Declares a $0.34 Per Share
Distribution
OFS Capital Corporation (NASDAQ:OFS) ("OFS Capital," the
"Company," "we," "us," or "our") today announced its financial
results for the second quarter ended June 30, 2018.
FINANCIAL HIGHLIGHTS
- Net investment income of $4.56
million, or $0.34 per share.
- Net asset value ("NAV") per share
increased to $13.70 at June 30, 2018 from $13.67 per share at March
31, 2018.
- At June 30, 2018, 80% of our loan
portfolio consisted of senior secured loans, based on fair
value.
- Closed investments in the second
quarter of 2018 totaled approximately $47.0 million. As
of August 3, 2018, we closed approximately $17.3
million of additional new investments during the third quarter
of 2018.
- As of June 30, 2018, 77% of the fair
value of our loan portfolio was floating rate, and the weighted
average yield of our loan portfolio was 12.26%(1).
- As of June 30, 2018, our debt had a
weighted average cost of 4.37%.
- As of June 30, 2018, 96% of our debt
was fixed rate and over 86% of our debt matures after 2023.
- On July 31, 2018, OFS
Capital's Board of Directors declared a distribution
of $0.34 per share for the third quarter of 2018, payable
on September 28, 2018 to stockholders of record as
of September 14, 2018.
"The second quarter was a strong period for us," said Bilal
Rashid, OFS Capital's Chairman and Chief Executive
Officer. "Our net investment income per share was in line with our
current distribution rate and we just declared our 23rd straight
$0.34 per share quarterly distribution. We believe that our loan
portfolio, which is predominantly senior secured, is performing
well as evidenced by the increase in our NAV this quarter. We
expect our portfolio to be well positioned for a rising interest
rate environment as a vast majority of our loan portfolio is
floating rate and our liabilities are largely fixed rate.
Since our IPO in 2012, our total return (as measured by change
in NAV plus cumulative distributions) is well above the industry
average. We believe our strong performance is attributable to the
strength of our platform which has been in existence since
1994."
(1) See Highlights contained in this press release for further
information on our weighted average yield. Excluding assets
classified as non-accrual, the weighted average yield of our debt
investment portfolio was 12.26% at June 30, 2018.
Including assets classified as non-accrual, the weighted average
yield of our debt investment portfolio was 11.80% at June
30, 2018.
HIGHLIGHTS
($ in millions, except for per share
data)
Portfolio Overview At June 30, 2018 Total
assets $ 392.7 Investment portfolio, at fair value $ 362.8 Net
assets $ 182.9 Net asset value per share $ 13.70 Weighted average
yield on performing debt investments (1) 12.26% Weighted average
yield on total debt investments (2) 11.80% Weighted average yield
on total investments (3) 11.06%
(1) The weighted average yield on our performing debt
investments is computed as (a) the annual stated accruing interest
on our debt investments at the balance sheet date, plus the
annualized accretion of loan origination fees, original issue
discount, market discount or premium, and loan amendment fees
divided by (b) amortized cost of our debt investments, excluding
assets on non-accrual basis as of the balance sheet date.
(2) The weighted average yield on our total debt investments is
computed as (a) the annual stated accruing interest on our debt
investments at the balance sheet date, plus the annualized
accretion of loan origination fees, original issue discount, market
discount or premium, and loan amendment fees divided by (b)
amortized cost of our debt 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 on our debt investments
at the balance sheet date, plus the annualized accretion of loan
origination fees, original issue discount, market discount or
premium, and loan amendment fees, 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 June 30, Operating Results
2018 2017 Total investment income $ 10.3 $ 8.0
Net investment income $ 4.6 $ 4.3 Net investment income per common
share, basic and diluted $ 0.34 $ 0.33 Adjusted net investment
income (a Non-GAAP measure described below) $ 4.6 $ 4.0 Adjusted
net investment income (a Non-GAAP measure described below) per
share, basic and diluted $ 0.34 $ 0.31 Net increase in net assets
resulting from operations $ 5.0 $ (2.3 )
Quarter Ended
June 30, Portfolio Activity 2018
2017 Number of new portfolio companies 5 9 Investments in
new portfolio companies $ 44.2 $ 59.1 Investments in existing
portfolio companies $ 2.8 $ 7.0 Number of portfolio companies at
end of period 42 42
PORTFOLIO AND INVESTMENT ACTIVITIES
During the second quarter of 2018, OFS Capital closed $44.2
million of senior secured debt investments, in five new portfolio
companies. In addition, we made $2.8 million of new senior secured
debt investments in existing portfolio companies.
The total fair value of OFS Capital’s investment portfolio was
$362.8 million at June 30, 2018, which was equal to approximately
99% of amortized cost. As of June 30, 2018, the fair value of OFS
Capital's debt investment portfolio totaled $326.5 million in 38
portfolio companies, of which 80% and 20% were senior secured loans
and subordinated loans, respectively. As of June 30, 2018, we also
held approximately $36.3 million in equity investments, at fair
value, in 17 portfolio companies in which we also held debt
investments and four portfolio companies in which we solely held an
equity investment. We had unfunded commitments of $10.8 million to
four portfolio companies at June 30, 2018. As of June 30, 2018,
floating rate loans comprised 77% of OFS Capital’s debt investment
portfolio, with the remaining 23% in fixed rate loans, as a
percentage of fair value.
RESULTS OF OPERATIONS
Income
Interest Income
Interest income increased by $2.6 million for the three months
ended June 30, 2018, compared to the three months ended June 30,
2017, due to a $2.2 million increase in recurring interest income
caused by a 25% increase in the average outstanding loan balance,
and an increase of $0.4 million in recurring interest income
resulting from a 57 basis point increase in the weighted average
yield in our portfolio. Acceleration of loan origination fees,
original issue discount, market discount or premium, and loan
amendment fees of approximately $110,000 and $128,000 were included
in interest income for the three months ended June 30, 2018 and
2017, respectively.
Expenses
Interest expense
Interest expense for the three months ended June 30, 2018
increased $0.8 million over the corresponding period in the prior
year due to an increase in borrowings under our revolving line of
credit with Pacific Western Bank (the "PWB Credit Facility") and
the $50.0 million issuance of the Unsecured Notes (defined below).
The average dollar amount of borrowings outstanding under the PWB
Credit Facility during the three months ended June 30, 2018 and
2017 was $7.1 million and $0.7 million, respectively.
Management fee
Management fee expense for the three months ended June 30, 2018
increased $0.3 million over the corresponding period in the prior
year due to an increase in our average total assets, primarily due
to a increase in net investment activity.
Incentive fee
Incentive fee expense increased by $1.2 million for the three
months ended June 30, 2018 compared to the three months ended June
30, 2017 primarily due to a increase in the income incentive fee of
$0.9 million. We accrue 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, which was
$0 and $(0.3) million for the three months ended June 30, 2018 and
2017, respectively.
Administration fee
Administration fee expense for the three months ended June 30,
2018, increased $0.1 million over the corresponding period in the
prior year primarily due to an increase in our allocable portion of
OFS Capital Services’s overhead expenses.
Other expenses
Other expenses for the three months ended June 30, 2018,
decreased $0.2 million over the corresponding period in the prior
year primarily due to legal and other offering costs incurred
during the second quarter of 2017 in connection with the closing of
a $53.7 million equity offering.
Net Gain (Loss) on Investments
We recognized net losses of $1.7 million on senior secured debt
during the three months ended June 30, 2018, primarily as a result
of an additional net loss of $1.2 million from the sale of Jobson
Healthcare Information, LLC, and additional unrealized losses of
$0.5 million, primarily as a result of the net negative impact of
portfolio company-specific performance factors and the impact of
changes to certain market loan indices.
We recognized net losses of $0.2 million on subordinated debt
during the three months ended June 30, 2018, primarily as a result
of the negative impact of portfolio company-specific performance
factors, including an unrealized depreciation of $0.3 million
recognized on our subordinated debt investment in Master Cutlery,
LLC, which was placed on non-accrual during the second quarter of
2018 and written down to a fair value of $2.3 million at June 30,
2018.
We recognized net losses of $0.6 million on preferred equity
investments for the three months ended June 30, 2018, primarily as
a result of unrealized depreciation on certain portfolio
investments due to the net negative impact of portfolio
company-specific performance factors.
We recognized net gains of $2.9 million on common equity and
warrant investments for the three months ended June 30, 2018,
primarily as a result of unrealized appreciation stemming from the
positive impact of portfolio company-specific performance
factors.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2018, we had $22.7 million in cash and
cash equivalents, which includes cash and cash equivalents
of $20.6 million held by our wholly owned small business
investment company, 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 June 30, 2018, we had $42.0 million available for
additional borrowings under our PWB Credit Facility and had drawn
all of our available SBA-guaranteed debentures.
In April 2018, we closed the public offering of $50.0 million in
aggregate principal amount of our 6.375% notes due 2025 (the
"Unsecured Notes"). The total net proceeds to us from the Unsecured
Notes, after deducting underwriting discounts of approximately $1.6
million and estimated offering expenses of $0.4 million, were
approximately $48.0 million. The Unsecured Notes will mature on
April 30, 2025 and bear interest at a rate of 6.375%. The Unsecured
Notes are unsecured obligations of the Company and rank pari passu
with our existing and future unsecured subordinated indebtedness;
effectively subordinated to all of our existing and future secured
unsubordinated indebtedness; and structurally subordinated to all
existing and future indebtedness and other obligations of any
subsidiaries, including the SBA-guaranteed debentures The Unsecured
Notes may be redeemed in whole or in part at any time or from time
to time at our option on or after April 30, 2020 at the redemption
price of 100% of the aggregate principal amount thereof plus
accrued and unpaid interest. Interest on the Unsecured Notes is
payable quarterly on January 31, April 30, July 31, and October 31
of each year. The Unsecured Notes are listed on the Nasdaq Global
Select Market under the trading symbol “OFSSL.” We may from time to
time repurchase Unsecured Notes in accordance with the 1940 Act and
the rules promulgated thereunder. As of June 30, 2018, the
outstanding principal balance of the Unsecured Notes was $50.0
million.
On May 22, 2018, our Board of Directors authorized the Company
to initiate the stock repurchase program under which the Company
may acquire up to $10.0 million of its outstanding common
stock. Under the 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 stock repurchase program may be
extended, modified or discontinued at any time for any reason. The
Company expects the stock repurchase program to be in place through
May 22, 2020, 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. No shares of common stock were repurchased
during the three months ended June 30, 2018.
CONFERENCE CALL
OFS Capital will host a conference call to discuss these results
on Friday, August 3, 2018, at 10:00 AM Eastern Time. Interested
parties may participate in the call via the following:
INTERNET: Log on 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
August 13, 2018 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 #10122867.
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 second quarter ended June 30, 2018,
which will be filed with the Securities and Exchange Commission
later today.
OFS Capital Corporation and
Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands, except
per share data)
June 30, 2018 December 31, 2017
(unaudited) Assets Investments, at fair value:
Non-control/non-affiliate investments (amortized cost of $249,111
and $209,360, respectively) $ 241,071 $ 197,374 Affiliate
investments (amortized cost of $106,689 and $70,402, respectively)
111,017 69,557 Control investments (amortized cost of $10,275 and
$10,213, respectively) 10,744 10,568 Total
investments at fair value (amortized cost of $366,075 and $289,975,
respectively) 362,832 277,499 Cash and cash equivalents 22,665
72,952 Interest receivable 2,919 2,734 Prepaid expenses and other
assets 4,257 4,593
Total assets $ 392,673
$ 357,778
Liabilities Revolving line of
credit $ 8,000 $ 17,600 SBA debentures (net of deferred debt
issuance costs of $2,470 and $2,657, respectively) 147,410 147,223
Unsecured notes (net of deferred debt issuance costs of $1,701 and
$0, respectively) 48,299 — Interest payable 2,260 1,596 Management
and incentive fees payable 2,683 1,987 Administration fee payable
478 476 Accrued professional fees 444 433 Other liabilities 170
127
Total liabilities 209,744 169,442
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 June 30,
2018, and December 31, 2017, respectively $ — $ — Common stock, par
value of $0.01 per share, 100,000,000 shares authorized, 13,350,458
and 13,340,217 shares issued and outstanding as of June 30, 2018,
and December 31, 2017, respectively 134 133 Paid-in capital in
excess of par 187,549 187,398 Accumulated undistributed net
investment income 7,088 9,404 Accumulated undistributed net
realized gain (loss) (8,497 ) 3,881 Net unrealized depreciation on
investments (3,345 ) (12,480 )
Total net assets 182,929
188,336
Total liabilities and net
assets $ 392,673 $ 357,778 Number of
shares outstanding 13,350,458 13,340,217 Net asset
value per share $ 13.70 $ 14.12
OFS Capital Corporation and
Subsidiaries
Condensed Consolidated Statements of
Operations (unaudited)
(Dollar amounts in thousands, except
per share data)
Three Months Ended June 30, Six Months Ended June
30, 2018 2017 2018
2017 Investment income Interest income:
Non-control/non-affiliate investments $ 6,326 $ 4,446 $ 12,084 $
9,058 Affiliate investments 2,768 1,646 4,853 3,477 Control
investment 250 542 489 1,066 Total
interest income 9,344 6,634 17,426 13,601 Payment-in-kind interest
and dividend income: Non-control/non-affiliate investments 122 319
346 626 Affiliate investments 285 374 746 726 Control investment 27
39 54 77 Total payment-in-kind interest
and dividend income 434 732 1,146 1,429 Dividend income:
Non-control/non-affiliate investments — 45 — 50 Affiliate
investments — — 130 85 Control investments 94 137 127
170 Total dividend income 94 182 257 305 Fee income:
Non-control/non-affiliate investments 387 169 413 325 Affiliate
investments 3 176 5 234 Control investments 16 85 34
118 Total fee income 406 430 452
677
Total investment income 10,278 7,978
19,281 16,012
Expenses Interest expense
2,169 1,339 3,803 2,726 Management fee 1,548 1,224 2,908 2,416
Incentive fee 1,135 (22 ) 1,872 1,159 Professional fees 200 293 401
556 Administration fee 358 307 941 708 Other expenses 310
521 1,005 791 Total expenses before incentive
fee waiver 5,720 3,662 10,929 8,356 Incentive fee waiver — —
(22 ) —
Total expenses, net of incentive fee
waiver 5,720 3,662 10,907 8,356
Net investment income 4,558 4,316 8,374 7,656
Net
realized and unrealized gain (loss) on investments Net realized
gain (loss) on non-control/non-affiliate investments (5,464 ) 163
(5,003 ) 163 Net realized gain (loss) on affiliate investments
(3,477 ) 874 (4,018 ) 874 Net unrealized appreciation
(depreciation) on non-control/non-affiliate investments 5,411
(5,505 ) 3,848 (8,546 ) Net unrealized appreciation (depreciation)
on affiliate investments 3,928 (3,366 ) 5,173 658 Net unrealized
appreciation on control investment 39 1,237 114
1,780
Net gain (loss) on investments
437 (6,597 ) 114 (5,071 )
Net increase
(decrease) in net assets resulting from operations $ 4,995
$ (2,281 ) $ 8,488 $ 2,585 Net
investment income per common share – basic and diluted $ 0.34
$ 0.33 $ 0.63 $ 0.67 Net increase
(decrease) in net assets resulting from operations per common share
– basic and diluted $ 0.37 $ (0.17 ) $ 0.64 $ 0.23 Distributions
declared per common share $ 0.34 $ 0.34 $ 1.05
$ 0.68 Basic and diluted weighted average shares outstanding
13,348,793 13,197,759 13,344,670 11,458,706
Non-GAAP Financial Measure – Adjusted
Net Investment Income (“Adjusted NII”)
On a supplemental basis, we disclose Adjusted NII (including on
a per share basis), which is a financial measure calculated and
presented on a non-GAAP basis. Adjusted NII represents net
investment income excluding the net capital gains incentive fee
(fee adjustments) in periods in which they occur. Our management
agreement with our investment adviser provides that a capital gains
incentive fee is determined and paid annually with respect to
realized capital gains (but not unrealized capital gains) to the
extent such realized capital gains exceed realized and unrealized
capital losses for such year. Management believes that Adjusted NII
is a useful indicator of operations exclusive of any net capital
gains incentive fee, as net investment income does not include
gains associated with the capital gains incentive fee. In addition,
management believes that providing Adjusted NII may facilitate a
more complete analysis and greater transparency into OFS Capital’s
ongoing operations, particularly in comparing underlying results
from period to period, and afford investors a view of results that
may be more easily compared to those of other companies.
The following table provides a reconciliation from net
investment income (the most comparable GAAP measure) to Adjusted
NII for the periods presented (dollar amounts in thousands, except
per share data):
Quarter Ended June 30, 2018
2017 Net investment income $ 4,558 $ 4,316 Capital
gains incentive fee — (283 ) Adjusted net investment income
$ 4,558 $ 4,033 Adjusted net investment income
per common share: Basic and diluted $ 0.34 $ 0.31
Weighted average shares outstanding: Basic and diluted
13,348,793 13,197,759
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 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; management's beliefs regarding the performance of the
portfolio and expectations regarding future portfolio performance
in a rising rate environment; management's view that OFS Capital
has experienced strong performance (whether measured through total
return, or otherwise) and the factors that have impacted such
performance; 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, 2017 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180803005105/en/
INVESTOR RELATIONS:Steve Altebrando, 646-652-8473saltebrando@ofsmanagement.com
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