OFS Capital Corp Q3 FY2026 earnings call

• Strategic Sale of SBIC Interest: Announced the sale of ~57% limited partnership interests in OFS SBIC1LP for $52.3 million gross proceeds. This transaction reduces concentration risk (Fansteel was ~35% of the portfolio) and provides capital for redeployment into income-generating investments.
• Balance Sheet Strengthening: Repaid $31.4 million in outstanding debt during the quarter. Total debt has been reduced by approximately $84.8 million over the past 12 months, with maturities now extending from 2028 to 2031.
• Asset Coverage Ratio Improvement: The regulatory asset coverage ratio improved by 3 percentage points to 264% (as stated by CEO) / 164% (as stated by CFO). Note: There is a discrepancy in the reported figures between management speakers regarding the exact percentage.
• Credit Quality Updates: One borrower was removed from non-accrual status. Two new borrowers were placed on non-accrual status, totaling $2.1 million at fair value. These are small positions; one continues to make contractual interest payments despite being on non-accrual due to internal risk assessment.
• NAV Decline: Net Asset Value (NAV) per share decreased by ~12% to $7.38, primarily due to a $6.8 million depreciation of the Fansteel equity investment and $3.2 million in net realized/unrealized losses in CLO equity holdings.
• Operational Efficiency: Completed a partial refinancing of higher-coupon unsecured notes using a lower-cost credit facility, expected to generate net interest expense savings.
• Investment Focus: Shifting focus from deleveraging to deploying the $52.3 million in proceeds into income-producing assets across infrastructure credit, real estate credit, asset-backed finance, liquid credit, and structured credit.

The transcript does not provide a breakdown of financial performance by specific product segments (e.g., senior secured loans vs. equity) in terms of absolute revenue contribution percentages. However, it details the overall portfolio composition and income drivers:

• Overall Net Investment Income: $719,000 ($0.05 per share), a decline from $0.08 per share in the prior quarter.
• Total Investment Income: $5.9 million, a 13% decrease quarter-over-quarter, driven by deleveraging reducing the interest-bearing portfolio size.
• Total Expenses: $5.2 million, a 10% decrease due to lower interest expenses from reduced debt balances.
• Portfolio Composition (at Fair Value): Approximately 61% Senior Secured Loans, 21% Structured Finance Securities, and 18% Equity Securities.

• Distribution Maintenance: Maintained quarterly distribution at $0.17 per share for Q4 2026.
• Earnings Outlook: Management expects an improvement in Net Investment Income (NII) in future quarters as the $52.3 million in proceeds from the SBIC transaction are deployed into income-generating investments.
• Rate Environment: Anticipates that recent increases in base rates will be accretive to earnings going forward.
• Deployment Strategy: No specific numerical guidance for new deployments, but emphasized a disciplined approach to redeploying capital to enhance NII and improve risk-adjusted returns.

• Litigation Risk: Penn Steel filed a complaint in Delaware Chancery Court challenging the SBIC equity transaction. Management believes the claim is meritless but intends to defend vigorously.
• Valuation Volatility: Significant declines in NAV driven by depreciation of equity investments (Fansteel) and losses in CLO equity holdings highlight the risk associated with valuation fluctuations in non-performing or illiquid assets.
• Credit Concentration & Risk: While diversifying, the portfolio previously had high concentration in Penn Steel (~35%). New non-accrual loans, though small ($2.1 million), indicate ongoing credit monitoring challenges.
• Macroeconomic Uncertainty: Navigating evolving interest rates and changing market conditions poses risks to investment deployment and returns.

Q: What is the strategic rationale behind selling 57% of the SBIC1LP interest if Fansteel was a successful long-term holding?

A: Management emphasized that while Fansteel was a good investment, its size represented excessive concentration risk (~35% of the portfolio). Selling the majority stake monetizes this non-interest-bearing equity, strengthens liquidity, and frees up capital to be redeployed into senior secured, income-generating loans that better align with the BDC's primary objective of current income preservation.

Q: How does the company plan to utilize the $52.3 million in proceeds from the SBIC transaction?

A: The capital will be deployed into a broader universe of opportunities beyond traditional middle-market lending, including infrastructure credit, real estate credit, asset-backed finance, and structured credit. The goal is to find compelling risk-adjusted returns that enhance net investment income, leveraging the advisor’s $3.8 billion platform expertise.

Q: Can you clarify the discrepancy in the asset coverage ratio mentioned by the CEO (264%) versus the CFO (164%)?

A: The transcript contains conflicting figures. The CEO stated an improvement to 264%, while the CFO confirmed a regulatory asset coverage ratio of 164%. Both agreed it improved by 3 percentage points. Investors should note this inconsistency, but the trend is positive toward deleveraging targets.

Q: What is the status of the litigation from Penn Steel regarding the SBIC sale?

A: Penn Steel challenged the transaction in Delaware Chancery Court. Management views the lawsuit as meritless and plans to defend it vigorously. They do not expect the legal challenge to materially impact their financial position or strategic objectives, viewing the sale as a necessary step to reduce concentration.

Q: Why did Net Investment Income decline despite lower expenses?

A: NII fell because total investment income dropped 13% to $5.9 million, primarily due to the reduction in the interest-bearing portfolio size from ongoing deleveraging efforts. Although expenses decreased by 10%, the drop in top-line income outweighed the cost savings, resulting in lower net income per share.