Earnings call transcript Q4 2022

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Operator

Good morning, and welcome to the OFS Capital Corporation Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Steve Altebrando, Vice President of Capital Markets. ahead. go Please

Steve Altebrando

Financial and the everyone, and for us. company's joining Executive Good today thank are on Chief the Cerny, call and Chairman and Bilal Also Treasurer. Officer; morning, Jeff you Officer Rashid, Chief our

that begin, guarantees from cause as OFS and on factors statements this to statements we filings future our such assumptions, by not differ results unknown risk applicable way statements. SEC. under time results management securities risks, the known webcast Before concerning statements control, the constitute expectations with reflect opinions described and from various may in are made and other and to performance are uncertainties factors materially time Capital anticipated management's note other that could the please beyond of forward-looking defined actual call laws. in The Such some and uncertainties are and including subject to factors

assumptions any incorrect. Although we based be assumptions could believe those forward-looking also the a on these inaccurate, reasonable, those statements assumptions of as result, and could are prove

place as not of call. Capital herein, update all forward-looking made statements. speak forward-looking reliance no date duty should You to on undertakes any statements forward-looking and of statements undue the only these OFS this

the the to Information. call, A our website principles. reconciliation measures referring this directly in During and section the heading of we These GAAP generally will financial Tax Non-GAAP Investor comparable available accepted accounting in of to non-GAAP non-GAAP accordance measures measures. financial most be under measures are Relations non-GAAP with not is prepared the

Bilal Chairman to Rashid. call With that, turn the and Chief I'll Executive Officer, over

Bilal Rashid

quarter. investment the closed We solid with another you, increase fourth in Good income net Thank XXXX Steve. out in morning.

the to portfolio ago first in quarters. As earnings is XX% increased This quarter the and to our increase vast increase per also XXXX. one spreads This higher of base share represents quarterly of have our XX rates for XX% This distribution power. helped our compared by loan $X.XX to increase is floating past be an us higher ninth our rate, XXXX. March paid year the over majority

remain stable, X% to share. unrealized from was than asset last primarily $XX.XX decreasing relatively by to due quarter net decline slight depreciation. Our value This per less

per investment a income $X.XX fourth third realize in increased the our net half Our balance In in to of per to $X.XX environment. the were up we the share in rising from year, quarter, the advance second interest quarter. the able of of benefits sheet positioning share rate

and rate of well comprised diversified portfolio is industries. across loans secured primarily Our is multiple senior floating

is sheet Our debt. fixed-rate balance primarily financed with long-term

We the expect this interest inflation. income our assumed, provide as if rates, combination is Fed investment continues to to continue net as widely to tailwinds they continue to increase fight will

and issues remains portfolio we the not systemic any them. The solid we interactions interest seeing cost of Based companies borrowing overall corporate among quality manageable environment. rising our rate in these on believe remains of this companies, our credit are with

to Our cyclical investing highly investment helped industries. has us discipline long-standing avoid in

technology. and largest are in manufacturing, We sector with services business positioned exposures our defensively healthcare,

overall As reported, has widely slow has been has muted. been in market activity as M&A been deal middle the activity

in M&A meantime, We we get pick work. we the its being as putting on of Fed's expect second that to to clarity on impact In the decisions the the capital up. in more half inflation, and will year, are activity deliberate begin

as cycles. manage through portfolio done our multiple conservatively have to we continue We credit

our fourth XXXX later provide continues the matures us unsecured. Our and XXX% approximately of end or in debt of debt At outstanding is half of quarter, financing flexibility. operational to with our the

to million maturity years senior our by with to XXXX. nonrecourse facility last calls, $XXX we As of BDC. the June, three This we June BNP is have previously noted facility on loan our extended Paribas the

no with rates locked provisions. to fixed-rate flexible the benefit and of the mark-to-market to $XXX the rising debt and are in Our rate, increasing high expect rates market we unsecured in million at is quarter that XXXX, And notably fast historically Fed first at we from a lower to us prior corporate of rates line see has of beyond. enabled than continue to interest combination pricing. benefits current This in and credit financings

As the interest to impact and is it to inflation. the it relates difficult economy, rates rising quantify of

being we senior top this economic with of us the structure in loan our that of at capital being majority uncertain environment. secured However, the believe the helps portfolio

We experience structured the billion and across continue also multiple of $X.X a through credit markets, several which approximately classes to industries cycles. benefit and from to record asset XX-plus expect has has in credit manages loan year the experience our and adviser, track

point, At the Officer, Cerny, for to our to the and more Financial over turn you give Chief Jeff this I’ll details color call quarter.

Jeff Cerny

Thanks, Bilal. morning, Good everyone.

of share mentioned, per $X.XX net As $X.XX Bilal share. net we the quarter’s our prior income posted for income compares of favorably investment per investment This to quarter.

investment quarter’s of period. the of our $X.XX net again the the income, share XX% continued up distribution and to which last to our increased from per prior share, once distribution up Due strength year is $X.XX quarterly per Board from XX%

the income the up balance sheet. Comparing thoughtful due construction net we part quarter-over-quarter, over are X%, to rising interest investment environment coupled of rate large in with our

continued income higher by economy. the by lower uncertainty the fee interest quarter-over-quarter lower was We state driven to approach income, and slightly with dividend fee of income. originations offset our cautious and partly The given overall saw improvements

strong increase of rate remain rising that the likelihood positioning will sheet our balance performance The our environment. in this will

asset net X% share per per Our decreased by than less value to $XX.XX share.

related our The XXXX year-end quarter despite level remains primarily was investment unrealized some above the depreciation pre-pandemic XXXX. the noted, approximately to decline As value Bilal on end at decline, this X% its of net portfolio. asset modest

see the incremental quarter Credit although some trends stable, losses. which in unrealized in relatively portfolio our remained we did led widening spread to some

currently have few investments had just we borrowers value, in small X.X% deterioration total non-accrual. non-accrual. performance, also showed of At placing some a our We a that fair credit on loan on including

up investment in million, prior $XX Total million the income income from was the quarter. $XX.X to Turning statement.

environment I previously well as an mentioned, was increase in due an dividend interest As increase income, rising as to this interest income. rate reflecting in primarily our the

Total $X.X from expense primarily variable of million to interest facilities. interest due on quarter’s expenses rate up increasing credit last due our $X higher to rates million, were

investment income mentioned nice income $X.XX earlier, quarter. to for I a last share. As $X.XX per share compared net increase investment per is was the quarter’s fourth net This of

exist portfolio our our that fixed believe matures continue levels in floating approximately at It debt. XXXX market of debt loan vast that that majority our unsecured. noting quarter’s rates of We of tailwinds liabilities to for is at later all given our and than was rate while or is rate worth also XX% fixed of current debt XX% at quarter’s outstanding lower earnings the are end, outstanding end

investments. debt, fair offset the balances our Excluding value debt-to-equity on ratio by SBIC X.XX with decreased quarter-over-quarter modestly partially to our lower approximately lower debt slightly times

Turning to our investments.

are our senior continued performance structure the pleased and We selective We in by capital portfolio the committed underwriting. this to our in companies being of environment. uncertain in remain macroeconomic

in it we for several opportunities with the originations, for While or continue are incremental funding remain identify either cautious evaluating we companies quarter regard to growth, to the quarter. first fourth in fund portfolio of which new add-on our

relationship our are team The the its majority XX, these we of XXX% at and and the as advantages opinion, was our in past, investments company And in secured. have investments. the today’s making senior of management in nearly loan value As informational in of especially gives macroeconomic knowing loans. said in us December portfolio environment fair

been there of has In portfolio was a floating meaningful rate XX% addition, at and loan benchmark rates. interest the quarter’s increase in end,

X% approximately during end quarter’s the increased and approximately X.XX% instance, X.XX% For fourth quarter’s three-month by at three-month increased to X% end. SOFR LIBOR similarly quarter, to by at

the of basis rates twice an by points points and for aggregate later this during the quarter FOMC next set month. first meeting XX so increase quarter increased far Fed another XXX increased the fourth The XXXX rates of in basis for the Fed with

We see to of in an SOFR, compared interest an for trajectory LIBOR and few quarters. although both this increase past continue so the less rates quarter to far upward

X% portfolio finance As a our subordinated investment notes percentage senior securities. X% structured of XX% and debt, secured overall includes equity XX% loans, approximately cost,

remains with fair fair totaling on portfolio million end the portfolio size $X.X of of the XX we million investments had basis investment $XXX value. X% a quarter, portfolio’s total At average Our approximately of diversified. an or value the approximately

of that For rate the the portfolio amortization and ended rate was portion our quarter interest which meaningful, of this increase nature rising all the December basis This the floating last XX.X%, reflecting XX, includes loan interest-bearing portfolio XXX from on fees. yield quarter is investment environment. point deferred in the income of

the I’ll to turn back call With Bilal. over that,

Bilal Rashid

Thank you, Jeff.

We with environment. in income grow to pleased our investment continued this rate interest rising ability net are

our us of debt being loan rate. balance sheet and also are the how We rate our vast fixed of positioning well our served with pleased majority floating XX% has being outstanding with portfolio

with addition, of XXX% to portfolio remain value, expect our benefit nearly our overall continue fair we preservation our from the quality secured loan confident we and and being at In to in of fundamentals portfolio. senior on focus capital

outstanding Our in XXXX with beyond. our all financing of debt maturing long-term is primarily and

$X.X continues, we has uncertain XX loss more upon rely just XXXX, while over Since billion our portfolio. this last discipline experience years net investment on and OFS will attractive of than to realized generating a of us. As economic environment our invested yields X% beginning the long-standing with cumulative the guide

billion continue corporate broad to our benefit experience platform credit banking within group, size, than has the billion a markets capital believe $X.X expertise, long-standing our relationships. adviser business. $XX we Lastly, including asset of a adviser our and management and more With will reputation

cycles also a BDC. that with reiterate XX% of through to over is corporate platform years. interest Our important shareholders last adviser stake credit credit the gone a ownership in OFS XX-plus multiple strong It alignment Capital’s has the with has

questions. open call With up the that, operator, for please

Operator

[Operator now Management. will question David go with from We Investment Please question-and-answer the begin Our is Confluence session. Miyazaki first ahead. Instructions]

David Miyazaki

just the some Good interest regarding Hello. environment. changing rate morning. for I questions you have

don’t buyers? your potential that made larger you that middle operational how on creating interest about that of agree origination interest One you middle potential hazard Or and Do actually you the do with higher issue an upper usually just that your creates in middle rising statement cause the wondering, see problems? And it’s market lower bigger target comment going with rates that has rates portfolio the who credit themselves comment are that in a of market. I’m the the upper and by forward? do the within feel market BDCs defaults focuses the

Bilal Rashid

Yes.

that David, think very a question. That’s thank – good I you.

we is that answer the market, a larger positive little the even I actually And part I mathematical think middle real statement. generally middle there’s generally have or in a that lower slightly to more a of which is than for market. the the think spreads market, you lower technical will it with that agree higher and middle

increase the in so a And so is of on the slightly what is would than the overall smaller middle expense interest and a lower benchmark market. percentage you part of on basis the larger percentage expense, have the interest

we companies to So quite I year, the interest increasing our with that are point, higher the rates are this at the last that think able significantly burden. one seeing over manage

are think there rates. been would overall have portfolio, caused the more And by if agree do that in activity issues eventually we with weakness so interest may the to I that related that economic be higher

certainly, environment seeing decent we’re in and now. and the shape. almost right all-time is – Unemployment economy So doing The consumer recessionary is a seems low, well. not pretty

So…

David Miyazaki

the was versus I helpful being – been one from of first middle well that aware borrowers for things hadn’t of all, very of Do how about of proportion space. the your spreads in interesting. – Do entire also you about feel obviously that phase. assets the which for but really market. I are the managing has you’ve tightening I forward, – obviously Fed That’s liabilities, you. the you would benefited you you fixed look thought also lower floating company mean, as your do think Thank wider

to So approaching nearing borrowing? perhaps or fix that – them the the forward, end tightening their was of interest cycle? there out – the we’re your in And fixing if look any as out near probably interest have we more would you Fed’s for given assets

Bilal Rashid

Yes.

David. that’s another So question, good very

seeing first of the terms the borrowers any any the on are think point, in request from we I rates. So demand not or interest fixing

the part I had broader in think that that that’s discussions not of not market. and any been we’ve I’m seeing

of and look that I yet. It there and assets, now having at grow relates – point. it at helping certainly some an forward, the I environment. rate potentially we interest are us rising I still going but we are have we but think, at assuming I assets. time originate Certainly, asset point, reached peak some seems for floating not to is to like Fed are and mean, think look is seeing cognizant assets. liabilities at point to management think are this rates of assets But from I fixed liabilities think there in we’re standpoint, the we’re about haven’t our from rate mismatch it’s rate is it we to we fixed so room also rates, as fixed-rate – to demand that interest as something that – to rate we borrowers right think hard and thinking want interest a some And that matching there. yet I that. assets looking the always see not to our looking part that it’s But with liability any

David Miyazaki

your higher easing if the around it whatever company. of that just from helpful LIBOR of and about as think was I’m the to guess the be cycle or kind XXX and down, the of in to LIBOR you. coming SOFR, And up far move basis things much or points. rates of were rate And the were seems the level question last of a people as before costless XXX I rates that, points I cycle benefited in a easing still like in the is. all and Fed XXX so would it was Thank of floors that the above structuring points has – basis in SOFR floors basis I Okay. would it’s Fed’s prior that – to about pandemic Fed thinking right the reference and me with tightened these cycle, course, tightening things now have floors one perspective to setting its began the or LIBOR and free kind almost kind a whole be that of somewhat last

the then don’t going – think asked ostensibly, rate back a lenders I’ve are think should the in to strength, of middle don’t this rates When that and nobody documentation. come that negotiating really kind I the market, thinks get that’s in general they is free of because down, they you to in some upper priority, seem the And more is when again. ability you there for LIBOR power negotiating back come lower sort opportunity to and putting the loans you market into or But SOFR the have loan going about about an down floors you you higher think more of in to underwrite documentation? the think cycle, to middle Do whole in where individualize documents? your

Bilal Rashid

another excellent Yes, David, question. that’s

looking are at We that as well.

at requesting a we example. fact, looking floor, were X% In recently transaction where a were for we

So that’s new as at we’re in we certainly definitely something And look that higher we asking floors. fact contemplating. are for originations,

to. be something more down open about X%, from the when should going going they’ll said this you be rates will are future, interest rates X% perhaps and to So, think say, people I nobody’s thinking high I is anytime that to as in or quite it’s near amenable that

certainly yes, we asking that it. so successful are fact on in certainly about thinking mind. And our for regard. we’ll then see And in But how we’re it it’s and

JeffCerny

a is term many and It’s can a term David, it do in competitive of issue push issue Jeff. Hey, yes, as negotiating for new and a sheet it’s terms if a of higher we also you’re we transaction. a become a But a competitive does floor, sheet bit have and on attempted that. to this one

David Miyazaki

at all your It you’re the going forward, on had the and details questions so how of nature of I Okay. I underwriting Great. appreciate and Well, the time. I appreciate your landscape range for whole helps a different you. looking

Bilal Rashid

David. you, Thank

JeffCerny

Thanks, David.

Operator

a from Please The private ahead. investor. go next is Prosky, David question

David Prosky

equity you about the the I Hi, gentlemen. particular, doing? just and in Pfanstiehl. wanted to you ask investments How

it’s color could what and us a your are? thoughts how you give If little on doing

JeffCerny

Yes, This good has good Jeff. Yes, morning, Pfanstiehl is very question. David. a Yes, thanks the performer. for been

ways company. investment levered continually I certainly maximize to a will risk conservatively We’re looking conservatively this note we’re in concentration of this very are company so very But and and for control here, that minority our run entity, value. don’t a we the it. is investor we monetize mindful a and

the we’re lot at of have always historically its monetize to ways and of So But to performer it’s flexibility a to it’s value. a maximize investment looking and this through manage they strong top been manage and business cycles. mind

David Prosky

Okay, equity other fair outside enough. Pfanstiehl? major And investments any of

JeffCerny

by the think – far that’s would No. biggest yes, I note. that’s that nothing I

David Prosky

Okay. Great quarter. Thank you very much.

Bilal Rashid

Thank you, David.

JeffCerny

David. Thanks,

Operator

This Thank question-and-answer our has concludes for And conference session. concluded. the attending today’s also presentation. now you

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OFS Capital (OFS) 3 Mar 232022 Q4 Earnings call transcript