).

We recognized net gains of $0.2 million on subordinated debt during the
three months ended March 31, 2019, primarily due to unrealized
appreciation of $0.3 million recognized on our subordinated debt
investment in Online Tech Stores, LLC. We recognized net losses of $0.1
million for the three months ended March 31, 2019, primarily as a result
from net negative impact of portfolio company-specific performance
factors.

We recognized net losses of $1.7 million on preferred equity investments
for the three months ended March 31, 2019, primarily as a result of
unrealized depreciation of $0.8 million recognized on our investment in
TRS Services, LLC Class A units. Additional unrealized losses of $0.9
million for the three months ended March 31, 2019 were primarily due to
the net negative impact of portfolio company-specific performance
factors.

We recognized net gains of $0.2 million on common equity and warrant
investments for the three months ended March 31, 2019, primarily as a
result of unrealized appreciation of $2.5 million stemming from the
positive impact of portfolio company-specific performance factors,
offset by unrealized depreciation of $2.3 million in Contract Datascan
Holdings, Inc. as a result of negative portfolio company-specific
performance factors.

We recognized net gains of $0.4 million on structured finance notes for
the three months ended March 31, 2019, primarily as a result of
unrealized appreciation due to net positive impact of mark-to-market
adjustments in the first quarter.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2019, we had $15.2 million in cash, which includes cash
of $12.9 million held by our wholly owned small business investment
company OFS SBIC I, LP (“SBIC I LP”), and $149.9 million in outstanding
SBA-guaranteed debentures. Our use of cash held by SBIC I LP is
restricted by SBA regulation, including limitations on the amount of
cash SBIC I LP can distribute to OFS Capital as parent company. As of
March 31, 2019, we had $14.2 million available for additional borrowings
under our senior secured revolving credit facility with Pacific Western
Bank, as lender (“PWB Credit Facility”) and had drawn all of our
available SBA-guaranteed debentures.

RECENT DEVELOPMENTS

Amendment to the PWB Credit Facility

On April 10, 2019, the Business Loan Agreement with Pacific Western Bank
was amended to, among other things: (i) increase the maximum amount
available under our PWB Credit Facility from $50.0 million to $100.0
million; (ii) change the interest rate from a variable rate of Prime
Rate plus a 0.75% margin to a variable rate of Prime Rate plus a 0.25%
margin (with a floor of 5.25%); (iii) extend the maturity date from
January 31, 2020 to February 28, 2021; (iv) increase the minimum
quarterly net investment income covenant from $2.0 million to $3.0
million; (v) reduce the statutory asset coverage ratio test from 200% to
150%; and (vi) add a total liabilities to Net Asset Value (as defined in
the amended Business Loan Agreement) covenant of 300%.

CONFERENCE CALL

OFS Capital will host a conference call to discuss these results on
Friday, May 3, 2019, at 10:00 AM Eastern Time. Interested parties may
participate in the call via the following:

INTERNET: Go to www.ofscapital.com
at least 15 minutes prior to the start time of the call to register,
download, and install any necessary audio software. A replay will be
available for 90 days on OFS Capital’s website at www.ofscapital.com.

TELEPHONE: Dial (877) 510-7674 (Domestic) or (412) 902-4139
(International) approximately 15 minutes prior to the call. A telephone
replay of the conference call will be available through May 13, 2019 at
9:00 AM Eastern Time and may be accessed by calling (877) 344-7529
(Domestic) or (412) 317-0088 (International) and utilizing conference ID
#10131169.

For more detailed discussion of the financial and other information
included in this press release, please refer to OFS Capital’s Form 10-Q
for the first quarter ended March 31, 2019, which we expect to file with
the Securities and Exchange Commission later today.

       

OFS Capital Corporation and Subsidiaries
Consolidated
Statement of Assets and Liabilities

(Dollar amounts in
thousands, except per share data)

 
March 31,
2019
December 31,
2018
(unaudited)
Assets
Investments, at fair value:

Non-control/non-affiliate investments (amortized cost of $323,794
and $312,223,
respectively)

$ 310,090 $ 297,749
Affiliate investments (amortized cost of $120,199 and $90,751,
respectively)
117,431 89,103
Control investments (amortized cost of $10,368 and $10,337,
respectively)
10,146   9,945  
Total investments at fair value (amortized cost of $454,361 and
$413,311, respectively)
437,667 396,797
Cash 15,156 38,172
Interest receivable 3,787 2,787
Prepaid expenses and other assets 3,592   3,665  
Total assets $ 460,202   $ 441,421  
 
Liabilities
Revolving line of credit $ 35,750 $ 12,000
SBA debentures (net of deferred debt issuance costs of $2,188 and
$2,280, respectively)
147,692 147,600
Unsecured notes (net of deferred debt issuance costs of $3,176 and
$3,299 respectively)
95,349 95,226
Interest payable 1,478 2,791
Payable to adviser and affiliates 3,767 3,700
Payable for investments purchased 1,027 4,151
Accrued professional fees 662 637
Other liabilities 219   293  
Total liabilities 285,944   266,398  
 
Commitments and contingencies
 
Net assets

Preferred stock, par value of $0.01 per share, 2,000,000 shares
authorized, -0- shares
issued and outstanding as of March 31,
2019, and December 31, 2018, respectively

$ $

Common stock, par value of $0.01 per share, 100,000,000 shares
authorized, 13,361,134
and 13,357,337 shares issued and
outstanding as of March 31, 2019, and
December 31, 2018,
respectively

134 134
Paid-in capital in excess of par 187,604 187,540
Total distributable earnings (losses) (13,480 ) (12,651 )
Total net assets 174,258   175,023  
 
Total liabilities and net assets $ 460,202   $ 441,421  
 
Number of shares outstanding 13,361,134   13,357,337  
Net asset value per share $ 13.04   $ 13.10  
 
   

OFS Capital Corporation and Subsidiaries
Condensed
Consolidated Statements of Operations (unaudited)

(Dollar
amounts in thousands, except per share data)

 

Three Months Ended
March 31,

2019   2018
Investment income
Interest income:
Non-control/non-affiliate investments $ 8,642 $ 5,758
Affiliate investments 2,333 2,085
Control investment 259   239  
Total interest income 11,234 8,082
Payment-in-kind interest and dividend income:
Non-control/non-affiliate investments 97 224
Affiliate investments 252 461
Control investment 27   27  
Total payment-in-kind interest and dividend income 376 712
Dividend income:
Affiliate investments 173 130
Control investment   33  
Total dividend income 173 163
Fee income:
Non-control/non-affiliate investments 342 26
Affiliate investments 205 2
Control investment 15   18  
Total fee income 562   46  
Total investment income 12,345   9,003  
Expenses
Interest and financing expense 3,455 1,634
Management fee 1,843 1,360
Incentive fee 1,163 736
Professional fees 535 201
Administration fee 437 583
Other expenses 84   695  
Total expenses before incentive fee waiver 7,517 5,209
Incentive fee waiver   (22 )
Total expenses, net of incentive fee waiver 7,517   5,187  
Net investment income 4,828 3,816
 
Net realized and unrealized gain (loss) on investments
Net realized gain (loss) on non-control/non-affiliate investments (804 ) 461
Net realized loss on affiliate investments (541 )
Net unrealized appreciation (depreciation) on
non-control/non-affiliate investments
658 (1,563 )
Net unrealized appreciation (depreciation) on affiliate investments (1,120 ) 1,245
Net unrealized appreciation on control investment 170   75  
 
Net loss on investments (1,096 ) (323 )
 
Net increase in net assets resulting from operations $ 3,732   $ 3,493  
 
Net investment income per common share – basic and diluted $ 0.36   $ 0.29  
Net increase in net assets resulting from operations per common
share – basic and diluted
$ 0.28 $ 0.26
Distributions declared per common share $ 0.34   $ 0.71  
Basic and diluted weighted average shares outstanding 13,357,464   13,340,502  

ABOUT OFS CAPITAL

The Company is an externally managed, closed-end, non-diversified
management investment company that has elected to be regulated as a
business development company. The Company’s investment objective is to
provide stockholders with both current income and capital appreciation
primarily through debt investments and, to a lesser extent, equity
investments. The Company invests primarily in privately held
middle-market companies in the United States, including
lower-middle-market companies, targeting investments of $3 to $20
million in companies with annual EBITDA between $3 million and $50
million. The Company offers flexible solutions through a variety of
asset classes including senior secured loans, which includes first-lien,
second-lien and unitranche loans, as well as subordinated loans and, to
a lesser extent, warrants and other equity securities. The Company’s
investment activities are managed by OFS Capital Management, LLC, an
investment adviser registered under the Investment Advisers Act of 1940,
as amended, and headquartered in Chicago, Illinois, with additional
offices in New York and Los Angeles.

FORWARD-LOOKING STATEMENTS

Statements in this press release regarding management’s future
expectations, beliefs, intentions, goals, strategies, plans or
prospects, including statements relating to: OFS Capital’s results of
operations, including net investment income, net asset value and net
investment gains and losses and the factors that may affect such
results; the Company’s efforts to establish an additional credit
facility and the Company’s ability to benefit from increased leverage
permitted under the Small Business Credit Availability Act, when there
can be no assurance that such a facility will be consummated or that the
Company can benefit from additional leverage; and other factors may
constitute forward-looking statements for purposes of the safe harbor
protection under applicable securities laws. Forward-looking statements
can be identified by terminology such as “anticipate,” “believe,”
“could,” “could increase the likelihood,” “estimate,” “expect,”
“intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would
be expected,” “look forward,” “may provide,” “would” or similar terms,
variations of such terms or the negative of those terms. Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors including those risks, uncertainties and
factors referred to in OFS Capital’s Annual Report on Form 10-K for the
year ended December 31, 2018 filed with the Securities and Exchange
Commission under the section “Risk Factors,” as well as other documents
that may be filed by OFS Capital from time to time with the Securities
and Exchange Commission. As a result of such risks, uncertainties and
factors, actual results may differ materially from any future results,
performance or achievements discussed in or implied by the
forward-looking statements contained herein. OFS Capital is providing
the information in this press release as of this date and assumes no
obligations to update the information included in this press release or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

Contacts

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

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