FS Credit Opportunities Corp. Q2 FY2024 earnings call

• The Fund achieved a net return of 2.75% in Q2 and 8.67% YTD. Distributions of $0.18 per share were paid, with net investment income covering distributions.
• Issued $100 million of term preferred shares in May 2024. Cash balance was ~$104 million as of June 30, 2024.
• Discount on common shares relative to NAV narrowed in 2023 and continued in 2024.
• U.S. economic growth was solid in Q2, treasury yields rose, credit markets benefited from macro backdrop.
• Investment activity: Purchases ($233 million) vs sales/exits ($234 million) in Q2. 67% of new investments in private origination, weighted to first lien senior secured loans. Public credit investments were 1/3 of activity, 91% in first lien loans.

In the second quarter of 2024, the Fund delivered a net return of 2.75% based on NAV. Year-to-date as of June 30, 2024, the net return was 8.67% based on NAV. The Fund paid distributions of $0.18 per share in Q2, with net investment income covering distributions. As of June 30, 2024, the portfolio consisted of approximately 83% senior secured debt, 4% subordinated debt, 4% asset-based finance, and 9% equities under investment. Public credit comprised 48% of the portfolio, while private credit comprised 52%.

• Focus on businesses with strong cash flows, modest leverage, and experienced management.
• Invest in senior debt with strong terms. Leverage size/scale of FS Investments' $82 billion platform.
• Ability to invest across public and private markets to allocate capital to best risk-adjusted opportunities.
• Fund is one of the largest credit-focused CEFs with $2.1 billion assets as of June 30, 2024.

• Potential economic slowdown and its impact on portfolio.
• Default rates expected to increase, skewed toward loans.
• Divergence in recovery rates between high yield bonds and loans.
• Volatility in credit markets and impact on leverage refinancing.

Q: What is the target LTV for portfolio companies we invest in?

A: On average, typical investments are between 50% and 60% loan to value based on FS' view of value.

Q: Are there any considerations for buying back equity to take advantage of the discounts?

A: The Board is constantly evaluating best use of capital, weighing buybacks against distribution policy and investment opportunities.

Q: Does the expect decline in rates affect the Fund's ability to pay the $0.06 per share monthly dividend?

A: Dividend is well-protected, but the sector may face earnings pressure in a downward rate environment; portfolio is 62% floating, but fee-based income is not tied to rate direction.

Q: FSCO still trades at a discount. Can you provide color on valuation relative to peers?

A: Focus on strong investment management to drive returns. FSCO's dividend is prudent and well-covered, but discount exists as absolute yield on NAV basis is slightly lower than some over-distributing peers.

Q: Portfolio is 52% private credit. Why is this opportunity attractive and what spreads are deployed?

A: Attractive due to business design, relationships, and capabilities. Private market spreads are higher, with examples of investments in various sectors; public market investments have spreads to SOFR of 600 basis points.