|
| | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Stancor, L.P. (5) | | Pump and Pumping Equipment Manufacturing | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.75% | | (L +9.00%) | | 8/19/2019 | | $ | 9,450 |
| | $ | 9,407 |
| | $ | 9,181 |
| | 6.4 | % |
Preferred Equity (1,250,000 units), 8% PIK (11) | | | | | | | | | | | | 1,501 |
| | 835 |
| | 0.6 |
|
| | | | | | | | | | 9,450 |
| | 10,908 |
| | 10,016 |
| | 7.0 |
|
TravelCLICK, Inc. | | Computer Systems Design and Related Services | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 8.75% | | (L +7.75%) | | 11/8/2021 | | 4,000 |
| | 3,879 |
| | 3,946 |
| | 2.7 |
|
| | | | | | | | | | | | | | | | |
United Biologics Holdings, LLC (5) | | Medical Laboratories | | | | | | | | | | | | | | |
Senior Secured Loan (12) | | | | 12.0% cash / 2.0% PIK | | N/A | | 4/30/2018 | | 4,181 |
| | 4,106 |
| | 4,034 |
| | 2.8 |
|
Subordinated Loan (11) | | | | 8.0% PIK | | N/A | | 4/30/2019 | | 7 |
| | 7 |
| | 6 |
| | — |
|
Preferred Equity (151,787 units) (11) | | | | | | | | | | | | 9 |
| | 20 |
| | — |
|
Warrants (29,374 units) (11) | | | | | | | | 3/5/2022 (12) | | | | 82 |
| | 114 |
| | 0.1 |
|
| | | | | | | | | | 4,188 |
| | 4,204 |
| | 4,174 |
| | 2.9 |
|
VanDeMark Chemical Inc. | | Other Basic Inorganic Chemical Manufacturing | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.50% | | (L +5.25%) | | 11/30/2017 | | 2,406 |
| | 2,386 |
| | 2,379 |
| | 1.7 |
|
| | | | | | | | | | | | | | | | |
Total Non-control/Non-affiliate Investments | | | | | | | | | | 174,405 |
| | 178,279 |
| | 173,219 |
| | 120.6 |
|
Affiliate Investments | | | | | | | | | | | | | | | | |
All Metals Holding, LLC (5) | | Metal Service Centers and Other Metal Merchant Wholesalers | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 12.0% cash / 1.0% PIK | | N/A | | 12/28/2021 | | 12,867 |
| | 12,135 |
| | 12,865 |
| | 8.9 |
|
Common Equity (637,954 units) (11) | | | | | | | | | | | | 565 |
| | 1,277 |
| | 0.9 |
|
| | | | | | | | | | 12,867 |
| | 12,700 |
| | 14,142 |
| | 9.8 |
|
Contract Datascan Holdings, Inc. (5) | | Office Machinery and Equipment Rental and Leasing | | | | | | | | | | | | | | |
Subordinated Loan | | | | 12.00% | | N/A | | 2/5/2021 | | 8,000 |
| | 7,980 |
| | 7,902 |
| | 5.5 |
|
Preferred Equity (3,061 shares), 10% PIK (11) | | | | | | | | | | | | 3,804 |
| | 5,421 |
| | 3.8 |
|
Common Equity (11,273 shares) (11) | | | | | | | | | | | | 104 |
| | 187 |
| | 0.1 |
|
| | | | | | | | | | 8,000 |
| | 11,888 |
| | 13,510 |
| | 9.4 |
|
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 20162020
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Spring Education Group, Inc. (F/K/A SSH Group Holdings, Inc.) | | Child Day Care Services | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 8.50% | | (L +8.25%) | | 7/26/2018 | | 7/30/2026 | | $ | 5,216 | | | $ | 5,178 | | | $ | 4,656 | | | 2.9 | % |
| | | | | | | | | | | | | | | | | | |
SSJA Bariatric Management LLC (15) | | Offices of Physicians, Mental Health Specialists | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 6.00% | | (L +5.00%) | | 8/26/2019 | | 8/26/2024 | | 9,875 | | | 9,803 | | | 9,647 | | | 6.1 | |
Senior Secured Loan | | | | 6.25% | | (L +5.25%) | | 12/31/2020 | | 8/26/2024 | | 1,067 | | | 1,056 | | | 1,042 | | | 0.7 | |
Senior Secured Loan (Revolver) (5) | | | | n/m (18) | | (L +5.00%) | | 8/26/2019 | | 8/26/2024 | | — | | | (5) | | | 15 | | | — | |
| | | | | | | | | | | | 10,942 | | | 10,854 | | | 10,704 | | | 6.8 | |
Stancor, L.P. (4) | | Pump and Pumping Equipment Manufacturing | | | | | | | | | | | | | | | | |
Preferred Equity (1,250,000 Class A units), 8% PIK (10) | | | | | | | | 8/19/2014 | | | | | | 1,501 | | | 1,281 | | | 0.8 | |
| | | | | | | | | | | | | | | | | | |
Staples, Inc. (14) (15) | | Business to Business Electronic Markets | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.21% | | (L +5.00%) | | 6/24/2019 | | 4/16/2026 | | 2,960 | | | 2,891 | | | 2,875 | | | 1.8 | |
| | | | | | | | | | | | | | | | | | |
STS Operating, Inc. | | Industrial Machinery and Equipment Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan (14) (15) | | | | 5.25% | | (L +4.25%) | | 5/16/2018 | | 12/11/2024 | | 625 | | | 626 | | | 601 | | | 0.4 | |
Senior Secured Loan | | | | 9.00% | | (L +8.00%) | | 5/15/2018 | | 4/30/2026 | | 9,073 | | | 9,070 | | | 8,578 | | | 5.4 | |
| | | | | | | | | | | | 9,698 | | | 9,696 | | | 9,179 | | | 5.8 | |
Sunshine Luxembourg VII SARL (14) (15) | | Pharmaceutical Preparation Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.00% | | (L +4.00%) | | 11/20/2019 | | 9/25/2026 | | 1,980 | | | 1,988 | | | 1,992 | | | 1.3 | |
| | | | | | | | | | | | | | | | | | |
Tank Holding Corp. (15) | | Unlaminated Plastics Profile Shape Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan (14) | | | | 5.50% | | (L +4.00%) | | 6/24/2019 | | 3/26/2026 | | 1,975 | | | 1,981 | | | 1,942 | | | 1.2 | |
Senior Secured Loan | | | | 3.40% | | (L +3.25%) | | 12/18/2020 | | 3/26/2026 | | 896 | | | 882 | | | 882 | | | 0.6 | |
| | | | | | | | | | | | 2,871 | | | 2,863 | | | 2,824 | | | 1.8 | |
The Escape Game, LLC (4) | | Other amusement and recreation industries | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.75% | | (L +8.75%) | | 7/18/2019 | | 12/22/2022 | | 7,000 | | | 6,973 | | | 6,647 | | | 4.2 | |
Senior Secured Loan | | | | 9.75% | | (L +8.75%) | | 12/22/2017 | | 12/31/2021 | | 2,333 | | | 2,329 | | | 2,216 | | | 1.4 | |
Senior Secured Loan | | | | 8.00% | | (L +7.00%) | | 7/20/2018 | | 12/31/2021 | | 4,667 | | | 4,665 | | | 4,463 | | | 2.8 | |
Senior Secured Loan (Delayed Draw) | | | | 9.75% | | (L +8.75%) | | 7/20/2018 | | 12/22/2022 | | 7,000 | | | 7,000 | | | 6,647 | | | 4.2 | |
| | | | | | | | | | | | 21,000 | | | 20,967 | | | 19,973 | | | 12.6 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Intelli-Mark Technologies, Inc.(5) | | Other Travel Arrangement and Reservation Services | | | | | | | | | | | | | | |
Senior Secured Loan (12) | | | | 13.00% | | N/A | | 11/23/2020 | | $ | 8,750 |
| | $ | 8,682 |
| | $ | 8,841 |
| | 6.2 | % |
Common Equity (2,553,089 shares) (11) | | | | | | | | | | | | 1,500 |
| | 1,998 |
| | 1.5 |
|
| | | | | | | | | | 8,750 |
| | 10,182 |
| | 10,839 |
| | 7.7 |
|
Master Cutlery, LLC (5) | | Sporting and Recreational Goods and Supplies Merchant Wholesalers | | | | | | | | | | | | | | |
Subordinated Loan | | | | 13.00% | | N/A | | 4/17/2020 | | 4,741 |
| | 4,722 |
| | 4,440 |
| | 3.1 |
|
Preferred Equity (3,723 units), 5% cash, 3% PIK (8) (11) | | | | | | | | | | | | 3,483 |
| | 954 |
| | 0.7 |
|
Common Equity (15,564 units) (11) | | | | | | | | | | | | — |
| | — |
| | — |
|
| | | | | | | | | | 4,741 |
| | 8,205 |
| | 5,394 |
| | 3.8 |
|
NeoSystems Corp. (5) | | Other Accounting Services | | | | | | | | | | | | | | |
Subordinated Loan | | | | 10.50% cash / 2.75% PIK | | N/A | | 8/13/2019 | | 4,090 |
| | 4,070 |
| | 3,656 |
| | 2.5 |
|
Preferred Equity (521,962 convertible shares), 10% PIK (11) | | | | | | | | | | | | 1,258 |
| | 1,255 |
| | 0.9 |
|
| | | | | | | | | | 4,090 |
| | 5,328 |
| | 4,911 |
| | 3.4 |
|
Pfanstiehl Holdings, Inc. (5) | | Pharmaceutical Preparation Manufacturing | | | | | | | | | | | | | | |
Subordinated Loan (12) | | | | 10.50% | | N/A | | 9/29/2021 | | 3,788 |
| | 3,832 |
| | 3,810 |
| | 2.6 |
|
Common Equity (400 shares) | | | | | | | | | | | | 217 |
| | 6,083 |
| | 4.2 |
|
| | | | | | | | | | 3,788 |
| | 4,049 |
| | 9,893 |
| | 6.8 |
|
Strategic Pharma Solutions, Inc. (5) | | Other Professional, Scientific, and Technical Services | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 11.32% | | (L +10.00%) | | 12/18/2020 | | 8,411 |
| | 8,344 |
| | 8,383 |
| | 5.8 |
|
Preferred Equity (1,191 units), 6% PIK (11) | | | | | | | | | | | | 1,915 |
| | 3,026 |
| | 2.1 |
|
| | | | | | | | | | 8,411 |
| | 10,259 |
| | 11,409 |
| | 7.9 |
|
TRS Services, LLC (5) | | Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.75% cash / 1.5% PIK | | (L +10.25%) | | 12/10/2019 | | 9,807 |
| | 9,607 |
| | 9,549 |
| | 6.5 |
|
Preferred Equity (329,266 Class AA units), 15% PIK (11) | | | | | | | | | | | | 346 |
| | 354 |
| | 0.2 |
|
Preferred Equity (3,000,000 Class A units), 11% PIK (11) | | | | | | | | | | | | 3,170 |
| | 1,707 |
| | 1.2 |
|
Common Equity (3,000,000 units) (11) | | | | | | | | | | | | 572 |
| | — |
| | — |
|
| | | | | | | | | | 9,807 |
| | 13,695 |
| | 11,610 |
| | 7.9 |
|
Total Affiliate Investments | | | | | | | | | | 60,454 |
| | 76,306 |
| | 81,708 |
| | 56.7 |
|
| | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 20162020
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Truck Hero, Inc. (15) | | Truck Trailer Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.25% | | (L +8.25%) | | 5/30/2017 | | 4/21/2025 | | $ | 8,174 | | | $ | 8,118 | | | $ | 8,174 | | | 5.1 | % |
| | | | | | | | | | | | | | | | | | |
United Biologics Holdings, LLC (4) (10) | | Medical Laboratories | | | | | | | | | | | | | | | | |
Preferred Equity (151,787 units) | | | | | | | | 4/16/2013 | | | | | | 9 | | | 26 | | | — | |
Warrants (29,374 units) | | | | | | | | 7/26/2012 | | 3/5/2022 (12) | | | | 82 | | | 12 | | | — | |
| | | | | | | | | | | | | | 91 | | | 38 | | | — | |
United Natural Foods (14) (15) | | General Line Grocery Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.40% | | (L +4.25%) | | 6/9/2020 | | 10/22/2025 | | 286 | | | 275 | | | 284 | | | 0.2 | |
| | | | | | | | | | | | | | | | | | |
Wastebuilt Environmental Solutions, LLC (4) | | Industrial Supplies Merchant Wholesalers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 10.25% | | (L +8.75%) | | 10/11/2018 | | 10/11/2024 | | 7,000 | | | 6,908 | | | 5,476 | | | 3.4 | |
| | | | | | | | | | | | | | | | | | |
Weight Watchers International, Inc. (14) (15) | | Diet and Weight Reducing Centers | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 5.50% | | (L +4.75%) | | 6/10/2020 | | 11/29/2024 | | 477 | | | 477 | | | 479 | | | 0.3 | |
| | | | | | | | | | | | | | | | | | |
Xperi (14) (15) | | Semiconductor and Related Device Manufacturing | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 4.15% | | (L +4.00%) | | 6/1/2020 | | 6/1/2025 | | 433 | | | 399 | | | 434 | | | 0.3 | |
| | | | | | | | | | | | | | | | | | |
Total Debt and Equity Investments | | | | | | | | | | | | $ | 306,683 | | | $ | 307,768 | | | $ | 272,240 | | | 171.3 | % |
| | | | | | | | | | | | | | | | | | |
Structured Finance Note Investments | | | | | | | | | | | | | | | | | | |
Apex Credit CLO 2020 (7) | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 14.16% (9) | | | | 11/16/2020 | | 11/19/2031 (17) | | 11,080 | | | 9,461 (16) | | 10,006 | | | 6.3 | |
| | | | | | | | | | | | | | | | | | |
Dryden 53 CLO, LTD. (7) | | | | | | | | | | | | | | | | | | |
Income Notes | | | | 16.68% (9) | | | | 10/26/2020 | | 1/15/2031 (17) | | 2,700 | | | 1,779 | | | 1,967 | | | 1.2 | |
Subordinated Notes | | | | 16.68% (9) | | | | 10/26/2020 | | 1/15/2031 (17) | | 2,159 | | | 1,423 (16) | | 1,573 | | | 1.0 | |
| | | | | | | | | | | | 4,859 | | | 3,202 | | | 3,540 | | | 2.2 | |
Dryden 76 CLO, Ltd. (7) | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 18.68% (9) | | | | 9/27/2019 | | 10/20/2032 (17) | | 2,750 | | | 2,282 (16) | | 2,235 | | | 1.4 | |
| | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Control Investments | | | | | | | | | | | | | | | | |
Malabar International (5) | | Other Aircraft Parts and Auxiliary Equipment Manufacturing | | | | | | | | | | | | | | |
Subordinated Loan | | | | 11.25% cash / 2.0% PIK | | N/A | | 11/13/2021 | | $ | 7,617 |
| | $ | 7,642 |
| | $ | 7,683 |
| | 5.3 | % |
Preferred Stock (1,644 shares), 6% cash | | | | | | | | | | | | 4,283 |
| | 5,868 |
| | 4.1 |
|
| | | | | | | | | | 7,617 |
| | 11,925 |
| | 13,551 |
| | 9.4 |
|
MTE Holding Corp. (5) | | Travel Trailer and Camper Manufacturing | | | | | | | | | | | | | | |
Senior Secured Loan (to Mirage Trailers, LLC, a controlled, consolidated subsidiary of MTE Holding Corp.) | | | | 12.50% | | (L +11.50%) | | 11/25/2020 | | 9,804 |
| | 9,728 |
| | 9,766 |
| | 6.8 |
|
Common Equity (554 shares) | | | | | | | | | | | | 3,069 |
| | 3,383 |
| | 2.4 |
|
| | | | | | | | | | 9,804 |
| | 12,797 |
| | 13,149 |
| | 9.2 |
|
Total Control Investment | | | | | | | | | | 17,421 |
| | 24,722 |
| | 26,700 |
| | 18.6 |
|
| | | | | | | | | | | | | | | | |
Total Investments | | | | | | | | | | $ | 252,280 |
| | $ | 279,307 |
| | $ | 281,627 |
| | 195.9 | % |
| |
(1) | Equity ownership may be held in shares or units of companies affiliated with the portfolio company. |
| |
(2) | The majority of investments that bear interest at a variable rate are indexed to LIBOR (L) or Prime (P), and reset monthly, quarterly, or semi-annually. Substantially all of the Company's LIBOR referenced investments are subject to a reference rate floor at December 31, 2016, with a weighted average reference rate floor of 1.11%. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at December 31, 2016. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision. |
| |
(3) | Fair value was determined using significant unobservable inputs for all of the Company's investments. See Note 5 for further details.
|
| |
(4) | The negative fair value is the result of the unfunded commitment being below par. |
| |
(5) | Investments held by OFS SBIC I LP. All other investments pledged as collateral under the PWB Credit Facility. |
| |
(6) | Non-qualifying assets under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Company's assets, as defined under Section 55 of the 1940 Act, at the time of acquisition of any additional non-qualifying assets. As of December 31, 2016, 98.4% of the Company's assets were qualifying assets. |
| |
(7) | Investment was on non-accrual status as of December 31, 2016, meaning the Company has ceased recognizing all or a portion of income on the investment. See Note 2, Non-accrual loans for further details.
|
| |
(8) | The fair value of the accrued PIK dividend at December 31, 2016 was $-0-. See Note 2, Dividend income for further details.
|
| |
(9) | The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The reported interest rate of 11.33% at December 31, 2016, includes additional interest of 2.08% per annum as specified under the contractual arrangement among the Company and the co‑lenders. |
| |
(10) | The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The reported interest rate of 12.47% at December 31, 2016, includes additional interest of 2.97% per annum as specified under the contractual arrangement among the Company and the co‑lenders. |
| |
(11) | Non-income producing. |
| |
(12) | The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed as of December 31, 2016: |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 20162020
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Elevation CLO 2017-7, Ltd. (7) | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 12.32% (9) | | | | 2/6/2019 | | 7/15/2030 (17) | | $ | 10,000 | | | $ 6,955 (16) | | $ | 6,226 | | | 3.9 | % |
| | | | | | | | | | | | | | | | | | |
Flatiron CLO 18, Ltd. (7) | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 20.73% (9) | | | | 1/2/2019 | | 4/17/2031 (17) | | 9,680 | | | 7,265 (16) | | 7,702 | | | 4.8 | |
| | | | | | | | | | | | | | | | | | |
Madison Park Funding XXIII, Ltd. (7) | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 21.99% (9) | | | | 1/8/2020 | | 7/27/2047 (17) | | 10,000 | | | 6,654 (16) | | 7,129 | | | 4.5 | |
| | | | | | | | | | | | | | | | | | |
Madison Park Funding XXIX, Ltd. (7) | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 14.22% (9) | | | | 12/22/2020 | | 10/18/2047 (17) | | 9,500 | | | 7,529 (16) | | 7,569 | | | 4.8 | |
| | | | | | | | | | | | | | | | | | |
Monroe Capital MML CLO X, LTD. | | | | | | | | | | | | | | | | | | |
Mezzanine bond - Class E | | | | 9.08% | | (L +8.85%) | | 8/7/2020 | | 8/20/2031 (17) | | 863 | | | 802 | | | 838 | | | 0.5 | |
| | | | | | | | | | | | | | | | | | |
Octagon Investment Partners 39, Ltd. (7) | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 20.81% (9) | | | | 1/23/2020 | | 10/20/2030 (17) | | 7,000 | | | 5,173 (16) | | 5,493 | | | 3.5 | |
| | | | | | | | | | | | | | | | | | |
Park Avenue Institutional Advisers CLO 2017-1 | | | | | | | | | | | | | | | | | | |
Mezzanine bond - Class D | | | | 6.44% | | (L +6.22%) | | 6/5/2020 | | 11/14/2029 (17) | | 100 | | | 83 | | | 95 | | | 0.1 | |
| | | | | | | | | | | | | | | | | | |
Regatta II Funding | | | | | | | | | | | | | | | | | | |
Mezzanine bond - Class DR2 | | | | 7.19% | | (L +6.95%) | | 6/5/2020 | | 1/15/2029 (17) | | 800 | | | 695 | | | 768 | | | 0.5 | |
| | | | | | | | | | | | | | | | | | |
THL Credit Wind River 2019‐3 CLO Ltd. (7) | | | | | | | | | | | | | | | | | | |
Subordinated Notes | | | | 14.69% (9) | | | | 4/5/2019 | | 4/15/2031 (17) | | 7,000 | | | 5,759 (16) | | 4,824 | | | 3.0 | |
| | | | | | | | | | | | | | | | | | |
Total Structured Finance Note Investments | | | | | | | | | | | | $ | 73,632 | | | $ | 55,860 | | | $ | 56,425 | | | 35.5 | % |
| | | | | | | | | | | | | | | | | | |
Total Non-control/Non-affiliate Investments | | | | | | | | | | | | $ | 380,315 | | | $ | 363,628 | | | $ | 328,665 | | | 206.8 | % |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
| | | | | | | | | | | | | | | | | | |
Affiliate Investments | | | | | | | | | | | | | | | | | | |
3rd Rock Gaming Holdings, LLC (20) | | Software Publishers | | | | | | | | | | | | | | | | |
Senior Secured Loan (6) | | | | 8.50% cash / 1.00% PIK | | (L +7.50%) | | 3/13/2018 | | 3/12/2023 | | $ | 20,858 | | | $ | 19,570 | | | $ | 9,258 | | | 5.8 | % |
Common Equity (2,547,250 units) (10) (13) | | | | | | | | 3/13/2018 | | | | | | 2,547 | | | — | | | — | |
| | | | | | | | | | | | 20,858 | | | 22,117 | | | 9,258 | | | 5.8 | |
Chemical Resources Holdings, Inc. (20) | | Custom Compounding of Purchased Resins | | | | | | | | | | | | | | | | |
Senior Secured Loan (4)(8) | | | | 9.22% | | (L +7.72%) | | 1/25/2019 | | 1/25/2024 | | 13,743 | | | 13,630 | | | 13,744 | | | 8.6 | |
Common Equity (1,832 Class A shares) (10) (13) | | | | | | | | 1/25/2019 | | | | | | 1,814 | | | 3,420 | | | 2.2 | |
| | | | | | | | | | | | 13,743 | | | 15,444 | | | 17,164 | | | 10.8 | |
Contract Datascan Holdings, Inc. (4)(20) | | Office Machinery and Equipment Rental and Leasing | | | | | | | | | | | | | | | | |
Preferred Equity (3,061 Series A shares) 10% PIK | | | | | | | | 8/5/2015 | | | | | | 5,849 | | | 2,690 | | | 1.7 | |
Common Equity (11,273 shares) (10) | | | | | | | | 6/28/2016 | | | | | | 104 | | | 46 | | | — | |
| | | | | | | | | | | | | | 5,953 | | | 2,736 | | | 1.7 | |
DRS Imaging Services, LLC (20) | | Data Processing, Hosting, and Related Services | | | | | | | | | | | | | | | | |
Common Equity (1,135 units) (10) (13) | | | | | | | | 3/8/2018 | | | | | | 1,135 | | | 1,749 | | | 1.1 | |
| | | | | | | | | | | | | | | | | | |
Master Cutlery, LLC (4) (10)(20) | | Sporting and Recreational Goods and Supplies Merchant Wholesalers | | | | | | | | | | | | | | | | |
Subordinated Loan (6) | | | | 13.00% (11) | | N/A | | 4/17/2015 | | 7/20/2022 | | 6,759 | | | 4,764 | | | 346 | | | 0.2 | |
Preferred Equity (3,723 Series A units), 8% PIK | | | | | | | | 4/17/2015 | | | | | | 3,483 | | | — | | | — | |
Common Equity (15,564 units) | | | | | | | | 4/17/2015 | | | | | | — | | | — | | | — | |
| | | | | | | | | | | | 6,759 | | | 8,247 | | | 346 | | | 0.2 | |
NeoSystems Corp. (4)(20) | | Other Accounting Services | | | | | | | | | | | | | | | | |
Preferred Equity (521,962 convertible shares) 10% PIK | | | | | | | | 8/14/2014 | | | | | | 1,879 | | | 2,250 | | | 1.4 | |
| | | | | | | | | | | | | | | | | | |
Pfanstiehl Holdings, Inc. (4)(20)(21) | | Pharmaceutical Preparation Manufacturing | | | | | | | | | | | | | | | | |
Common Equity (400 Class A shares) | | | | | | | | 1/1/2014 | | | | | | 217 | | | 36,221 | | | 22.8 | |
| | | | | | | | | | | | | | | | | | |
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company (1) Investment Type | | Industry | | Interest Rate (2) | | Spread Above Index (2) | | Initial Acquisition Date | | Maturity | | Principal Amount | | Amortized Cost | | Fair Value (3) | | Percent of Net Assets |
Professional Pipe Holdings, LLC (19) | | Plumbing, Heating, and Air-Conditioning Contractors | | | | | | | | | | | | | | | | |
Senior Secured Loan | | | | 9.75% cash / 1.50% PIK | | (L +8.75%) | | 3/23/2018 | | 3/23/2023 | | $ | 6,263 | | | $ | 6,193 | | | $ | 6,086 | | | 3.8 | % |
Common Equity (1,414 Class A units) (10) | | | | | | | | 3/23/2018 | | | | | | 1,414 | | | 1,208 | | | 0.8 | |
| | | | | | | | | | | | 6,263 | | | 7,607 | | | 7,294 | | | 4.6 | |
TalentSmart Holdings, LLC (20) | | Professional and Management Development Training | | | | | | | | | | | | | | | | |
Common Equity (1,595,238 Class A shares) (10) (13) | | | | | | | | 10/11/2019 | | | | | | 1,595 | | | 1,306 | | | 0.8 | |
| | | | | | | | | | | | | | | | | | |
TRS Services, LLC (4)(20) | | Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance | | | | | | | | | | | | | | | | |
Preferred Equity (1,937,191 Class A units), 11% PIK | | | | | | | | 12/10/2014 | | | | | | — | | | 915 | | | 0.6 | |
Common Equity (3,000,000 units) (10) | | | | | | | | 12/10/2014 | | | | | | 572 | | | — | | | — | |
| | | | | | | | | | | | | | 572 | | | 915 | | | 0.6 | |
TTG Healthcare, LLC (20) | | Diagnostic Imaging Centers | | | | | | | | | | | | | | | | |
Senior Secured Loan (4) | | | | 8.50% | | (L +7.50%) | | 3/1/2019 | | 11/28/2025 | | 19,603 | | | 19,409 | | | 19,530 | | | 12.3 | |
Preferred Equity ( 2,309 Class B units) (10) (13) | | | | | | | | 3/1/2019 | | | | | | 2,309 | | | 4,077 | | | 2.6 | |
| | | | | | | | | | | | 19,603 | | | 21,718 | | | 23,607 | | | 14.9 | |
| | | | | | | | | | | | | | | | | | |
Total Affiliate Investments | | | | | | | | | | | | $ | 67,226 | | | $ | 86,484 | | | $ | 102,846 | | | 64.7 | % |
| | | | | | | | | | | | | | | | | | |
Control Investment | | | | | | | | | | | | | | | | | | |
MTE Holding Corp. (4)(19) | | Travel Trailer and Camper Manufacturing | | | | | | | | | | | | | | | | |
Subordinated Loan (to Mirage Trailers, LLC, a controlled, consolidated subsidiary of MTE Holding Corp.) | | | | 11.00% cash / 5.00% PIK | | (L +10.00%) | | 11/25/2015 | | 11/25/2021 | | 7,842 | | | 7,842 | | | 7,822 | | | 4.9 | |
Common Equity (554 shares) (10) | | | | | | | | 11/25/2015 | | | | | | 3,069 | | | 2,990 | | | 1.9 | |
| | | | | | | | | | | | 7,842 | | | 10,911 | | | 10,812 | | | 6.8 | |
Total Control Investment | | | | | | | | | | | | $ | 7,842 | | | $ | 10,911 | | | $ | 10,812 | | | 6.8 | % |
| | | | | | | | | | | | | | | | | | |
Total Investments | | | | | | | | | | | | $ | 455,383 | | | $ | 461,023 | | | $ | 442,323 | | | 278.3 | % |
(1)Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144.
OFS Capital Corporation and Subsidiaries
Consolidated Schedule of Investments - Continued
December 31, 2020
(Dollar amounts in thousands)
(2)Substantially all of the investments that bear interest at a variable rate are indexed to LIBOR (L), generally between 0.75% and 1.0% at December 31, 2020, and reset monthly, quarterly, or semi-annually. Variable-rate loans with an aggregate cost of $328,736 include LIBOR reference rate floor provisions of generally 0.75% to 1.0% at December 31, 2020, the reference rate on such instruments was generally below the stated floor provisions. For each investment, the Company has provided the spread over the reference rate and current interest rate in effect at December 31, 2020. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision.
(3)Unless otherwise noted with footnote 14, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP. See Note 5 for further details.
(4)Investments (or portion thereof) held by SBIC I LP. These assets are pledged as collateral of the SBA debentures and cannot be pledged under any debt obligation of the Company.
(5)Subject to unfunded commitments. See Note 6 for further details.
(6)Investment was on non-accrual status as of December 31, 2020, meaning the Company has suspended recognition of all or a portion of income on the investment. See Note 4 for further details.
(7)CLO subordinated debt positions are entitled to recurring distributions which are generally equal to the remaining cash flow of payments made by underlying securities less contractual payments to debt holders and fund expenses.
(8)The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The table below provides additional details as of December 31, 2020: | | | | | | | | | | | | | | | | | |
Portfolio Company | Reported Interest Rate | | Interest Rate per Credit Agreement | | Additional Interest per Annum |
Chemical Resources Holdings, Inc. | 9.17% | | 7.50% | | 1.67% |
Milrose Consultants, LLC | 7.62% | | 7.00% | | 0.62% |
SourceHOV Tax, Inc. | 7.61% | | 7.00% | | 0.61% |
(9)The rate disclosed is the estimated effective yield, generally established at purchase and re-evaluated upon receipt of distributions, and based upon projected amounts and timing of future distributions and the projected amount and timing of terminal principal payments at the time of estimation. The estimated yield and investment cost may ultimately not be realized.
(10)Non-income producing.
(11)The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed as of December 31, 2020: |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Company | | Investment Type | | Range of PIK Option
| | Range of Cash Option
| | Maximum PIK Rate Allowed
|
Community Intervention Services, Inc. | | Subordinated Loan | | 0% or 6.00% | | 13.00% or 7.00% | | 6.00 | %6.00% |
Intelli-Mark Technologies, Inc. | | Senior Secured Loan | | 0% or 2.00% | | 13.00% or 11.50% | | 2.00 | % |
Jobson Healthcare Information, LLC | | Senior Secured Loan | | 1.50% and 4.295% | | 10.13% and 12.925% | | 4.295 | % |
PfanstiehlEblens Holdings, Inc. | | Subordinated Loan | | 0% or 2.00%1.00% | | 10.50% or % 8.50% | | 2.00 | % |
United Biologics Holdings, LLC | | Senior Secured Loan | | 0% or 2.00% | | 14.00%13.00% or 12.00% | | 2.001.00% |
Master Cutlery, LLC | % | Subordinated Loan | | 0% to 13.00% | | 13.00% to 0% | | 13.00% |
| |
(13) | Represents expiration date of the warrants. |
(12)Represents expiration date of the warrants.
(13)All or portion of investment held by a wholly-owned subsidiary of the Company subject to income tax.
(14)Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details.
(15)Investments (or portion thereof) held by OFSCC-FS. These assets are pledged as collateral of the BNP Facility and cannot be pledged under any other debt obligation of the Company.
(16)Amortized cost reflects accretion of effective yield less any cash distributions received or entitled to be received from CLO subordinated debt investments.
(17)Maturity date represents the contractual maturity date of the Structured Finance Notes. Projected cash flows, including the projected amount and timing of terminal principal payments which may be projected to occur prior to the contractual maturity date, were utilized in deriving the effective yield of the investments.
(18)Not meaningful as there is no outstanding balance on the revolver. The Company earns unfunded commitment fees on undrawn revolving lines of credit balances, which are reported in fee income.
(19)The Company holds at least one seat on the portfolio company’s board of directors.
(20)The Company has an observer seat on the portfolio company’s board of directors.
(21)Portfolio company represents greater than 5% of total assets at December 31, 2020.
See Notes to Consolidated Financial Statements.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 1. Organization
OFS Capital Corporation, a Delaware corporation, is an externally managed, closed-end, non-diversified management investment company. The Company has elected to be regulated as a BDC under the 1940 Act. In addition, for income tax purposes, the Company has elected to be treated as a RIC under Subchapter M of the Code.
The Company’s investment objective is to provide stockholders with both current income and capital appreciation through its strategic investment focus primarily onthrough debt investments and, to a lesser extent, equity investments primarily in middle-market companies principally in the United States.investments. OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company.
In addition, OFS Advisor also serves as the investment adviser for HPCI, a Maryland corporationnon-traded BDC with an investment strategy and a BDC. HPCI’s investment objective is similar to that of the Company. OFS Advisor also serves as the investment adviser for OCCI, a non-diversified, externally managed, closed-end management investment company that has registered as an investment company under the 1940 Act, and that primarily invests in the equity tranche of CLOs.
The Company may make investments directly or through one of its subsidiaries: SBIC I LP, itsOFSCC-FS or OFSCC-MB.
SBIC I LP is an investment company subsidiary licensed under the SBASBA's small business investment company program. The Company is limited to follow-on investments in current portfolio companies held through SBIC Program. The SBIC Program is designed to stimulate the flow of capital into eligible businesses.I LP. SBIC I LP is subject to SBA regulatory requirements, includingincluding: limitations on the businesses and industries in which it can invest,invest; requirements to invest at least 25% of its regulatory capital in eligible smaller businesses, as defined under the SBIC Act,Act; limitations on the financing terms of investments,investments; and capitalization thresholds that may limit distributions to the Company, andCompany. SBIC I LP is subject to periodic audits and examinations of its financial statements.
In April 2017, the Company issued 3,625,000 shares of SBIC I LP is repaying over time its common stock in a follow-on public offering at an offering price of $14.57 per share (the "Offering"), including shares purchased by the underwriters pursuantoutstanding SBA debentures prior to their exercisescheduled maturity dates.
OFSCC-FS is a special-purpose vehicle formed in April 2019 for the purpose of acquiring senior secured loan investments. OFSCC-FS has debt financing through its BNP Facility which provides OFSCC-FS with borrowing capacity of up to $150,000.
OFSCC-MB is a wholly-owned subsidiary taxed under subchapter C of the over-allotment option. OFS Advisor paid all of the underwriting discountsCode and commissions, and a supplemental payment of $0.25 per share that represented the difference between the public offering price of $14.57 per share and the net offering proceeds of $14.82 per share,generally holds the Company's net asset value per share at the time of the Offering. All payments made by OFS Advisorequity investments in connection with the Offeringportfolio companies that are not subject to reimbursement by the Company. The Company received net proceeds from the Offering of $53,723.taxed as pass-through entities.
Note 2. BasisSummary of Presentation and Significant Accounting Policies
Basis of presentation: The Company prepares its consolidated financial statementsis an investment company as defined in accordance with GAAP, includingthe accounting and reporting guidance under ASC Topic 946, Financial Services–Investment Companies,. The accompanying interim consolidated financial statements of the 1940 Act, Articles 6 or 10 of Regulation S-X,Company and related financial information have been prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q. In10-Q, and Articles 6, 10 and 12 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. However, in the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal and recurring accruals and adjustments, necessary for fair presentation have been made. Certain amounts inas of and for the prior period financial statements have been reclassified to conform to the current year presentation.periods presented. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2020. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
PrinciplesSignificant Accounting Policies:The following information supplements the description of consolidation: The Company consolidates majority-owned, investment company subsidiaries. The Company does not own any controlled operating company whose business consists of providing servicessignificant accounting policies contained in Note 2 to the Company, which would also require consolidation. All intercompany balances and transactions are eliminated upon consolidation.Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
Investments:Reclassifications: The Company applies fair value accountingCertain prior period amounts have been reclassified to conform to the current period presentation in accordance with ASC Topic 820, which defines fair value, establishes a framework to measure fair value, and requires disclosures regarding fair value measurements. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is determined through the use of models and other valuation techniques, valuation inputs, and assumptions market participants would use to value the investment. Highest priority is given to prices for identical assets quoted in active markets (Level 1)consolidated financial statements and the lowest priority is given to unobservable valuation inputs (Level 3). The availabilityaccompanying notes thereto. Reclassifications did not impact net increase in net assets resulting from operations, total assets, total liabilities or total net assets, or consolidated statements of observable inputs can vary significantlychanges in net assets and is affected by many factors, including the typeconsolidated statements of product, whether the product is new to the market, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that the valuation is based on less observable or unobservable inputs, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3 (i.e., those instruments valued using non-observable inputs), which comprise the entirety of the Company’s investments.
Changes to the valuation policy are reviewed by management and the Company’s Board. As the Company’s investments change, markets change, new products develop, and valuation inputs become more or less observable, the Company will continue to refine its valuation methodologies.
OFS Capital Corporation and Subsidiaries
Notes to Financial Statements
(Dollar amounts in thousands, except per share data)
See Note 5 for more detailed disclosures of the Company’s fair value measurements of its financial instruments.
Investment classification: The Company classifies its investments in accordance with the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in those companies in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of board representation, “Affiliate Investments” are defined as investments in those companies in which the Company owns between 5% and 25% of the voting securities, and “Non-Control/Non-Affiliate Investments” are those that neither qualify as Control Investments nor Affiliate Investments.cash flows classifications.
Use of estimates:The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Reportable segments: The Company has a single reportable segment and single operating segment structure.
Cash and cash equivalents: Cash and cash equivalents consist of cash and highly liquid investments not held for resale with original maturities of three months or less. The Company’s cash and cash equivalents are maintained with a member bank of the FDIC and, at times, such balances may be in excess of the FDIC insurance limits. Included in cash and cash equivalents was $52,345 and $17,659 held in a US Bank Money Market Deposit Account as of September 30, 2017, and December 31, 2016, respectively.
Revenue recognition:
Interest income: Interest income is recorded on an accrual basis and reported as interest receivable until collected. Interest income is accrued daily based on the outstanding principal amount and the contractual terms of the debt investment. Certain of the Company’s investments contain a payment-in-kind interest income provision (“PIK interest”). The PIK interest, computed at the contractual rate specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash, and recorded as interest income, as applicable, on the consolidated statements of operations. The Company discontinues accrual of interest income, including PIK interest, when there is reasonable doubt that the interest income will be collected.
Loan origination fees, original issue discount (“OID”), market discount or premium, and loan amendment fees (collectively, “Net Loan Fees”) are recorded as an adjustment to the amortized cost of the investment, and accreted or amortized as an adjustment to interest income over the life of the respective debt investment using a method that approximates the effective interest method. When the Company receives a loan principal payment, the unamortized Net Loan Fees related to the paid principal is accelerated and recognized in interest income.
Further, the Company may acquire or receive equity, warrants or other equity-related securities (“Equity”) in connection with the Company’s acquisition of, or subsequent amendment to, debt investments. The Company determines the cost basis of Equity based on their fair value, and the fair value of debt investments and other securities or consideration received. Any resulting difference between the face amount of the debt and its recorded cost resulting from the assignment of value to the Equity is treated as OID, and accreted into interest income as described above.
Dividend income: Dividend income on common stock, generally payable in cash, is recorded at the time dividends are declared. Dividend income on preferred equity securities is accrued daily based on the the contractual terms of the preferred equity investment. Dividends on preferred equity securities may be payable in cash or in additional preferred securities, and are generally not payable unless declared or upon liquidation. Declared dividends payable in cash are reported as dividend receivables until collected. Non-cash dividends payable in additional preferred securities or contractually earned but not declared (“PIK dividends”) are recognized at fair value and recorded as an adjustment to the cost basis of the investment. At September 30, 2017, the Company had four preferred equity securities (Master Cutlery, LLC, Stancor, L.P., Southern Technical Institute, LLC, and TRS Services, LLC), with an aggregate amortized cost and fair value of $10,452 and $3,822, respectively, for which the fair value of the accrued PIK dividend for the three months ended September 30, 2017 was $-0-. In addition, beginning June 30, 2017, the Company discontinued recognition of the cash preferred dividend from its investment in Master Cutlery, LLC. At December 31, 2016, the Company had one preferred equity security (Master Cutlery, LLC) with an amortized cost and fair value of $3,483, and $954, respectively, for which the fair value of the accrued PIK dividend for the three months ended December 31, 2016 was $-0-.
Fee income: The Company generates revenue in the form of management, valuation, and other contractual fees, that is recognized as the related services are rendered. In the general course of its business, the Company receives certain fees from portfolio companies which are non-recurring in nature. Such non-recurring fees include prepayment fees on certain loans repaid
OFS Capital Corporation and Subsidiaries
Notes to Financial Statements
(Dollar amounts in thousands, except per share data)
prior to their scheduled due date, which are recognized as earned when received, and fees for capital structuring or advisory services from certain portfolio companies, which are recognized as earned upon closing of the investment.
Net realized and unrealized gain or loss on investments: Investment transactions are reported on a trade-date basis. Unsettled trades as of the balance sheet date are included in payable for investments purchased on the consolidated balance sheets. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of the investment. Investments are valued at fair value as determined in good faith by Company management under the supervision and review of the Board. After recording all appropriate interest, dividend, and other income, some of which is recorded as an adjustment to the cost basis of the investment as described above, the Company reports changes in the fair value of investments as net changes in unrealized appreciation/depreciation on investments in the consolidated statements of operations.
Non-accrual loans: When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. When an investment is placed on non-accrual status, all interest previously accrued but not collected, other than PIK interest that has been contractually added to the adjusted cost basis of the investment prior to the designation date, is reversed against current period interest income. Interest payments subsequently received on non-accrual investments may be recognized as income or applied to principal depending upon management’s judgment. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal and interest, and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal and interest. At September 30, 2017, the Company had one loan (Community Intervention Services, Inc.) on non-accrual status with respect to all interest and Net Loan Fee amortization, with an amortized cost and fair value of $7,639 and $2,038, respectively. The Company's loan investment in My Alarm Center, LLC, which was on non-accrual status at June 30, 2017, was restructured and exchanged for a new class of preferred equity securities and common equity securities in July 2017. See Note 4 for further discussion. At December 31, 2016, the Company had one loan (Community Intervention Services, Inc.) on non-accrual status with respect to PIK interest and Net Loan Fees with an amortized cost and fair value of $7,639 and $5,393, respectively.
Income taxes: The Company has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. To qualify as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements, and timely distribute at least 90% of its ICTI to its stockholders. The Company has made, and intends to continue to make, the requisite distributions to its stockholders, which generally relieves the Company from U.S. federal income taxes.
Depending on the level of ICTI earned in a tax year, the Company may choose to retain ICTI in an amount less than that which would trigger federal income tax liability under Subchapter M of the Code. However, the Company would be liable for a 4% excise tax on such income. Excise tax liability is recognized when the Company determines its estimated current year annual ICTI exceeds estimated current year distributions.
The Company may utilize wholly-owned holding companies taxed under Subchapter C of the Code when making equity investments in portfolio companies taxed as pass-through entities to meet its source-of-income requirements as a RIC. These “tax blocker” entities are consolidated in the Company’s GAAP financial statements and may result in federal income tax expense with respect to income derived from those investments. Such income, net of applicable federal income tax, is not included in the Company’s tax-basis net investment income until distributed by the holding company, which may result in temporary differences and character differences between the Company’s GAAP and tax-basis net investment income and realized gains and losses. Federal income tax expense from such holding-company subsidiaries is included in general and administrative expenses in the consolidated statements of operations.
The Company evaluates tax positions taken in the course of preparing its tax returns to determine whether they are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold could result in greater and undistributed ICTI, income and excise tax expense, and, if involving multiple years, a re-assessment of the Company’s RIC status. GAAP requires recognition of accrued interest and penalties related to uncertain tax benefits as income tax expense. There were no uncertain income tax positions at September 30, 2017 or December 31, 2016. The current and prior three tax years remain subject to examination by U.S. federal and most state tax authorities.
Distributions: Distributions to common stockholders are recorded on the declaration date. The timing of distributions as well as the amount to be paid out as a distribution is determined by the Board each quarter. Distributions from net investment income and net realized gains are determined in accordance with the Code. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment. Distributions paid in excess of taxable net investment income and net realized gains are considered returns of capital to stockholders.
OFS Capital Corporation and Subsidiaries
Notes to Financial Statements
(Dollar amounts in thousands, except per share data)
The Company has adopted a DRIP that provides for reinvestment of any distributions the Company declares in cash on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes, and the Company declares a cash distribution, then stockholders who have not “opted out” of the DRIP will have their cash distribution automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution.
The Company may use newly issued shares under the guidelines of the DRIP, or the Company may purchase shares in the open market in connection with its obligations under the plan.
Deferred debt issuance costs: Deferred debt issuance costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. Deferred debt issuance costs are presented as a direct reduction of the related debt liability on the consolidated balance sheets except for deferred debt issuance costs associated with the Company’s line of credit arrangements, which are included in prepaid expenses and other assets on the consolidated balance sheets. Deferred debt issuance costs are amortized to interest expense over the term of the related debt.
Goodwill: On December 4, 2013, in connection with the SBIC Acquisition, the Company recorded goodwill of $1,077, which is included in prepaid expenses and other assets on the consolidated balance sheets. Goodwill is not subject to amortization. Goodwill is evaluated for impairment annually or more frequently if events occur or circumstances change that indicate goodwill may be impaired. There have been no goodwill impairments since the date of the SBIC Acquisition.
Intangible asset: On December 4, 2013, in connection with the SBIC Acquisition, the Company recorded an intangible asset of $2,500 attributable to the SBIC license. The Company amortizes this intangible asset on a straight-line basis over its estimated useful life of 13 years. The Company expects to incur annual amortization expense of approximately $195 in each of the years ending December 31, 2025 and $145 in 2026.
The Company tests its intangible asset for impairment if events or circumstances suggest that the asset carrying value may not be fully recoverable. The intangible asset, net of accumulated amortization of $747 and $600 at September 30, 2017 and December 31, 2016, respectively, is included in prepaid expenses and other assets.
Interest expense: Interest expense is recognized on an accrual basis.
Concentration of credit riskrisk:: Aside from its debt instruments, including investments in Structured Finance Notes of CLOs, financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. To mitigate this risk, theThe Company places cash deposits only with high credit quality institutions. Management believes the risk of loss is minimal.
New Accounting Standards: The following table discusses ASUs issued by the FASB adopted or yet to be adopted by the Company during 2017:
|
| | | | | | |
Standard | | Description | | Period of Adoption | | Effect of Adoption on the financial statements |
Standards that were adopted | | | | | | |
ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update) | | Incorporates into the FASB ASC Topic 250, SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on the financial statements of recently issued accounting standards when adopted, and specifically for ASU 2014-09, ASU 2016-02, and ASU 2016-03. If a registrant does not know or cannot reasonably estimate the impact of adoption of the above standards, the SEC staff expects the registrant to make a statement to that effect. Consistent with SAB Topic 11.M, the SEC staff also expects the registrant to provide qualitative disclosures to help users assess the significance the adoption will have on the financial statements. In addition, conforms the SEC Staff comments included in ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for investments in Qualified Affordable Housing Projects. The primary effect of the amendment was to change the reference "effective yield method" to "proportional amortization method" | | First Quarter of 2017 | | No material impact to the Company's consolidated financial statements |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
places cash deposits only with high credit quality institutions which OFS Advisor believes will mitigate the risk of loss due to credit risk. The amount of loss due to credit risk from debt investments if borrowers completely fail to perform according to the terms of the contracts, is equal to the Company's recorded investment in debt instruments and the unfunded loan commitments as disclosed in Note 6. The collateral or other security for those instruments proved to be of no value to the Company.
|
| | | | |
Standard | | Description | | Effect of Adoption on the the financial statements |
Standards that are not yet adopted | | |
ASU 2014-09, Revenue from Contracts with Customers |
| Supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle. The standard must be adopting using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures) |
| In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09, such that the guidance is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company has completed its initial evaluation phase and has determined the impact of its pending adoption of ASU 2014-09 is not expected to have a material effect on the Company's consolidated financial statements. |
ASU 2016-01, Financial Instruments – Overall |
| Modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value, and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820 - Fair Value Measurement, and as such these investments may be measured at cost |
| Annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is required to record its investments at fair value with changes in fair value recognized in net income in accordance with ASC Topic 946, Financial Services—Investment Companies. Therefore, the adoption of ASU 2016-01 is not expected to have a material effect on the Company’s consolidated financial statements
|
ASU 2016-15, Statement of Cash Flows |
| Addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows |
| Annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the impact of this ASU will have on the Company's consolidated financial position and disclosures. |
ASU 2016-19, Technical Corrections and Improvements |
| Makes minor corrections and clarifications that affect a wide variety of topics in the Accounting Standards Codification, including an amendment to ASC Topic 820, Fair Value Measurement, which clarifies the difference between a valuation approach and a valuation technique when applying the guidance of that Topic. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. The transition guidance for the ASC Topic 820 amendment must be applied prospectively because it could potentially involve the use of hindsight that includes fair value measurements |
| Annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early application is permitted for any fiscal year or interim period for which the entity’s financial statements have not yet been issued. The Company is currently evaluating the impact this ASU will have on the Company’s consolidated financial position or disclosures |
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers |
| Amends certain narrow aspects of ASU 2014-09, including loan guarantee fees, impairment testing of contract costs, provisions for losses on construction-type and production type contracts, advertising costs, scope exception clarifications, and various disclosures |
| The effective date and transition requirements are the same as the effective date and transition requirements for ASU 2014-09 and is not expected to have a material effect on the Company's consolidated financial statements. |
OFS Capital Corporation and Subsidiaries
Notes to Financial Statements
(Dollar amounts in thousands, except per share data)
|
| | | | |
Standard | | Description | | Effect of Adoption on the the financial statements |
Standards that are not yet adopted | | |
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment |
| Removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill |
| Annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application is permitted. The adoption of ASU 2017-04 is not expected to have a material effect on the Company's consolidated financial statements. |
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 620-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets |
| Defines "insubstance nonfinancial asset", unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributios of nonfinancial assets to joint ventures |
| The effective date and transition requirements are the same as the effective date and transition requirements for ASU 2014-09 and is not expected to have a material effect on the Company's consolidated financial statements. |
ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities |
| Shortens the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Securities held at a discount are to continue to be amortized to maturity |
| Annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The adoption of ASU 2017-08 is not expected to have a material effect on the Company's consolidated financial statements. |
Note 3. Related Party Transactions
Investment Advisory and Management Agreement: OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company pursuant to anthe Investment Advisory Agreement. The continuation of the Investment Advisory Agreement was most recently re-approvedapproved by the Board on April 7, 2017.1, 2021. Under the terms of the Investment Advisory Agreement, which are in accordance with the 1940 Act and subject to the overall supervision of the Company’s Board, OFS Advisor is responsible for sourcing potential investments, conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring investments, and monitoring investments and portfolio companies on an ongoing basis. OFS Advisor is a subsidiary of OFSAM and a registered investment advisor under the Investment Advisers Act of 1940, as amended.
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to usthe Company and OFS Advisor is free to furnish similar services to other entities, including other BDCsfunds affiliated with OFS Advisor, so long as its services to usthe Company are not impaired. OFS Advisor also serves as the investment adviser or collateral manager to CLO funds and other assets,companies, including HPCI a non-traded BDC with an investment strategy similar to the Company.and OCCI.
OFS Advisor receives fees for providing services, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.75% and based on the average value of the Company’s total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters, adjusted for any share issuances or repurchases during the quarter. OFS Advisor has elected to exclude the value of the intangible asset and goodwill resulting from the SBIC Acquisition from the base management fee calculation.
Effective January 1, 2020, OFS Capital Corporation and Subsidiaries
NotesAdvisor agreed to Financial Statements
(Dollar amounts in thousands, exceptreduce a portion of its base management fee by reducing the portion of such fee from 0.4375% per share data)
quarter (1.75% annualized) to 0.25% per quarter (1.00% annualized) of the average value of the portion of the OFSCC-FS Assets at the end of the two most recently completed calendar quarters. The base management fee reduction by OFS Advisor is payable quarterly in arrearsrenewable on an annual basis and was $1,310 and $3,726 for the three and nine months ended September 30, 2017, respectively and $1,120 and $3,324, foramount of the three and nine months ended September 30, 2016.base management fee reduced with respect to the OFSCC-FS Assets shall not be subject to recoupment by OFS Advisor; On February 16, 2021, OFS Advisor renewed the waiver through December 31, 2021.
The incentive fee has two parts. The first part ("Part One"Income Incentive Fee") is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination and sourcing, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement (as defined(defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest or dividend feature (such as OID, debt instruments with PIK interest, equity investments with accruing or PIK dividend and zero coupon securities), accrued income that the Company has not yet received in cash.
Pre-incentive fee net investment income is expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter and adjusted for any share issuances or repurchases during such quarter. Accordingly, as a result of the Offering, the Part One incentive fee was reduced by $(593) for the three months ended June 30, 2017, determined by adjusting the value of net assets, as defined above, at March 31, 2017 by the daily weighted average of the Offering proceeds available to the Company during the three months ended June 30, 2017.
The incentive fee with respect to pre-incentive fee net income is 20.0% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 2.0% hurdle rate (which is 8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, OFS Advisor receives no incentive fee until the net investment income equals the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100.0% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, OFS Advisor will receive 20.0% of the pre-incentive fee net investment income.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the base management fee. These calculations are appropriately prorated for any period of less than three months.
The second part ("Part Two") of the incentive fee (the “Capital Gain Fee”) is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), commencing on December 31, 2012, and equals 20.0% of the Company’s aggregate realized capital gains, if any, on a cumulative basis from the date of the election to be a BDC through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the Capital Gain Fee; provided that the incentive fee determined as of December 31, 2012, was calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation for the period beginning on the date of the Company’s election to be a BDC and ending December 31, 2012.Fee.
The Company accrues 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. If, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) decreases during a period, the Company will reverse any excess Capital Gain Fee previously accrued such that the amount of Capital Gains Fee accrued is no more than 20% of the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation).
On May 4, 2020, OFS Advisor has excluded fromagreed to irrevocably waive the Capital Gain Fee calculation any realized gain with respect to (1) the SBIC Acquisitions, and (2) the WM Asset Sale.
The Company incurred incentive fee expensereceipt of $1,090 and $2,249 for the three and nine months ended September 30, 2017, respectively, which consisted entirely of Part One incentive fees$441 in Income Incentive Fees (based on net investment income), and included a share issue adjustment of $(593) for the nine months ended September 30, 2017, related to net investment income, that it would otherwise be entitled to receive under the Company's Offering. The Company incurred incentive fee expense of $817 and $2,407Investment Advisory Agreement for the three and nine months ended September 30, 2016, respectively,March 31, 2020. As a result of the voluntary fee waiver, the Company incurred Income Incentive Fee expense of $442 for the three months ended March 31, 2020, which consisted of Part One incentive fees (based on net investment income) of $817 and $2,546, respectively. Part Two incentive fees (based upon net realized and unrealized gains and losses, or capital gains) were $-0- and $(139).
OFSis equal to half the Income Incentive Fee expense the Company would have incurred for the three months ended March 31, 2020. The voluntary fee waiver did not include Capital Corporation and Subsidiaries
Notes to Financial Statements
(Dollar amounts in thousands, except per share data)
Gain Fees, which was $0 for the three months ended March 31, 2020.
License Agreement: The Company entered intois party to a license agreement with OFSAM under which OFSAM has agreed to grantgranted the Company a non-exclusive, royalty-free license to use the name “OFS.”
Administration Agreement: OFS Services a wholly-owned subsidiary of OFSAM, furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions, and clerical, bookkeeping and record keeping services at such facilities pursuant to anthe Administration Agreement. Under the Administration Agreement, OFS Services performs, or oversees the performance of, the Company’s required administrative services, which include being responsible for the financial records that the Company is required to maintain and preparing reports to its stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS Services assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports to its stockholders, and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Under the Administration Agreement, OFS Services also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted the Company’s offer to provide such assistance. Payment under the Administration Agreement is equal to an amount based upon the Company’s allocable portion of OFS Services’s overhead in performing its obligations under the Administration Agreement, including, but not limited to, rent, information technology services and the Company’s allocable portion of the cost of its officers, including its chief executive officer, chief financial officer, chief compliance officer, chief accounting officer and their respective staffs. To the extent that OFS Services outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without profit to OFS Services.
Administration fee expense was $274Equity Ownership: As of March 31, 2021, affiliates of OFS Advisor held 3,033,257 shares of common stock, which is approximately 23% of the Company's outstanding shares of common stock.
OFS Capital Corporation and $982Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Expenses recognized under agreements with OFS Advisor and OFS Services and distributions paid to affiliates for the three and nine months ended September 30, 2017, respectively. For the threeMarch 31, 2021 and nine months ended September 30, 2016, administration fee expense was $255 and $1,009, respectively. 2020, are presented below:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
Base management fees | | | | | $ | 1,834 | | | $ | 2,019 | |
Incentive fees: | | | | | | | |
Income Incentive Fee | | | | | — | | | 883 | |
| | | | | | | |
Incentive fee waiver | | | | | — | | | (441) | |
Administration fee expense | | | | | 568 | | | 520 | |
Distributions paid to affiliates | | | | | 607 | | | 1,031 | |
Note 4. Investments
As of September 30, 2017,March 31, 2021, the Company had loans to 3759 portfolio companies, of which 76%96% were senior secured loans and 24%4% were subordinated loans, at fair value, as well as equity investments in 1710 of these portfolio companies. The Company also held an equity investmentinvestments in threethirteen portfolio companies in which it did not hold a debt investment.investment and fifteen investments in Structured Finance Notes. At September 30, 2017,March 31, 2021, the Company's investments consisted of the following: | | | | | | | | | | | | Percentage of Total | | Percentage of Total |
| Amortized Cost | | Percentage of Net Assets | | Fair Value | | Percentage of Net Assets | | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Senior secured debt investments(1) | $ | 196,477 |
|
| 104.1 | % | | $ | 194,153 |
| | 102.9 | % | $ | 339,615 | | | 70.7 | % | | 211.6 | % | | $ | 324,150 | | | 69.5 | % | | 201.9 | % |
Subordinated debt investments | 70,768 |
|
| 37.5 |
| | 62,942 |
| | 33.4 |
| Subordinated debt investments | 45,526 | | | 9.5 | | | 28.4 | | | 13,742 | | | 2.9 | | | 8.6 | |
Preferred equity | 28,492 |
|
| 15.1 |
| | 28,499 |
| | 15.1 |
| Preferred equity | 18,695 | | | 3.9 | | | 11.7 | | | 12,311 | | | 2.6 | | | 7.7 | |
Common equity and warrants | 6,321 |
|
| 3.4 |
| | 11,036 |
| | 5.8 |
| |
Total | 302,058 |
|
| 160.1 | % | | 296,630 |
| | 157.2 | % | |
Common equity, warrants and other | | Common equity, warrants and other | 15,459 | | | 3.2 | | | 9.6 | | | 54,266 | | | 11.6 | | | 33.8 | |
Total debt and equity investments | | Total debt and equity investments | 419,295 | | | 87.3 | | | 261.3 | | | 404,469 | | | 86.6 | | | 252.0 | |
Structured Finance Notes | | Structured Finance Notes | 61,608 | | | 12.7 | | | 38.4 | | | 61,630 | | | 13.4 | | | 38.5 | |
Total investments | | Total investments | $ | 480,903 | | | 100.0 | % | | 299.7 | % | | $ | 466,099 | | | 100.0 | % | | 290.5 | % |
In July, 2017, the Company's senior secured(1) Includes debt investment with a cost basis of $6,701, and preferred equity investments, with an aggregate cost basis of $247,typically referred to as unitranche, in My Alarm Center, LLC, were restructured and exchanged for common equity and a new class of preferred equity securities with a fair value of $-0- and $1,745 respectively. As of June 30, 2017,which the Company recognized cumulative unrealized losseshas entered into contractual arrangements with co‑lenders whereby, subject to certain conditions, the Company has agreed to receive its principal payments after the repayment of $5,203, which upon restructuring, was realized during the quarter ended September 30, 2017.
At September 30, 2017, all but one (domiciled in Canada) of the Company’s investments, with an amortizedcertain co‑lenders pursuant to a payment waterfall. Amortized cost and fair value of $3,935these investments were $55,767 and $4,038, respectively, were domiciled$57,029, respectively.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in the United States. thousands, except per share data)
Geographic composition is determined by the location of the corporate headquarters of the portfolio company. TheAs of March 31, 2021 and December 31, 2020, the Company's investment portfolio was domiciled as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
United States of America | $ | 409,586 | | | $ | 394,756 | | | $ | 399,278 | | | $ | 380,004 | |
Canada | 5,749 | | | 5,757 | | | 1,921 | | | 1,905 | |
Cayman Islands1 | 61,608 | | | 61,630 | | | 55,860 | | | 56,425 | |
| | | | | | | |
Luxembourg | 1,980 | | | 1,976 | | | 1,976 | | | 1,997 | |
Switzerland | 1,980 | | | 1,980 | | | 1,988 | | | 1,992 | |
Total investments | $ | 480,903 | | | $ | 466,099 | | | $ | 461,023 | | | $ | 442,323 | |
(1) Cayman Island investments represent Structured Finance Notes held by the Company. These investments generally represent beneficial interests in underlying portfolios of debt investments in companies domiciled in the United States of America.
As of March 31, 2021, the industry
compositionscomposition of the Company’s
investment portfolio
werewas as follows:
| | | | | | Percentage of: | | | | Percentage of: | | Percentage of Total | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets | | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Administrative and Support and Waste Management and Remediation Services |
|
|
|
|
| | |
|
| |
|
| | | Administrative and Support and Waste Management and Remediation Services | | | | | | | | | | | | |
| Convention and Trade Show Organizers | | Convention and Trade Show Organizers | | $ | 214 | | | — | % | | 0.1 | % | | $ | 28 | | | — | % | | — | % |
| Security Systems Services (except Locksmiths) |
| $ | 15,129 |
|
| 5.0 | % |
| 8.0 | % | | $ | 14,960 |
| | 5.0 | % | | 7.9 | % | Security Systems Services (except Locksmiths) | | 12,507 | | | 2.6 | % | | 7.8 | | | 9,413 | | | 2.0 | | | 6.0 | |
Tour Operators |
| 439 |
|
| 0.1 |
|
| 0.2 |
| | 1,424 |
| | 0.5 |
| | 0.8 |
| |
| Arts, Entertainment, and Recreation |
|
|
|
|
|
| |
| |
| |
| Arts, Entertainment, and Recreation | |
Fitness and Recreational Sports Centers |
| 15,390 |
|
| 5.1 |
|
| 8.2 |
| | 15,422 |
| | 5.2 |
| | 8.2 |
| |
| Other Amusement and Recreation Industries | | Other Amusement and Recreation Industries | | 20,970 | | | 4.4 | | | 13.1 | | | 20,774 | | | 4.5 | | | 12.9 | |
Construction |
|
|
|
|
|
| |
| |
| |
| Construction | |
Electrical Contractors and Other Wiring Installation Contractors | | Electrical Contractors and Other Wiring Installation Contractors | | 17,670 | | | 3.7 | | | 11.0 | | | 12,806 | | | 2.7 | | | 8.0 | |
New Single-Family Housing Construction (except For-Sale Builders) | | New Single-Family Housing Construction (except For-Sale Builders) | | 596 | | | 0.1 | | | 0.4 | | | 596 | | | 0.1 | | | 0.4 | |
Plumbing, Heating, and Air-Conditioning Contractors | | Plumbing, Heating, and Air-Conditioning Contractors | | 7,026 | | | 1.5 | | | 4.4 | | | 6,475 | | | 1.4 | | | 4.0 | |
Education Services | | Education Services | |
Colleges, Universities, and Professional Schools | | Colleges, Universities, and Professional Schools | | — | | | — | | | — | | | 4,789 | | | 1.0 | | | 3.0 | |
Professional and Management Development Training | | Professional and Management Development Training | | 1,595 | | | 0.3 | | | 1.0 | | | 1,017 | | | 0.2 | | | 0.6 | |
Finance and Insurance | | Finance and Insurance | |
Direct Health and Medical Insurance Carriers | | Direct Health and Medical Insurance Carriers | | 2,968 | | | 0.6 | | | 1.8 | | | 2,968 | | | 0.6 | | | 1.8 | |
Insurance Agencies and Brokerages | | Insurance Agencies and Brokerages | | 12,466 | | | 2.6 | | | 7.8 | | | 12,452 | | | 2.7 | | | 7.8 | |
| Health Care and Social Assistance | | Health Care and Social Assistance | |
| Child Day Care Services | | Child Day Care Services | | 5,150 | | | 1.1 | | | 3.2 | | | 4,667 | | | 1.0 | | | 2.9 | |
Diagnostic Imaging Centers | | Diagnostic Imaging Centers | | 21,672 | | | 4.5 | | | 13.5 | | | 23,838 | | | 5.1 | | | 14.9 | |
| Home Health Care Services | | Home Health Care Services | | 4,203 | | | 0.9 | | | 2.6 | | | 4,250 | | | 0.9 | | | 2.5 | |
Medical Laboratories | | Medical Laboratories | | 91 | | | — | | | 0.1 | | | 33 | | | — | | | — | |
Offices of Physicians, Mental Health Specialists | | Offices of Physicians, Mental Health Specialists | | 10,831 | | | 2.3 | | | 6.7 | | | 10,834 | | | 2.3 | | | 6.8 | |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Outpatient Mental Health and Substance Abuse Centers | | $ | 20,679 | | | 4.3 | % | | 12.9 | % | | $ | 13,205 | | | 2.8 | % | | 8.2 | % |
| | | | | | | | | | | | |
Information | | | | | | | | | | | | |
All Other Telecommunications | | 980 | | | 0.2 | | | 0.6 | | | 961 | | | 0.2 | | | 0.6 | |
Cable and Other Subscription Programming | | 2,929 | | | 0.6 | | | 1.8 | | | 2,928 | | | 0.6 | | | 1.8 | |
Data Processing, Hosting, and Related Services | | 3,632 | | | 0.8 | | | 2.3 | | | 4,368 | | | 0.9 | | | 2.7 | |
Directory and Mailing List Publishers | | 2,578 | | | 0.5 | | | 1.6 | | | 2,657 | | | 0.6 | | | 1.7 | |
Internet Publishing and Broadcasting and Web Search Portals | | 2,003 | | | 0.4 | | | 1.2 | | | 2,003 | | | 0.4 | | | 1.2 | |
Motion Picture and Video Production | | 2,450 | | | 0.5 | | | 1.5 | | | 2,450 | | | 0.5 | | | 1.5 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Software Publishers | | 24,692 | | | 5.1 | | | 15.5 | | | 11,921 | | | 2.6 | | | 7.4 | |
Television Broadcasting | | 1,972 | | | 0.4 | | | 1.2 | | | 1,368 | | | 0.3 | | | 0.9 | |
| | | | | | | | | | | | |
Manufacturing | | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial Printing (except Screen and Books) | | 4,792 | | | 1.0 | | | 3.0 | | | 4,821 | | | 1.0 | | | 3.0 | |
Custom Compounding of Purchased Resins | | 15,453 | | | 3.2 | | | 9.6 | | | 17,109 | | | 3.7 | | | 10.7 | |
Other Aircraft Parts and Auxiliary Equipment Manufacturing | | 5,436 | | | 1.1 | | | 3.4 | | | 4,412 | | | 0.9 | | | 2.7 | |
Fabricated Pipe and Pipe Fitting Manufacturing | | 2,548 | | | 0.5 | | | 1.6 | | | 2,543 | | | 0.5 | | | 1.6 | |
Motor Vehicle Body Manufacturing | | 1,465 | | | 0.3 | | | 0.9 | | | 1,465 | | | 0.3 | | | 0.9 | |
| | | | | | | | | | | | |
Other Commercial and Service Industry Machinery Manufacturing | | 1,934 | | | 0.4 | | | 1.2 | | | 1,934 | | | 0.4 | | | 1.2 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Pharmaceutical Preparation Manufacturing | | 2,197 | | | 0.5 | | | 1.4 | | | 39,154 | | | 8.4 | | | 24.4 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Pump and Pumping Equipment Manufacturing | | 1,501 | | | 0.3 | | | 0.9 | | | 1,264 | | | 0.3 | | | 0.8 | |
Semiconductor and Related Device Manufacturing | | 395 | | | 0.1 | | | 0.2 | | | 427 | | | 0.1 | | | 0.3 | |
| | | | | | | | | | | | |
Travel Trailer and Camper Manufacturing | | 11,009 | | | 2.3 | | | 6.9 | | | 11,298 | | | 2.4 | | | 7.0 | |
| | | | | | | | | | | | |
Unlaminated Plastics Profile Shape Manufacturing | | 9,106 | | | 1.9 | | | 5.7 | | | 9,094 | | | 2.0 | | | 5.7 | |
Other Services (except Public Administration) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance | | 572 | | | 0.1 | | | 0.4 | | | 822 | | | 0.2 | | | 0.5 | |
| | | | | | | | | | | | |
Diet and Weight Reducing Centers | | 470 | | | 0.1 | | | 0.3 | | | 470 | | | 0.1 | | | 0.3 | |
Professional, Scientific, and Technical Services | | | | | | | | | | | | |
Administrative Management and General Management Consulting Services | | 22,377 | | | 4.7 | | | 13.9 | | | 23,026 | | | 4.9 | | | 14.3 | |
| | | | | | | | | | | | |
All Other Professional, Scientific, and Technical Services | | 1,998 | | | 0.4 | | | 1.2 | | | 2,006 | | | 0.4 | | | 1.3 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Marketing Consulting Services | | 5,234 | | | 1.1 | | | 3.3 | | | 5,274 | | | 1.1 | | | 3.3 | |
Other Accounting Services | | 21,677 | | | 4.5 | | | 13.5 | | | 23,392 | | | 5.0 | | | 14.6 | |
Other Computer Related Services | | 16,200 | | | 3.4 | | | 10.1 | | | 16,408 | | | 3.5 | | | 10.2 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Public Administration | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of: | | | | Percentage of: |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Electrical Contractors and Other Wiring Installation Contractors |
| 18,646 |
|
| 6.2 |
|
| 9.9 |
| | 18,877 |
| | 6.4 |
| | 10.0 |
|
Education Services |
|
|
|
|
|
| |
| |
| |
|
Colleges, Universities, and Professional Schools |
| 5,563 |
|
| 1.8 |
|
| 2.9 |
| | 2,911 |
| | 1.0 |
| | 1.5 |
|
Finance and Insurance |
|
|
|
|
|
| |
| |
| |
|
Insurance Agencies and Brokerages |
| 12,490 |
|
| 4.1 |
|
| 6.6 |
| | 12,327 |
| | 4.2 |
| | 6.5 |
|
Offices of Real Estate Agents and Brokers |
| 3,935 |
|
| 1.3 |
|
| 2.1 |
| | 4,038 |
| | 1.4 |
| | 2.1 |
|
Health Care and Social Assistance |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Medical Laboratories |
| 4,310 |
|
| 1.4 |
|
| 2.3 |
| | 4,156 |
| | 1.4 |
| | 2.2 |
|
Offices of Physicians, Mental Health Specialists |
| 6,938 |
|
| 2.3 |
|
| 3.7 |
| | 6,920 |
| | 2.3 |
| | 3.7 |
|
Outpatient Mental Health and Substance Abuse Centers |
| 7,639 |
|
| 2.5 |
|
| 4.0 |
| | 2,038 |
| | 0.7 |
| | 1.1 |
|
Information |
|
|
|
|
|
|
|
|
| |
|
| | | |
|
|
Other Information Services |
| 2,382 |
|
| 0.8 |
|
| 1.3 |
| | 2,375 |
| | 0.8 |
| | 1.3 |
|
Manufacturing |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Bolt, Nut, Screw, Rivet, and Washer Manufacturing |
| 3,926 |
|
| 1.3 |
|
| 2.1 |
| | 3,618 |
| | 1.2 |
| | 1.9 |
|
Commercial Printing (except Screen and Books) |
| 6,646 |
|
| 2.2 |
|
| 3.5 |
| | 6,661 |
| | 2.2 |
| | 3.5 |
|
Other Aircraft Parts and Auxiliary Equipment Manufacturing |
| 12,035 |
|
| 4.0 |
|
| 6.4 |
| | 16,855 |
| | 5.7 |
| | 8.9 |
|
Other Basic Inorganic Chemical Manufacturing |
| 1,929 |
|
| 0.6 |
|
| 1.0 |
| | 1,939 |
| | 0.7 |
| | 1.0 |
|
Packaging Machinery Manufacturing |
| 1,647 |
|
| 0.5 |
|
| 0.9 |
| | 1,643 |
| | 0.6 |
| | 0.9 |
|
Pharmaceutical Preparation Manufacturing |
| 4,040 |
|
| 1.3 |
|
| 2.1 |
| | 8,763 |
| | 3.0 |
| | 4.6 |
|
Pump and Pumping Equipment Manufacturing |
| 9,855 |
|
| 3.3 |
|
| 5.2 |
| | 9,389 |
| | 3.2 |
| | 5.0 |
|
Travel Trailer and Camper Manufacturing |
| 10,182 |
|
| 3.5 |
|
| 5.4 |
| | 10,697 |
| | 3.5 |
| | 5.7 |
|
Truck Trailer Manufacturing |
| 6,237 |
|
| 2.1 |
|
| 3.3 |
| | 6,390 |
| | 2.2 |
| | 3.4 |
|
Other Services (except Public Administration) |
|
|
|
|
|
| |
| |
| |
|
Automotive Oil Change and Lubrication Shops |
| 24,149 |
|
| 8.0 |
|
| 12.8 |
| | 24,149 |
| | 8.0 |
| | 12.8 |
|
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance |
| 13,679 |
|
| 4.6 |
|
| 7.3 |
| | 12,495 |
| | 4.2 |
| | 6.6 |
|
Professional, Scientific, and Technical Services |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Computer Systems Design and Related Services |
| 7,300 |
|
| 2.4 |
|
| 3.9 |
| | 7,401 |
| | 2.5 |
| | 3.9 |
|
Custom Computer Programming Services |
| 6,737 |
|
| 2.2 |
|
| 3.6 |
| | 6,821 |
| | 2.3 |
| | 3.6 |
|
Other Accounting Services |
| 3,484 |
|
| 1.2 |
|
| 1.8 |
| | 4,291 |
| | 1.4 |
| | 2.3 |
|
Other Professional, Scientific, and Technical Services |
| 23,604 |
|
| 7.8 |
|
| 12.5 |
| | 20,209 |
| | 6.8 |
| | 10.7 |
|
Veterinary Services |
| 743 |
|
| 0.2 |
|
| 0.4 |
| | 750 |
| | 0.3 |
| | 0.4 |
|
Public Administration |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Other Justice, Public Order, and Safety Activities |
| 14,725 |
|
| 4.9 |
|
| 7.8 |
| | 14,896 |
| | 5.0 |
| | 7.9 |
|
Real Estate and Rental and Leasing |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Home Health Equipment Rental |
| 900 |
|
| 0.3 |
|
| 0.5 |
| | 132 |
| | — |
| | 0.1 |
|
Office Machinery and Equipment Rental and Leasing |
| 12,294 |
|
| 4.1 |
|
| 6.5 |
| | 13,045 |
| | 4.4 |
| | 6.9 |
|
Retail Trade |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Warehouse Clubs and Supercenters |
| 7,268 |
|
| 2.4 |
|
| 5.0 |
| | 6,999 |
| | 2.4 |
| | 5.0 |
|
Shoe store |
| 9,436 |
|
| 3.1 |
|
| 3.9 |
| | 9,436 |
| | 3.2 |
| | 3.7 |
|
All Other General Merchandise Stores |
| 6,653 |
|
| 2.2 |
|
| 3.5 |
| | 6,325 |
| | 2.1 |
| | 3.4 |
|
Wholesale Trade |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
Metal Service Centers and Other Metal Merchant Wholesalers |
| 12,908 |
|
| 4.3 |
|
| 6.8 |
| | 14,449 |
| | 4.9 |
| | 7.7 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Other Justice, Public Order, and Safety Activities | | $ | 703 | | | 0.1 | % | | 0.4 | % | | $ | 462 | | | 0.1 | % | | 0.3 | % |
| | | | | | | | | | | | |
Real Estate and Rental and Leasing | | | | | | | | | | | | |
Construction, Mining, and Forestry Machinery and Equipment Rental and Leasing | | 462 | | | 0.1 | | | 0.3 | | | 463 | | | 0.1 | | | 0.3 | |
| | | | | | | | | | | | |
Office Machinery and Equipment Rental and Leasing | | 5,953 | | | 1.2 | | | 3.7 | | | 2,769 | | | 0.6 | | | 1.7 | |
| | | | | | | | | | | | |
Retail Trade | | | | | | | | | | | | |
Automotive Parts and Accessories Stores | | 1,710 | | | 0.4 | | | 1.1 | | | 1,710 | | | 0.4 | | | 1.1 | |
Cosmetics, Beauty Supplies, and Perfume Stores | | 1,536 | | | 0.3 | | | 1.0 | | | 1,527 | | | 0.3 | | | 1.0 | |
Shoe store | | 9,754 | | | 2.0 | | | 6.1 | | | 4,946 | | | 1.1 | | | 3.1 | |
Sporting Goods Stores | | 5,729 | | | 1.2 | | | 3.6 | | | 5,755 | | | 1.2 | | | 3.6 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
All Other General Merchandise Stores | | 5,211 | | | 1.1 | | | 3.2 | | | 5,254 | | | 1.1 | | | 3.3 | |
Transportation and Warehousing | | | | | | | | | | | | |
| | | | | | | | | | | | |
Scheduled Passenger Air Transportation | | 360 | | | 0.1 | | | 0.2 | | | 373 | | | 0.1 | | | 0.2 | |
Taxi Service | | 1,980 | | | 0.4 | | | 1.2 | | | 1,976 | | | 0.4 | | | 1.2 | |
Wholesale Trade | | | | | | | | | | | | |
Business to Business Electronic Markets | | 2,887 | | | 0.6 | | | 1.8 | | | 2,885 | | | 0.6 | | | 1.8 | |
Computer and Computer Peripheral Equipment and Software Merchant Wholesalers | | 1,951 | | | 0.4 | | | 1.2 | | | 1,966 | | | 0.4 | | | 1.2 | |
Construction and Mining (except Oil Well) Machinery and Equipment Merchant Wholesalers | | 16,193 | | | 3.4 | | | 10.1 | | | 15,977 | | | 3.4 | | | 10.0 | |
Drugs and Druggists' Sundries Merchant Wholesalers | | 3,782 | | | 0.8 | | | 2.4 | | | 3,816 | | | 0.8 | | | 2.4 | |
| | | | | | | | | | | | |
General Line Grocery Merchant Wholesalers | | 273 | | | 0.1 | | | 0.2 | | | 283 | | | 0.1 | | | 0.2 | |
Industrial Machinery and Equipment Merchant Wholesalers | | 9,693 | | | 2.0 | | | 6.0 | | | 9,343 | | | 2.0 | | | 5.8 | |
Industrial Supplies Merchant Wholesalers | | 7,206 | | | 1.5 | | | 4.5 | | | 7,272 | | | 1.6 | | | 4.5 | |
| | | | | | | | | | | | |
Motor Vehicle Parts (Used) Merchant Wholesalers | | 15,285 | | | 3.2 | | | 9.5 | | | 15,221 | | | 3.3 | | | 9.5 | |
| | | | | | | | | | | | |
Sporting and Recreational Goods and Supplies Merchant Wholesalers | | 8,247 | | | 1.7 | | | 5.1 | | | 657 | | | 0.1 | | | 0.4 | |
Stationary & Office Supply Merchant Wholesaler | | 16,142 | | | 3.4 | | | 10.1 | | | 94 | | | — | | | 0.1 | |
Total debt and equity investments | | $ | 419,295 | | | 87.3 | % | | 261.3 | % | | $ | 404,469 | | | 86.3 | % | | 252.1 | % |
Structured Finance Notes | | 61,608 | | | 12.7 | | | 38.4 | | | 61,630 | | | 13.7 | | | 21.7 | |
Total investments | | $ | 480,903 | | | 100.0 | % | | 299.7 | % | | $ | 466,099 | | | 100.0 | % | | 273.8 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of: | | | | Percentage of: |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Sporting and Recreational Goods and Supplies Merchant Wholesalers |
| 8,820 |
|
| 2.9 |
|
| 4.7 |
| | 3,829 |
| | 1.3 |
| | 2.0 |
|
|
| $ | 302,058 |
|
| 100.0 | % |
| 160.1 | % | | $ | 296,630 |
| | 100.0 | % | | 157.2 | % |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
As of December 31, 2016,2020, the Company had loans to 3949 portfolio companies, of which 74%95% were senior secured loans and 26%5% were subordinated loans, at fair value, as well as equity investments in 1710 of these portfolio companies. The Company also held an equity investment in two13 portfolio companies in which it did not hold a debt interest.
investment, as well as 12 investments in Structured Finance Notes. At December 31, 2016,2020, investments consisted of the following: | | | | | | | | | | | | Percentage of Total | | Percentage of Total |
| Amortized Cost | | Percentage of Net Assets | | Fair Value | | Percentage of Net Assets | | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Senior secured debt investments | $ | 182,315 |
| | 126.8 | % | | $ | 180,955 |
| | 125.9 | % | Senior secured debt investments | $ | 325,647 | | | 70.6 | % | | 204.9 | % | | $ | 306,304 | | | 69.2 | % | | 192.7 | % |
Subordinated debt investments | 66,591 |
| | 46.3 |
| | 63,410 |
| | 44.1 |
| Subordinated debt investments | 45,409 | | | 9.8 | | | 28.6 | | | 15,067 | | | 3.4 | | | 9.5 | |
Preferred equity | 23,293 |
| | 16.2 |
| | 23,721 |
| | 16.5 |
| Preferred equity | 18,648 | | | 4.0 | | | 11.7 | | | 11,543 | | | 2.6 | | | 7.3 | |
Common equity and warrants | 7,108 |
| | 4.9 |
| | 13,541 |
| | 9.4 |
| |
Common equity, warrants and other | | Common equity, warrants and other | 15,459 | | | 3.4 | | | 9.7 | | | 52,984 | | | 12.0 | | | 33.3 | |
Total debt and equity investments | | Total debt and equity investments | 405,163 | | | 87.8 | % | | 254.9 | % | | 385,898 | | | 87.2 | % | | 242.8 | % |
Structured Finance Notes | | Structured Finance Notes | 55,860 | | | 12.2 | | | 35.1 | | | 56,425 | | | 12.8 | | | 35.5 | |
Total | $ | 279,307 |
| | 194.2 | % | | $ | 281,627 |
| | 195.9 | % | Total | $ | 461,023 | | | 100.0 | % | | 290.0 | % | | $ | 442,323 | | | 100.0 | % | | 278.3 | % |
At December 31, 2016, all but one (domiciled in Canada) of the Company’s investments, with an amortized cost and fair value of $3,923 and $3,923, respectively, were domiciled in the United States. Geographic composition is determined by the location of the corporate headquarters of the portfolio company. TheAs of December 31, 2020, the industry compositions of the Company’s portfoliodebt and equity investments were as follows: | | | | | | Percentage of: | | | | Percentage of: | | Percentage of Total | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets | | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Administrative and Support and Waste Management and Remediation Services | | | | | | | | | | | | | Administrative and Support and Waste Management and Remediation Services | | | | | | | | | | | | |
Other Travel Arrangement and Reservation Services | | $ | 10,182 |
| | 3.6 | % | | 7.1 | % | | $ | 10,839 |
| | 3.8 | % | | 7.5 | % | |
Convention and Trade Show Organizers | | Convention and Trade Show Organizers | | $ | 214 | | | — | % | | 0.1 | % | | $ | 210 | | | — | % | | 0.1 | % |
Security Systems Services (except Locksmiths) | | 18,663 |
| | 6.7 |
| | 13.0 |
| | 18,883 |
| | 6.7 |
| | 13.1 |
| Security Systems Services (except Locksmiths) | | 6,531 | | | 1.4 | | | 4.1 | | | 3,487 | | | 0.8 | | | 2.2 | |
Tour Operators | | 439 |
| | 0.2 |
| | 0.3 |
| | 1,019 |
| | 0.4 |
| | 0.7 |
| |
| Arts, Entertainment, and Recreation | | | | | | | | | | | | | Arts, Entertainment, and Recreation | |
Fitness and Recreational Sports Centers | | 14,372 |
| | 5.1 |
| | 10.0 |
| | 14,410 |
| | 5.1 |
| | 10.0 |
| |
Other Amusement and Recreation Industries | | Other Amusement and Recreation Industries | | 20,967 | | | 4.5 | | | 13.3 | | | 19,973 | | | 4.5 | | | 12.6 | |
Construction | | Construction | |
Electrical Contractors and Other Wiring Installation Contractors | | Electrical Contractors and Other Wiring Installation Contractors | | 17,837 | | | 3.9 | | | 11.2 | | | 13,137 | | | 3.0 | | | 8.3 | |
Plumbing, Heating, and Air-Conditioning Contractors | | Plumbing, Heating, and Air-Conditioning Contractors | | 7,607 | | | 1.7 | | | 4.8 | | | 7,294 | | | 1.6 | | | 4.6 | |
Education Services | | | | | | | | | | | | | Education Services | |
Colleges, Universities, and Professional Schools | | 5,314 |
| | 1.9 |
| | 3.7 |
| | 5,142 |
| | 1.8 |
| | 3.6 |
| Colleges, Universities, and Professional Schools | | — | | | — | | | — | | | 4,295 | | | 1.0 | | | 2.7 | |
Professional and Management Development Training | | Professional and Management Development Training | | 1,595 | | | 0.3 | | | 1.0 | | | 1,306 | | | 0.3 | | | 0.8 | |
Finance and Insurance | | | | | | | | | | | | | Finance and Insurance | |
| Insurance Agencies and Brokerages | | 13,510 |
| | 4.8 |
| | 9.4 |
| | 13,599 |
| | 4.8 |
| | 9.5 |
| Insurance Agencies and Brokerages | | 9,544 | | | 2.1 | | | 6.0 | | | 9,302 | | | 2.1 | | | 5.9 | |
Health Care and Social Assistance | | | | | | | | | | | | | Health Care and Social Assistance | |
| Child Day Care Services | | Child Day Care Services | | 5,178 | | | 1.1 | | | 3.3 | | | 4,656 | | | 1.1 | | | 2.9 | |
Diagnostic Imaging Centers | | Diagnostic Imaging Centers | | 21,718 | | | 4.8 | | | 13.8 | | | 23,607 | | | 5.3 | | | 14.9 | |
| Home Health Care Services | | Home Health Care Services | | 4,199 | | | 0.9 | | | 2.6 | | | 4,250 | | | 1.0 | | | 2.7 | |
Medical Laboratories | | 4,204 |
| | 1.5 |
| | 2.9 |
| | 4,174 |
| | 1.5 |
| | 2.9 |
| Medical Laboratories | | 91 | | | — | | | 0.1 | | | 38 | | | — | | | — | |
Other Outpatient Care Centers | | 14,207 |
| | 5.2 |
| | 9.9 |
| | 14,393 |
| | 5.1 |
| | 10.0 |
| |
Offices of Physicians, Mental Health Specialists | | Offices of Physicians, Mental Health Specialists | | 21,013 | | | 4.6 | | | 13.2 | | | 20,802 | | | 4.7 | | | 13.1 | |
Outpatient Mental Health and Substance Abuse Centers | | 7,639 |
| | 2.7 |
| | 5.3 |
| | 5,393 |
| | 1.9 |
| | 3.8 |
| Outpatient Mental Health and Substance Abuse Centers | | 11,615 | | | 2.5 | | | 7.3 | | | 4,105 | | | 0.9 | | | 2.6 | |
| Information | | | | | | | | | | | | | Information | |
Other Information Services | | 2,427 |
| | 0.9 |
| | 1.7 |
| | 2,340 |
| | 0.8 |
| | 1.6 |
| |
Other Telecommunications | | 2,652 |
| | 0.9 |
| | 1.8 |
| | 2,630 |
| | 0.9 |
| | 1.8 |
| |
Software Publishers | | 4,896 |
| | 1.8 |
| | 3.4 |
| | 4,949 |
| | 1.8 |
| | 3.4 |
| |
Manufacturing | | | | | | | | | | | | | |
Bolt, Nut, Screw, Rivet, and Washer Manufacturing | | 4,090 |
| | 1.5 |
| | 2.8 |
| | 3,555 |
| | 1.3 |
| | 2.5 |
| |
Other Aircraft Parts and Auxiliary Equipment Manufacturing | | 11,925 |
| | 4.3 |
| | 8.3 |
| | 13,551 |
| | 4.8 |
| | 9.4 |
| |
Other Basic Inorganic Chemical Manufacturing | | 4,413 |
| | 1.6 |
| | 3.1 |
| | 4,396 |
| | 1.6 |
| | 3.1 |
| |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Data Processing, Hosting, and Related Services | | $ | 1,135 | | | 0.2 | % | | 0.7 | % | | $ | 1,749 | | | 0.4 | % | | 1.1 | % |
| | | | | | | | | | | | |
Software Publishers | | 28,799 | | | 6.3 | | | 18.2 | | | 16,104 | | | 3.6 | | | 10.0 | |
Television Broadcasting | | 1,977 | | | 0.4 | | | 1.2 | | | 1,758 | | | 0.4 | | | 1.1 | |
| | | | | | | | | | | | |
Manufacturing | | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial Printing (except Screen and Books) | | 4,789 | | | 1.0 | | | 3.0 | | | 4,812 | | | 1.1 | | | 3.0 | |
Custom Compounding of Purchased Resins | | 15,444 | | | 3.3 | | | 9.7 | | | 17,164 | | | 3.9 | | | 10.8 | |
| | | | | | | | | | | | |
Other Aircraft Parts and Auxiliary Equipment Manufacturing | | 5,431 | | | 1.2 | | | 3.4 | | | 4,275 | | | 1.0 | | | 2.7 | |
Other Commercial and Service Industry Machinery Manufacturing | | 1,925 | | | 0.4 | | | 1.2 | | | 1,936 | | | 0.4 | | | 1.2 | |
| | | | | | | | | | | | |
Pharmaceutical Preparation Manufacturing | | 2,205 | | | 0.5 | | | 1.4 | | | 38,213 | | | 8.7 | | | 24.1 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Pump and Pumping Equipment Manufacturing | | 1,501 | | | 0.3 | | | 0.9 | | | 1,281 | | | 0.3 | | | 0.8 | |
Semiconductor and Related Device Manufacturing | | 399 | | | 0.1 | | | 0.3 | | | 434 | | | 0.1 | | | 0.3 | |
Travel Trailer and Camper Manufacturing | | 10,911 | | | 2.4 | | | 6.9 | | | 10,812 | | | 2.4 | | | 6.8 | |
Truck Trailer Manufacturing | | 8,118 | | | 1.8 | | | 5.1 | | | 8,174 | | | 1.8 | | | 5.1 | |
Unlaminated Plastics Profile Shape Manufacturing | | 8,922 | | | 1.9 | | | 5.6 | | | 8,818 | | | 2.0 | | | 5.5 | |
Other Services (except Public Administration) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance | | 572 | | | 0.1 | | | 0.4 | | | 915 | | | 0.2 | | | 0.6 | |
| | | | | | | | | | | | |
Diet and Weight Reducing Centers | | 477 | | | 0.1 | | | 0.3 | | | 479 | | | 0.1 | | | 0.3 | |
Professional, Scientific, and Technical Services | | | | | | | | | | | | |
Administrative Management and General Management Consulting Services | | 28,503 | | | 6.3 | | | 18.0 | | | 28,729 | | | 6.6 | | | 18.2 | |
| | | | | | | | | | | | |
All Other Professional, Scientific, and Technical Services | | 1,921 | | | 0.4 | | | 1.2 | | | 1,905 | | | 0.4 | | | 1.2 | |
Marketing Consulting Services | | 5,229 | | | 1.1 | | | 3.3 | | | 5,229 | | | 1.2 | | | 3.3 | |
Other Accounting Services | | 21,621 | | | 4.7 | | | 13.7 | | | 22,238 | | | 5.0 | | | 14.0 | |
Other Computer Related Services | | 16,247 | | | 3.5 | | | 10.2 | | | 16,000 | | | 3.6 | | | 10.1 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Public Administration | | | | | | | | | | | | |
Other Justice, Public Order, and Safety Activities | | 703 | | | 0.2 | | | 0.4 | | | 676 | | | 0.2 | | | 0.4 | |
| | | | | | | | | | | | |
Real Estate and Rental and Leasing | | | | | | | | | | | | |
Construction, Mining, and Forestry Machinery and Equipment Rental and Leasing | | 496 | | | 0.1 | | | 0.3 | | | 499 | | | 0.1 | | | 0.3 | |
| | | | | | | | | | | | |
Office Machinery and Equipment Rental and Leasing | | 5,953 | | | 1.3 | | | 3.7 | | | 2,736 | | | 0.6 | | | 1.7 | |
Retail Trade | | | | | | | | | | | | |
Cosmetics, Beauty Supplies, and Perfume Stores | | 6,738 | | | 1.5 | | | 4.2 | | | 6,701 | | | 1.5 | | | 4.2 | |
Shoe Store | | 9,748 | | | 2.1 | | | 6.1 | | | 4,368 | | | 1.0 | | | 2.7 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of: | | | | Percentage of: |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Packaging Machinery Manufacturing | | 1,996 |
| | 0.7 |
| | 1.4 |
| | 1,885 |
| | 0.7 |
| | 1.3 |
|
Pharmaceutical Preparation Manufacturing | | 4,049 |
| | 1.4 |
| | 2.8 |
| | 9,893 |
| | 3.5 |
| | 6.9 |
|
Pump and Pumping Equipment Manufacturing | | 10,908 |
| | 3.9 |
| | 7.6 |
| | 10,016 |
| | 3.6 |
| | 7.0 |
|
Travel Trailer and Camper Manufacturing | | 12,797 |
| | 4.6 |
| | 8.9 |
| | 13,149 |
| | 4.7 |
| | 9.1 |
|
Other Services (except Public Administration) | | | | | | | | | | | | |
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance | | 13,695 |
| | 4.9 |
| | 9.5 |
| | 11,610 |
| | 4.1 |
| | 8.1 |
|
Professional, Scientific, and Technical Services | | | | | |
|
| | | | | | |
Computer Systems Design and Related Services | | 3,879 |
| | 1.4 |
| | 2.7 |
| | 3,946 |
| | 1.4 |
| | 2.7 |
|
Custom Computer Programming Services | | 5,097 |
| | 1.8 |
| | 3.5 |
| | 5,143 |
| | 1.8 |
| | 3.6 |
|
Other Accounting Services | | 5,328 |
| | 1.9 |
| | 3.7 |
| | 4,911 |
| | 1.7 |
| | 3.4 |
|
Other Computer Related Services | | 14,738 |
| | 5.3 |
| | 10.3 |
| | 14,883 |
| | 5.3 |
| | 10.4 |
|
Other Professional, Scientific, and Technical Services | | 32,750 |
| | 11.7 |
| | 22.7 |
| | 31,422 |
| | 11.2 |
| | 21.8 |
|
Veterinary Services | | 650 |
| | 0.2 |
| | 0.5 |
| | 651 |
| | 0.2 |
| | 0.5 |
|
Real Estate and Rental and Leasing | | | | | | | | | | | | |
Home Health Equipment Rental | | 900 |
| | 0.3 |
| | 0.6 |
| | 1,037 |
| | 0.4 |
| | 0.7 |
|
Office Machinery and Equipment Rental and Leasing | | 11,888 |
| | 4.3 |
| | 8.3 |
| | 13,510 |
| | 4.8 |
| | 9.4 |
|
Offices of Real Estate Agents and Brokers | | 3,923 |
| | 1.4 |
| | 2.7 |
| | 3,923 |
| | 1.4 |
| | 2.7 |
|
Offices of Real Estate Appraisers | | 10,032 |
| | 3.6 |
| | 7.0 |
| | 10,000 |
| | 3.6 |
| | 7.0 |
|
Retail Trade | | | | | | | | | | | | |
All Other General Merchandise Stores | | 6,839 |
| | 2.4 |
| | 4.8 |
| | 6,839 |
| | 2.4 |
| | 4.8 |
|
Wholesale Trade | | | | | | | | | | | | |
Metal Service Centers and Other Metal Merchant Wholesalers | | 12,700 |
| | 4.5 |
| | 8.8 |
| | 14,142 |
| | 5.0 |
| | 9.8 |
|
Sporting and Recreational Goods and Supplies Merchant Wholesalers | | 8,205 |
| | 3.0 |
| | 5.7 |
| | 5,394 |
| | 1.9 |
| | 3.8 |
|
| | $ | 279,307 |
| | 100.0 | % | | 194.2 |
| | $ | 281,627 |
| | 100.0 | % | | 195.9 | % |
Unconsolidated Significant Subsidiaries: In accordance with Regulation S-X and GAAP, the Company is not permitted to consolidate any subsidiary or other entity that is not an investment company, including those in which the Company has a controlling interest unless the business of the controlled operating company consists of providing services to the Company. In accordance with Regulation S-X Rules 3-09 and 4-08(g), the Company evaluates its unconsolidated controlled portfolio companies as significant subsidiaries under the respective rules. As of September 30, 2017, MTE Holding Corp. was considered a significant unconsolidated subsidiary under Regulation S-X Rule 4-08(g). The Company's voting ownership in MTE Holding Corp. is limited to 50% through a substantive participating voting rights agreement with an unaffiliated investor. Based on the requirements under Regulation S-X Rule 4-08(g), the summarized consolidated financial information of MTE Holding Corp. and Subsidiaries is presented below: |
| | | | | | | | |
Balance Sheet: | | September 30, 2017 | | December 31, 2016 |
Current assets | | $ | 6,861 |
| | $ | 5,535 |
|
Noncurrent assets | | 25,245 |
| | 24,681 |
|
Total Assets | | $ | 32,106 |
| | $ | 30,216 |
|
Current liabilities | | $ | 2,757 |
| | $ | 2,401 |
|
Noncurrent liabilities | | 17,162 |
| | 16,889 |
|
Total liabilities | | 19,919 |
| | 19,290 |
|
Non-controlling interest | | 5,441 |
| | 4,878 |
|
Total equity | | 6,746 |
| | 6,048 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Total | | | | Percentage of Total |
| | Amortized Cost | | Amortized Cost | | Net Assets | | Fair Value | | Fair Value | | Net Assets |
Sporting Goods Stores | | $ | 2,907 | | | 0.6 | % | | 1.8 | % | | $ | 2,968 | | | 0.7 | % | | 1.9 | % |
| | | | | | | | | | | | |
All Other General Merchandise Stores | | 5,252 | | | 1.1 | | | 3.3 | | | 5,060 | | | 1.1 | | | 3.2 | |
Transportation and Warehousing | | | | | | | | | | | | |
| | | | | | | | | | | | |
Scheduled Passenger Air Transportation | | 495 | | | 0.1 | | | 0.3 | | | 520 | | | 0.1 | | | 0.3 | |
Taxi Service | | 1,976 | | | 0.4 | | | 1.2 | | | 1,997 | | | 0.5 | | | 1.3 | |
Wholesale Trade | | | | | | | | | | | | |
Business to Business Electronic Markets | | 2,891 | | | 0.6 | | | 1.8 | | | 2,875 | | | 0.6 | | | 1.8 | |
Computer and Computer Peripheral Equipment and Software Merchant Wholesalers | | 1,955 | | | 0.4 | | | 1.2 | | | 1,942 | | | 0.4 | | | 1.2 | |
Construction and Mining (except Oil Well) Machinery and Equipment Merchant Wholesalers | | 16,392 | | | 3.6 | | | 10.3 | | | 16,777 | | | 3.8 | | | 10.6 | |
General Line Grocery Merchant Wholesalers | | 275 | | | 0.1 | | | 0.2 | | | 284 | | | 0.1 | | | 0.2 | |
Industrial Machinery and Equipment Merchant Wholesalers | | 9,696 | | | 2.1 | | | 6.1 | | | 9,179 | | | 2.1 | | | 5.8 | |
Industrial Supplies Merchant Wholesalers | | 6,908 | | | 1.5 | | | 4.3 | | | 5,476 | | | 1.2 | | | 3.4 | |
Motor Vehicle Parts (Used) Merchant Wholesalers | | 14,167 | | | 3.1 | | | 8.9 | | | 13,581 | | | 3.1 | | | 8.5 | |
| | | | | | | | | | | | |
Sporting and Recreational Goods and Supplies Merchant Wholesalers | | 8,247 | | | 1.8 | | | 5.2 | | | 346 | | | 0.1 | | | 0.2 | |
Stationery and Office Supplies Merchant Wholesalers | | 16,129 | | | 3.5 | | | 10.1 | | | 2,426 | | | 0.5 | | | 1.5 | |
Total debt and equity investments | | $ | 405,163 | | | 87.9 | % | | 254.9 | % | | $ | 385,898 | | | 87.2 | % | | 242.8 | % |
Structured Finance Notes | | 55,860 | | | 12.1 | | | 35.1 | | | 56,425 | | | 12.8 | | | 35.5 | |
Total investments | | $ | 461,023 | | | 100.0 | % | | 290.0 | % | | $ | 442,323 | | | 100.0 | % | | 278.3 | % |
When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal. The aggregate amortized cost and fair value of loans on non-accrual status with respect to all interest and Net Loan Fee amortization was $45,878 and $7,856, respectively, at March 31, 2021, and $48,102 and $12,135 respectively, at December 31, 2020.
On March 27, 2020, the Company's debt investment in Constellis Holdings, LLC was restructured, pursuant to which the Company converted its non-accrual debt investment into 20,628 shares of common equity. The cost and fair value of the common shares received were $703 and $703, respectively, as of March 31, 2020. The Company recognized a realized loss on the restructuring of $9,145 for the three months ended March 31, 2020, which was fully recognized as an unrealized loss as of December 31, 2019.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Summary of Operations: | | 2017 | | 2016 | | 2017 | | 2016 |
Net Sales | | $ | 7,709 |
| | $ | 7,040 |
| | 23,571 |
| | $ | 21,058 |
|
Gross Profit | | 2,310 |
| | 2,358 |
| | 7,519 |
| | 6,951 |
|
Net income | | 433 |
| | 599 |
| | 1,885 |
| | 1,935 |
|
Net income attributable to MTE Holding Corp. | | 240 |
| | 332 |
| | 1,043 |
| | 1,071 |
|
Note 5. Fair Value of Financial Instruments
The Company’s investments are valuedcarried at fair value as determined in good faith by Company management under the supervision, and review and approval of the Board. These fair values are determined in accordance with a documented valuation policy and a consistently applied valuation process as described below:
For each debt investment, a basic credit risk rating review process is completed. The risk rating on every credit facility is reviewed and either reaffirmed or revised by OFS Advisor’s investment committee.
Each portfolio company or investment is valued by OFS Advisor.
The preliminary valuations are documented and are then submitted to OFS Advisor’s investment committee for ratification.
Third-party valuation firm(s) provide valuation services as requested, by reviewing the investment committee’s preliminary valuations. OFS Advisor’s investment committee’s preliminary fair value conclusions on each of the Company’s assets for which sufficient market quotations are not readily available is reviewed and assessed by a third-party valuation firm at least once in every 12-month period, and more often as determined by the audit committee of the Company’s Board or required by the Company’s valuation policy. Such valuation assessment may be in the form of positive assurance, range of values or other valuation method based on the discretion of the Company’s Board.
The audit committee of the Board reviews the preliminary valuations of OFS Advisor’s investment committee and independent valuation firms and, if appropriate, recommends the approval of the valuations by the Board.
The Company’s Board discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of OFS Advisor, the audit committee and, where appropriate, the respective independent valuation firm.process.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions that market participants would use in pricing anthe subject asset or liability. Valuation inputs
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities quoted in active markets (Level 1) and the lowest priority to fair values based on unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are described below:
Level 11:: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 22:: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived principally from or corroborated by observable market data.
Level 33:: Unobservable inputs for the asset or liability, and situations where there is little, if any, market activity for the asset or liability at the measurement date.
The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant management judgment or estimation.estimation by management. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’sCompany's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
OFS Capital Corporation The Company generally categorizes its investment portfolio into Level 2 and Subsidiaries
Notes to Financial Statements
(Dollar amounts in thousands, except per share data)
Level 3 of the hierarchy.
The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the measurement date. All of the Company’s investments, which are measured at fair value, were categorized as Level 3 based upon the lowest level of significant input to the valuations.There were no transfers among Level 1, 2 and 3 for the three and nine months ended September 30, 2017 and 2016.
Each quarter, for investments for which unadjusted quoted prices in active markets are not available, the Company assesses whether market quotations, prices from pricing services or bids from brokers or dealers (collectively, "Indicative Prices") are available, as well as the Company's ability to transact at such Indicative Prices. Investments for which sufficient Indicative Prices exist are generally valued consistentSenior securities with such Indicative Prices. The Company periodically corroborates observed Indicative Prices with its actual investment purchase prices and/or other valuation techniques, such as the discounted cash flow method described below. Based on the corroborating analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these Indicative Prices may be reasonable indicators of fair value. In certain instances, the Company may partially rely on Indicative Prices when the Company determines such Indicative Prices are not of sufficient strength to rely on as the sole indication of fair value. In such instances, the Company applies a weighting factor to the Indicative Price and an alternative fair value analysis, typically a discounted cash flow analysis. The weighting factor placed on an Indicative Price is applied consistently based upon its relative strength, which considers, among other factors, and when available, the depth and liquidity of the Indicative Price. Weighting factors are not significant to the overall fair value measurement, but rather are applied to incorporate relevant market data when available.
In addition, each quarter, the Company assesses whether an arm’s length transaction occurred in the same security, including the Company's new investments during the quarter, the cost of which (“Transaction Prices”), may be considered a reasonable indication of fair value for up to three months after the transaction date.
Due to the private nature of this marketplace (meaning actual transactions are not publicly reported), and the non-binding nature of the Indicative Prices, and the general inability to observe the input for the full length of the term of an investment, the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy.
In the absence of sufficient, actionable Indicative Prices or Transaction Prices, as an indication of fair value, and consistent with the policies and methodologies adopted by the Board, the Company performs detailed valuations of its debt and equity investments, including an analysis on the Company’s unfunded loan commitments, using both the market and income approaches as appropriate. There is no one methodology to estimate fair value and, in fact, for any one portfolio company, fair value is generally best expressed as a range of values. The Company may also engage one or more independent valuation firms(s) to conduct independent appraisals of its investments to develop the range of values, from which the Company derives a single estimate of value. Under the income approach, the Company typically prepares and analyzes discounted cash flow models to estimate the present value of future cash flows of either an individual debt investment or of the underlying portfolio company itself.
The primary method used to estimate the fair value of $899 were transferred from Level 3 to Level 2 during the Company's debt investments is the discounted cash flow method. However, if there is deterioration in credit quality orthree months ended March 31, 2021. Senior securities with a debt investment is in workout status, the Company may consider other methods in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. The discounted cash flow approach to determining fair value (or a range of fair values) involves applying an appropriate discount rate(s) to the estimated future cash flows using various relevant factors depending on investment type, including the latest arm’s length or market transactions involving the subject security, a benchmark credit spread or other indication of market yields, and company performance. The valuation based on the inputs determined to be the most reasonable and probable is used as the fair value of $12,683 were transferred from Level 2 to Level 3 during the investment, which may include a weighting factor applied to multiple valuation methods. The determination of fair value using these methodologies may take into consideration a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment and anticipated financing transactions after the valuation date.three months ended March 31, 2020.
The Company changed the primary method used to value certain of its investments, primarily equity investments, as of December 31, 2016, from the income approach to the market approach, principally due to the nature of evidence available under the discounted cash flow method, and to better align with industry practice. The Company may also utilize an income approach when estimating the fair value of its equity securities, either as a primary methodology if consistent with industry practice or if the market approach is otherwise not applicable, or as a supporting methodology to corroborate the fair value ranges determined by the market approach.
Under the market approach, the Company estimates the enterprise value of portfolio companies. Typically, the enterprise value of a private company is based on multiples of EBITDA, net income, revenues, or other relevant basis. The valuation based on
OFS Capital Corporation and Subsidiaries
Notes to Financial Statements
(Dollar amounts in thousands, except per share data)
the inputs determined to be the most reasonable and probable is used as the fair value of the investment, which may include a weighting factor applied to multiple valuation methods. In estimating the enterprise value of a portfolio company, the Company analyzes various factors consistent with industry practice, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, the portfolio company’s historical and projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the nature and realizable value of any collateral, financing transactions subsequent to the acquisition of the investment and anticipated financing transactions after the valuation date.
Application of these valuation methodologies involves a significant degree of judgment by management. Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded. The Company’s investments are subject to market risk. Market risk, which is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.
The following tables present the Company's investment portfolio measured at fair value on a recurring basis as of March 31, 2021, and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Security | | Level 1 | | Level 2 | | Level 3 | | Fair Value at March 31, 2021 |
Debt investments | | $ | — | | | $ | 48,387 | | | $ | 289,505 | | | $ | 337,892 | |
Equity investments | | — | | | — | | | 66,577 | | | 66,577 | |
Structured Finance Notes | | — | | | — | | | 61,630 | | | 61,630 | |
| | $ | — | | | $ | 48,387 | | | $ | 417,712 | | | $ | 466,099 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Security | | Level 1 | | Level 2 | | Level 3 | | Fair Value at December 31, 2020 |
Debt investments | | $ | — | | | $ | 22,226 | | | $ | 299,145 | | | $ | 321,371 | |
Equity investments | | — | | | — | | | 64,527 | | | 64,527 | |
Structured Finance Notes | | — | | | — | | | 56,425 | | | 56,425 | |
| | $ | — | | | $ | 22,226 | | | $ | 420,097 | | | $ | 442,323 | |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following tables provide quantitative information about
valuation techniques and the Company’s significant
Level 3 fair value inputs to the Company’s
Level 3 fair value measurements as of
September 30, 2017,March 31, 2021 and December 31,
2016.2020. In addition to the techniques and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The table below
is not intended to be exhaustive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements.
|
| | | | | | | | | |
| Fair Value at September 30, 2017 (1) |
| Valuation technique |
| Unobservable inputs |
| Range (Weighted average) |
Debt investments: |
|
|
|
|
|
|
|
|
Senior secured | $ | 126,310 |
|
| Discounted cash flow |
| Discount rates |
| 6.18% - 17.65% (11.52%) |
| 11,841 |
|
| Enterprise value |
| EBITDA multiple |
| 7.50x - 7.50x (7.50x) |
|
|
|
|
|
|
|
|
|
Subordinated | 48,897 |
|
| Discounted cash flow |
| Discount rates |
| 11.06% - 25.00% (15.05%) |
| 5,322 |
|
| Enterprise value |
| EBITDA multiple |
| 7.25x - 7.81x (7.47x) |
|
|
|
|
|
|
|
|
|
Equity investments: |
|
|
|
|
|
|
|
|
Preferred equity | 22,855 |
|
| Enterprise value |
| EBITDA multiples |
| 5.00x - 13.48x (7.16x) |
Common equity and warrants | 10,324 |
|
| Enterprise value |
| EBITDA multiples |
| 4.72x - 9.40x (5.65x) |
| | | | | | | | | | | | | | | | | | | | | | | |
(1) | Excludes $56,002, $8,723,Fair Value at March 31, 2021 | | Valuation technique | | Unobservable inputs | | Range (Weighted average) |
Debt investments: | | | | | | | |
Senior secured | $ | 239,159 | | | Discounted cash flow | | Discount rates | | 6.46% - 16.74% (9.87%) |
| | | | | | | |
Senior secured | 19,670 | | | Market approach | | Revenue multiples | | 0.51x - 0.74x (0.59x) |
Senior secured | 16,934 | | | Market approach | | Transaction Price | | |
Subordinated | 7,940 | | | Discounted cash flow | | Discount rates | | 17.49% - 17.49% (17.49%) |
Subordinated | 5,040 | | | Market approach | | EBITDA multiples | | 2.71x - 6.00x (5.94x) |
Subordinated | 657 | | | Market approach | | Revenue multiples | | 0.25x - 0.25x (0.25x) |
Subordinated | 105 | | | Market approach | | Transaction Price | | |
| | | | | | | |
Structured Finance Notes | | | | | | | |
Subordinated notes (3) | 58,833 | | | Discounted cash flow | | Discount rates | | 10.00% - 18.50% (13.33%) |
| | | | | Constant Default Rate(1) | | 0.00% - 2.00% (1.67%) |
| | | | | Constant Default Rate(2) | | 2.00% - 2.00% (2.00%) |
| | | | | Recovery Rate | | 60.00% - 60.00% (60.00%) |
| | | | | | | |
Mezzanine debt | 2,797 | | | Discounted cash flow | | Discount rates | | 7.30% - 8.45% (7.79%) |
| | | | | Constant Default Rate(1) | | 0.00% - 3.00% (1.65%) |
| | | | | Constant Default Rate(2) | | 2.00% - 3.00% (2.36%) |
| | | | | Recovery Rate | | 60.00% - 60.00% (60.00%) |
| | | | | | | |
Equity investments: | | | | | | | |
Preferred equity | 11,438 | | | Market approach | | EBITDA multiples | | 3.45x - 8.50x (7.26x) |
Preferred equity | 873 | | | Market approach | | Revenue multiples | | 0.20x - 3.00x (0.95x) |
| | | | | | | |
Common equity, warrants and $6,356, of senior secured debt investments, subordinated debt investments,other | 54,256 | | | Market approach | | EBITDA multiples | | 3.45x - 12.00x (8.08x) |
Common equity, warrants and equity investments, respectively, valued at Transaction Prices.other | 10 | | | Market approach | | Revenue multiples | | 0.20x - 3.00x (0.20x) |
| | | | | | | |
| $ | 417,712 | | | | | | | |
(1) Constant default rates for the next six months.
(2) Constant default rates following the next six months.
(3) The cash flows utilized in the discounted cash flow calculations assume liquidation of (a) certain distressed investments and (b) all investments currently in default held by the issuing CLO at their current market prices, and redeployment of proceeds at the issuing CLO's assumed reinvestment rate.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2020 | | Valuation technique | | Unobservable inputs | | Range (Weighted average) |
Debt investments: | | | | | | | |
Senior secured | $ | 256,042 | | | Discounted cash flow | | Discount rates | | 6.30% - 24.43% (10.18%) |
Senior secured | 12,668 | | | Market approach | | EBITDA multiples | | 8.50x - 8.50x (8.50x) |
Senior secured | 9,257 | | | Market approach | | Revenue multiples | | 0.86x - 0.86x (0.86x) |
Senior secured | 6,111 | | | Market approach | | Transaction Price | | |
Subordinated | 7,822 | | | Discounted cash flow | | Discount rates | | 17.83% - 17.83% (17.83%) |
Subordinated | 6,794 | | | Market approach | | EBITDA multiples | | 7.05x - 9.10x (7.78x) |
Subordinated | 451 | | | Market approach | | Revenue multiples | | 0.10x - 0.20x (0.18x) |
| | |
| | |
|
| | | | | | | | | |
| Fair Value at December 31, 2016 (1) | | Valuation technique | | Unobservable inputs | | Range (Weighted average) |
Debt investments: | | | | | | | |
Senior secured | $ | 149,128 |
| | Discounted cash flow | | Discount rates | | 6.70% - 18.71% (12.07%) |
| 15,901 |
| | Enterprise value | | EBITDA multiples | | 7.25x - 7.50x (7.31x) |
| | | | | | | |
Subordinated | 45,635 |
| | Discounted cash flow | | Discount rates | | 10.75% - 21.24% (14.19%) |
| 5,393 |
| | Enterprise value | | EBITDA multiples | | 8.00x - 8.00x (8.00x) |
| | | | | | | |
Equity investments | | | | | | | |
Preferred equity | 23,721 |
| | Enterprise value | | EBITDA multiples | | 4.50x - 8.50x (6.82x) |
| | | | | | | |
Common equity and warrants | 13,042 |
| | Enterprise value | | EBITDA multiples | | 5.00x - 8.50x (6.07x) |
| |
(1)Structured Finance Notes: | Excludes $15,926, $12,382, | | | | | | |
Subordinated notes(1) | 54,724 | | | Discounted cash flow | | Discount rates | | 15.00% - 19.50% (17.79%) |
| | | | | Constant default rate | | 0.00% - 2.00% (1.63%) |
| | | | | Constant default rate after 6 months | | 2.00% - 2.00% (2.00%) |
| | | | | Recovery rate | | 60.00% - 60.00% (60.00%) |
| | | | | | | |
Mezzanine debt | 1,701 | | | Discounted cash flow | | Discount Margin | | 7.25% - 9.45% (8.58%) |
| | | | | Constant default rate | | 0.00% - 2.00% (1.01%) |
| | | | | Constant default rate after 9 months | | 2.00% - 3.00% (2.49%) |
| | | | | Recovery rate | | 60.00% - 60.00% (60.00%) |
| | | | | | | |
Equity investments: | | | | | | | |
Preferred equity | 10,395 | | | Market approach | | EBITDA multiples | | 4.73x - 8.50x (7.37x) |
Preferred equity | 1,148 | | | Market approach | | Revenue multiples | | 0.20x - 1.56x (0.96x) |
| | | | | | | |
Common equity and $499 of senior secured debt investments, subordinated debt investments,warrants | 52,969 | | | Market approach | | EBITDA multiples | | 3.75x - 11.50x (8.10x) |
Common equity and equity investments, respectively, valued at Transaction Prices.warrants | 15 | | | Market approach | | Revenue multiples | | 0.20x - 1.56x (0.47x) |
| | | | | | | |
| $ | 420,097 | | | | | | | |
(1) The cash flows utilized in the discounted cash flow calculations assume liquidation at current market prices and redeployment of proceeds on all assets currently in default and all assets below specified fair value thresholds.
Averages in the preceding two tables were weighted by the fair value of the related instruments.
Changes in market credit spreads or events impacting the credit quality of the underlying portfolio company (both of which could impact the discount rate), as well as changes in EBITDA and/or EBITDA multiples, among other things, could have a significant impact on debt fair values, with the fair value of a particular debt investment susceptible to change in inverse relation to the changes in the discount rate but in tandem with changes in EBITDA and/or EBITDA multiples.rate. Changes in EBITDA and/or EBITDA multiples, as well as changes in the discount rate, could have a significant impact on equity fair values, with the fair value of an equity investment susceptible to change in tandem with the changes in EBITDA and/or EBITDA multiples, and other multiples.in inverse relation to changes in the discount rate. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
The following tables present changes in investments measured at fair value using Level 3 inputs for the ninethree months ended September 30, 2017March 31, 2021 and September 30, 2016.March 31, 2020. |
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Senior Secured Debt Investments |
| Subordinated Debt Investments |
| Preferred Equity |
| Common Equity and Warrants |
| Total |
Level 3 assets, January 1, 2017 | $ | 180,955 |
|
| $ | 63,410 |
|
|
| $ | 23,721 |
|
| $ | 13,541 |
|
| $ | 281,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss) on investments | (4,957 | ) |
| — |
|
|
| 2,814 |
|
| 558 |
|
| (1,585 | ) |
Net change in unrealized appreciation/depreciation on investments | (949 | ) |
| (4,660 | ) |
|
| (421 | ) |
| (1,718 | ) |
| (7,748 | ) |
Amortization of Net Loan Fees | 1,136 |
| ` | 51 |
|
|
| — |
|
| — |
|
| 1,187 |
|
Capitalized PIK interest and dividends | 682 |
|
| 452 |
|
|
| 1,065 |
|
| — |
|
| 2,199 |
|
Purchase and origination of portfolio investments | 100,619 |
|
| 8,700 |
|
|
| 4,631 |
|
| 713 |
|
| 114,663 |
|
Proceeds from principal payments on portfolio investments | (71,903 | ) |
| (14,624 | ) |
|
| — |
|
| — |
|
| (86,527 | ) |
Sale and redemption of portfolio investments | — |
|
| — |
|
|
| (5,056 | ) |
| (2,058 | ) |
| (7,114 | ) |
Conversion from debt investment to equity investment | (1,745 | ) |
| — |
|
|
| 1,745 |
|
| — |
|
| — |
|
Conversion from subordinated to senior secured debt investment | (9,631 | ) |
| 9,631 |
|
|
| — |
|
| — |
|
| — |
|
Other | (54 | ) |
| (18 | ) | — |
| — |
|
| — |
|
| (72 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets, September 30, 2017 | $ | 194,153 |
|
| $ | 62,942 |
|
|
| $ | 28,499 |
|
| $ | 11,036 |
|
| $ | 296,630 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Senior Secured Debt Investments | | Subordinated Debt Investments | | Preferred Equity | | Common Equity, Warrants and Other | | Structured Finance Notes | | Total |
Level 3 assets, January 1, 2021 | $ | 284,078 | | | $ | 15,067 | | | $ | 11,543 | | | $ | 52,984 | | | $ | 56,425 | | | $ | 420,097 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net unrealized appreciation (depreciation) on investments | 4,726 | | | (1,443) | | | 721 | | | 1,282 | | | (543) | | | 4,743 | |
Amortization of Net Loan Fees | 524 | | | 6 | | | — | | | — | | | 28 | | | 558 | |
Accretion of interest income on structured-finance notes | — | | | — | | | — | | | — | | | 2,278 | | | 2,278 | |
Capitalized PIK interest and dividends | 404 | | | 112 | | | 47 | | | — | | | — | | | 563 | |
Amendment fees | (97) | | | — | | | — | | | — | | | — | | | (97) | |
Purchase and origination of portfolio investments | 32,569 | | | — | | | — | | | — | | | 6,163 | | | 38,732 | |
Proceeds from principal payments on portfolio investments | (31,800) | | | — | | | — | | | — | | | — | | | (31,800) | |
| | | | | | | | | | | |
Proceeds from distributions received from portfolio investments | — | | | — | | | — | | | — | | | (2,721) | | | (2,721) | |
| | | | | | | | | | | |
Transfers out of Level 3 | (899) | | | — | | | — | | | — | | | — | | | (899) | |
Level 3 assets, March 31, 2021 | $ | 289,505 | | | $ | 13,742 | | | $ | 12,311 | | | $ | 54,266 | | | $ | 61,630 | | | $ | 431,454 | |
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| Senior Secured Debt Investments | | Subordinated Debt Investments | | Preferred Equity | | Common Equity and Warrants | | Total |
Level 3 assets, January 1, 2016 | $ | 160,437 |
| | $ | 64,240 |
| | $ | 22,133 |
| | $ | 10,486 |
| | 257,296 |
|
| | | | | | | | | |
Net realized gain (loss) on investments | — |
| | 7 |
| | — |
| | 2,560 |
| | 2,567 |
|
Net change in unrealized appreciation/depreciation on investments | 803 |
| | (279 | ) | | (4,549 | ) | | (3 | ) | | (4,028 | ) |
Amortization of Net Loan Fees | 610 |
| | 180 |
| | — |
| | — |
| | 790 |
|
Capitalized PIK interest, dividends, and fees | 506 |
| | 693 |
| | 1,031 |
| | — |
| | 2,230 |
|
Purchase and origination of portfolio investments | 35,638 |
| | 3,786 |
| | 646 |
| | 104 |
| | 40,174 |
|
Proceeds from principal payments on portfolio investments | (22,729 | ) | | (14,408 | ) | | — |
| | — |
| | (37,137 | ) |
Sale and redemption of portfolio investments | — |
| | — |
| | — |
| | (2,560 | ) | | (2,560 | ) |
Equity received in connection with purchase of portfolio investments and amendments | (346 | ) | | (79 | ) | | 247 |
| | 381 |
| | 203 |
|
Conversion from debt investment to equity investment | (321 | ) | | (1,765 | ) | | 2,039 |
| | 47 |
| | — |
|
Other | (404 | ) | | (95 | ) | | 133 |
| | — |
| | (366 | ) |
| | | | | | | | | |
Level 3 assets, September 30, 2016 | $ | 174,194 |
| | $ | 52,280 |
| | $ | 21,680 |
| | $ | 11,015 |
| | $ | 259,169 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Senior Secured Debt Investments | | Subordinated Debt Investments | | Preferred Equity | | Common Equity, Warrants and Other | | Structured Finance Notes | | Total |
Level 3 assets, January 1, 2020 | $ | 334,059 | | | $ | 43,090 | | | $ | 17,729 | | | $ | 25,777 | | | $ | 21,610 | | | $ | 442,264 | |
| | | | | | | | | | | |
Net realized loss on investments | (9,091) | | | — | | | — | | | — | | | — | | | (9,091) | |
Net unrealized depreciation on investments | (4,970) | | | (7,465) | | | (1,653) | | | (344) | | | (8,206) | | | (22,638) | |
Amortization of Net Loan Fees | 405 | | | 5 | | | — | | | — | | | — | | | 410 | |
Accretion of interest income on structured-finance notes | — | | | — | | | — | | | — | | | 1,223 | | | 1,223 | |
Capitalized PIK interest and dividends | 319 | | | 129 | | | 179 | | | — | | | — | | | 627 | |
Purchase and origination of portfolio investments | 48,802 | | | — | | | — | | | 69 | | | 12,040 | | | 60,911 | |
Proceeds from principal payments on portfolio investments | (30,674) | | | — | | | — | | | — | | | — | | | (30,674) | |
Sale and redemption of portfolio investments | (7,095) | | | — | | | (3,645) | | | — | | | — | | | (10,740) | |
Proceeds from distributions received from portfolio investments | — | | | — | | | — | | | — | | | (1,354) | | | (1,354) | |
Conversion from debt investment to equity investment (Note 4) | (703) | | | — | | | — | | | 703 | | | — | | | — | |
Transfers in to Level 3 | 12,683 | | | — | | | — | | | — | | | — | | | 12,683 | |
Level 3 assets, March 31, 2020 | $ | 343,735 | | | $ | 35,759 | | | $ | 12,610 | | | $ | 26,205 | | | $ | 25,313 | | | $ | 443,621 | |
The net change in unrealized appreciation/depreciation for the nine months ended September 30, 2017 and 2016appreciation (depreciation) reported in the Company’s consolidated statements of operations for the three months ended March 31, 2021 and 2020, attributable to the Company’s Level 3 assets still held at those respective period ends was $(5,425)as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
Senior secured debt investments | $ | 4,078 | | | $ | (19,003) | |
Subordinated debt investments | (1,442) | | | (7,465) | |
Preferred equity | 721 | | | (1,650) | |
Common equity, warrants and other | 1,282 | | | (344) | |
Structured Finance Notes | (531) | | | (8,206) | |
Net unrealized appreciation (depreciation) on investments held | $ | 4,108 | | | $ | (36,668) | |
OFS Capital Corporation and $(904), respectively. Subsidiaries
GAAP requires
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Other Financial Assets and Liabilities
The Company provides disclosure of the fair value of financial instruments for which it is practical to estimate such value and the methods and significant assumptions used to estimate fair value. It excludes from this requirement nonfinancial assets and liabilities. Accordingly, the required fair value disclosures provide only a partial estimate of the fair value of the Company. The Company believes that the carrying amounts of its other financial instruments such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments. The PWB Credit Facility and BNP Facility are variable rate instruments and fair value is approximately book value.
The following table sets forth carrying values and fair values of the Company’s debt as of March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2021 | | As of December 31, 2020 |
Description | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
PWB Credit Facility | $ | — | | | $ | — | | | $ | 600 | | | $ | 600 | |
BNP Facility | 19,550 | | | 19,550 | | | 31,450 | | | 31,450 | |
Unsecured Notes Due September 2023 | 24,188 | | | 25,490 | | | 24,106 | | | 25,100 | |
Unsecured Notes Due April 2025 | — | | | — | | | 48,891 | | | 48,800 | |
Unsecured Notes Due October 2025 | — | | | — | | | 47,339 | | | 47,069 | |
Unsecured Notes Due February 2026 | 121,617 | | | 121,617 | | | — | | | — | |
Unsecured Notes Due October 2026 | 52,690 | | | 55,270 | | | 52,617 | | | 51,066 | |
SBA-guaranteed debentures | 94,583 | | | 99,380 | | | 104,182 | | | 116,172 | |
Total debt, at fair value | $ | 312,628 | | | $ | 321,307 | | | $ | 309,185 | | | $ | 320,257 | |
The following tables present the fair value measurements of the Company's SBA-guaranteed debentures are carried at costdebt and with their longer maturity dates,indicate the fair value hierarchy of the significant unobservable inputs utilized by the Company to determine such fair values as of March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
Description | Level 1 | | Level 2 | | Level 3 (1) | | Total |
PWB Credit Facility | $ | — | | | $ | — | | | $ | — | | | $ | — | |
BNP Facility | — | | | — | | | 19,550 | | | 19,550 | |
Unsecured Notes Due September 2023 | 25,490 | | | — | | | — | | | 25,490 | |
Unsecured Notes Due February 2026 | — | | | — | | | 121,617 | | | 121,617 | |
Unsecured Notes Due October 2026 | 55,270 | | | — | | | — | | | 55,270 | |
SBA-guaranteed debentures | — | | | — | | | 99,380 | | | 99,380 | |
Total debt, at fair value | $ | 80,760 | | | $ | — | | | $ | 240,547 | | | $ | 321,307 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
Description | Level 1 | | Level 2 | | Level 3 (1) | | Total |
PWB Credit Facility | $ | — | | | $ | — | | | $ | 600 | | | $ | 600 | |
BNP Facility | — | | | — | | | 31,450 | | | 31,450 | |
Unsecured Notes Due September 2023 | 25,100 | | | — | | | — | | | 25,100 | |
Unsecured Notes Due April 2025 | 48,800 | | | — | | | — | | | 48,800 | |
Unsecured Notes Due October 2025 | 47,069 | | | — | | | — | | | 47,069 | |
Unsecured Notes Due October 2026 | 51,066 | | | — | | | — | | | 51,066 | |
SBA-guaranteed debentures | — | | | — | | | 116,172 | | | 116,172 | |
Total debt, at fair value | $ | 172,035 | | | $ | — | | | $ | 148,222 | | | $ | 320,257 | |
(1) For Level 3 measurements, fair value is estimated by discounting remaining payments usingat current market rates for similar instruments at the measurement date and considering such factors as the legal maturity date. As of September 30, 2017,
OFS Capital Corporation and December 31, 2016, the fair value of the Company’s SBA debentures using Level 3 inputs is estimated at $153,265 and $159,708, respectively.Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 6. Commitments and Contingencies
UnfundedThe Company has the following unfunded commitments to the Company's portfolio companies as of September 30, 2017, were as follows:March 31, 2021: |
| | | | | | |
Name of Portfolio Company | | Investment Type | | September 30, 2017 |
BCC Software, LLC |
| Senior Secured Revolver |
| $ | 1,094 |
|
TRS Services, LLC |
| Senior Secured Loan |
| 500 |
|
Carolina Lubes, Inc. | | Senior Secured Loan | | 2,920 |
|
|
|
|
| $ | 4,514 |
|
| | | | | | | | | | | | | | |
Name of Portfolio Company | | Investment Type | | Commitment |
A&A Transfer, LLC | | Senior Secured Loan (Revolver) | | $ | 2,136 | |
I&I Sales Group, LLC | | Senior Secured Loan (Revolver) | | 156 | |
Inergex Holdings, LLC | | Senior Secured Loan (Revolver) | | 2,813 | |
SSJA Bariatric Management LLC | | Senior Secured Loan (Revolver) | | 667 | |
| | | | $ | 5,772 | |
From time to time, the Company is involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any certainty, management is of the opinion, based on the advice of legal counsel, that final disposition of any litigation should not have a material adverse effect on the financial position of the Company as of September 30, 2017.March 31, 2021.
Additionally, the Company is subject to periodic inspection by regulators to assess compliance with applicable BDC regulations related to being a BDC and SBIC I LP is subject to periodic inspections by the SBA.
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide for general indemnifications.indemnification. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company believes the risk of any material obligation under these indemnifications to be low.
Note 7. Borrowings
SBA Debentures:The SBIC Program allowsSBA debentures issued by SBIC I LP to obtain leverageand other SBA regulations generally restrict assets held by issuing SBA-guaranteed debentures, subject to issuance of a capital commitment by the SBA and customary procedures. These debentures are non-recourse to the Company, have interest payable semi-annually and a ten-year maturity. The interest rate is fixed at the time of SBA pooling, which is March and September of each year, at a market-driven spread over U.S. Treasury Notes with ten-year maturities.
Under present regulations of the SBIC Act, the maximum amount of SBA-guaranteed debt that may be issued by a single SBIC licensee is $150,000. An SBIC fund may borrow up to two times the amount of its regulatory capital, subject to customary regulatory requirements. For two or more SBICs under common control, the maximum amount of outstanding SBA-provided leverage cannot exceed $350,000. In connection with the SBIC Acquisition, the Company increased its total commitments to SBIC I LP to $75,000, which became a wholly-owned investment company subsidiary of the Company on December 4, 2013. During 2014, the Company fully funded its $75,000 commitment to SBIC I LP. As of September 30, 2017, and December 31, 2016, SBIC I LP had fully drawn the $149,880 of leverage commitments from the SBA.
On a stand-alone basis, SBIC I LP held $248,247$201,454 and $247,512$223,795 in assets at September 30, 2017,March 31, 2021, and December 31, 2016,2020, respectively, which accounted for approximately 70%39% and 81%46% of the Company’s total consolidated assets, respectively. The SBICThese assets can notcannot be pledged under any debt obligation of the Company. The average dollar amount of borrowings outstanding during the three months ended March 31, 2021 and 2020, were $95,953 and $144,392, respectively.
During the three months ended March 31, 2021, SBIC I LP prepaid $9,765 of SBA debentures that were contractually due September 1, 2022 and September 1, 2024. The Company recognized a loss on extinguishment of debt of $101 related to the charge-off of deferred borrowing costs on the prepaid debentures. As of March 31, 2021, SBIC I LP had outstanding SBA debentures of $95,505.
BNP Facility: OFSCC-FS has up to $150,000 of available credit, subject to borrowing base requirements, under the BNP Facility maturing on June 20, 2024, of which $19,550 was drawn as of March 31, 2021. The effective interest rate on the BNP Facility was 7.36% at March 31, 2021. The average dollar amount of borrowings outstanding during the three months ended March 31, 2021 and 2020, were $31,183 and $65,016, respectively. Borrowings under the BNP Facility are secured by substantially all of the assets held by OFSCC-FS, which were $100,901, or 20%, of the Company's total consolidated assets at March 31, 2021. The unused commitment under the BNP Facility was $130,450 as of March 31, 2021.
PWB Credit Facility:The Company has up to $25,000 of available credit, subject to borrowing base requirements, under its PWB Credit Facility maturing February 28, 2023, of which $-0- was drawn as of March 31, 2021. The average dollar amount of borrowings outstanding during the three months ended March 31, 2021 and 2020, were $2,249 and $7,836, respectively. The effective interest rate on the PWB Credit Facility was 5.02% at March 31, 2021. As of March 31, 2021 the unused commitment under the PWB Credit Facility was $25,000.
On February 17, 2021, the Company amended the BLA to among other things: (i) increase the maximum amount available from $20,000 to $25,000; (ii) decrease the interest rate floor from 5.25% per annum to 5.00% per annum; (iii) modify certain financial performance covenants; and (iv) extend the maturity date from February 28, 2021 to February 28, 2023.
Unsecured Notes: As of March 31, 2021, the Company had Unsecured Notes with an aggregate outstanding principal of $204,325. The average dollar amount of borrowings under the Unsecured Notes outstanding during the three months ended
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
March 31, 2021 and 2020, were $221,789 and $152,850, respectively. The following table shows the Company’s outstanding SBA debentures payable as of September 30, 2017, and December 31, 2016:
|
| | | | | | | | | | | | | |
| | | | | | SBA debentures outstanding |
Pooling Date | | Maturity Date | | Fixed Interest Rate | | September 30, 2017 | | December 31, 2016 |
September 19, 2012 | | September 1, 2022 | | 3.049 | % | | $ | 14,000 |
| | $ | 14,000 |
|
September 25, 2013 | | September 1, 2023 | | 4.448 |
| | 7,000 |
| | 7,000 |
|
March 26, 2014 | | March 1, 2024 | | 3.995 |
| | 5,000 |
| | 5,000 |
|
September 24, 2014 | | September 1, 2024 | | 3.819 |
| | 4,110 |
| | 4,110 |
|
September 24, 2014 | | September 1, 2024 | | 3.370 |
| | 31,265 |
| | 31,265 |
|
March 25, 2015 | | March 1, 2025 | | 2.872 |
| | 65,920 |
| | 65,920 |
|
September 23, 2015 | | September 1, 2025 | | 3.184 |
| | 22,585 |
| | 22,585 |
|
SBA debentures outstanding | | | | | | 149,880 |
| | 149,880 |
|
Unamortized debt issuance costs | | | | | | (2,752 | ) | | (3,037 | ) |
SBA debentures outstanding, net of unamortized deferred debt issuance costs | | | | $ | 147,128 |
| | $ | 146,843 |
|
The Company received exemptive relief from the SEC effective November 26, 2013, which permits the Company to exclude SBA guaranteed debentures from the definition of senior securities in the statutory 200% asset coverage ratio under the 1940 Act, allowing for greater capital deployment.
Theweighted average effective interest rate on the SBA debentures, which includesUnsecured Notes was 5.89% at March 31, 2021.
On February 10, 2021, the Company closed the public offering of $100,000 aggregate principal amount of its 4.75% notes due 2026, and on March 18, 2021, the Company closed an additional public offering of $25,000 aggregate principal amount of its 4.75% notes due 2026 (together, the "Unsecured Notes Due February 2026"). The total net proceeds to the Company from the Unsecured Notes Due February 2026, after deducting underwriting fees of $3,209 and offering expenses of $231, was approximately $121,560. The Unsecured Notes Due February 2026 bear an effective interest rate, including amortization of deferred debt issuance costs, was 3.43% as of September 30, 2017. Interest expense5.30%. The Unsecured Notes Due February 2026 will mature on the SBA debentures was $1,295February 10, 2026, and $3,846 for the three and nine months ended September 30, 2017, respectively, which includes amortization of debt issuance costs of $95 and $286, respectively. Interest expense on the SBA debentures was $1,295 and $3,860 for the three and nine months ended September 30, 2016, respectively, which includes amortization of debt issuance costs of $95 and $286, respectively.
The weighted-average fixed cash interest rate on the SBA debentures as of September 30, 2017, and December 31, 2016 was 3.18%.
PWB Credit Facility: On November 5, 2015, the Company entered intomay redeem the Unsecured Notes Due February 2026 in whole or in part at any time, or from time to time, at the Company’s option at par plus a BLA with Pacific Western Bank, as lender, to provide"make-whole" premium, if applicable. The Unsecured Notes Due February 2026 bear interest at a rate of 4.75% per year payable semi-annually in arrears on February 10 and August 10 of each year, commencing on August 10, 2021.
On March 12, 2021, the Company withused the PWB Credit Facility, a $15,000 senior secured revolving credit facility scheduledproceeds from the Unsecured Notes Due February 2026 to mature on November 6, 2017. The PWB Credit Facility is available for general corporate purposes including investment funding. The maximum availability of the PWB Credit Facility is equal to 50% of theredeem all $50,000 in aggregate outstanding principal amount of eligible loans includedthe Unsecured Notes Due April 2025 and all $48,525 in the borrowing base and otherwise specified in the BLA. The PWB Credit Facility is guaranteed by OFS Capital WM and secured by allaggregate principal amount of the Company’sUnsecured Notes Due October 2025. The Unsecured Notes Due April 2025 and the Unsecured Notes Due October 2025 were redeemed at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from January 31, 2021, through, but excluding, March 12, 2021. The Company recognized a loss on extinguishment of debt of $2,198 related to the charge-off of deferred borrowing costs on the redeemed notes.
The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all current and future unsecured indebtedness of the Company. Because the Unsecured Notes are not secured by any of the Company's assets, excludingthey are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which the Company subsequently grants a security interest), to the extent of the value of the assets held by SBIC I LP and the Company’s SBIC I LP and SBIC I GP partnership interests.
On October 31, 2016, the BLA was amended to, among other things (i) increase the maximum amount availablesecuring such indebtedness, including, without limitation, borrowings under the PWB Credit Facility from $15 million to $25 million, (ii) extendFacility.
Interest expense for the maturity date from November 6, 2017 to Octoberthree months ended March 31, 2018, (iii) increase the fixed interest rate from 4.75% to 5.00% per annum,2021 and (iv) exclude subordinated loan investments (as defined in the BLA) from the borrowing base. In addition, as of the amendment date, the Company will incur an unused commitment fee, payable monthly in arrears, equal to 0.50% per annum on any unused portion of the PWB Credit Facility in excess of $15,000, which is included in interest expense2020 on the consolidated statement of operations. There were no advances underCompany's outstanding borrowings is presented below:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
SBA Debentures | | | | | $ | 833 | | | $ | 1,224 | |
PWB Credit Facility | | | | | 40 | | | 289 | |
Unsecured Notes | | | | | 3,502 | | | 2,615 | |
BNP Facility | | | | | 450 | | | 794 | |
Total interest expense | | | | | $ | 4,825 | | | $ | 4,922 | |
| | | | | | | |
Average dollar borrowings | | | | | $ | 351,174 | | | $ | 370,094 | |
Weighted average interest rate | | | | | 5.57 | % | | 5.33 | % |
Interest expense includes the facility prior to the October 31, 2016, amendment.
On August 9, 2017, the BLA was further amended to increase the maximum amount available under the PWB Credit Facility from $25 million to $35 million, and change thestated interest rate from a fixed per annum rate of 5.00% to a variable rate initially set at 5.00%, calculated as the Prime Rate plus a 0.75% margin, with a 5.00% floor. As of September 30, 2017, the interest rate on the unpaid principaloutstanding balance, ofcommitment fees on undrawn amounts, and the PWB Credit Facility was 5.00%. All other principal covenants and terms under the PWB Credit Facility remained the same. The Company incurred deferred debt issuance costs of $100 in connection with the amendment.
The average dollar amount of borrowings outstanding during the three and nine months ended September 30, 2017, was $11,073 and $5,823, respectively. The effective interest rate, which includes amortization of deferred debt issuance costs, as of September 30, 2017, was 5.44% based maximum amount available under the PWB Credit Facility. Deferred debt issuance
financing costs.
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
costs, net of accumulated amortization, was $240 and $256 as of September 30, 2017 and December 31, 2016, respectively. Amortization of debt issuance costs was $47 and $117 for the three and nine months ended September 30, 2017, respectively. Availability under the PWB Credit Facility as of September 30, 2017, was $17,900 based on the stated advance rate of 50% under the borrowing base.
The BLA contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, and a statutory asset coverage test. The BLA also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, andfollowing table shows the occurrence of a material adverse change in our financial condition. As of September 30, 2017, the Company was in compliance with the applicable covenants.
Note 8. Federal Income Tax
The Company has elected to be taxed as a RIC under Subchapter Mscheduled maturities of the Code. Maintenance of its status as a RIC, requires the Company requires annual distributions to its stockholders at least 90% of its ICTI, as defined by the Code. Additionally, to avoid a 4% excise tax on undistributed earnings the Company must distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending October 31 of that calendar year, and (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no federal income tax. Maintenanceprincipal balances of the Company's RIC status also requires adherence to certain source of income and asset diversification requirements.
The Company has met the required distribution, source of income and asset diversification requirementsoutstanding borrowings as of March 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than year | | 1-3 years (1) | | 4-5 years (1) | | After 5 years (1) |
PWB Credit Facility | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Unsecured Notes | | 204,325 | | | — | | | 25,000 | | | 125,000 | | | 54,325 | |
SBA Debentures | | 95,505 | | | — | | | 7,000 | | | 88,505 | | | — | |
BNP Facility | | 19,550 | | | — | | | — | | | 19,550 | | | — | |
Total | | $ | 319,380 | | | $ | — | | | $ | 32,000 | | | $ | 233,055 | | | $ | 54,325 | |
(1)The SBA debentures are scheduled to mature between September 30, 2017,2022 and intendsSeptember 2025. The Unsecured Notes are scheduled to continue to meet these requirements. Accordingly, there is no liability for federal income taxes at the Company level. The Company’s ICTI differs from the net increase in net assets resulting from operations primarily due to differences in income recognition on the unrealized appreciation/depreciation of investments, income from Company’s equity investments in pass-through entities, PIK dividends that have not yet been declaredmature between October 2023 and paid by underlying portfolio companies, capital gains and losses and the net creation or utilization of capital loss carryforwards.
The determination of the tax attributes of the Company’s distributions is made annually as of the end of its fiscal year based upon its ICTI for the full year and distributions paid for the full year. If the tax characteristics of the Company’s $12,362 distributions paid during 2017 were determined as of September 30, 2017, approximately $3,314 would have represented return of capital to its stockholders.
The Company records reclassifications to its capital accounts related to permanent differences between GAAP and tax treatment related to goodwill amortization, excise taxes, and other permanent differences; and temporary differences between GAAP and tax treatment of realized gains and losses, income arising from Company’s equity investments in pass-through entities, PIK dividends, and other temporary differences. Reclassifications for the three and nine months ended September 30, 2017 and 2016, were as follows:October 2026.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 |
| 2016 | | 2017 |
| 2016 |
Paid-in capital in excess of par | $ | 1,470 |
|
| $ | (38 | ) |
| $ | 1,534 |
|
| $ | (2 | ) |
Undistributed net investment income | 184 |
|
| 70 |
|
| 516 |
|
| 97 |
|
Accumulated net realized gain (loss) | (1,654 | ) |
| (32 | ) |
| (2,050 | ) |
| (95 | ) |
The tax-basis cost of investments and associated tax-basis gross unrealized appreciation (depreciation) inherent in the fair value of investments as of September 30, 2017, and December 31, 2016, were as follows:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Tax-basis amortized cost of investments | $ | 294,310 |
| | $ | 273,414 |
|
Tax-basis gross unrealized appreciation on investments | 19,361 |
| | 19,554 |
|
Tax-basis gross unrealized depreciation on investments | (17,041 | ) | | (11,341 | ) |
Tax-basis net unrealized appreciation on investments | 2,320 |
| | 8,213 |
|
Fair value of investments | $ | 296,630 |
| | $ | 281,627 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 9.8. Financial Highlights
The following is a schedule of financial highlights for the three and nine months ended September 30, 2017March 31, 2021 and 2016:2020:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
Per share operating performance: | | | | | | | |
Net asset value per share at beginning of period | | | | | $ | 11.85 | | | $ | 12.46 | |
Net investment income (4) | | | | | 0.19 | | | 0.30 | |
Net realized gain (loss) on non-control/non-affiliate investments (4) | | | | | 0.02 | | | (0.67) | |
| | | | | | | |
Net unrealized appreciation (depreciation) on non-control/non-affiliate investments, net of taxes (4) | | | | | 0.11 | | | (1.69) | |
Net unrealized appreciation (depreciation) on affiliate investments (4) | | | | | 0.14 | | | (0.22) | |
Net unrealized appreciation (depreciation) on control investment (4) | | | | | 0.03 | | | (0.12) | |
Loss on extinguishment of debt (4) | | | | | (0.17) | | | (0.01) | |
| | | | | | | |
Total from operations | | | | | 0.32 | | | (2.41) | |
Distributions | | | | | (0.20) | | | (0.34) | |
Issuance of common stock (10) | | | | | (0.02) | | | — | |
Net asset value per share at end of period | | | | | $ | 11.95 | | | $ | 9.71 | |
| | | | | | | |
Per share market value, end of period | | | | | $ | 8.78 | | | $ | 4.07 | |
Total return based on market value (1)(9) | | | | | 25.6 | % | | (60.8) | % |
Total return based on net asset value (2)(9) | | | | | 3.2 | % | | (15.6) | % |
Shares outstanding at end of period | | | | | 13,411,962 | | | 13,392,529 | |
Weighted average shares outstanding | | | | | 13,409,033 | | | 13,377,008 | |
Ratio/Supplemental Data (in thousands except ratios) | | | | | | | |
Average net asset value (3) | | | | | $ | 159,713 | | | $ | 148,305 | |
Net asset value at end of period | | | | | $ | 160,470 | | | $ | 129,983 | |
Net investment income | | | | | $ | 2,550 | | | $ | 3,972 | |
Ratio of total expenses, net to average net assets (5)(7) | | | | | 19.9 | % | | 24.0 | % |
Ratio of total expenses and losses extinguishment of debt to average net assets(5) | | | | | 25.6 | % | | 24.4 | % |
Ratio of net investment income to average net assets (5)(8) | | | | | 6.4 | % | | 10.7 | % |
| | | | | | | |
Ratio of loss on extinguishment of debt to average net assets(9) | | | | | 1.4 | % | | 0.1 | % |
Portfolio turnover (6) | | | | | 11.4 | % | | 12.9 | % |
(1)Calculated as ending market value less beginning market value, adjusted for distributions reinvested at prices based on the Company’s dividend reinvestment plan for the respective distributions.
(2)Calculated as ending net asset value less beginning net asset value, adjusted for distributions reinvested at the Company’s dividend reinvestment plan for the respective distributions.
(3)Based on the average of the net asset value at the beginning and end of the indicated period and if applicable the preceding calendar quarters.
(4)Calculated on the average share method.
(5)Annualized.
(6)Portfolio turnover rate is calculated using the lesser of period-to-date sales, Structured Finance Note distributions and principal payments or period-to-date purchases over the average of the invested assets at fair value.
(7)Ratio of total expenses before incentive fee waiver to average net assets was 25.2% for the three months ended March 31, 2020.
(8)Ratio of net investment income before incentive fee waiver to average net assets was 9.5% for the three months ended March 31, 2020.
(9)Not annualized.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 |
| 2016 | | 2017 |
| 2016 |
Per share data: | | | | | | | |
Net asset value per share at beginning of period | $ | 14.40 |
| | $ | 14.76 |
| | $ | 14.82 |
| | $ | 14.76 |
|
Distributions (4) | (0.34 | ) |
| (0.34 | ) | | (1.02 | ) | | (1.02 | ) |
Net investment income | 0.33 |
| | 0.34 |
| | 1.00 |
| | 1.07 |
|
Net realized gain on non-control/non-affiliate investments | (0.39 | ) |
| 0.01 |
|
| (0.42 | ) |
| 0.27 |
|
Net realized gain on affiliate investments | 0.27 |
|
| — |
|
| 0.37 |
|
| — |
|
Net change in unrealized appreciation/depreciation on non-control/non-affiliate investments | 0.09 |
|
| (0.06 | ) |
| (0.61 | ) |
| (0.38 | ) |
Net change in unrealized appreciation/depreciation on affiliate investments | (0.22 | ) |
| (0.04 | ) |
| (0.19 | ) |
| 0.01 |
|
Net change in unrealized depreciation on control investment | — |
|
| — |
|
| 0.15 |
|
| (0.04 | ) |
Issuance of common stock (7) | — |
|
| — |
|
| (0.03 | ) |
| — |
|
Other (8) | 0.01 |
|
| — |
|
| 0.08 |
|
| — |
|
Net asset value per share at end of period | $ | 14.15 |
|
| $ | 14.67 |
|
| $ | 14.15 |
|
| $ | 14.67 |
|
| | | | | | | |
Per share market value, end of period | $ | 13.17 |
| | $ | 13.03 |
| | $ | 13.17 |
| | $ | 13.03 |
|
Total return based on market value (1) | (5.6 | )% | | 4.0 | % | | 2.8 | % | | 22.4 | % |
Total return based on net asset value (2) | 0.6 | % | | 1.4 | % | | 2.1 | % | | 6.2 | % |
Shares outstanding at end of period | 13,334,851 |
| | 9,697,210 |
| | 13,334,851 |
| | 9,697,210 |
|
Weighted average shares outstanding | 13,331,690 |
| | 9,694,353 |
| | 12,089,895 |
| | 9,692,634 |
|
Ratio/Supplemental Data (in thousands except ratios) |
|
| |
|
| |
|
| |
|
|
Average net asset value (3) | $ | 190,326 |
| | $ | 142,645 |
| | $ | 167,454 |
| | $ | 142,578 |
|
Net asset value at end of period | $ | 188,656 |
| | $ | 142,210 |
| | $ | 188,656 |
| | $ | 142,210 |
|
Net investment income | $ | 4,402 |
| | $ | 3,297 |
| | $ | 12,058 |
| | $ | 10,409 |
|
Ratio of total expenses to average net assets (5) | 9.9 | % | | 11.4 | % | | 10.4 | % | | 11.7 | % |
Ratio of net investment income to net assets at end of period (5) | 9.3 | % | | 9.3 | % | | 8.5 | % | | 9.8 | % |
Portfolio turnover (6) | 13.5 | % | | 2.2 | % | | 33.2 | % | | 15.5 | % |
| |
(1) | Calculation is ending market value less beginning market value, adjusting for distributions reinvested at prices obtained in the Company’s distribution reinvestment plan for the respective distributions. |
| |
(2) | Calculation is ending net asset value less beginning net asset value, adjusting for distributions reinvested at the Company’s quarter-end net asset value for the respective distributions. |
| |
(3) | Based on net asset values as the end of the indicated and preceding calendar quarter for three-month periods, and net asset values as the end of the indicated and three preceding calendar quarters for nine-month periods. |
| |
(4) | The components of the distributions are presented on an income tax basis. The determination of the tax attributes of the Company’s distributions is made annually as of the end of its fiscal year based upon its ICTI for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. If the tax characteristics of the Company’s distributions paid during 2017 were determined as of September 30, 2017, approximately $0.27 per share would represent a return of capital. |
| |
(6) | Portfolio turnover rate is calculated using the lesser of period-to-date sales and principal payments or period-to-date purchases over the average of the invested assets at fair value. |
| |
(7) | The issuance of common stock on a per share basis reflects the incremental net asset value change as a result of the Offering. |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(10)Common stock issued through DRIP.
(11)Ratio of total expenses and losses on extinguishment of debt before incentive fee waiver to average net assets was 25.6% for the three months ended March 31, 2020.
| |
(8) | Represents the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date. |
Note 10. Distributions9. Capital Transactions
Distributions:The Company intends to make distributionsdistribute to its stockholders, on a quarterly basis, of substantially all of its net investment income. In addition, although the Company intends to make distributions ofdistribute at least annually net realized capital gains, net of taxes if any, at least annually, out of assets legally available for such distributions, itdistribution, the Company may in the future decide toalso retain such capital gains for investment.investment through a deemed distribution.
The Company may be limited in its ability to make distributions due to the BDC asset coverage requirements of the 1940 Act. The Company’s ability to make distributions may also be affected by its abilitySBIC I LP's distributions to receivethe Company, which are governed by SBA regulations and currently require the prior approval of the SBA. In addition, distributions from OFSCC-FS to the Company are restricted by the terms and conditions of the BNP Facility. Net assets of SBIC I LP which is governed by SBA regulations. Consolidatedwere $106,587, and consolidated cash and cash equivalentsat March 31, 2021 includes $52,245$4,536 held by SBIC I LP, of which $8,863 was not available for distribution to the Company with the prior consent of the SBA. Net Assets of OFSCC-FS were $63,140, and consolidated cash at September 30, 2017.March 31, 2021 includes $4,448 held by OFSCC-FS, of which $-0- was available for distribution to the Company.
The following table summarizes distributions declared and paid for the three and nine months ended September 30, 2017March 31, 2021 and 2016:2020:
|
| | | | | | | | | | | | | | | | | | | |
Date Declared | | Record Date | | Payment Date | | Amount Per Share | | Cash Distribution | | DRIP Shares Issued | | DRIP Shares Value |
Nine Months Ended September 30, 2016 | | | | | | | | | | |
March 7, 2016 | | March 17, 2016 | | March 31, 2016 | | $ | 0.34 |
| | $ | 3,280 |
| | 1,154 |
| | $ | 15 |
|
May 2, 2016 | | June 16, 2016 | | June 30, 2016 | | 0.34 |
| | 3,269 |
| | 1,998 |
| | 26 |
|
August 5, 2016 | | September 16, 2016 | | September 30, 2016 | | 0.34 |
| | 3,258 |
| | 2,888 |
| | 38 |
|
| | | | | | $ | 1.02 |
| | $ | 9,807 |
| | 6,040 |
|
| $ | 79 |
|
Nine Months Ended September 30, 2017 | | | | | | | | | | |
March 9, 2017 |
| March 17, 2017 |
| March 31, 2017 |
| $ | 0.34 |
|
| $ | 3,257 |
|
| 2,919 |
|
| $ | 41 |
|
May 2, 2017 |
| June 16, 2017 |
| June 30, 2017 |
| 0.34 |
|
| 4,483 |
|
| 3,439 |
|
| 49 |
|
August 1, 2017 |
| September 15, 2017 |
| September 29, 2017 |
| 0.34 |
|
| 4,491 |
|
| 3,196 |
|
| 42 |
|
| | | | | | $ | 1.02 |
| | $ | 12,231 |
| | 9,554 |
| | $ | 132 |
|
For the nine months ended September 30, 2017, $132 of the total $12,363 paid to stockholders represented DRIP participation, during which the Company satisfied the DRIP participation requirements with the issuance of 9,554 shares at an average value of $13.89 per share at the date of issuance. For the nine months ended September 30, 2016, $79 of the total $9,886 paid to stockholders represented DRIP participation, during which the Company satisfied the DRIP participation requirements with the issuance of 6,040 shares at an average value of $12.96 per share at the date of issuance.
Since the Company’s IPO, distributions to stockholders total $63,242, or $6.29 per share, on a cumulative basis. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Date Declared | | Record Date | | Payment Date | | Amount Per Share | | Cash Distribution | | DRIP Shares Issued | | DRIP Shares Value |
Three Months Ended March 31, 2020 | | | | | | | | | | |
March 11, 2020 | | March 24, 2020 | | March 31, 2020 | | $ | 0.34 | | | $ | 4,484 | | | 15,693 | | | $ | 64 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | $ | 0.34 | | | $ | 4,484 | | | $ | 15,693 | | | $ | 64 | |
Three Months Ended March 31, 2021 | | | | | | | | | | |
March 2, 2021 | | March 24, 2021 | | March 31, 2021 | | $ | 0.20 | | | $ | 2,655 | | | 3,103 | | | $ | 27 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | $ | 0.20 | | | $ | 2,655 | | | $ | 3,103 | | | $ | 27 | |
Distributions in excess of the Company’s current and accumulated ICTI would be treated first as a return of capital to the extent of the stockholder’s adjusted tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of the Company’s distributions is made annually as of the end of its fiscal year based upon its ICTI for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. Each year, a statement on Form 1099-DIV identifying the sourcetax character of the distributiondistributions is mailed to the Company’s stockholders. If
Stock repurchase program:
The Company maintains a Stock Repurchase Program under which the tax characteristicsCompany may acquire up to $10.0 million of its outstanding common stock. On May 4, 2020, the Company’s distributions paidBoard extended the Stock Repurchase Program for an additional two-year period ending May 22, 2022, or until the approved dollar amount has been used to repurchase shares.
The following table summarizes shares of common stock repurchased under the Stock Repurchase Program during 2017 were determined as of September 30, 2017, approximately $0.27 per share of the Company’s distributions represented a return of capital to its stockholders,three months ended March 31, 2021 and 2020, respectively.
| | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Cost of Shares Purchased | | Average Price Paid Per Share |
Three Months Ended March 31, 2020 | | | | | | |
January 1, 2020 through March 31, 2020 | | — | | | $ | — | | | $ | — | |
| | | | | | |
Three Months Ended March 31, 2021 | | | | | | |
January 1, 2021 through March 31, 2021 | | 700 | | | $ | 5 | | | $ | 6.70 | |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 11.10. Consolidated Schedule of Investments In and Advances To Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Period Ended March 31, 2021 | | | | | | | | |
Name of Portfolio Company | | Investment Type (1) | | Net Realized Gain (Loss) | | Net change in unrealized appreciation/(depreciation) | | Interest & PIK Interest | | Dividends | | Fees | | Total Income (2) | | December 31, 2020, Fair Value | | Gross Additions (3) | | Gross Reductions (4) | | March 31, 2021, Fair Value (5) |
Control Investment | | | | | | | | | | | | | | | | | | | | | | |
MTE Holding Corp. | | Subordinated Loan | | $ | — | | | $ | 20 | | | $ | 367 | | | $ | — | | | $ | — | | | $ | 367 | | | $ | 7,822 | | | $ | 118 | | | $ | — | | | $ | 7,940 | |
| | Common Equity | | — | | | 368 | | | — | | | — | | | — | | | — | | | 2,990 | | | 368 | | | — | | | 3,358 | |
| | | | — | | | 388 | | | 367 | | | — | | | — | | | 367 | | | 10,812 | | | 486 | | | — | | | 11,298 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total Control Investment | | | | — | | | 388 | | | 367 | | | — | | | — | | | 367 | | | 10,812 | | | 486 | | | — | | | 11,298 | |
Affiliate Investments | | | | | | | | | | | | | | | | | | | | | | |
3rd Rock Gaming Holdings, LLC | | Senior Secured Loan | | — | | | (21) | | | — | | | — | | | — | | | — | | | 9,258 | | | 13 | | | (2,271) | | | 7,000 | |
| | Common Equity (6) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | — | | | (21) | | | — | | | — | | | — | | | — | | | 9,258 | | | 13 | | | (2,271) | | | 7,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
Chemical Resources Holdings, Inc. | | Senior Secured Loan | | — | | | 89 | | | 324 | | | — | | | — | | | 324 | | | 13,744 | | | 89 | | | 9 | | | 13,842 | |
| | Common Equity (6) | | — | | | (153) | | | — | | | — | | | — | | | — | | | 3,420 | | | — | | | (153) | | | 3,267 | |
| | | | — | | | (64) | | | 324 | | | — | | | — | | | 324 | | | 17,164 | | | 89 | | | (144) | | | 17,109 | |
| | | | | | | | | | | | | | | | | | | | | | |
Contract Datascan Holdings, Inc. | | Preferred Equity (7) | | — | | | 38 | | | — | | | — | | | — | | | — | | | 2,690 | | | 38 | | | — | | | 2,728 | |
| | Common Equity (6) | | — | | | (5) | | | — | | | — | | | — | | | — | | | 46 | | | — | | | (5) | | | 41 | |
| | | | — | | | 33 | | | — | | | — | | | — | | | — | | | 2,736 | | | 38 | | | (5) | | | 2,769 | |
| | | | | | | | | | | | | | | | | | | | | | |
DRS Imaging Services, LLC | | Common Equity (6) | | — | | | 123 | | | — | | | — | | | — | | | — | | | 1,749 | | | 123 | | | — | | | 1,872 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Master Cutlery, LLC | | Subordinated Loan (6) | | — | | | 311 | | | — | | | — | | | — | | | — | | | 346 | | | 311 | | | — | | | 657 | |
| | Preferred Equity (6) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | Common Equity (6) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | — | | | 311 | | | — | | | — | | | — | | | — | | | 346 | | | 311 | | | — | | | 657 | |
| | | | | | | | | | | | | | | | | | | | | | |
NeoSystems Corp. | | Preferred Equity (7) | | — | | | 934 | | | — | | | 47 | | | — | | | 47 | | | 2,250 | | | 981 | | | — | | | 3,231 | |
| | | | | | | | | | | | | | | | | | | | | | |
Pfanstiehl Holdings, Inc | | Common Equity | | — | | | 953 | | | | | | | | | — | | | 36,221 | | | — | | | 953 | | | 37,174 | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name of Portfolio Company | | Investment Type(1) | | Net Realized Gain (Loss) | | Net change in unrealized appreciation/depreciation | | Interest, Fees and Dividends Credited to Income(2) | | December 31, 2016, Fair Value | | Gross Additions(3) | | Gross Reductions(4) | | September 30, 2017, Fair Value (5) |
Control Investments | | | | | | | | | | | | | | | | |
Malabar International (8) | | Subordinated Loan | | $ | — |
|
| $ | 74 |
|
| $ | 536 |
|
| $ | 7,683 |
|
| $ | 150 |
|
| $ | (7,833 | ) |
| $ | — |
|
| | Preferred Equity | | — |
|
| 1,608 |
|
| 65 |
|
| 5,868 |
|
| 1,608 |
|
| (7,476 | ) |
| — |
|
| | | | — |
|
| 1,682 |
|
| 601 |
|
| 13,551 |
|
| 1,758 |
|
| (15,309 | ) |
| — |
|
| | | | | | | | | | | | | | | | |
MTE Holding Corp. | | Subordinated Loan | | $ | — |
|
| $ | (43 | ) | | $ | 1,005 |
|
| $ | 9,766 |
|
| $ | 59 |
|
| $ | (2,717 | ) |
| $ | 7,108 |
|
| | Common Equity | | — |
|
| 206 |
| | 197 |
|
| 3,383 |
|
| 206 |
|
| — |
|
| 3,589 |
|
| | | | — |
|
| 163 |
| | 1,202 |
|
| 13,149 |
|
| 265 |
|
| (2,717 | ) |
| 10,697 |
|
| | | | | | | | | | | | | | | | |
Total Control Investments | | | | — |
|
| 1,845 |
| | 1,803 |
|
| 26,700 |
|
| 2,023 |
|
| (18,026 | ) |
| 10,697 |
|
Affiliate Investments | | | | | | | | | | | | | | | | |
All Metals Holding, LLC | | Senior Secured Loan | | — |
|
| (108 | ) | | 1,383 |
|
| 12,865 |
|
| 208 |
|
| (108 | ) |
| 12,965 |
|
| | Common Equity(6) | | — |
|
| 207 |
| | — |
|
| 1,277 |
|
| 207 |
|
|
|
|
| 1,484 |
|
| | | | — |
|
| 99 |
| | 1,383 |
|
| 14,142 |
|
| 415 |
|
| (108 | ) |
| 14,449 |
|
| | | | | | | | | | | | | | | | |
Contract Datascan Holdings, Inc. | | Subordinated Loan | | — |
|
| 94 |
| | 732 |
|
| 7,902 |
|
| 98 |
|
|
|
|
| 8,000 |
|
| | Preferred Equity(6)(7) | | — |
|
| (778 | ) | | 402 |
|
| 5,421 |
|
| 402 |
|
| (778 | ) |
| 5,045 |
|
| | Common Equity(6) | | — |
|
| (187 | ) | | — |
|
| 187 |
|
|
|
|
| (187 | ) |
| — |
|
| | | | — |
|
| (871 | ) | | 1,134 |
|
| 13,510 |
|
| 500 |
|
| (965 | ) |
| 13,045 |
|
| | | | | | | | | | | | | | | | |
Intelli-Mark Technologies, Inc. | | Senior Secured Loan | | — |
|
| (159 | ) | | 613 |
|
| 8,841 |
|
| 68 |
|
| (8,909 | ) |
| — |
|
| | Common Equity(6) | | 874 |
|
| (498 | ) | | — |
|
| 1,998 |
|
| — |
|
| (1,998 | ) |
| — |
|
| | | | 874 |
|
| (657 | ) | | 613 |
|
| 10,839 |
|
| 68 |
|
| (10,907 | ) |
| — |
|
| | | | | | | | | | | | | | | | |
Malabar International (8) | | Subordinated Loan | | — |
|
| 20 |
| | 281 |
|
| — |
|
| 7,893 |
|
| (6 | ) |
| 7,887 |
|
| | Preferred Equity | | — |
|
| 1,492 |
| | 34 |
|
| — |
|
| 8,968 |
|
| — |
|
| 8,968 |
|
| | | | — |
|
| 1,512 |
| | 315 |
|
| — |
|
| 16,861 |
|
| (6 | ) |
| 16,855 |
|
| | | | | | | | | | | | | | | | |
Master Cutlery, LLC | | Senior Secured Loan | | — |
|
| — |
|
| — |
|
| — |
|
| 545 |
|
| — |
|
| 545 |
|
| | Subordinated Loan | | — |
|
| (1,226 | ) | | 459 |
|
| 4,440 |
|
| 106 |
|
| (1,262 | ) |
| 3,284 |
|
| | Preferred Equity(6)(7) | | — |
|
| (954 | ) | | — |
|
| 954 |
|
| — |
|
| (954 | ) |
| — |
|
| | Common Equity (6) | | — |
|
| — |
| | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| | | | — |
|
| (2,180 | ) | | 459 |
|
| 5,394 |
|
| 651 |
|
| (2,216 | ) |
| 3,829 |
|
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Period Ended March 31, 2021 | | | | | | | | |
Name of Portfolio Company | | Investment Type (1) | | Net Realized Gain (Loss) | | Net change in unrealized appreciation/(depreciation) | | Interest & PIK Interest | | Dividends | | Fees | | Total Income (2) | | December 31, 2020, Fair Value | | Gross Additions (3) | | Gross Reductions (4) | | March 31, 2021, Fair Value (5) |
| | | | | | | | | | | | | | | | | | | | | | |
Professional Pipe Holdings, LLC | | Senior Secured Loan | | $ | — | | | $ | (6) | | | $ | 188 | | | $ | — | | | $ | — | | | $ | 188 | | | $ | 6,086 | | | $ | 36 | | | $ | (623) | | | $ | 5,499 | |
| | Common Equity (6) | | — | | | (232) | | | — | | | — | | | — | | | — | | | 1,208 | | | — | | | (232) | | | 976 | |
| | | | — | | | (238) | | | 188 | | | — | | | — | | | 188 | | | 7,294 | | | 36 | | | (855) | | | 6,475 | |
| | | | | | | | | | | | | | | | | | | | | | |
TalentSmart Holdings, LLC | | Common Equity (6) | | — | | | (289) | | | — | | | — | | | — | | | — | | | 1,306 | | | — | | | (289) | | | 1,017 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
TRS Services, Inc. | | Preferred Equity (6) | | — | | | (93) | | | — | | | — | | | — | | | — | | | 915 | | | — | | | (93) | | | 822 | |
| | Common Equity (6) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | — | | | (93) | | | — | | | — | | | — | | | — | | | 915 | | | — | | | (93) | | | 822 | |
| | | | | | | | | | | | | | | | | | | | | | |
TTG Healthcare, LLC | | Senior Secured Loan | | — | | | 139 | | | 416 | | | — | | | 37 | | | 453 | | | 19,530 | | | 142 | | | (49) | | | 19,623 | |
| | Preferred Equity (6) | | — | | | 138 | | | — | | | — | | | — | | | — | | | 4,077 | | | 138 | | | — | | | 4,215 | |
| | | | — | | | 277 | | | 416 | | | — | | | 37 | | | 453 | | | 23,607 | | | 280 | | | (49) | | | 23,838 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total Affiliate Investments | | | | — | | | 1,926 | | | 928 | | | 47 | | | 37 | | | 1,012 | | | 102,846 | | | 1,871 | | | (2,753) | | | 101,964 | |
Total Control and Affiliate Investments | | | | $ | — | | | $ | 2,314 | | | $ | 1,295 | | | $ | 47 | | | $ | 37 | | | $ | 1,379 | | | $ | 113,658 | | | $ | 2,357 | | | $ | (2,753) | | | $ | 113,262 | |
(1)Principal balance, interest rate and maturity of debt investments, and ownership detail for equity investments are presented in the consolidated schedule of investments. The Company's investments are generally classified as "restricted securities" as such term is defined under Regulation S-X Rule 6-03(f) or Securities Act Rule 144.
(2)Represents the total amount of interest, fees or dividends included in income for the three months ended March 31, 2021, during which an investment was included in the Control Investment or Affiliate Investment categories.
(3)Gross additions include increases in cost basis of investments resulting from a new portfolio investment, PIK interest, fees and dividends; accretion of OID, and net increases in unrealized appreciation or decreases in net depreciation.
(4)Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales, if any, and net decreases in net unrealized appreciation or net increases in net depreciation.
(5)Fair value was determined using significant unobservable inputs. See Note 5 for further details.
(6)Non-income producing.
(7)Dividends credited to income include dividends contractually earned but not declared.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name of Portfolio Company | | Investment Type(1) | | Net Realized Gain (Loss) | | Net change in unrealized appreciation/depreciation | | Interest, Fees and Dividends Credited to Income(2) | | December 31, 2016, Fair Value | | Gross Additions(3) | | Gross Reductions(4) | | September 30, 2017, Fair Value (5) |
| | | | | | | | | | | | | | | | |
NeoSystems Corp. | | Subordinated Loan | | — |
|
| 368 |
| | 327 |
|
| 3,656 |
|
| 426 |
|
| (2,000 | ) |
| 2,082 |
|
| | Preferred Equity(6)(7) | | — |
|
| 856 |
| | 98 |
|
| 1,255 |
|
| 954 |
|
| — |
|
| 2,209 |
|
| | | | — |
|
| 1,224 |
| | 425 |
|
| 4,911 |
|
| 1,380 |
|
| (2,000 | ) |
| 4,291 |
|
| | | | | | | | | | | | | | | | |
Pfanstiehl Holdings, Inc | | Subordinated Loan | | — |
|
| (13 | ) | | 289 |
|
| 3,810 |
|
| — |
|
| (22 | ) |
| 3,788 |
|
| | Common Equity | | — |
|
| (1,108 | ) | | 84 |
|
| 6,083 |
|
| — |
|
| (1,108 | ) |
| 4,975 |
|
| | | | — |
|
| (1,121 | ) | | 373 |
|
| 9,893 |
|
| — |
|
| (1,130 | ) |
| 8,763 |
|
| | | | | | | | | | | | | | | | |
Strategic Pharma Solutions, Inc. | | Senior Secured Loan | | — |
|
| (39 | ) | | 904 |
|
| 8,383 |
|
| 67 |
|
| (8,450 | ) |
| — |
|
| | Preferred Equity(6)(7) | | 3,617 |
|
| (1,111 | ) | | 81 |
|
| 3,026 |
|
| 81 |
|
| (3,107 | ) |
| — |
|
| | | | 3,617 |
|
| (1,150 | ) | | 985 |
|
| 11,409 |
|
| 148 |
|
| (11,557 | ) |
| — |
|
| | | | | | | | | | | | | | | | |
TRS Services, Inc. | | Senior Secured Loan | | — |
|
| 206 |
| | 825 |
|
| 9,549 |
|
| 304 |
|
| (359 | ) |
| 9,494 |
|
| | Preferred Equity (Class AA units)(6)(7) | | — |
|
| — |
| | 41 |
|
| 354 |
|
| 41 |
|
|
|
|
| 395 |
|
| | Preferred Equity (Class A units)(6)(7) | | — |
|
| 695 |
| | 204 |
|
| 1,707 |
|
| 899 |
|
|
|
|
| 2,606 |
|
| | Common Equity (6) | | — |
|
| — |
| | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| | | | — |
|
| 901 |
| | 1,070 |
|
| 11,610 |
|
| 1,244 |
|
| (359 | ) |
| 12,495 |
|
| | | | | | | | | | | | | | | | |
Total Affiliate Investments | | | | 4,491 |
|
| (2,243 | ) | | 6,757 |
|
| 81,708 |
|
| 21,267 |
|
| (29,248 | ) |
| 73,727 |
|
Total Control and Affiliate Investments | | | | $ | 4,491 |
|
| $ | (398 | ) | | $ | 8,560 |
|
| $ | 108,408 |
|
| $ | 23,290 |
|
| $ | (47,274 | ) |
| $ | 84,424 |
|
| |
(1) | Principal balance of debt investments, interest rate detail, maturity date, dividend rate on preferred equity investments, and industry classification are shown in the consolidated schedule of investments. |
| |
(2) | Represents the total amount of interest, fees or dividends included in income for the nine months ended September 30, 2017. |
| |
(3) | Gross additions include increases in cost basis resulting from a new portfolio investment, PIK interest, fees and dividends, and accretion of OID. Gross additions also include net increases in unrealized net appreciation or decreases in unrealized depreciation. |
| |
(4) | Gross reductions include decreases in the cost basis of investments resulting from principal repayments and sales, if any. Gross reductions also include net decreases in unrealized appreciation or net increases in unrealized depreciation. |
| |
(5) | Fair value was determined using significant unobservable inputs. See Note 5 for further details.
|
| |
(7) | Dividends credited to income include dividends contractually earned but not declared. |
| |
(8) | Malabar was reclassified from a control investment to an affiliate investment during the three months ended September 30, 2017, due to a decrease in voting interest. |
OFS Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
Note 12.11. Subsequent Events Not Disclosed Elsewhere
On October 31, 2017,May 7, 2021, the Company’s Board declared a distribution of $0.34$0.22 per share for the fourthsecond quarter of 2017,2021, payable on December 29, 2017,June 30, 2021 to stockholders of record as of June 23, 2021.
COVID-19
The Company evaluated events subsequent to March 31, 2021 through May 7, 2021. The Company is continuing to closely monitor the impact of the outbreak of COVID-19 on all aspects of our business, including how it impacts its portfolio companies, employees, due diligence and underwriting processes, and financial markets. The U.S. capital markets experienced extreme volatility and disruption following the COVID-19 pandemic, which appear to have subsided and returned to pre-COVID-19 levels. Nonetheless, certain economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a prolonged period of world-wide economic downturn.
On March 27, 2020, the U.S. government enacted the CARES Act, which contains provisions intended to mitigate the adverse economic effects of the coronavirus pandemic. On December 15, 2017.
27, 2020, the U.S. government enacted the December 2020 COVID Relief Package. Additionally, on March 11, 2021, the U.S. government enacted the American Rescue Plan, which included additional funding to mitigate the adverse economic effects of the COVID-19 pandemic. It is uncertain whether, or to what extent, our portfolio companies will be able to benefit from the CARES Act, the December 2020 COVID Relief Package, the American Rescue Plan, or any other subsequent legislation intended to provide financial relief or assistance. As a result of this disruption and the pressures on their liquidity, certain of its portfolio companies have been, or may continue to be, incentivized to draw on most, if not all, of the unfunded portion of any revolving or delayed draw term loans made by the Company, subject to availability under the terms of such loans.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend to a large extent on future developments regarding the duration and severity of the coronavirus, effectiveness of vaccination deployment and the actions taken by governments (including stimulus measures or the lack thereof) and their citizens to contain the coronavirus or treat its impact, all of which are beyond our control. An extended period of global supply chain and economic disruption could materially affect its business, results of operations, access to sources of liquidity and financial condition. Given the fluidity of the situation, the Company cannot estimate the long-term impact of COVID-19 on its business, future results of operations, financial position, or cash flows at this time.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the 1940 Act. Our investment activities are managed by OFS Advisor; and OFS Services, an affiliate of OFS Advisor, provides the administrative services necessary for us to operate. In exchange for these services we pay OFS Advisor a base management fee and an incentive fee and we pay OFS Services an administration fee. The base management fee, incentive fee, and the administration fee represents a substantial portion of our total expenses.
Our investment objective is to provide our stockholders with both current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments in middle-market companies in the United States. We believe that these middle-market companies represent a significant growth segment of the U.S. economy and often require substantial capital investments to grow. Middle-market companies have historically constituted the bulk of our portfolio companies since inception, and as of September 30, 2017. We believe that this market segment will continue to produce significant investment opportunities for us.
In April 2017, we issued 3,625,000 shares of our common stock in a follow-on public offering at an offering price of $14.57 per share (the "Offering"), including shares purchased by the underwriters pursuant to their exercise of the over-allotment option. OFS Advisor paid all of the underwriting discounts and commissions and an additional supplemental payment of $0.25 per share, representing the difference between the public offering price of $14.57 per share and the net offering proceeds of $14.82 per share, which also represented our NAV per share at the time of the Offering. All payments made by OFS Advisor in connection with the Offering are not subject to reimbursement by us. We received net proceeds from this Offering of $53.7 million
Our investment strategy includes SBIC I LP, a licensee under the SBA's SBIC program. The SBIC license allows SBIC I LP to receive SBA-guaranteed debenture funding, subject to the issuance of a leverage commitment by the SBA and other customary procedures. SBA leverage funding is subject to SBIC I LP’s payment of certain fees to the SBA, and the ability of SBIC I LP to draw on the leverage commitment is subject to its compliance with SBA regulations and policies, including an audit by the SBA. On a stand-alone basis, SBIC I LP held approximately $248.2 million and $247.5 million in assets at September 30, 2017 and December 31, 2016, respectively, which accounted for approximately 70% and 81% of our total consolidated assets, respectively.
We generate revenue in the form of interest income on debt investments, capital gains, and dividend income from our equity investments. Our debt investments typically have a term of three to eight years and bear interest at fixed and floating rates. As of September 30, 2017, floating rate and fixed rate loans comprised 73% and 27%, respectively, of our current debt investment portfolio at fair value; however, in accordance with our investment strategy, we expect that over time the proportion of fixed rate loans will continue to increase. We expect to make quarterly distributions, such that we distribute substantially all of our ICTI. In addition, although we intend to make distributions of net realized capital gains, if any, at least annually, out of assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.
Further, we have elected to be taxed as a RIC under the Code. As a RIC, we are not required to pay corporate-level federal income taxes on any income that we distribute to our stockholders from our ICTI. We are required to recognize ICTI in circumstances in which we have not received a corresponding payment in cash. For example, we hold debt obligations that are treated under applicable tax rules as issued with OID and debt instruments with PIK interest, and we must include in ICTI each year the portion of the OID and PIK interest that accrues for that year (as it accrues over the life of the obligation), irrespective of the fact the cash representing such income is received by us in that taxable year. The continued recognition of non-cash ICTI may cause difficulty in meeting the Annual Distribution Requirement. We may be required to sell investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital, or forgo new investment opportunities to meet this requirement. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
We are permitted to borrow money from time to time within the levels permitted by the 1940 Act (which generally allows us to incur leverage for up to 50% of our asset base). We may borrow money when the terms and conditions available are favorable to do so and are aligned with our investment strategy and portfolio composition. The use of borrowed funds or the proceeds of preferred stock to make investments would have its own specific benefits and risks, and all of the costs of borrowing funds or issuing preferred stock would be borne by holders of our common stock. For a discussion of the risks associated with leverage, see “Item 1A. Risk Factors—Risks Related to our Business and Structure" in our Annual Report on Form 10-K for the year ended December 31, 2016. As a BDC, we may need to raise additional capital, which will expose us to
risks, including the typical risks associated with leverage. For additional overview information on the Company, see "Item 1. Business" in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Overview
Key performance metrics are presented below:
| | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
Net asset value per common share | | $ | 11.96 | | | $ | 11.85 | |
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2021 | | 2020 |
Net investment income per common share | | | | | | $ | 0.19 | | | $ | 0.30 | |
Net increase (decrease) in net assets resulting from operations per common share | | | | | | 0.31 | | | (2.41) | |
Distributions paid per common share | | | | | | 0.20 | | | 0.34 | |
Net investment income per share declined $0.11 from the corresponding quarter in the prior year primarily due to an approximate $0.15 decline in net interest margin—total interest income less interest expense—per share. Weighted average yield on debt and Structured Finance Notes for the three months ended March 31, 2021, declined to 9.01% from 9.51% in the quarter ended March 31, 2020, due to the decrease in LIBOR and our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers, which we believe will improve our overall risk profile. The decline in net interest margin was partially offset by declines in management and incentive fees of $0.08 per share. For the three months ended March 31, 2021, our weighted-average interest costs increased to 5.57% from 5.33% in the quarter ended March 31, 2020, principally due to borrowings under our Unsecured Notes Due September 2023, offset by repayments of our SBA debentures. As of March 31, 2021, approximately 94% of our debt is fixed rate.
Our portfolio experienced net gains of $3.9 million, or $0.29 per share, during the three months ended March 31, 2021, principally due to a $4.4 million, or 1.6%, improvement in the fair values of our directly originated debt and equity investments. The net appreciation in our directly originated investments was led by a $1.6 million improvement on our debt investment in Wastebuilt Environmental Solutions LLC, which experienced an improvement in fair value as the company continues to proceed with an anticipated acquisition. Our investment in the common equity of Pfanstiehl Holdings, Inc., and NeoSystems Corp., also improved by $1.0 million and $0.9 million, respectively, in both instances driven by improved operating results of the companies. Additionally, we observed spread tightening in middle market loans ranging from zero to 25 basis points, which translated into fair value increases across our portfolio from zero to 1%. These investment valuation increases were partially offset by a decrease of $2.3 million in the fair value of our subordinated debt investment in Online Tech Stores LLC, due to further degradation of performance at that company. We also experienced net depreciation of $0.5 million in our Structured Finance Note investments, due to the decline in value of Apex Credit CLO 2020 Ltd. The fair value of our investments in broadly syndicated loans were relatively unchanged, consistent with major syndicated loan indices.
Since OFS Advisor implemented its business continuity plan in mid-March 2020, OFS Advisor's entire team has effectively transitioned to remote work and we are currently capable of maintaining our normal functionality to complete our operational requirements.
OFS Advisor has actively monitored our portfolio companies throughout this period of economic uncertainty, which has included assessments of our portfolio companies' operational and liquidity outlook. During the three months ended March 31, 2021, we converted cash interest to PIK interest on one subordinated debt investment, rescheduled the due date of one portfolio company's first quarter 2021 interest payment until the second quarter of 2021, and amended two debt investments that resulted in increased all-in interest rates. As of March 31, 2021, we have unfunded commitments of $5.8 million. During the three months ended March 31, 2021, we purchased Structured Finance Notes for an aggregate cost of $6.2 million and $62.3 million in Portfolio Company Investments.
At March 31, 2021, our asset coverage ratio of 171% was within minimum asset coverage requirements under the 1940 Act, generally prohibits BDCsand we remained in compliance with all applicable financial thresholds under our outstanding debt. On February 17, 2021, we executed an amendment to our BLA with Pacific Western Bank in order to, among other things, increase the total commitment under the PWB Credit Facility from making certain negotiated co-investments with certain affiliates absent$20.0 million to $25.0 million. As of March 31, 2021, we had an order from the SEC permitting the BDC to do so. On October 12, 2016, we received exemptive relief from the SEC to permit us to co-invest in portfolio companies with certain other funds managed by OFS Advisor (“Affiliated Funds”) in a manner consistent withunused commitment of $25.0 million under our investment objective, positions, policies, strategies and restrictionsPWB Credit Facility, as well as regulatory requirementsan unused commitment of $130.5 million under our BNP Facility, both subject to a borrowing base and other pertinent factors, subject tocovenants. Based our portfolio's fair value and our equity capital at March 31, 2021, we could access these available lines of credit for $97.0 million and remain in compliance with certain conditions (the “Order”). Pursuantour asset coverage requirements. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and will continue to selectively deploy capital in new investment opportunities in this challenging environment.
On May 7, 2021, the Board declared a distribution of $0.22 per share for the second quarter of 2021, payable on June 30, 2021 to stockholders of record as of June 23, 2021.
We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide, and the magnitude of the economic impact of the outbreak, including the impact of travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our portfolio companies’ operating results, or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration and extent of the disruption to the Order, we are generally permitted to co-invest with Affiliated Funds if a “required majority” (as defined in Section 57(o) of the 1940 Act)operations of our independent directors makeportfolio companies, we expect that certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonableportfolio companies will experience financial distress and fairpossibly default on their financial obligations to us and their other capital providers. We also expect that some of our stockholdersportfolio companies may significantly curtail business operations, furlough or lay-off employees and do not involve overreaching by us orterminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our stockholders on the partinvestment in any such portfolio company.
We are also subject to financial risks, including changes in market interest rates. As of any person concernedMarch 31, 2021, approximately $330 million (principal amount) of our debt investments bore interest at variable rates, which are generally LIBOR-based, and (2) the transaction is consistentmany of which are subject to reference-rate floors. In connection with the interestsCOVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased, primarily in the second quarter of 2020. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on our portfolio investments, a decrease in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our stockholdersfloating interest rate liabilities indexed to LIBOR. As of March 31, 2021, the majority of our variable rate debt investments are subject to the base rate floor, partially mitigating the impact of the recent decrease in LIBOR on our gross investment income.
We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and is consistent withguidance from U.S. and international authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future. However, to the extent our portfolio companies continue to be adversely impacted by the COVID-19 pandemic, our future net investment objectiveincome, financial condition, results of operations and strategies.the fair value of our portfolio investments may be materially adversely impacted.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. Critical accounting policies are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on our current and future financial condition and results of operations.
Our critical accounting policies and estimates are those relating to revenue recognition and fair value estimates. Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board of Directors.Board. For descriptions of our revenue recognition and fair value policies, see "Item 8. Financial Statements - Notes to Financial Statements - Note 2 to the consolidated financial statements included2" and "Management's Discussion and Analysis - Critical Accounting Policies and Significant Estimates" in "Item 1.–Financial Statements" of this Quarterlyour Annual Report on Form 10-Q.
Revenue recognition. Our investment activities frequently involve the acquisition of multiple financial instruments or rights either in an initial transaction, or in subsequent or "follow-on" transactions, including amendments to existing securities. These financial instruments can include loans, preferred and common stock, warrants, or membership interests in limited liability companies. Acquired rights can include fixed or variable fees that can be either guaranteed or contingent upon operating performance of the underlying portfolio companies. Moreover, these fees may be payable in cash or additional securities. (Acquired rights and financial instruments together, "Instruments".)
The revenue recognized on these Instruments is a function of the fee or other consideration allocated to them, including amounts allocated to capital structuring fees, at the time of acquisition. Additionally, subsequent amendments to these Instruments can involve both
a determination as to whether the amendment is
| |
◦ | of such significance to deem it the consummation of the initial investment transaction and the acquisition of new Instruments (i.e., a "significant modification"), or |
| |
◦ | a modification of those Instruments to be recognized over their remaining lives, and
|
an additional allocation of consideration among newly acquired Instruments.
These allocations are generally based on the relative fair value of the Instruments at the time of the transaction, a process involving fair value estimates which is also a critical accounting policy and significant estimate. Moreover, these allocations and determinations can differ between GAAP and federal income tax bases. Once determined, these allocations directly effect the discount/premium and yield on debt securities, the cost and net gains/losses on equity securities, and capital structuring fees recognized in the statements of operations; and ICTI. These allocations require an understanding of the terms and conditions of the underlying agreements and significant management judgment. The table below presents the impact to the initial cost bases of allocated consideration to acquired Instruments10-K for the nine monthsyear ended September 30, 2017, and 2016, (in thousands):
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Loans: | | | | |
Net Loan Fees (excluding equity securities and cash amendment fees) | | $ | (968 | ) | | $ | (646 | ) |
Equity securities (including performance-contingent fees) | | — |
| | (793 | ) |
Equity securities (including performance-contingent fees) | | — |
| | 793 |
|
Capital structuring fees | | (651 | ) | | (153 | ) |
December 31, 2020.Fair value estimates. AsOur approach to fair value estimates was significantly adjusted in response to the economic uncertainty associated with the spread of September 30, 2017, approximately 83%the COVID-19 pandemic, principally through adjustments to the weights given the various methodologies we utilize to estimate discount rates, greater use of pandemic-adjusted forward-looking information, and shortening the evaluation periods used to assess the market depth and liquidity associated with Indicative Prices. These adjustments resulted from observed decreases in the historic correlation between observable inputs utilized on our valuation models. However, as of December 31, 2020, we had reverted all of our total assets were carried on the consolidated balance sheets at fair value. As discussed more fully in “Item 1.–Financial Statements–Note 2” GAAP requires usmethodologies to categorizetheir pre-pandemic weightings as financial assets and liabilities carried at fair value according to a three-level valuation hierarchy. The hierarchy gives the highest priority to quoted, active market prices for identical assets and liabilities (Level 1)markets stabilized and the lowest priority to valuation techniques that require significant management judgment because one or more of the significant inputs are unobservable in thecorrelations between observable market place (Level 3). All of our assets carried at fair value are classified as Level 3; we typically do not hold equity securities or other instruments that are actively traded on an exchange.factors returned.
As described in “Item 1.–Financial Statements–Note 5”, we follow a process, under the supervision and review of the Board, to determine these unobservable inputs used to calculate the fair values of our investments. The most significant unobservable inputs in these fair value measurements are the discount rates, EBITDA multiples and projected cash flows contractually due from the investment.
We consider a variety of factors in our determination of the discount rate to be applied to an investment including, among other things, investment type, LIBOR swap rate, indicative yields from independent third-party sources and the yield on our investment relative to indicative yields at the time of our investment (initial and subsequent investments) in the portfolio company.
We also consider a variety of factors in our determination of the EBITDA multiple to be applied to an investment including, among other things, the actual EBITDA multiple for the last arms-length transaction, the ratio of the portfolio company’s EBITDA multiple to the average of EBITDA multiples on comparable public companies ("Comparable Multiples"), and the change in Comparable Multiples and the financial performance of the underlying comparable public companies relative to the financial performance of the portfolio company.
For both the discount rate and the EBITDA multiple we also consider developments at the portfolio company since our investment including, but not limited to, trends in the portfolio company’s earnings and leverage multiple, and input from our independent third-party valuation firms. This process typically results in a single selected discount rate and/or EBITDA multiple for each investment.
The following table illustrates the sensitivityimpact of our fair value measures to reasonably likely changes toif we selected the estimated discount rate and EBITDA multiple inputs used in our debt and equity investment valuationslow or high end of the range of values for all investments at September 30, 2017March 31, 2021 (dollar amounts in thousands):
| | | | Fair Value at September 30, 2017 | | Weighted average discount rate/EBITDA multiple at September 30, 2017 | | Discount rate sensitivity | | EBITDA multiple sensitivity | |
Valuation Method / Investment Type | | -10% Weighted average | | +10% Weighted average | | +0.5x | | -0.5x | |
Discounted cash flow | | | | | | | | | | | |
Investment Type | | Investment Type | | Fair Value at March 31, 2021 | | Range of Fair Value |
| | Low-end | | High-end |
Debt investments: | | |
| | | | |
| | |
| | | | | Debt investments: | | | | | | |
Senior Secured | | $ | 126,310 |
|
| 11.52% |
| $ | 128,711 |
|
| $ | 123,162 |
|
| N/A |
|
| N/A |
| |
Senior secured | | Senior secured | | $ | 307,216 | | | $ | 303,443 | | | $ | 311,156 | |
Senior secured (valued at Transaction Prices) | | Senior secured (valued at Transaction Prices) | | 16,934 | | | 16,934 | | | 16,934 | |
Subordinated | | $ | 48,897 |
|
| 15.05% |
| $ | 49,843 |
|
| $ | 47,395 |
|
| N/A |
|
| N/A |
| Subordinated | | 13,742 | | | 12,599 | | | 14,885 | |
| | | | | | | | | | | |
Enterprise value | | | | | | | | | | | |
Debt investments: | | | | | | | | | | | |
Senior Secured | | $ | 11,841 |
|
| 7.50x |
| N/A |
|
| N/A |
|
| $ | 12,626 |
|
| $ | 11,055 |
| |
Subordinated | | $ | 5,322 |
|
| 7.47x |
| N/A |
|
| N/A |
|
| $ | 6,239 |
|
| $ | 4,405 |
| |
Structured Finance Notes: | | Structured Finance Notes: | |
Subordinated notes | | Subordinated notes | | 58,833 | | | $ | 57,076 | | | 60,588 | |
Mezzanine debt | | Mezzanine debt | | 2,797 | | | 2,748 | | | 2,845 | |
| | | | | | | | | | | |
Equity investments: | | | | | | | | | | | Equity investments: | |
Preferred equity | | $ | 22,855 |
|
| 7.16x |
| N/A |
|
| N/A |
|
| $ | 25,316 |
|
| $ | 19,441 |
| Preferred equity | | 12,311 | | | 10,829 | | | 13,775 | |
Common equity and warrants | | $ | 10,324 |
|
| 5.65x |
| N/A |
|
| N/A |
|
| $ | 10,441 |
|
| $ | 8,042 |
| |
Common equity, warrants and other | | Common equity, warrants and other | | 54,266 | | | 50,155 | | | 58,146 | |
| | | $ | 466,099 | | | $ | 453,784 | | | $ | 478,329 | |
The table above presentsSEC issued a final rule in 2020 modifying Rule 2a-5 under the 1940 Act to establish requirements for determining fair value in good faith for purposes of the 1940 Act. We are evaluating the impact of adopting Rule 2a-5 on the consolidated financial statements and intend to our debt and equity investment fair value accounting measures by uniformly modifying our discount rate and EBITDA valuation inputs, as applicable. This discount rate sensitivity measures includedcomply with the new rule’s requirements on or before the compliance date in the table do not present the estimated effect of hypothetical changes in actual, observed interest rates, which would affect the cash flows from many of the underlying investments as they are indexed to LIBOR or the Prime Rate of interest, the operating environment of many of our portfolio companies, and other factors, as well as our estimates of the discount rate valuation input. The effect of hypothetical changes in actual, observed interest rates on our fair value measures is not subject to reasonable estimation.September 2022.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
•The Investment Advisory Agreement with OFS Advisor to manage our operating and investment activities. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) as well as an incentive fee based on our investment performance. See “Item 1–Financial Statements–Note 3”3”.
•The Administration Agreement with OFS Capital Services, an affiliate of OFS Advisor, to provide us with the office facilities and administrative services necessary to conduct our operations. See “Item 1–Financial Statements–Note 3.
•Note 3.
A license agreement with OFSAM, the parent company of OFS Advisor, under which OFSAM has agreed to grant us a non-exclusive, royalty-free license to use the name “OFS.” Under this agreement, we have a right to use the “OFS” name for so long as OFS Advisor or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “OFS” name. This license agreement will remain in effect for so long as the Investment Advisory Agreement with OFS Advisor is in effect.
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other BDCsfunds affiliated with OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including Hancock Park Corporate Income,HPCI and OCCI. Additionally, OFS Advisor provides sub-advisory services to CMFT Securities Investments, LLC, a wholly owned subsidiary of CIM Real Estate Finance Trust, Inc., a non-tradedcorporation that qualifies as a real estate investment trust. Additionally, OFS Advisor serves as sub-adviser to CIM Real Assets & Credit Fund, an externally managed registered investment company that operates as an interval fund that invests primarily in a combination of real estate, credit and related investments.
Effective January 1, 2020, OFS Advisor agreed to reduce a portion of its base management fee by reducing the portion of such fee from 0.4375% per quarter (1.75% annualized) to 0.25% per quarter (1.00% annualized) of the average value of the portion of the OFSCC-FS Assets at the end of the two most recently completed calendar quarters. The base management fee reduction by OFS Advisor is renewable on an annual basis and the amount of the base management fee reduced with respect to the OFSCC-FS Assets shall not be subject to recoupment by OFS Advisor; On February 16, 2021, OFS Advisor renewed the waiver through December 31, 2021.
The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On August 4, 2020, we received the Order, which superseded a previous
order we received on October 12, 2016 and provides us with greater flexibility to enter into co-investment transactions with Affiliated Funds. We are generally permitted to co-invest with Affiliated Funds if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.
In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates, even if such other funds had not previously invested in such existing portfolio company. Without this order, affiliated funds would not be able to participate in such co-investments with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order expired on December 31, 2020, the SEC’s Division of Investment Management has indicated that until March 31, 2022, it will not recommend enforcement action, to the extent that any BDC with an investment strategy similarexisting co-investment order continues to engage in certain transactions described in the conditional exemptive order, pursuant to the Company.same terms and conditions described therein.
Conflicts may arise when we make an investment in conjunction with an investment being made by an Affiliated Account, or in a transaction where an Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments, particularly where these accounts may invest in different types of securities in a single portfolio company. Potential conflicts arise when addressing, among other things, questions as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced. For a discussion of the risks associated with conflicts of interest, see "Item 1A. Business — Conflicts of Interest", "Item 1A. Risk Factors — Risks Related to OFS Advisor and its Affiliates —We have potential conflicts of interest related to the purchases and sales that OFS Advisor makes on our behalf and/or on behalf of Affiliated Accounts" and "Item 1A. Risk Factors — Regulations — Conflicts of Interest - Conflicts Related to Portfolio Investments" in our Annual Report on Form 10-K for the year ended December 31, 2020.
Portfolio Composition and Investment Activity
Portfolio Composition
As of September 30, 2017,March 31, 2021, the fair value of our debt investment portfolio totaled $257.1$337.9 million in 3759 portfolio companies, of which 76%96% and 24%4% were senior secured loans and subordinated loans, respectively, and approximately $39.5 million inrespectively. As of March 31, 2021, we had equity investments atin 23 portfolio companies with a fair value of approximately $66.6 million. We also have fifteen investments in 17 portfolio companies in which we also held debt investments and three portfolio companies in which we solely held an equity investment.Structured Finance Notes with a fair value of $61.6 million. We had unfunded commitments of $4.5$5.8 million to threefour portfolio companies at September 30, 2017.March 31, 2021. Set forth in the tables and charts below is selected information with respect to our portfolio as of September 30, 2017,March 31, 2021 and December 31, 2016.
The following table summarizes the composition of our investment portfolio as of September 30, 2017, and December 31, 2016 (dollar amounts in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Senior secured debt investments (1) | $ | 196,477 |
|
| $ | 194,153 |
| | $ | 182,315 |
| | $ | 180,955 |
|
Subordinated debt investments | 70,768 |
|
| 62,942 |
| | 66,591 |
| | 63,410 |
|
Preferred equity | 28,492 |
|
| 28,499 |
| | 23,293 |
| | 23,721 |
|
Common equity and warrants | 6,321 |
|
| 11,036 |
| | 7,108 |
| | 13,541 |
|
| $ | 302,058 |
|
| $ | 296,630 |
| | $ | 279,307 |
| | $ | 281,627 |
|
Total number of portfolio companies | 40 |
| | 40 |
| | 41 |
| | 41 |
|
| |
(1) | Includes debt investments in which we have entered into contractual arrangements with co‑lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co‑lenders pursuant to a payment waterfall. The aggregate amortized cost and fair value of these investments was $21,226 and $21,226 at September 30, 2017, respectively, and $28,945 and $29,276, at December 31, 2016, respectively |
The following table shows the portfolio composition by geographic region at amortized cost and fair value and as a percentage of total investments; the geographic composition is determined by the location of the portfolio companies' corporate headquarters (dollar amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Fair Value |
| September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
South - US | $ | 125,824 |
| | 41.7 | % | | $ | 120,005 |
| | 42.9 | % | | $ | 124,082 |
| | 41.8 | % | | $ | 122,511 |
| | 43.5 | % |
Northeast - US | 105,586 |
| | 34.9 |
| | 85,693 |
| | 30.7 |
| | 92,236 |
| | 31.0 |
| | 78,186 |
| | 27.8 |
|
West - US | 43,190 |
| | 14.3 |
| | 59,120 |
| | 21.2 |
| | 48,208 |
| | 16.3 |
| | 61,219 |
| | 21.7 |
|
Midwest - US | 23,523 |
| | 7.8 |
| | 10,566 |
| | 3.8 |
| | 28,066 |
| | 9.5 |
| | 15,788 |
| | 5.6 |
|
Canada | 3,935 |
| | 1.3 |
| | 3,923 |
| | 1.4 |
| | 4,038 |
| | 1.4 |
| | 3,923 |
| | 1.4 |
|
Total | $ | 302,058 |
| | 100.0 | % | | $ | 279,307 |
| | 100.0 | % | | $ | 296,630 |
| | 100.0 | % | | $ | 281,627 |
| | 100.0 | % |
As of September 30, 2017, our investment portfolio’s three largest industries by fair value, were (1) Manufacturing, (2) Professional, Scientific, and Technical Services, and (3) Other Services (except Public Administration), totaling approximately 47.9% of the investment portfolio. For a full summary of our investment portfolio by industry, see “Item 1–Financial Statements–Note 4".2020.
The following table presents our debt investment portfolio by investment sizeeach wholly owned legal entity within the consolidated group as of September 30, 2017,March 31, 2021, and December 31, 20162020 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
OFS Capital Corporation (Parent) | $ | 181,644 | | | $ | 164,001 | | | $ | 190,627 | | | $ | 172,249 | |
SBIC I LP | 192,881 | | | 196,466 | | | 191,192 | | | 190,573 | |
OFSCC-FS | 95,168 | | | 94,629 | | | 67,781 | | | 68,037 | |
OFSCC-MB | 11,209 | | | 11,003 | | | 11,423 | | | 11,464 | |
Total investments | $ | 480,902 | | | $ | 466,099 | | | $ | 461,023 | | | $ | 442,323 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Fair Value |
| September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Up to $4,000 | $ | 27,410 |
| | 10.2 | % | | $ | 34,547 |
| | 13.9 | % | | $ | 28,373 |
| | 11.0 | % | | $ | 41,419 |
| | 17.0 | % |
$4,001 to $7,000 | 56,065 |
| | 21.0 |
| | 57,996 |
| | 23.3 |
| | 62,004 |
| | 24.1 |
| | 55,342 |
| | 22.6 |
|
$7,001 to $10,000 | 79,287 |
| | 29.7 |
| | 78,446 |
| | 31.5 |
| | 64,609 |
| | 25.1 |
| | 80,735 |
| | 33.0 |
|
$10,001 to $13,000 | 35,193 |
| | 13.2 |
| | 34,549 |
| | 13.9 |
| | 47,448 |
| | 18.5 |
| | 37,593 |
| | 15.4 |
|
Greater than $13,000 | 69,290 |
| | 25.9 |
| | 43,368 |
| | 17.4 |
| | 54,661 |
| | 21.3 |
| | 29,276 |
| | 12.0 |
|
Total | $ | 267,245 |
| | 100.0 | % | | $ | 248,906 |
| | 100.0 | % | | $ | 257,095 |
| | 100.0 | % | | $ | 244,365 |
| | 100.0 | % |
Portfolio Yields
The weighted average yield on total investments(1) was 8.41% and 8.56% at March 31, 2021 and December 31, 2020, respectively. The following table displays the composition of our performing debt investment and Structured Finance Note portfolio by yield range and its weighted average yieldyields as of September 30, 2017,March 31, 2021, and December 31, 2016:2020:
| | | | | | | | | | | | | | | | | March 31, 2021 | | December 31, 2020 |
| | September 30, 2017 | | December 31, 2016 | |
| | Senior Secured | | Subordinated | | Total | | Senior Secured | | Subordinated | | Total | |
Weighted Average Yield (1) | | Debt | | Debt | | Debt | | Debt | | Debt | | Debt | |
Yield Range | | Yield Range | | Senior Secured | | Subordinated | | Structured Finance | | | | Senior Secured | | Subordinated | | Structured Finance | | |
| | Debt | | Debt | | Notes | | Total | | Debt | | Debt | | Notes | | Total |
Less than 8% | | 11.4 | % | | — | % | | 8.7 | % | | 8.7 | % | | 11.4 | % | | 9.5 | % | Less than 8% | | 35.0 | % | | — | % | | 2.7 | % | | 28.6 | % | | 29.5 | % | | — | % | | 1.4 | % | | 24.0 | % |
8% - 10% | | 32.4 |
| | — |
| | 24.5 |
| | 7.7 |
| | — |
| | 5.6 |
| 8% - 10% | | 49.0 | | | — | | | 1.5 | | | 39.6 | | | 52.0 | | | — | | | 1.4 | | | 42.2 | |
10% - 12% | | 32.4 |
| | 9.4 |
| | 26.8 |
| | 32.6 |
| | 11.9 |
| | 27.0 |
| 10% - 12% | | 11.5 | | | — | | | — | | | 9.2 | | | 13.5 | | | — | | | — | | | 10.9 | |
12% - 14% | | 7.7 |
| | 54.2 |
| | 19.0 |
| | 30.9 |
| | 58.1 |
| | 38.2 |
| 12% - 14% | | 3.0 | | | 53.2 | | | 12.9 | | | 6.7 | | | 3.4 | | | 53.6 | | | 12.5 | | | 7.0 | |
Greater than 14% | | 16.1 |
| | 36.4 |
| | 21.0 |
| | 20.1 |
| | 18.6 |
| | 19.7 |
| Greater than 14% | | 1.5 | | | 46.8 | | | 82.9 | | | 15.9 | | | 1.6 | | | 46.4 | | | 84.7 | | | 15.9 | |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Weighted average yield | | 10.88 | % | | 13.45 | % | | 11.50 | % | | 11.95 | % | | 12.44 | % | | 12.08 | % | |
Weighted average yield - performing debt and Structured Finance Note investments (2) | | Weighted average yield - performing debt and Structured Finance Note investments (2) | | 8.52 | % | | 14.05 | % | | 16.88 | % | | 10.04 | % | | 8.92 | % | | 14.88 | % | | 16.56 | % | | 10.27 | % |
Weighted average yield - total debt and Structured Finance Note investments (3) | | Weighted average yield - total debt and Structured Finance Note investments (3) | | 8.09 | % | | 5.24 | % | | 16.88 | % | | 9.01 | % | | 8.38 | % | | 5.53 | % | | 16.56 | % | | 9.15 | % |
(1) The weightedWeighted average yield on our performing debttotal investments is computed as (a) the sum of (i) the annual stated accruing interest on our debt investments at the balance sheet date plus the annualized accretion of Net Loan Fees, (ii) the effective yield on our performing preferred equity investments, and (iii) the annual effective yield on Structured Finance Notes, divided by (b) amortized cost of our total investment portfolio, including assets in non-accrual status as of the balance sheet date.
(2) 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 debt investments plus the annualized accretion of Net Loan Fees; and (ii) the annual effective yield on Structured Finance Notes divided by (b) amortized cost of our debt and Structured Finance Note investments, excluding assets ondebt investments in non-accrual basisstatus as of the balance sheet date. Including assets on non-accrual, the
(3) 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 Net Loan Fees and (ii) plus the annual effective yield on Structured Finance Notes divided by (b) amortized cost of our debt investment portfolio was 11.17% and 11.72%, at September 30, 2017 and December 31, 2016.Structured Finance Note investments, including debt investments in non-accrual status as of the balance sheet date.
The weighted average yield on performing portfolio company debt securities, including Structured Finance Notes, decreased to 10.04% at March 31, 2021 from 12.08%10.27% at December 31, 2016 to 11.50% at September 30, 2017,2020, primarily due to the deployment of cash during the six months ended September 30, 2017, including partial deployment of proceeds received from our April 2017 follow-on public offering, into $46.17.4% weighted average yield on new debt investments and Structured Finance Notes. We purchased approximately $40.9 million ofin debt securities, primarily in lower-yielding, first lien senior secured debt investmentsloans to larger borrowers, with a weighted average yield of 9.2%6.5%. The weighted average yield on total debt, including Structured Finance Notes, decreased to 9.01% at September 30, 2017. March 31, 2021 from 9.15% at December 31, 2020.
As of March 31, 2021, and December 31, 2020, floating rate loans at fair value were 93% and 96% of our debt portfolio, excluding Structured Finance Notes, respectively, and fixed rate loans at fair value were 7% and 4% of this portfolio, respectively.
The weighted average yield of our debt investments is not the same as a return on investment for our stockholders, but rather relates to a portion ofthe gross investment income from our investment portfolio and is calculated before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will remain at its current level.
Portfolio Company Investments
The following table summarizes the composition of September 30, 2017,our Portfolio Company Investments as of March 31, 2021 and December 31, 2016, floating rate2020 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Senior secured debt investments (1) | $ | 339,615 | | | $ | 324,150 | | | $ | 325,647 | | | $ | 306,304 | |
Subordinated debt investments | 45,526 | | | 13,742 | | | 45,409 | | | 15,067 | |
Preferred equity | 18,695 | | | 12,311 | | | 18,648 | | | 11,543 | |
Common equity, warrants and other | 15,459 | | | 54,266 | | | 15,459 | | | 52,984 | |
Total Portfolio Company Investments | $ | 419,295 | | | $ | 404,469 | | | $ | 405,163 | | | $ | 385,898 | |
Total number of portfolio companies | 72 | | | 72 | | | 62 | | | 62 | |
(1) Includes debt investments in which we have entered into contractual arrangements with co‑lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co‑lenders pursuant to a payment waterfall. The aggregate amortized cost and fair value of these investments was $55,767 and $57,029, respectively, at March 31, 2021, and $55,776 and $56,217, respectively, at December 31, 2020.
At March 31, 2021, 96% and 70% of our loan portfolio and total portfolio, respectively, consisted of senior secured loans, based on fair value. Approximately 80% of our Portfolio Company Investments at fair value are senior securities of the borrower, rather than in the subordinated securities, preferred equity or common equity. We believe the seniority of our debt investments in the borrowers' capital structures may provide greater downside protection against adverse economic changes, including those caused by the COVID-19 pandemic.
As of March 31, 2021, the three largest industries of our Portfolio Company Investments by fair value, were 73%(1) Manufacturing (23.1%), (2) Professional, Scientific, and 66%Technical Services (17.3%), and (3) Wholesale Trade (14.2%), totaling approximately 54.5% of the investment portfolio. We have limited exposure to the Retail Trade industry (4.3%), which has been significantly impacted by the COVID-19 pandemic.For a full summary of our investment portfolio by industry, see “Item 1–Financial Statements–Note 4.”
The following table presents our debt investment portfolio respectively,by investment size as of March 31, 2021 and fixed rate loans at fair value were 27% and 34% of our debt investment portfolio, respectively.December 31, 2020 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Fair Value |
| March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 |
Up to $4,000 | $ | 52,017 | | | 13.5 | % | | $ | 30,427 | | | 8.2 | % | | $ | 52,405 | | | 15.5 | % | | $ | 33,149 | | | 10.3 | % |
$4,001 to $7,000 | 55,388 | | | 14.4 | | | 72,030 | | | 19.4 | | | 61,476 | | | 18.2 | | | 68,939 | | | 21.5 | |
$7,001 to $10,000 | 59,965 | | | 15.6 | | | 51,874 | | | 14.0 | | | 43,023 | | | 12.7 | | | 43,735 | | | 13.6 | |
$10,001 to $13,000 | 23,297 | | | 6.0 | | | 21,013 | | | 5.7 | | | 35,956 | | | 10.6 | | | 33,470 | | | 10.4 | |
Greater than $13,000 | 194,474 | | | 50.5 | | | 195,711 | | | 52.7 | | | 145,032 | | | 43.0 | | | 142,078 | | | 44.2 | |
Total | $ | 385,141 | | | 100.0 | % | | $ | 371,055 | | | 100.0 | % | | $ | 337,892 | | | 100.0 | % | | $ | 321,371 | | | 100.0 | % |
Investment Activity
The following is a summary of our investmentPortfolio Company Investment activity for the three and nine months ended September 30, 2017 and 2016 (inMarch 31, 2021 (dollar amounts in millions).:
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2021 |
| | | | | | Debt Investments | | Equity Investments |
Investments in new portfolio companies | | | | | | $ | 36.2 | | | $ | — | |
Investments in existing portfolio companies | | | | | | | | |
Follow-on investments | | | | | | 26.1 | | | — | |
Restructured investments | | | | | | — | | | — | |
Delayed draw and revolver funding | | | | | | — | | | — | |
Total investments in existing portfolio companies | | | | | | 26.1 | | | — | |
Total investments in new and existing portfolio companies | | | | | | $ | 62.3 | | | $ | — | |
Number of new portfolio company investments | | | | | | 18 | | | — | |
Number of existing portfolio company investments | | | | | | 16 | | | — | |
| | | | | | | | |
Proceeds/redemptions from principal payments/ equity investments | | | | | | 48.6 | | | — | |
Proceeds from investments sold or redeemed | | | | | | 0.6 | | | — | |
Total proceeds from principal payments, equity distributions and investments sold | | | | | | $ | 49.2 | | | $ | — | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| | Debt Investments | | Equity Investments | | Debt Investments | | Equity Investments |
Investments in new portfolio companies | | $ | 36.9 |
| | $ | 3.6 |
|
| $ | 95.8 |
|
| $ | 3.9 |
|
Investments in existing portfolio companies | |
|
| |
|
|
|
|
|
|
|
|
Follow-on investments | | 0.5 |
| | 0.9 |
|
| 12.6 |
|
| 1.4 |
|
Delayed draw funding | | 0.5 |
| | — |
|
| 1.0 |
|
| — |
|
Total investments in existing portfolio companies | | 1.0 |
| | 0.9 |
|
| 13.6 |
|
| 1.4 |
|
Total investments in new and existing portfolio companies | | $ | 37.9 |
| | $ | 4.5 |
|
| $ | 109.4 |
|
| $ | 5.3 |
|
Number of new portfolio company investments | | 4 |
| | 2 |
|
| 13 |
|
| 3 |
|
Number of existing portfolio company investments | | 2 |
| | 1 |
|
| 11 |
|
| 2 |
|
| |
|
| | |
| | | |
Proceeds/distributions from principal payments/ equity investments | | $ | 35.1 |
| | $ | — |
|
| $ | 86.5 |
| | $ | — |
|
Proceeds from investments sold or redeemed | | 5.1 |
| | — |
|
| — |
| | 7.5 |
|
Total proceeds from principal payments, equity distributions and investments sold | | $ | 40.2 |
| | $ | — |
|
| $ | 86.5 |
| | $ | 7.5 |
|
In July 2017, our senior secured debt investment with a cost basis of $6.7 million, and preferred equity investments, with an aggregate cost basis of $0.3 million, in My Alarm Center, LLC, were restructured and exchanged for common equity and a new class of preferred equity securities with a fair value of $-0- and $1.8 million, respectively. As of June 30, 2017, we recognized cumulative unrealized losses of $5.2 million on our pre-restructured securities of My Alarm Center, LLC, which upon restructuring, were realized during the quarter ended September 30, 2017.
As of November 3, 2017, we closed $7.0 million of senior secured debtNotable investments in two new portfolio companies and $6.3 million of senior secured debt investments in four existing portfolio companies during the fourth quarter of 2017.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
| | Debt Investments | | Equity Investments | | Debt Investments | | Equity Investments |
Investments in new portfolio companies | | $ | 14.3 |
| | $ | — |
| | $ | 23.3 |
| | $ | — |
|
Investments in existing portfolio companies | |
|
| |
|
| |
|
| |
|
|
Follow-on investments | | 1.2 |
| | — |
| | 11.9 |
| (1) | 0.8 |
|
Refinanced investments | | — |
| | — |
| | 3.3 |
| | — |
|
Delayed draw funding | | 0.9 |
| | — |
| | 0.9 |
| | — |
|
Total investments in existing portfolio companies | | 2.1 |
| | — |
| | 16.1 |
| | 0.8 |
|
Total investments in new and existing portfolio companies | | $ | 16.4 |
| | $ | — |
| | $ | 39.4 |
| | $ | 0.8 |
|
Number of new portfolio company investments | | 2 |
| | — |
| | 5 |
| | — |
|
Number of existing portfolio company investments | | 2 |
| | — |
| | 8 |
| | 1 |
|
| | | | | | | | |
Proceeds/distributions from principal payments/ equity investments | | $ | 5.5 |
| | $ | — |
| | $ | 37.1 |
| | $ | — |
|
Proceeds from investments sold or redeemed | | — |
| | — |
| | — |
| | 2.1 |
|
Total proceeds from principal payments, equity distributions and investments sold | | $ | 5.5 |
| | $ | — |
| | $ | 37.1 |
| | $ | 2.1 |
|
| |
(1) | Acquired no-cost LLC membership interest in connection with a follow-on debt investment in an existing portfolio company valued at $0.3 million. |
During the ninethree months ended September 30, 2016, we convertedMarch 31, 2021, include Allen Media, LLC ($2.9 million senior secured loan), Confie Seguros Holding II Co. ($2.9 million senior secured loan), Innovacare, Inc. ($3.0 million senior secured loan), Ivanti Software, Inc. ($3.0 million senior secured loan) and JP Intermediate B, LLC ($3.8 million senior secured loan).
The weighted-average yield of new debt in Portfolio Company Investment companies during the three months ended March 31, 2021 was 6.5%.
We also invested $6.2 million in Structured Finance Notes with a $1.8 million portionweighted average annual effective yield of 14.9% during the three months ended March 31, 2021.
The following is a summary of our subordinatedPortfolio Company Investment activity for the three months ended March 31, 2020 (dollar amounts in millions):
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2020 |
| | | | | | Debt Investments | | Equity Investments |
Investments in new portfolio companies | | | | | | $ | 39.8 | | | $ | — | |
Investments in existing portfolio companies | | | | | | | | |
Follow-on investments | | | | | | 9.6 | | | 0.1 | |
Restructured investments | | | | | | — | | | 0.7 | |
Delayed draw and revolver funding | | | | | | 1.4 | | | — | |
Total investments in existing portfolio companies | | | | | | 11.0 | | | 0.8 | |
Total investments in new and existing portfolio companies | | | | | | $ | 5.8 | | | $ | 0.8 | |
Number of new portfolio company investments | | | | | | 5 | | | — | |
Number of existing portfolio company investments | | | | | | 11 | | | 2 | |
| | | | | | | | |
Proceeds/distributions from principal payments/ equity investments | | | | | | 37.2 | | | — | |
Proceeds from investments sold or redeemed | | | | | | 38.5 | | | 3.6 | |
Total proceeds from principal payments, equity distributions and investments sold | | | | | | $ | 75.7 | | | $ | 3.6 | |
Notable investments in new portfolio companies during the three months ended March 31, 2020, include A&A Transfer, LLC ($23.7 million senior secured loan and $1.6 million revolver) and SourceHOV Tax, Inc. ($12.8 million senior secured loan).
The weighted-average yield of direct debt investments in new portfolio companies during the three months ended March 31, 2020 was 8.8%.
We also invested $12.0 million in Structure Finance Notes with a weighted average annual effective yield of 17.3% during the three months ended March 31, 2020.
Non-cash investment activity
On March 27, 2020, our debt investment in Southern Technical Institute,Constellis Holdings, LLC with a principal amountwas restructured. We converted our non-accrual debt investment into 20,628 shares of $1.8common equity. The cost and fair value of the 20,628 shares of common equity received was $0.7 million into equity units and warrants valued at $1.8 million. No gain or loss was$0.7 million, respectively, which we recognized as a result of the conversion. In addition, we received equity in a portfolio company valued at $0.2 million as consideration for an amendment to a senior secured debt investmentinvestment's cost.
Risk Monitoring
We categorize direct investments in the samedebt securities of portfolio company.
Our level of investment activity may vary substantially from period to period depending on various factors, including, but not limited to, the amount of debt and equity capital available to middle market companies the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
We categorize debt investments into seven risk categories based on relevant information about the ability of borrowers to service their debt. For additional information regarding our risk categories, see “Item 1. Business–Portfolio Review/Risk Monitoring” in our Annual Report on Form 10-K for the year ended December 31, 2016.2020. The following table shows the classification of our debt investmentssecurities of portfolio companies, excluding Structured Finance Notes, by credit risk rating as of September 30, 2017,March 31, 2021, and December 31, 20162020 (dollar amounts in thousands): | | | September 30, 2017 | | December 31, 2016 | | Debt Investments, at Fair Value |
Risk Category | Debt Investments, at Fair Value | | % of Debt Investments | | Debt Investments, at Fair Value | | % of Debt Investments | Risk Category | | March 31, 2021 | | December 31, 2020 |
1 (Low Risk) | $ | — |
| | — | % | | $ | — |
| | — | % | 1 (Low Risk) | | $ | — | | | — | % | | $ | — | | | — | % |
2 (Below Average Risk) | 3,788 |
| | 1.5 |
| | 3,810 |
| | 1.6 |
| 2 (Below Average Risk) | | — | | | — | | | — | | | — | |
3 (Average) | 221,212 |
| | 86.0 |
| | 192,078 |
| | 78.6 |
| 3 (Average) | | 282,739 | | | 83.7 | | | 263,934 | | | 82.2 | |
4 (Special Mention) | 26,773 |
| | 10.4 |
| | 43,084 |
| | 17.6 |
| 4 (Special Mention) | | 47,297 | | | 14.0 | | | 45,302 | | | 14.1 | |
5 (Substandard) | 3,284 |
| | 1.3 |
| | 5,393 |
| | 2.2 |
| 5 (Substandard) | | 7,094 | | | 2.1 | | | 11,684 | | | 3.6 | |
6 (Doubtful) | 2,038 |
| | 0.8 |
| | — |
| | — |
| 6 (Doubtful) | | 762 | | | 0.2 | | | 451 | | | 0.1 | |
7 (Loss) | — |
| | — |
| | — |
| | — |
| 7 (Loss) | | — | | | — | | | — | | | — | |
| $ | 257,095 |
| | 100.0 | % | | $ | 244,365 |
| | 100.0 | % | | $ | 337,892 | | | 100.0 | % | | $ | 321,371 | | | 100.0 | % |
During the nine months ended September 30, 2017, we reclassified our subordinated debt investment in Community Intervention Service, Inc, designated non-accrual at September 30, 2017, from risk category 5 to risk category 6 with a fair value of $5.4 million at December 31, 2016, and reclassified our subordinated debt investment in Master Cutlery, LLC from risk category 4 to risk category 5 with a fair value $4.4 million at December 31, 2016. Each reclassification was primarily due
to a degradationChanges in the underlying business of the portfolio company. In addition, we reclassified one debt investment from risk category 4 to risk category 3, with a fair value of $9.5 million at December 31, 2016. All other year changes in distribution of our debt investments across risk categories were a result of new debt investments, the receipt of amortization payments on existing debt investments, repayment of certain debt investments in full, changes in the fair value of our existing debt investments, withinrealized gains on the categories,sale of investments, as well as changes in risk categories. A debt investment with a cost and other investment activity.fair value of $4,712 and $4,731, respectively, had a risk rating upgrade from risk category 4 to risk category 3 during the three months ended March 31, 2021.
Non-Accrual Loans
At September 30, 2017,When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company had one loan (Community Intervention Services, Inc.)will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal. No new loans were placed on non-accrual status during the three months ended March 31, 2021. The aggregate amortized cost and fair value of loans on non-accrual status with respect to all interest and Net Loan Fee amortization with an amortized costwas $45,878 and fair value of $7,639$7,856, respectively, at March 31, 2021, and $2,038, respectively. The Company's loan investment in My Alarm Center, LLC, which was on non-accrual status$48,102 and $12,135, respectively, at June 30, 2017, was restructured and exchanged for a new class of preferred equity securities and common equity securities in July 2017. See "Item 1.–Financial Statements–Note 4" for further information. At December 31, 2016, we had one loan (Community Intervention Services, Inc.) on non-accrual status with respect to PIK interest2020.
Structured Finance Notes
The following table summarizes the composition of our Structured Finance Notes as of March 31, 2021, and unamortized Net Loan Fees with an amortized cost and fair value of $7,639 and $5,393, respectively.
PIK and Cash Dividend Accruals
At September 30, 2017, we had four preferred equity securities (Master Cutlery, LLC, Stancor, L.P., Southern Technical Institute, LLC, and TRS Services, LLC), with an aggregate amortized cost and fair value of $10,452 and $3,822, respectively, for which the fair value of the accrued PIK dividend for the three months ended September 30, 2017 was $-0-. In addition, beginning June 30, 2017, the Company discontinued recognition of the cash preferred dividend from its investment in Master Cutlery, LLC. At December 31, 2016, the Company had one preferred equity security (Master Cutlery, LLC) with an amortized cost and fair value of $3,483, and $954, respectively, for which the fair value of the accrued PIK dividend for the three months ended2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Subordinated notes | $ | 58,992 | | | $ | 58,833 | | | $ | 54,280 | | | $ | 54,724 | |
Mezzanine bonds | 2,616 | | | 2,797 | | | 1,580 | | | 1,701 | |
Total Structured Finance Notes | $ | 61,608 | | | $ | 61,630 | | | $ | 55,860 | | | $ | 56,425 | |
The weighted average yield on Structured Finance Notes increased to 16.88% at March 31, 2021, from 16.56% at December 31, 2016 was $-0-.2020, primarily due to an increase in the effective yields of our subordinated notes.
Results of Operations
Our key financial measures are described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations–Key Financial Measures
Measures" in our Annual Report on Form 10-K for the year ended December 31, 2020. The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations.
Total Investment Income. We generate revenue in the form of interest income on debt investments and dividend income from our equity investments. Our debt investments typically have a term of three to eight years and bear interest at fixed and floating rates. As of September 30, 2017, floating rate and fixed rate loans comprised 73% and 27%, respectively, of our debt investment portfolio at fair value; however, in accordance with our investment strategy, we expect that over time the proportion of fixed rate loans will continue to increase. In some cases, our investments provide for PIK interest, or PIK dividends (meaning interest or dividends paid in the form of additional principal amount of the loan or equity security instead of in cash). We also generate revenue in the form of management, valuation, and other contractual fees, which is recognized as the related services are rendered. In the general course of business, we receive certain fees from portfolio companies which are non-recurring in nature. Such non-recurring fees include prepayment fees on certain loans repaid prior to their scheduled due date, which are recognized as earned when received, and fees for capital structuring services from certain portfolio companies, which are recognized as earned upon closing of the investment. Net Loan Fees are capitalized, and accreted or amortized over the life of the loan as interest income. When we receive principal payments on a loan in an amount that exceeds its amortized cost, we will also recognize the excess principal payment as income in the period it is received.
Expenses. Our primary operating expenses include interest expense due under our outstanding borrowings, the payment of fees to OFS Advisor under the Investment Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement and other operating costs described below. Additionally, we will pay interest expense on any outstanding debt under any new credit facility or other debt instrument we may enter into. We will bear all other out-of-pocket costs and expenses of our operations and transactions, whether incurred by us directly or on our behalf by a third party, including:
the cost of calculating our net asset value, including the cost of any third-party valuation services;
the cost of effecting sales and repurchases of shares of our common stock and other securities;
fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;
transfer agent and custodial fees;
out-of-pocket fees and expenses associated with marketing efforts;
federal and state registration fees and any stock exchange listing fees;
U.S. federal, state and local taxes;
independent directors’ fees and expenses;
brokerage commissions;
fidelity bond, directors’ and officers’ liability insurance and other insurance premiums;
direct costs, such as printing, mailing and long-distance telephone;
fees and expenses associated with independent audits and outside legal costs;
costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws; and
other expenses incurred by either OFS Services or us in connection with administering our business.
Net Gain (Loss) on Investments. Net gain (loss) on investments consists of the sum of: (a) realized gains and losses from the sale of debt or equity securities, or the redemption of equity securities; and (b) net unrealized appreciation or depreciation on debt and equity investments. In the period in which a realized gain or loss is recognized, such gain or loss will generally be offset by the reversal of accumulated net unrealized appreciation or depreciation, and the net gain recognized in that period will generally be smaller. The accumulated net unrealized appreciation or depreciation on debt securities is also reversed when those investments are redeemed or paid off prior to maturity. In such instances, the reversal of accumulated unrealized appreciation or depreciation will be reported as a net loss or gain, respectively, and may be partially offset by the acceleration of any premium or discount on the debt security, which is reported in interest income, and any prepayment fees on the debt security, which is reported in fee income.
We do not believe that our historical operating performance is necessarily indicative of our future results of operations that we expect to report in future periods.operations. We are primarily focused on debt investments in middle-market and larger companies in the United States including debt investments and, to a lesser
extent, equity investments, including warrants and other minority equity securities and Structured Finance Notes, which differs to some degree from our historical investment concentration, in senior secured loans to middle-marketthat we now also focus on the debt of larger U.S. companies in the United States.and Structured Finance Notes. Moreover, as a BDC and a RIC, we will also be subject to certain constraints on our operations, including, but not limited to, limitations imposed by the 1940 Act and the Code. In addition, SBIC I L.P.LP is subject to regulation and oversight by they SBA. For the reasons described above, the results of operations described below may not necessarily be indicative of the results we expect to report in future periods.
Net increase (decrease) in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase (decrease) in net assets resulting from operations may not be meaningful.
The following analysis compares our quarterly results of operations to the preceding quarter, as well as our year-to-date results of operations to the corresponding period in the prior year. We believe a comparison of our current quarterly results to the preceding quarter is more meaningful and transparent than a comparison to the corresponding prior-year quarter as our results of operations are not influenced by seasonal factors the latter comparison is designed to elicit and highlight.
Comparison of the three and nine months ended September 30, 2017,March 31, 2021 and 2016December 31, 2020
Consolidated operating results for the three and nine months ended September 30, 2017March 31, 2021 and 2016,December 31, 2020 are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2021 | | December 31, 2020 | | | | |
Investment income | | | | | | | |
Interest income: | | | | | | | |
Cash interest income | $ | 6,837 | | | $ | 7,423 | | | | | |
Net Loan Fee amortization | 573 | | | 625 | | | | | |
Accretion of interest income on Structured Finance Notes | 2,278 | | | 1,735 | | | | | |
Other interest income | 12 | | | 15 | | | | | |
Total interest income | 9,700 | | | 9,798 | | | | | |
PIK income: | | | | | | | |
PIK interest income | 440 | | | 306 | | | | | |
Preferred equity PIK dividends | 47 | | | 116 | | | | | |
Total PIK income | 487 | | | 422 | | | | | |
Dividend income: | | | | | | | |
| | | | | | | |
Common and preferred equity cash dividends | — | | | 350 | | | | | |
Total dividend income | — | | | 350 | | | | | |
Fee income: | | | | | | | |
Syndication fees | 217 | | | 278 | | | | | |
Prepayment and other fees | 86 | | | 289 | | | | | |
Total fee income | 304 | | | 567 | | | | | |
Total investment income | 10,491 | | | 11,137 | | | | | |
Total expenses | 7,941 | | | 8,133 | | | | | |
Net investment income | 2,550 | | | 3,004 | | | | | |
Net gain on investments | 3,923 | | | 8,915 | | | | | |
Loss on extinguishment of debt | (2,299) | | | (484) | | | | | |
Net increase in net assets resulting from operations | $ | 4,174 | | | $ | 3,694 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Investment income | | | | | | | |
Interest income: | | | | | | | |
Cash interest income | $ | 6,742 |
|
| $ | 5,872 |
|
| $ | 19,592 |
|
| $ | 17,781 |
|
Net Loan Fee amortization | 518 |
|
| 352 |
|
| 1,187 |
|
| 1,162 |
|
PIK interest income | 485 |
|
| 311 |
|
| 1,134 |
|
| 868 |
|
Other interest income | 73 |
|
| 45 |
|
| 156 |
|
| 124 |
|
Total interest income | 7,818 |
|
| 6,580 |
|
| 22,069 |
|
| 19,935 |
|
Dividend income: |
|
|
|
|
|
|
|
|
|
|
|
Preferred equity cash dividends | 34 |
|
| 82 |
|
| 99 |
|
| 410 |
|
Preferred equity PIK dividends | 286 |
|
| 396 |
|
| 1,065 |
|
| 1,032 |
|
Common equity dividends | 91 |
|
| 50 |
|
| 331 |
|
| 182 |
|
Total dividend income | 411 |
|
| 528 |
|
| 1,495 |
|
| 1,624 |
|
Fee income: |
|
|
|
|
|
|
|
|
|
|
|
Management, valuation, and other | 43 |
|
| 69 |
|
| 127 |
|
| 167 |
|
Prepayment, structuring, and other fees | 850 |
|
| 182 |
|
| 1,443 |
|
| 1,159 |
|
Total fee income | 893 |
|
| 251 |
|
| 1,570 |
|
| 1,326 |
|
Total investment income | 9,122 |
|
| 7,359 |
|
| 25,134 |
|
| 22,885 |
|
Total expenses | 4,720 |
|
| 4,062 |
|
| 13,076 |
|
| 12,476 |
|
Net investment income | 4,402 |
|
| 3,297 |
|
| 12,058 |
|
| 10,409 |
|
Net loss on investments | (3,227 | ) |
| (909 | ) |
| (8,298 | ) |
| (1,404 | ) |
Net increase in net assets resulting from operations | $ | 1,175 |
|
| $ | 2,388 |
|
| $ | 3,760 |
|
| $ | 9,005 |
|
Interest and PIK income by debt investment type for the three and nine months ended September 30, 2017March 31, 2021 and 2016,December 31, 2020, is summarized below (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | December 31, | | | | |
| 2021 | | 2020 | | | | |
Interest income and PIK interest income: | | | | | | | |
Senior secured debt investments | $ | 7,202 | | | $ | 7,464 | | | | | |
Subordinated debt investments | 660 | | | 863 | | | | | |
Structured Finance Notes | 2,278 | | | 1,777 | | | | | |
Total interest income and PIK interest income | 10,140 | | | 10,104 | | | | | |
Plus purchased premiums (less Net Loan Fees) accelerations | (342) | | | (333) | | | | | |
Recurring interest income and PIK interest income | $ | 9,798 | | | $ | 9,771 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Interest income: | | | | | | | |
Senior secured debt investments | $ | 5,721 |
|
| $ | 4,979 |
|
| $ | 16,170 |
|
| $ | 13,930 |
|
Subordinated debt investments | 2,097 |
|
| 1,601 |
|
| 5,899 |
|
| 6,005 |
|
Total interest income | $ | 7,818 |
|
| $ | 6,580 |
|
| $ | 22,069 |
|
| $ | 19,935 |
|
Investment IncomeInterestWe consider our interest income increased by $1.2on direct debt investments to portfolio companies—other than acceleration of Net Loan Fees recognized upon the repayment of a loan—PIK interest income, and the accretable yield on Structured Finance Notes to be recurring in nature. Such recurring interest income and PIK interest income was essentially unchanged during the three months ended March 31, 2021 compared to the three months ended December 31, 2020.
Total PIK income on debt securities was $0.4 million and $0.3 million for the three months ended September 30, 2017,March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, we amended two loans to increase the PIK rate and amended a non-accrual loan to convert first quarter cash interest due to PIK interest; however, such income remained unrecognized in accordance with our non-accrual policy.
Syndication fees, prepayment fees and the acceleration of Net Loan Fees generally result from periodic transactions rather than from holding portfolio investments and are considered non-recurring. Syndication fees, which are recognized when OFS Advisor sources, structures, and arranges the lending group, and for which we are additionally compensated, declined to $0.2 million for the three months ended March 31, 2021 compared to $0.3 million for the three months ended December 31, 2020. Total fee income for the three months ended March 31, 2021 compared to December 31, 2020, decreased from $0.6 million to $0.3 million due to decreases in syndication fees and prepayment fees.
Expenses
Operating expenses for the three months ended March 31, 2021 and December 31, 2020, are presented below (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | December 31, | | | | |
| 2021 | | 2020 | | | | |
Interest expense | $ | 4,825 | | | $ | 4,507 | | | | | |
Management fee | 1,834 | | | 1,846 | | | | | |
Incentive fee | — | | | 693 | | | | | |
Professional fees | 387 | | | 464 | | | | | |
Administration fee | 568 | | | 399 | | | | | |
General and administrative expenses | 327 | | | 224 | | | | | |
Total expenses | $ | 7,941 | | | $ | 8,133 | | | | | |
Interest expense for the three months ended March 31, 2021, increased $0.3 million compared to the three months ended September 30, 2016. The $1.2 million increase was due to a $1.1 million increase primarily attributable to a 19% increase in the average outstanding loan balance, and a $0.2 million increase in Net Loan Fee amortization, offset by a $0.1 million decrease primarily attributable to a 30 basis points decrease in the weighted average yield in our portfolio. Acceleration
of Net Loan Fees of $0.3 million and $0.1 million were included in interest income for the three months ended September 30, 2017 and 2016, respectively.
Interest income increased by $2.1 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The $2.1 million increase was due to a $2.7 million increase primarily attributable to a 15% increase in the average outstanding loan balance, and a $0.1 million increase in accelerated Net Loan Fee amortization, offset by a $0.7 million decrease primarily attributable to a 42 basis point decrease in the weighted average yield in our portfolio. Acceleration of Net Loan Fees of $0.5 million and $0.4 million were included in interest income for the nine months ended September 30, 2017 and 2016, respectively.
Fee income increased by $0.6 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016,December 31, 2020, primarily due to an increaseus paying interest on both the Unsecured Notes Due February 2026, issued in prepayment feesMarch of 2021, and structuring fees of $0.3 millionthe Unsecured Notes Due April 2025 and $0.4 million, respectively, offset by a $0.1 million decrease in other fees. We recorded prepayment fees of $0.3 million resultingthe Unsecured Notes Due October 2025. After the 30-day notice period expired, we used the proceeds from $17.5 million of unscheduled principal payments during the three months ended September 30, 2017. We did not receive any unscheduled principal payments subjectUnsecured Notes Due February 2026 to prepayment fees duringredeem both the three months ended September 30, 2016. We recorded structuring fees of $0.5 million in connection withUnsecured Notes Due April 2025 and the closing of $30.2 million of investments during the three months ended September 30, 2017, compared to structuring fees of $0.1 million in connection with the closing of $9.5 million of investments during the three months ended September 30, 2016.
Fee income increased by $0.2 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to a $0.5 million increase in structuring fees, offset by a $0.2 million decrease in prepayment fees and $0.1 million in other fees. We recorded structuring fees of $0.7 million in connection with the closing of $48.7 million of investments during the nine months ended September 30, 2017, compared to structuring fees of $0.2 million in connection with the closing of $15.7 million of investments during the nine months ended September 30, 2016. We recorded prepayment fees of $0.7 million resulting from $45.7 million of unscheduled principal payments during the nine months ended September 30, 2017, compared to prepayment fees of $0.9 million resulting from $24.8 million of unscheduled principal payments we recorded during the nine months ended September 30, 2016.
Expenses
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Interest expense | $ | 1,503 |
|
| $ | 1,320 |
| | $ | 4,229 |
| | $ | 3,936 |
|
Management fees | 1,310 |
|
| 1,120 |
| | 3,726 |
| | 3,324 |
|
Incentive fee | 1,090 |
|
| 817 |
| | 2,249 |
| | 2,407 |
|
Professional fees | 284 |
|
| 260 |
| | 840 |
| | 877 |
|
Administration fee | 274 |
|
| 255 |
| | 982 |
| | 1,009 |
|
General and administrative expenses | 259 |
|
| 290 |
| | 1,050 |
| | 923 |
|
Total expenses | $ | 4,720 |
|
| $ | 4,062 |
| | $ | 13,076 |
| | $ | 12,476 |
|
Interest expense for the three and nine months ended September 30, 2017, increased over the corresponding periods in the prior year due to an increase in borrowings under our PWB Credit Facility. The average dollar amount of borrowings outstanding under the PWB Credit Facility during the three and nine months ended September 30, 2017, was $11.1 million and $5.8 million, respectively. There were no borrowings under the PWB Credit Facility during the three or nine months ended September 30, 2016.Unsecured Notes Due October 2025.
Management fee expense for the three and nine months ended September 30, 2017, increased over the corresponding periods inMarch 31, 2021 remained stable compared to the prior year due to an increase in our average total assets, primarily due to a increase in net investment activity, including deployment of funds from the Offering.quarter.
Incentive fee expense increased by $0.3 million for the three months ended September 30, 2017,March 31, 2021 decreased $0.7 million compared to the prior quarter due to a decline in net interest margin and lower fee income.
Professional fees for the three months ended September 30, 2016, due to an increase in pre-incentive fee net investment incomeMarch 31, 2021 decreased $0.1 million compared to the prior year, which was primarily attributablequarter due to an increase in the average investment balance as a result of net investment activity, including deployment of funds from the Offering.reduced valuation and accounting costs.
Administration fee expense decreased byfor the three months ended March 31, 2021 increased $0.2 million over the prior quarter due to allocations related to year-end administrative services, including audit support.
General and administrative expenses for the ninethree months ended September 30, 2017, compared toMarch 31, 2021 increased $0.1 million over the nine months ended September 30, 2016. The decrease wasprior quarter primarily due to a $0.6 million decrease in Part One incentive fees, due to a share issuance adjustment related to the Offering, which raised the hurdle rate to a level that was not exceededrealization of tax benefits in the secondfourth quarter because the Offering Proceeds were not fully deployed, offset by an increase in pre-incentive fee net investment income due to an increase in net investment activity, including additional deployment of funds from the Offering, and an
increase in the accrued Capital Gains Fee. During the nine months ended September 30, 2017, we did not incur a Capital Gains Fee, compared to a Capital Gains Fee of $(0.1) million recorded during nine months ended September 30, 2016, which represents the reversal of the accrued Capital Gains Fee at December 31, 2015.2020.
Net Lossrealized and unrealized gain (loss) on Investmentsinvestments
Net gain (loss) by investment type for the three and nine months ended September 30, 2017March 31, 2021 and 2016, areDecember 31, 2020, were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | December 31, | | | | |
| 2021 | | 2020 | | | | |
Senior secured debt | $ | 3,880 | | | $ | 148 | | | | | |
Subordinated debt | (1,442) | | | (4,803) | | | | | |
Preferred equity, net of taxes | 655 | | | (71) | | | | | |
Common equity, warrants and other | 1,373 | | | 9,347 | | | | | |
Structured Finance Notes | (543) | | | 4,294 | | | | | |
Total net gain on investments | $ | 3,923 | | | $ | 8,915 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Senior secured debt | $ | (1,669 | ) |
| $ | (368 | ) |
| $ | (5,906 | ) |
| $ | 859 |
|
Subordinated debt | (2,306 | ) |
| (193 | ) |
| (4,660 | ) |
| (272 | ) |
Preferred equity | 270 |
|
| (497 | ) |
| 2,949 |
|
| (4,549 | ) |
Common equity and warrants | 478 |
|
| 149 |
|
| (681 | ) |
| 2,558 |
|
Net loss on investments | (3,227 | ) |
| (909 | ) |
| $ | (8,298 | ) |
| $ | (1,404 | ) |
Three and nineNet gain on investments for the three months ended September 30, 2017March 31, 2021 and March 31, 2020
Our portfolio experienced net gains of $3.9 million in the first quarter of 2021, primarily as a result of performance improvements in our directly originated debt and equity investments, resulting in net unrealized appreciation. During the first quarter of 2020, the fair value of the portfolio declined $27.4 million primarily as a result of the adverse economic effects of the COVID-19 pandemic on market conditions and the overall economy and the related declines in quoted loan prices, increases in underlying market credit spreads and company-specific negative impacts on past and expected future operating performance. Additionally, we incurred realized losses of $9.1 million primarily due to the restructuring of our debt investment in Constellis Holdings, LLC, which was fully recognized as an unrealized loss as of December 31, 2019.
The net appreciation on our senior secured debt investments in the first quarter of 2021 was primarily attributable to a $1.5 million improvement on our debt investment in Wastebuilt Environmental Solutions LLC, which experienced an improvement in fair value as the company continues to proceed with an anticipated acquisition. We also experienced general appreciation in our senior secured investments as a result of credit spread tightening observed in the market, leading to a 31 basis point reduction in the weighted averge discount rates utilized in our discounted cash flow fair value models. We recognized net losses of $1.7$18.7 million on senior secured debt during the three months ended September 30, 2017,March 31, 2020, primarily as a result of the negative impactnet unrealized depreciation of portfolio company-specific performance factors. In addition,$19.0 million on our senior secured debt. We also recognized a previously recognized cumulative unrealizednet realized loss of $5.0$9.1 million, at June 30, 2017, on My Alarm Center, LLC wasprimarily due to a $9.1 million realized duringloss from the three months ended September 30, 2017 upon restructurerestructuring of the senior securedour debt investment into preferredin Constellis Holdings, LLC, which had unrealized depreciation of $9.3 million as of December 31, 2019, and common equity interests.therefore positively impacted the first quarter of 2020 net loss by $0.2 million.
First quarter 2021 net losses in our subordinated debt investments was principally due to a decrease of $2.3 million in the fair value of our subordinated debt investment in Online Tech Stores LLC, due to further degradation of performance at that company. We recognized net losses of $5.9 million on senior secured debt during the nine months ended September 30, 2017, primarily as a result of the negative impact of portfolio company-specific performance factors, including a realized loss of $5.0 million on our senior secured debt investment in My Alarm Center, LLC recognized upon restructuring in the third quarter of 2017. We held this investment from the fourth quarter of 2015 and recognized unrealized appreciation of $0.2 million and $-0-during the years ended December 31, 2016 and 2015, respectively.
We recognized net losses of $2.3$7.5 million on subordinated debt during the three months ended September 30, 2017,March 31, 2020, primarily as a result of the negative impact of portfolio company-specific performance factors, including an unrealized depreciation of $1.2$7.2 million recognized on our subordinated debt investment in Community Intervention Services, Inc.,Online Tech Stores, LLC, which was the only loan placed on non-accrual during 2016.
the quarter. We also recognized net lossesunrealized depreciation of $4.7$0.3 million on our remaining subordinated debt during the nine months ended September 30, 2017,securities, primarily as a result of thedue to net negative impact of portfolio company-specific performance factors, including anfactors.
Net gain on investments for the three months ended December 31, 2020
Our portfolio experienced net gains of $8.9 million in the fourth quarter of 2020 primarily as a result of performance improvements in our equity investments. During the three months ended December 31, 2020, we recognized net gains of $9.3 million on our equity investments, primarily due to unrealized depreciationappreciation of $3.4$4.3 million on our investment in Pfanstiehl Holdings, Inc., as well as unrealized appreciation of $2.5 million on our investment in MTE Holding Corp. We recognized net losses of $4.8 million on our subordinated debt investments, primarily due to unrealized depreciation of $4.7 million on our investment in Community Intervention Services, Inc.,Online Tech Stores, LLC.
Loss on Extinguishment of Debt
During the three months ended March 31, 2021, we prepaid $9.8 million of SBA debentures and redeemed $98.5 million of unsecured notes, and, as a result, we recognized losses on extinguishment of debt of $2.3 million related to the charge-off of deferred borrowing costs on these instruments.
During the three months ended December 31, 2020, we prepaid $23.5 million of SBA debentures and the BLA was amended to reduce the total commitment from $50.0 million to $20.0 million, and, as a result, recognized losses on extinguishment of debt of $0.5 million related to the charge-off of deferred borrowing costs on these instruments.
Comparison of the three months ended March 31, 2021 and 2020
Consolidated operating results for the three months ended March 31, 2021 and 2020 are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Investment income | | | | | | | |
Interest income: | | | | | | | |
Cash interest income | $ | 6,837 | | | $ | 9,988 | | | | | |
Net Loan Fee amortization | 573 | | | 414 | | | | | |
Accretion of interest income on Structured Finance Notes | 2,278 | | | 1,223 | | | | | |
Other interest income | 12 | | | 37 | | | | | |
Total interest income | 9,700 | | | 11,662 | | | | | |
PIK income: | | | | | | | |
PIK interest income | 440 | | | 436 | | | | | |
Preferred equity PIK dividends | 47 | | | 179 | | | | | |
Total PIK income | 487 | | | 615 | | | | | |
Dividend income: | | | | | | | |
| | | | | | | |
Common and preferred equity cash dividends | — | | | 100 | | | | | |
Total dividend income | — | | | 100 | | | | | |
Fee income: | | | | | | | |
Management and syndication | 217 | | | 378 | | | | | |
Prepayment and other fees | 86 | | | 115 | | | | | |
Total fee income | 304 | | | 493 | | | | | |
Total investment income | 10,491 | | | 12,870 | | | | | |
Total expenses, net incentive fee waiver | 7,941 | | | 8,898 | | | | | |
Net investment income | 2,550 | | | 3,972 | | | | | |
Net gain (loss) on investments | 3,923 | | | (35,983) | | | | | |
Loss on extinguishment of debt | (2,299) | | | (149) | | | | | |
Net increase (decrease) in net assets resulting from operations | $ | 4,174 | | | $ | (32,160) | | | | | |
Interest and PIK income by debt investment type for the three months ended March 31, 2021 and 2020, is summarized below (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Interest income and PIK interest income: | | | | | | | |
Senior secured debt investments | $ | 7,202 | | | $ | 9,918 | | | | | |
Subordinated debt investments | 660 | | | 958 | | | | | |
Structured Finance Notes | 2,278 | | | 1,223 | | | | | |
Total interest income and PIK interest income | 10,140 | | | 12,099 | | | | | |
Plus purchased premiums (less Net Loan Fees) accelerations | (342) | | | (103) | | | | | |
Recurring interest income and PIK interest income | $ | 9,798 | | | $ | 11,996 | | | | | |
Investment Income
We consider our interest income on direct debt investments to portfolio companies—other than acceleration of Net Loan Fees recognized upon the repayment of a loan—PIK interest income, and the accretable yield on Structured Finance Notes to be recurring in nature. Such recurring interest income and PIK interest income decreased by $2.2 million for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, primarily due to $2.0 million from a $85 million decrease in the average outstanding performing loan balance, and a $0.2 million decrease resulting from a 6 basis point reduction in the recurring earned yield on our portfolio primarily due to lower yielding senior secured investments.
Expenses
Operating expenses for the three months ended March 31, 2021 and 2020, are presented below (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Interest expense | $ | 4,825 | | | $ | 4,922 | | | | | |
Management fee | 1,834 | | | 2,019 | | | | | |
Incentive fee | — | | | 883 | | | | | |
Professional fees | 387 | | | 648 | | | | | |
Administration fee | 568 | | | 520 | | | | | |
Other expenses | 327 | | | 347 | | | | | |
Total expenses before incentive fee waiver | $ | 7,941 | | | $ | 9,339 | | | | | |
Incentive fee waiver | — | | | (441) | | | | | |
Total expenses, net of incentive fee waiver | $ | 7,941 | | | $ | 8,898 | | | | | |
Interest expense for the three months ended March 31, 2021 decreased $0.1 million over the corresponding prior year period primarily due to a decrease in the average dollar borrowings.
Management fee expense for the three months ended March 31, 2021 decreased $0.2 million over the corresponding prior year period due to a decrease in the size of our portfolio.
The $0.9 million decrease in incentive fee expense during the three months ended March 31, 2021 was attributable to a decrease in net investment income resulting from a decline in net interest margin. On May 4, 2020, OFS Advisor agreed to irrevocably waive the receipt of $0.4 million in Income Incentive Fees (based on net investment income) related to net investment income, that it would otherwise be entitled to receive under the Investment Advisory Agreement for the three months ended March 31, 2020. As a result of the voluntary fee waiver, we incurred Income Incentive Fee expense of $0.4 million for the three months ended March 31, 2020, which is equal to half the Income Incentive Fee expense we would have incurred for such period.
The $0.3 million decrease in professional fees for the three months ended March 31, 2021, compared to the corresponding prior year period was placedattributable to reduced valuation and accounting costs.
Administration fee expense for the three months ended March 31, 2021, remained stable compared to the corresponding prior year period.
Other expenses for the three months ended March 31, 2021 remained stable compared to the corresponding prior year period.
Net realized and unrealized gain (loss) on non-accrual during 2016.investments
Net gain (loss) by investment type for the three months ended March 31, 2021 and 2020, were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Senior secured debt | $ | 3,880 | | | $ | (18,731) | | | | | |
Subordinated debt | (1,442) | | | (7,465) | | | | | |
Preferred equity, net of taxes | 655 | | | (1,237) | | | | | |
Common equity, warrants and other | 1,373 | | | (344) | | | | | |
Structured Finance Notes | (543) | | | (8,206) | | | | | |
Total net gain (loss) on investments | $ | 3,923 | | | $ | (35,983) | | | | | |
Net gains on investments for the three months ended March 31, 2020.
We recognized net gainslosses of $0.3$1.2 million on preferred equity investments for the three months ended September 30, 2017,March 31, 2020, primarily as a result of the positive impact from changes to EBITDA multiples used in our valuations as a resultunrealized depreciation of pending transactions,$2.0 million on Contract Datascan Series A units, offset by the net negative impact of portfolio company-specific performance factors. Included in net gains of $0.3 million for the three months ended September 30, 2017, was a realized gain of $3.6 million we recognized upon exit of a preferred equity investment. We recognized cumulative unrealized appreciation of approximately $3.6$0.8 million on this investment through June 30, 2017, which resultedTTG Healthcare, LLC Class B preferred shares.
Net appreciation in a net gain of $-0-our common equity, warrants and other during the three months ended September 30, 2017. In addition, previously March 31, 2021, was led by net gains on our investments in the common equity of Pfanstiehl Holdings, Inc., and NeoSystems Corp., which improved by $1.0 million and $0.9 million, respectively, in both instances driven by improved operating results of the companies. We
recognized cumulative unrealized depreciationnet losses of $0.3 million at June 30, 2017, on our preferred equity investments in My Alarm Center, LLC, was realized upon restructuring.
We recognized net gains of $2.9 million on preferred equity investments for the nine months ended September 30, 2017, primarily as a result of the net positive impact from changes to EBITDA multiples used in our valuations as a result of pending transactions, offset by the net negative impact of portfolio company-specific performance factors. Included in net gains of $2.9 million for the nine months ended September 30, 2017, was a realized gain of $3.6 million we recognized upon exit of a preferred equity investment. We recognized cumulative unrealized appreciation of approximately $1.1 million on this investment through December 31, 2016, which resulted in a net gain of $2.5 million during the nine months ended September 30, 2017. In addition, previously recognized cumulative unrealized depreciation of $0.3 million at June 30, 2017, on our preferred equity investments in My Alarm Center, LLC, was realized upon restructuring.
We recognized net gains of $0.5 million on common equity and warrant investments for the three months ended September 30, 2017,March 31, 2020, primarily as a result of the positive impact ofnegative portfolio company-specific performance factors.
We recognized net lossesunrealized depreciation of $0.7$8.2 million on common equity and warrant investmentsStructured Finance Notes for the ninethree months ended September 30, 2017,March 31, 2020, primarily as a result of the negative impact of portfolio company-specific performance factors. Included inassumptions that reflect more stress on the net loss was a realized gain of $0.9 million from the exit of a common equity investment, for which we had recognized cumulative unrealized appreciation of $0.5 million through December 31, 2016, resulting in a net gain of $0.4 million during the nine months ended September 30, 2017.
Three and nine months ended September 30, 2016
We recognized net losses of $0.4 million on senior secured debt during the three months ended September 30, 2016, primarily as a result of the net impact of portfolio company-specific performance factors, offset by the impact of changes to certain market loan indices, and the impact of certain investments moving closer to their expected exit events.
We recognized net gains of $0.9 million on senior secured debt during the nine months ended September 30, 2016, primarily as a result of the impact of changes to certain market loan indices, and by the impact of portfolio company-specific performance factors, partially offset by the pay-off of certain senior secured debt investments.
We recognized net losses of $0.2 million on subordinated debt during the three months ended September 30, 2016, principally as a result of the net impact of portfolio company-specific performance factors.
We recognized net losses of $0.3 million on subordinated debt during the nine months ended September 30, 2016, principallyunderlying portfolios due to the pay-off of certain subordinated debt investments, offset by the net impact of portfolio company-specific performance factors.widening credit spreads.
We recognized net losses of $0.5 million on preferred equity investments for the three months ended September 30, 2016, primarily attributable to the net impact of portfolio company-specific performance factors, offset primarily by the impact of certain investments moving closer to their expected exit events.
We recognized net losses of $4.6 million on preferred equity investments for the nine months ended September 30, 2016, primarily attributable to the net impact of portfolio company-specific performance factors, offset primarily by the impact of certain investments moving closer to their expected exit events.
We recognized net gains of $0.1 million on common equity and warrant investments for the three months ended September 30, 2016, primarily due to the net impact of certain investments moving closer to their expected exit events, offset by the negative net impact of portfolio company-specific performance factors.
We recognized net gains of $2.6 million on common equity and warrant investments for the nine months ended September 30, 2016, primarily due to the net impact of portfolio company-specific performance factors and the net impact of certain investments moving closer to their expected exit events. In addition, we realized gains of $2.6 million from the redemption of an equity investment. We held this investment from the first quarter of 2014 and recognized unrealized appreciation of $2.1 million and $0.5 during the years ended December 31, 2015 and 2014, respectively. There was no net gain during the nine months ended September 30, 2016, on this transaction.
Liquidity and Capital Resources
We manage the liquidityAt March 31, 2021, we held cash of $41.6 million, which includes $4.5 million held by SBIC I LP, ("our wholly owned SBIC, Liquidity") separately from our general corporate liquidity ("Corporate Liquidity"). At September 30, 2017, our Corporate Liquidity and our$4.4 million held by OFSCC-FS. Our use of cash held by SBIC Liquidity includesI LP may be restricted by SBA regulation, including limitations on the amount of cash and cash equivalents of $1.6 million and $52.2 million, respectively. Additionally, we had $17.9 million in Corporate Liquidity available through our PWB Credit Facility at September 30, 2017. TransfersSBIC I LP can distribute to the Parent. Any such distributions to the Parent from SBIC Liquidity to Corporate LiquidityI LP are limited bygenerally restricted under SBA regulations to a statutory measure of undistributed accumulated earnings or regulatory capital of SBIC I LP, and require the prior approval of the SBA. During the three months ended March 31, 2021, the Parent received a return of capital distribution of $19.1 million from SBIC I LP. Distributions from OFSCC-FS to the Parent are restricted by the terms and conditions of the BNP Facility. During the three months ended March 31, 2021, the Parent received $0.7 million in cash distributions from OFSCC-FS. As of March 31, 2021, cash available to be distributed from SBIC I LP and OFSCC-FS were $8.9 million and $-0-, respectively.
At March 31, 2021, we had an unused commitment of $25.0 million under our abilityPWB Credit Facility, as well as an unused commitment of $130.5 million under our BNP Facility, both subject to transfer liquidity from Corporate Liquidity to SBIC Liquidity is currently limited to capital contributionsa borrowing base requirements and other covenants. The Parent may make unsecured loans to SBIC I LP. Additionally,LP, the useaggregate which cannot exceed $35 million at any given time, and no interest may be charged on the unpaid principal balance. There were no intercompany loans between the Parent and SBIC I LP as of SBIC Liquidity is limited by regulation; see "Item 1.–Business–Small Business Investment Company Regulations"March 31, 2021.
Based on fair values and equity capital at March 31, 2021, we could access available lines of credit for $97 million and remain in compliance with our Annual Reportasset coverage requirements. As of May 7, 2021, we had cash on Form 10-K for the year ended December 31, 2016. During the nine months ended September 30, 2017,hand of approximately $28.5 million. We continue to believe that we transferred $3.1 million from from SBIC Liquidityhave sufficient levels of liquidity to Corporate Liquidity. At September 30, 2017, $2.5 million cashsupport our existing portfolio companies and cash equivalents were available to transfer from SBIC Liquidity to Corporate Liquidity.selectively deploy capital in new investment opportunities in this challenging environment.
Sources and Uses of Cash and Cash Equivalents
We generate operating cash through operationsflows from net investment income and the net liquidation of portfolio investments, and use cash in our operations in the net purchase of portfolio investments.investments and payment of expenses. Significant variations may exist between net investment income and cash from net investment income, primarily due to the recognition of non-cash investment income, including certain Net Loan Fee amortization, PIK interest, and PIK dividends, which generally will not be fully realized in cash until we exit the investment. As discussed in "Item 1.–Financial Statements–Note 3,", we pay OFS Advisor a quarterly incentive fee with respect to our pre-incentive fee net investment income, which includesmay include investment income that we have not received in cash. In addition, we must distribute substantially all of our taxable income, which approximates, but will not always equal, the cash we generate from net investment income to maintain our RIC tax treatment. Historically, our distributions have been in excess of taxable income,
and we have limited history of net taxable gains. We also obtain cash to
fund investments or general corporate activities from the issuance of securities and our revolving line of credit. These principal sources and uses of cash and liquidity are presented below (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Cash from net investment income | | $ | (1,517) | | | $ | 886 | |
Net (purchases and originations)/repayments and sales of portfolio investments | | 7,340 | | | 6,831 | |
Net cash provided by operating activities | | 5,823 | | | 7,717 | |
| | | | |
Distributions paid to stockholders(1) | | (2,655) | | | (4,484) | |
Net (borrowings) repayments under lines of credit | | (12,500) | | | 1,600 | |
Repayment of SBA debentures | | (9,765) | | | (16,110) | |
Proceeds from unsecured notes offering, net of discounts | | 121,791 | | | — | |
Redemption of unsecured notes | | (98,525) | | | — | |
Other financing activities | | (236) | | | — | |
Net cash used in financing activities | | (1,890) | | | (18,994) | |
Increase (decrease) in cash | | $ | 3,933 | | | $ | (11,277) | |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Cash from net investment income | | $ | 8,198 |
|
| $ | 6,009 |
|
Cash received from realized gains | | 3,959 |
|
| 2,179 |
|
Net purchases and originations of portfolio investments excluding cash received from realized gains | | (24,639 | ) |
| (3,106 | ) |
Net cash provided by (used in) operating activities | | (12,482 | ) |
| 5,082 |
|
Proceeds from common stock offering, net of expenses | | 53,423 |
|
| — |
|
Cash distributions paid | | (12,231 | ) |
| (9,807 | ) |
Net repayment of borrowings on PWB Credit Facility | | 7,600 |
|
| — |
|
Payment of debt issuance costs | | (101 | ) | | — |
|
Increase (decrease) in cash and cash equivalents | | $ | 36,209 |
| | $ | (4,725 | ) |
(1) The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our ICTI for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. See "Item 1–Financial Statements–Note 9. "At September 30, 2017, we held cash and cash equivalents of $53.9 million, an increase of $36.2 million from December 31, 2016.
Cash from net investment income
Net cashCash from net investment income increased $2.2decreased $2.4 million for the ninethree months ended September 30, 2017,March 31, 2021, compared to the ninethree months ended September 30, 2016. The net increase to net cash from investment income wasMarch 31, 2020, principally due to an increase in interest income, common dividends, prepayment and structuring fees collected, and a decrease in cash paid for incentive fees, which primarily resulted from a share issuance adjustment related to the Offering , offset by a decrease in preferred equity cash dividends collected an increase in cash paid for management fees, primarily due to a increase in net investment activity, including additional deploymentinterest, dividend, and fee income of funds from the Offering,$3.1 million and an increase in cash interestoperating expenses paid on our PWB Credit Facility.of $0.5 million, offset by an decrease in fees paid to OFS Advisor and affiliates of $1.4 million.
Cash received from realized gains
Cash received on realized gains may differ from realized gains in the statement of operations due to delays in the receipt of sale proceeds related to escrowNet (purchases and earn-out provisions in the investmentoriginations)/repayments and sales transactions.
Net purchases and originations of portfolio investments excluding cash received from realized gains
During the ninethree months ended September 30, 2017,March 31, 2021, net purchases and originations of portfolio investments of $7.3 million were primarily due to $114.7$44.0 million of cash we used to purchase portfolio investments, offset by $90.0$51.3 million of cash we received from amortized cost repayments and sales on our portfolio investments. During the ninethree months ended September 30, 2016,March 31, 2020, net purchases were due to $40.2and originations of portfolio investments consisted of $71.9 million of cash we used to purchase portfolio investments. These cash purchases wereinvestments, offset by $37.1$78.7 million of cash we received from principal paymentsamortized cost repayments and sales on our portfolio investments. See "—Portfolio Composition and Investment Activity–Investment Activity."
Proceeds from common stock offering, net of expenses
In April 2017, we issued 3,625,000 shares of our common stock in a follow-on public offering at an offering price of $14.57 per share, including shares purchased by the underwriters pursuant to their exercise of the over-allotment option. OFS Advisor paid all of the underwriting discounts and commissions and an additional supplemental payment of $0.25 per share, representing the difference between the public offering price of $14.57 per share and the net offering proceeds of $14.82 per share, which also represented our NAV per share at the time of the Offering. All payments made by OFS Advisor in connection with the Offering are not subject to reimbursement by us. We received net proceeds from this Offering of $53.7 millionBorrowings
SBA Debentures
SBIC I LP has a SBIC license that allowed it to obtain leverage by issuing SBA-guaranteed debentures, subject to issuance of a capital commitment by the SBA and customary procedures. These debentures are non-recourse to us, and bear interest payable semi-annually, and each debenture has a maturity date that is ten years following issuance. The interest rate was fixed at the first pooling date after issuance, which was March and September of each year, at a market-driven spreadsspread over U.S. Treasury Notes with ten-year maturities. SBA regulations currently limit the amount that an SBIC may borrow up to a maximum of $150 million when it has at least $75 million in regulatory capital, receives a leverage commitment from the SBA and has been through an examination by the SBA subsequent to licensing. For two or more SBICs under common control, the
maximum amount of outstanding SBA-provided leverage cannot exceed $350 million. As of DecemberMarch 31, 20162021 and 2015,2020, SBIC I LP had fully drawn the $149.9outstanding debentures of $95.5 million of leverage commitments from the SBA.
In January 2015, we filed an application with the SBA for a second SBIC license, which, if approved, would provide up to $75.0and $133.8 million, in additional SBA debentures for the funding of our future investments upon our contribution of at least $37.5 million in additional regulatory capital and subject to the issuance of a leverage commitment by the SBA and other customary procedures. There can be no assurance as to whether or when this application will be approved by the SBA.respectively.
On a stand-alone basis, SBIC I LP held $248.2$201.5 million, and $247.5$223.8 million in total assets at September 30, 2017,March 31, 2021 and December 31, 2016,2020, respectively, which accounted for approximately 70%39% and 81%46% of the Company’s total consolidated assets, respectively.
As part of our plans to focus on lower-yielding, first lien senior secured loans to larger borrowers, which we believe will improve our overall risk profile, SBIC I LP is repaying over time its outstanding SBA debentures prior to the scheduled maturity dates of its debentures. Under a plan approved by the SBA, we will only make follow-on investments in current portfolio companies held by SBIC I LP. We believe that investing in more senior loans to larger borrowers is consistent with our view of the private loan market and will reduce our overall leverage on a consolidated basis. During the three months ended March 31, 2021, SBIC I LP prepaid $9.8 million of SBA debentures that were contractually due September 1, 2022 and September 1, 2024. We recognized a loss on extinguishment of debt of $0.1 million related to the charge-off of deferred borrowing costs on the prepaid debentures.
SBIC I LP is periodically examined and audited by the SBA’s staff to determine its compliance with SBA regulations. If SBIC I LP fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit SBIC I LP’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit SBIC I LP from making new investments.distributions.
We have received exemptive relief from the SEC effective November 26, 2013, which permits us to exclude SBA guaranteed debentures from the definition of senior securities in the statutory 150% asset coverage ratio under the 1940 Act.
PWB Credit Facility
TheWe are party to a BLA with Pacific Western Bank, as lender, to provide us with a senior secured revolving credit facility, or the PWB Credit Facility, which is available for general corporate purposes including investment funding and is scheduled to mature on October 31, 2018. In addition, we incur an unused commitment fee, payable monthly in arrears, equal to 0.50% per annum on any unused portionfunding. The maximum availability of the PWB Credit Facility is equal to 50% of the aggregate outstanding principal amount of eligible loans included in excess of $15.0 million.
On August 9, 2017, the BLA was amended to increaseborrowing base, which excludes subordinated loan investments (as defined in the maximum amount available underBLA) and as otherwise specified in the PWB Credit Facility from $25 million to $35 million, and change the interest rate from a fixed per annum rate of 5.00% to a variable rate initially set at 5.00%, calculated as the prime plus a 0.75% margin, with a 5.00% floor. All other principal covenants and terms under the PWB Credit Facility remained the same. We incurred deferred debt issuance costs of $0.1 million in connection with the amendment.
As of September 30, 2017, we had $17.1 million outstanding at a variable interest rate of 5.00% per annum, and $17.9 million available for use under the PWB Credit Facility.
BLA. The PWB Credit Facility is guaranteed by OFS Capital WMOFSCC-MB, Inc. and secured by all of our current and future assets, excluding assets held by SBIC I LP, OFSCC-FS and ourthe Company’s partnership interests in SBIC I LP and OFS SBIC I, GP partnership interests.GP.
On February 17, 2021, we amended the BLA to among other things: (i) increase the maximum amount available from $20.0 million to $25.0 million; (ii) decrease the interest rate floor from 5.25% per annum to 5.00% per annum; (iii) modify certain financial performance covenants; and (iv) extend the maturity date from February 28, 2021 to February 28, 2023.
As of March 31, 2021, we had no outstanding balance and an unused commitment of $25.0 million under the PWB Credit Facility, subject to a borrowing base and other covenants.
The BLA contains customary terms and conditions, including, without limitation, affirmative and negative covenants, such as information reporting requirements, a minimum tangible net asset value, a minimum quarterly net investment income after incentive fees, a debt/worth ratio and a statutory asset coverage test.net loss restriction. The BLA also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change in investment advisor, and the occurrence of a material adverse change in our financial condition. As of September 30, 2017, the Company wasMarch 31, 2021, we were in compliance with the applicable covenants under the PWB Credit Facility.
Unsecured Notes
On February 10, 2021, we closed the public offering of $100.0 million aggregate principal amount of our 4.75% notes due 2026, and on March 18, 2021, we closed an additional public offering of $25.0 million aggregate principal amount of our 4.75% notes due 2026 (the "Unsecured Notes Due February 2026"). The total net proceeds to us from the Unsecured Notes Due February 2026, after deducting underwriting fees of $3.2 million and estimated offering expenses of $0.3 million, was approximately $121.5 million. The Unsecured Notes Due February 2026 bear an effective interest rate, including amortization of deferred debt issuance costs, of 5.30%. The Unsecured Notes Due February 2026 will mature on February 10, 2026, and we may redeem the Unsecured Notes Due February 2026 in whole or in part at any time, or from time to time, at our option at par plus a "make-whole" premium, if applicable. The Unsecured Notes Due February 2026 bear interest at a rate of 4.75% per year payable semi-annually in arrears on February 10 and August 10 of each year, commencing on August 10, 2021.
In connection with, and using the proceeds from, the issuance of the Unsecured Notes Due February 2026, on March 12, 2021, we redeemed all $50.0 million in aggregate principal amount of the Unsecured Notes Due April 2025 and all $48.5 million in aggregate principal amount of the Unsecured Notes Due October 2025. The Unsecured Notes Due April 2025 and the Unsecured Notes Due October 2025 were redeemed at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from January 31, 2021, through, but excluding, March 12, 2021. We recognized a loss on extinguishment of debt of $2.2 million related to the charge-off of deferred borrowing costs on the redemption of the notes.
The Unsecured Notes are direct unsecured obligations and rank equal in right of payment with all of our current and future unsecured indebtedness. Because the Unsecured Notes are not secured by any of our assets, they are effectively subordinated to all existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under the PWB Credit Facility.
In order to, among other things, reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, purchase the Unsecured Notes for cash in open market purchases and/or privately negotiated transactions. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity, prospects for future access to capital, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.
BNP Facility
On June 20, 2019, OFSCC-FS entered into the BNP Facility, which provides for borrowings in an aggregate principal amount up to $150.0 million, of which $19.6 million was drawn as of March 31, 2021. Borrowings under the BNP Facility bear interest based on LIBOR for the relevant interest period, plus an applicable spread. The effective interest rate on the BNP Facility was 7.36% at March 31, 2021. The BNP Facility will mature on the earlier of June 20, 2024 or upon certain other events defined in the credit agreement which result in accelerated maturity. Borrowings under the BNP Facility are secured by substantially all of the assets held by OFSCC-FS. The unused commitment under the BNP Facility was $130.5 million as of March 31, 2021. As of March 31, 2021, we were in compliance with the applicable covenants.
On a stand-alone basis, OFSCC-FS held approximately $100.9 million and $72.4 million in total assets at March 31, 2021 and December 31, 2020, respectively, which accounted for approximately 19.7% and 15% of our total consolidated assets, respectively.
Other Liquidity Matters
We expect to fund the growth of our investment portfolio utilizing our current borrowings, under SBA debentures, follow-on equity offerings, and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments or make additional investments in our portfolio companies. The illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
In addition, asAs a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our assets, as defined by the 1940 Act, are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States. Conversely, we may invest up to 30% of our portfolio in opportunistic investments not otherwise eligible under BDC regulations. Specifically, as part of this 30% basket, we may consider investments in investment funds that are operating pursuant to certain exceptions to the 1940 Act and in advisers to similar investment funds, as well as in debt or equity of middle-market portfolio companies located outside of the United States and debt and equity of public companies that do not meet the definition of eligible portfolio companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the 1940 Act. As of March 31, 2021, approximately 86% of our investments were qualifying assets.
BDCs generally will beare required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities (including SBIC I LP’s SBA-guaranteed debt), to total senior securities, which include all of our borrowings (excluding SBA-guaranteed debt) and any outstanding preferred stock, (of which we had none at September 30, 2017), of at least 200% (150% if certain requirements are met). We received an exemptive order from the SEC to permit us to exclude the debt of SBIC I LP guaranteed by the SBA from the definition of Senior Securities in the statutory 200% asset coverage ratio under the 1940 Act. This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate the need to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.
On May 3, 2018, our Board, including a required majority (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our minimum required asset coverage ratio decreased from 200% to 150%, effective May 3, 2019.
On May 22, 2018, the Board authorized the Stock Repurchase Program under which we could acquire up to $10.0 million of our outstanding common stock through the two-year period ending May 22, 2020. On May 4, 2020, the Board extended the Stock Repurchase Program for an additional two-year period. Under the extended Stock Repurchase Program, we are authorized to repurchase shares in open-market transactions, including through block purchases, depending on prevailing market conditions and other factors. We expect the Stock Repurchase Program to be in place through May 22, 2022, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not obligate us 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. The Stock Repurchase Program may be extended, modified or discontinued at any time for any reason. We have provided our stockholders with notice of our intention to repurchase shares of our common stock in accordance with 1940 Act requirements. We retire all shares of common stock that we purchased in connection with the Stock Repurchase Program.
The following table summarizes shares of common stock repurchased under the Stock Repurchase Program during the three months ended March 31, 2021.
| | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Cost of Shares Purchased | | Average Price Paid Per Share |
January 1, 2021 through March 31, 2021 | | 700 | | | $ | 4,690 | | | $ | 6.70 | |
As of March 31, 2021, the aggregate amount outstanding of the senior securities issued by us was $223.9 million, for which our asset coverage was 171%. The Small Business Administration Debentures are not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC effective November 26, 2013. The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness.
As a BDC, we are generally not permitted to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if the Board determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale. On June 23, 2020, our stockholders approved a proposal to authorize us, with approval of our Board, to sell or otherwise issue shares of our common stock (during a twelve-month period) at a price below our then-current net asset value per share in one or more offerings, subject to certain limitations (including that the cumulative number of shares sold pursuant to such authority does not exceed 25% of our then outstanding common stock immediately prior to each such sale).
Contractual Obligations and Off-Balance Sheet Arrangements
The following table shows our contractual obligations as of September 30, 2017March 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
Contractual Obligation (1) | | Total | | Less than year | | 1-3 years (2) | | 4-5 years (2) | | After 5 years (2) |
PWB Credit Facility | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Unsecured Notes | | 204,325 | | | — | | | 25,000 | | | 125,000 | | | 54,325 | |
SBA Debentures | | 95,505 | | | — | | | 7,000 | | | 88,505 | | | — | |
BNP Facility | | 19,550 | | | — | | | — | | | 19,550 | | | — | |
Total(3) | | $ | 319,380 | | | $ | — | | | $ | 32,000 | | | $ | 233,055 | | | $ | 54,325 | |
|
| | | | | | | | | | | | | | | | | | | | |
|
| Payments due by period |
|
| Total |
| Less than year |
| 1-3 years (2) |
| 3-5 years |
| After 5 years (2) |
Contractual Obligations (1) |
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PWB Credit Facility |
| $ | 17,100 |
|
| $ | — |
|
| $ | 17,100 |
|
| $ | — |
|
| $ | — |
|
SBA Debentures |
| 149,880 |
|
| — |
|
| — |
|
| — |
|
| 149,880 |
|
Total |
| $ | 166,980 |
|
| $ | — |
|
| $ | 17,100 |
|
| $ | — |
|
| $ | 149,880 |
|
(1)Excludes commitments to extend credit to our portfolio companies. | |
(1) | Excludes commitments to extend credit to our portfolio companies. |
| |
(2) | The PWB Credit Facility is scheduled to mature on October 31, 2018. The SBA debentures are scheduled to mature between September 2022 and 2025. |
(2)The PWB Credit Facility is scheduled to mature on February 28, 2023. The SBA debentures are scheduled to mature between September 2022 and September 2025. SBIC I LP is repaying over time its outstanding SBA debentures prior to the scheduled maturity dates of its debentures. The Unsecured Notes are scheduled to mature between October 2023 and October 2026. The BNP Facility is scheduled to mature on June 20, 2024.
(3)64% of the outstanding debt is unsecured.
We continue to believe our long-dated financing, with approximately 90% of our total debt contractually maturing in 2024 and beyond, affords us operational flexibility.
We have entered into contracts with third parties under which we have material future commitments—the Investment Advisory Agreement, pursuant to which OFS Advisor has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which OFS Services has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations.
We may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. WeAt March 31, 2021, we had $4.5$5.8 million of totalin unfunded commitments to threefour portfolio companies. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies at September 30, 2017.and will meet these unfunded commitments by using our cash on hand or utilizing our available borrowings under the PWB Credit Facility.
Distributions
We are taxed as a RIC under the Code. In order to maintain our tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90% of our ICTI, as defined by the Code. Additionally, to avoid a 4% excise tax on undistributed earnings we are required to distribute each calendar year the sum of (i) 98% of our ordinary income for such calendar year (ii) 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year and (iii) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax. Maintenance of our RIC status requires adherence to certain source of income and asset diversification requirements. Generally, a RIC is entitled to
deduct dividends it pays to its stockholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense.
Our board of directorsBoard maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount not less than 90-100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend, or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income to a following year. Each year, a statement on Form 1099-DIV identifying the source of the distribution is mailed to the Company’s stockholders. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and
amortization expense. If
Recent Developments
On May 7, 2021, our Board declared a distribution of $0.22 per share for the tax characteristicssecond quarter of 2021, payable on June 30, 2021 to stockholders of record as of June, 23, 2021.
We evaluated events subsequent to March 31, 2021 through May 10, 2021. We are continuing to closely monitor the impact of the distributions paid during fiscal 2017 were determined asoutbreak of September 30, 2017,COVID-19 on all aspects of our business, including how it impacts our portfolio companies, employees, due diligence and underwriting processes, and financial markets. The U.S. capital markets experienced extreme volatility and disruption following the COVID-19 pandemic, which appear to have subsided and returned to pre-COVID-19 levels. Nonetheless, certain economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a prolonged period of world-wide economic downturn.
On March 27, 2020, the U.S. government enacted the CARES Act, which contains provisions intended to mitigate the adverse economic effects of the coronavirus pandemic. On December 27, 2020, the U.S. government enacted the December 2020 COVID Relief Package. Additionally, on March 11, 2021, the U.S. government enacted the American Rescue Plan, which included additional funding to mitigate the adverse economic effects of the COVID-19 pandemic. It is uncertain whether, or to what extent, our portfolio companies will be able to benefit from the CARES Act, the December 2020 COVID Relief Package, the American Rescue Plan, or any other subsequent legislation intended to provide financial relief or assistance. As a result of this disruption and the pressures on their liquidity, certain of our portfolio companies have been, or may continue to be, incentivized to draw on most, if not all, of the unfunded portion of any revolving or delayed draw term loans made by us, subject to availability under the terms of such loans.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend to a large extent on future developments regarding the duration and severity of the coronavirus, effectiveness of vaccination deployment and the actions taken by governments (including stimulus measures or the lack thereof) and their citizens to contain the coronavirus or treat its impact, all of which are beyond our control. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition. Given the fluidity of the situation, we cannot estimate that approximately $0.27 per share would represent a returnthe long-term impact of capital.COVID-19 on our business, future results of operations, financial position, or cash flows at this time.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subjectThe economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets. The U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. In addition, in a prolonged low interest rate environment, including a reduction of LIBOR to financial market risks, including changeszero, our net interest margin will be compressed and adversely affect our operating results. For additional information concerning the COVID-19 outbreak and its potential impact on our business and our operating results, see"Part I, Item 1A. Risk Factors” in interest rates. our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
As of September 30, 2017, 73%March 31, 2021, 93% of our debt investments bore interest at floating interest rates, at fair value. The interest rates on our debt investments bearing floating interest rates are usually based on a floating LIBOR, and the debt investments typically contain interest rate re-set provisions that adjust applicable interest rates to current market rates on a periodic basis. A significant portion of our loans that are subject to the floating LIBOR rates are also subject to a minimum base rate, or floor, that we charge on our loans if the current market rates are below the respective floors. As of September 30, 2017, 89%March 31, 2021, a majority of our floating rate loans were based on a floating LIBOR, (not subject to a floor).its floor.
Our outstanding SBA debentures and Unsecured Notes bear interest at a fixed rate.rates. Our PWB Credit Facility has aand BNP Facility have floating interest rate provisionprovisions based on the Prime Rate and LIBOR, respectively, with a 5.0%effective interest rate floor. We expect that other credit facilities into which we may enter in the future may have floating interest rate provisions.rates of 5.02% and 7.36%, respectively, as of March 31, 2021.
Assuming that the interim and unaudited consolidated balance sheet as of September 30, 2017March 31, 2021 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following tables show the annualized impact of hypothetical base rate changes in interest ratesrate indices (in thousands).
| | | | | | | | | | | | | | | | | | | | |
Basis point increase | | Interest income | | Interest expense | | Net change |
25 | | $ | 70 | | | $ | (49) | | | $ | 21 | |
50 | | 162 | | | (99) | | | 63 | |
75 | | 267 | | | (148) | | | 119 | |
100 | | 637 | | | (198) | | | 439 | |
125 | | 1,222 | | | (247) | | | 975 | |
|
| | | | | | | | | | | | |
Basis point increase |
| Interest income |
| Interest expense |
| Net increase (decrease) |
50 |
| $ | 959 |
|
| $ | 87 |
|
| $ | 872 |
|
100 |
| 1,902 |
|
| 173 |
|
| 1,729 |
|
150 |
| 2,885 |
|
| 260 |
|
| 2,625 |
|
200 |
| 3,869 |
|
| 347 |
|
| 3,522 |
|
250 |
| 4,852 |
|
| 433 |
|
| 4,419 |
|
| | Basis point decrease |
| Interest income |
| Interest expense |
| Net increase (decrease) | Basis point decrease | | Interest income | | Interest expense | | Net change |
25 | | 25 | | $ | (71) | | | $ | 37 | | | $ | (34) | |
50 |
| $ | (496 | ) |
| $ | — |
|
| $ | (496 | ) | 50 | | _ (1) | | _ (1) | | _ (1) |
75 | | 75 | | _ (1) | | _ (1) | | _ (1) |
100 |
| (565 | ) |
| — |
|
| (565 | ) | 100 | | _ (1) | | _ (1) | | _ (1) |
150 |
| (590 | ) |
| — |
|
| (590 | ) | |
200 |
| (590 | ) |
| — |
|
| (590 | ) | |
250 |
| (590 | ) |
| — |
|
| (590 | ) | |
125 | | 125 | | _ (1) | | _ (1) | | _ (1) |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.March 31, 2021. The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the foregoing evaluation of our disclosure controls and
Item 1. Legal Proceedings
We, OFS Advisor and OFS Services, are not currently subject to any material pending legal proceedings threatened against us as of September 30, 2017.March 31, 2021. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition, results of operations or cash flows.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Listed below are the exhibits that are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):