Group 1 - Business Development Companies (BDCs) are highlighted as one of the best sectors for collecting high yields due to their straightforward business models and easily understood investment methodologies [1] - A hybrid investment strategy combining classic dividend growth stocks, BDCs, Real Estate Investment Trusts (REITs), and Closed-End Funds can enhance investment income while achieving total returns comparable to traditional index funds like the S&P [1] - The article emphasizes the potential for early retirement through effective investment strategies without compromising portfolio safety, aligning with the principles of the FIRE (Financial Independence, Retire Early) movement [1]

Financial Data and Key Metrics Changes - Net investment income increased by approximately 4.8% to $0.27 per share [7] - Net asset value per share decreased modestly by 1.9% to $11.29 per share [7][19] - Total investment income was down approximately 2% to $10.9 million [21] - Total expenses decreased by 5.3% to $7.3 million, primarily due to a reduction in G&A expenses [22] Business Line Data and Key Metrics Changes - The fair value of the minority equity investment in Pfanstiehl appreciated by $2.8 million to $73.7 million [8] - Nonaccrual metrics as a percentage of total portfolio at fair value remained stable, with one new non-accrual loan representing 0.6% of the total portfolio [10][20] - 5.4% of total investments at fair value were on non-accrual status at quarter end [20] Market Data and Key Metrics Changes - The weighted average performing investment income yield on the interest-bearing portion of the portfolio improved slightly to 13.6%, up about 0.2% quarter-over-quarter [26] - 72% of outstanding debt is unsecured, with all outstanding debt maturing in 2026 or later [12][23] Company Strategy and Development Direction - The company remains focused on increasing net investment income by rotating non-interest earning equity positions into interest earning assets [7][27] - The investment discipline emphasizes avoiding highly cyclical industries and maintaining a diversified loan portfolio [11][24] - The company anticipates an increase in M&A activity, which could lead to higher originations and fee income [14] Management's Comments on Operating Environment and Future Outlook - Management believes the portfolio is well positioned for the current macroeconomic environment, with lower interest rates expected to benefit borrowers [11][24] - The recent interest rate cut by the Federal Reserve may put pressure on net interest margin but is expected to reduce the risk of recession [13][14] - Confidence in the advisor's experience and track record through multiple credit cycles is emphasized [14][29] Other Important Information - The company has invested more than $2 billion since 2011 with a cumulative net realized loss of just 3.2% [28] - The advisor maintains approximately 23% ownership in the company, aligning their interests with shareholders [29][30] Q&A Session Summary Question: What are the plans for increasing net investment income? - The company is exploring alternatives to monetize non-interest earning equity investments, particularly the minority equity stake in Pfanstiehl [18]

Group 1: Earnings Performance - OFS Capital reported quarterly earnings of $0.27 per share, exceeding the Zacks Consensus Estimate of $0.25 per share, but down from $0.40 per share a year ago, representing an earnings surprise of 8% [1] - The company posted revenues of $10.92 million for the quarter ended September 2024, missing the Zacks Consensus Estimate by 0.47%, and down from $14.65 million year-over-year [2] - Over the last four quarters, OFS Capital has surpassed consensus EPS estimates two times and topped consensus revenue estimates just once [2] Group 2: Stock Performance and Outlook - OFS Capital shares have declined approximately 30.3% since the beginning of the year, contrasting with the S&P 500's gain of 21.9% [3] - The company's earnings outlook is crucial for investors, as it includes current consensus earnings expectations for upcoming quarters and any recent changes to these expectations [4] - The current consensus EPS estimate for the coming quarter is $0.25 on revenues of $10.97 million, and for the current fiscal year, it is $1.18 on revenues of $47.33 million [7] Group 3: Industry Context - The Financial - SBIC & Commercial Industry, to which OFS Capital belongs, is currently ranked in the bottom 27% of over 250 Zacks industries, indicating potential challenges for stock performance [8] - Empirical research suggests a strong correlation between near-term stock movements and trends in earnings estimate revisions, which can be tracked by investors or through tools like the Zacks Rank [5][6]

Financial Performance - Net investment income increased to $0.27 per common share for Q3 2024, up from $0.26 in Q2 2024[2] - Net loss on investments was $0.15 per common share for Q3 2024, compared to a net gain of $0.51 per common share in Q2 2024[4] - Total investment income decreased to $10.9 million in Q3 2024 from $11.2 million in Q2 2024, primarily due to a decrease in interest income[8] - Total investment income for the three months ended September 30, 2023, was $10,918,000, a decrease of 25.0% from $14,651,000 in the same period last year[17] - Net investment income for the nine months ended September 30, 2023, was $12,636,000, down 10.5% from $15,463,000 in the prior year[17] - Net realized loss on investments for the three months ended September 30, 2023, was $(11,116,000), compared to a gain of $117,000 in the same period last year[17] - Net unrealized appreciation for the three months ended September 30, 2023, was $9,201,000, compared to a depreciation of $(3,512,000) in the same period last year[17] Asset and Investment Metrics - Net asset value per common share decreased to $11.29 as of September 30, 2024, down from $11.51 as of June 30, 2024[2] - Total investments at fair value were $394.7 million as of September 30, 2024, compared to $398.2 million as of June 30, 2024[4] - The weighted-average performing income yield increased to 13.6% in Q3 2024 from 13.4% in Q2 2024[5] Expenses and Distributions - Total expenses decreased by $0.4 million to $7.3 million in Q3 2024 compared to Q2 2024[9] - Total expenses for the three months ended September 30, 2023, were $7,315,000, a decrease of 21.0% from $9,261,000 in the same period last year[17] - The company declared a distribution of $0.34 per common share for Q4 2024, payable on December 31, 2024[3] - Distributions declared per common share remained stable at $0.34 for both the current and prior year periods[17] Cash and Credit Facilities - As of September 30, 2024, the company had $20.3 million in cash and no outstanding balance under its senior secured revolving credit facility[11][12] Management and Investment Strategy - The company targets investments of $3 million to $20 million in privately held middle-market companies with annual EBITDA between $5 million and $50 million[18] - The company is externally managed by OFS Capital Management, LLC, which is registered under the Investment Advisers Act of 1940[18] Forward-Looking Statements - Forward-looking statements indicate potential risks and uncertainties that may affect future results, as detailed in the company's Annual Report on Form 10-K[19]

Core Viewpoint - OFS Capital's 17% dividend yield is among the highest in the business development industry, but its sustainability is in question due to declining portfolio value, deteriorating earnings growth, higher non-accruals, and a weak cash position, leading to a hold rating for the stock [1][14]. Dividend Performance - The 4-year average dividend yield for OFS Capital is 11.62%, significantly higher than the sector median of 3.29%, indicating a 252.78% difference [2]. - The current dividend yield of 17.00% is 449.62% above the sector median of 3.09% [2]. - The dividend yield has increased due to a share price selloff rather than dividend growth, with the company losing almost 30% of its share price year-to-date [3][4]. Financial Performance - In the latest quarter, OFS Capital reported a net investment income of $0.26 per share, while the quarterly dividend was $0.34 per share, indicating that dividends are not covered by net investment income [4]. - Earnings forecasts suggest a decline in net investment income, with estimates of $1.18 per share in 2024, down 21.67% year-over-year, which is insufficient to cover the annual dividend payment of $1.36 per share [5][6]. - The company has only around $5 million in cash, making it challenging to sustain current dividend levels [6]. Portfolio and Investment Strategy - OFS Capital's portfolio investments at fair value have declined by almost $100 million over the past four quarters, now standing at $398 million [7]. - The company has been highly selective in its underwriting policies and cautious about new originations, which may hinder investment income growth [8]. - As of the end of the June quarter, 92% of the loan portfolio was at floating rates, and potential rate cuts could negatively impact investment income and margins [9]. Market Sentiment and Valuation - Despite a cheap stock price based on valuations and net asset value, potential returns are limited due to a lack of financial support and the risk of a dividend cut, which could negatively affect investor sentiment [9]. - The quant rating for OFS Capital is 3.35, indicating a hold rating, with low grades on momentum, growth, and profitability [12]. Conclusion - The current financial outlook does not support OFS Capital's high dividend yield, suggesting it may not be a suitable investment at this time, with investors advised to wait for a better entry point [14].

Financial Data and Key Metrics Changes - The net asset value per share increased by 3.9% to $11.51, up $0.43 from the prior quarter [4] - Net investment income decreased from $0.42 per share in Q1 to $0.26 per share in Q2, primarily due to non-recurring items in the previous quarter [4][8] - The GAAP leverage ratio decreased from 1.87 times at December 31 to 1.62 times at June 30 [8] - Total investment income decreased by approximately $3.1 million to $11.2 million this quarter [10] - Total expenses decreased by 10.5% to $7.7 million, mainly due to lower interest expenses [10] Business Line Data and Key Metrics Changes - The fair value of the minority equity investment in Pfanstiehl increased by $7.8 million to $70.8 million at quarter end [5] - Approximately 100% of the loan portfolio at fair value consists of senior secured loans [12] - The weighted average performing investment income yield on the interest-bearing portion of the portfolio improved slightly to 13.4%, up about 0.4% quarter-over-quarter [13] Market Data and Key Metrics Changes - The company remains cautious about new originations and notes that M&A activity remains subdued [6][12] - The overall quality of the portfolio remains stable, with 4.6% of total investments at fair value on non-accrual status at quarter's end [9] Company Strategy and Development Direction - The company is focused on increasing net investment income by converting non-interest earning equity positions into interest-earning assets [5][14] - The investment discipline emphasizes avoiding highly cyclical industries and maintaining a well-diversified loan portfolio [6][12] - The company aims to preserve capital with approximately 100% of the known portfolio at fair value being senior secured [14] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the uncertain interest rate environment but believes the company benefits from its balance sheet positioning [4] - The company anticipates an increase in M&A activity later in the year as clarity on interest rates improves [6] - Management expresses confidence in the overall quality and fundamentals of the portfolio, citing a long-standing investment discipline [14][15] Other Important Information - The quarterly distribution will remain at $0.34 per share for the third quarter, representing a 15.3% annualized yield based on the stock price at quarter end [8] - The adviser managing the company has a strong track record and maintains approximately 23% ownership in the company, aligning their interests with shareholders [15] Q&A Session Summary Question: What are the plans for increasing net investment income? - The company is actively exploring alternatives to monetize non-interest-bearing investments, specifically the minority equity stake in Pfanstiehl [9] Question: How is the company positioned in the current market? - The company believes its portfolio remains solid with no new non-accruals and is focused on capital preservation [14]

OFS Capital (OFS) came out with quarterly earnings of $0.26 per share, missing the Zacks Consensus Estimate of $0.29 per share. This compares to earnings of $0.38 per share a year ago. These figures are adjusted for nonrecurring items. This quarterly report represents an earnings surprise of -10.34%. A quarter ago, it was expected that this management investment company would post earnings of $0.35 per share when it actually produced earnings of $0.42, delivering a surprise of 20%. Over the last four quarte ...

Financial Performance - The net asset value (NAV) per common share increased to $11.51 at June 30, 2024, from $11.08 at March 31, 2024, due to a net gain on investments of $0.51 per common share[120] - Total investment income decreased to $11.2 million for the quarter ended June 30, 2024, down from $14.2 million in the prior quarter, primarily due to a $2.4 million decrease in dividend income[120] - Net investment income for the three months ended June 30, 2024, was $3.4 million, compared to $5.6 million in the prior quarter[141] - For the three months ended June 30, 2024, total investment income decreased to $11.2 million from $14.2 million in the prior quarter, primarily due to a decrease in total dividend income of $2.4 million and interest income of $0.5 million[142] - For the six months ended June 30, 2024, total investment income decreased by $3.4 million compared to the same period in the prior year, mainly due to a decrease in total interest income of $5.2 million[143] - Cash from net investment income for the six months ended June 30, 2024, was $6.2 million, a decrease of $2.9 million compared to the same period in 2023[153] Debt and Financing - The total outstanding debt decreased to $249.1 million at June 30, 2024, from $258.5 million at March 31, 2024, due to repayments of $9.4 million on the BNP Facility[120] - The weighted-average debt interest costs increased to 6.5% for the quarter ended June 30, 2024, compared to 6.3% for the prior quarter[120] - The company had unused commitments of $25.0 million under the Banc of California Credit Facility and $80.9 million under the BNP Facility as of June 30, 2024[120] - The effective interest rate on the Banc of California Credit Facility was 9.25% as of June 30, 2024, with a maturity date extended to February 28, 2026[156] - The effective interest rate on the BNP Facility was 9.07% as of June 30, 2024, with $69.1 million drawn and an unused commitment of $80.9 million[158] - Approximately 50% of the company's outstanding debt matures in 2027 and beyond, with 72% carrying fixed interest rates[162] Investment Portfolio - A net gain on investments of $6.9 million was recognized for the quarter ended June 30, 2024, primarily due to net unrealized appreciation of $11.3 million[120] - The fair value of the debt investment portfolio totaled $236.9 million in 40 portfolio companies as of June 30, 2024, with approximately 85% being first lien debt investments[125] - Total Portfolio Company Investments amounted to $322.537 million at fair value as of June 30, 2024, compared to $341.242 million at the end of 2023[130] - The three largest industries by fair value in the Portfolio Company Investments were Manufacturing (29.8%), Health Care and Social Assistance (20.6%), and Wholesale Trade (12.9%), totaling approximately 63.3%[131] - The classification of debt investments by credit risk rating showed that 80.5% were rated as Average, with a fair value of $190.782 million[135] - As of June 30, 2024, approximately 100% of the loan portfolio and 59% of the total portfolio consisted of first lien and second lien loans, providing greater downside protection against adverse economic changes[130] Distributions and Shareholder Returns - The Board declared a distribution of $0.34 per share for the third quarter of 2024, payable on September 30, 2024[120] - The company is required to distribute at least 90% of its taxable income to maintain its RIC status[163] - The company did not make any repurchases of common stock during the six months ended June 30, 2024, with approximately $9.6 million remaining under the Stock Repurchase Program[160] Operational Metrics - The asset coverage ratio was 162% as of June 30, 2024, exceeding the minimum requirement of 150% under the 1940 Act[120] - Total expenses for the three months ended June 30, 2024, were $7.7 million, a decrease from $8.6 million in the prior quarter[144] - Interest expense for the three months ended June 30, 2024, decreased to $4.1 million from $4.6 million in the prior quarter, due to a reduction in average outstanding debt balances[144] - The total net increase in net assets resulting from operations for the three months ended June 30, 2024, was $10.3 million, compared to a net decrease of $9.0 million in the prior quarter[141] Cash and Liquidity - As of June 30, 2024, the company held cash and cash equivalents of $5.6 million, with an unused commitment of $25.0 million under the Banc of California Credit Facility and $80.9 million under the BNP Facility[149] - The company had $5.6 million in cash and cash equivalents and unused commitments of $25.0 million under the Banc of California Credit Facility and $80.9 million under the BNP Facility[162] Market Conditions and Risks - The company may incur significant realized losses if required to liquidate portfolio investments in a forced sale[162] - Non-performing Structured Finance Securities had an amortized cost of $3.5 million and a fair value of $1.7 million as of June 30, 2024[131] - The company recognized a realized loss of $0.7 million on the debt restructure of its first lien debt investment in GoTo Group during the six months ended June 30, 2024[134] - The company recognized a net realized loss of $2.4 million on its second lien debt investment in Astro One Acquisition Corporation[137]

What first stands out to me is that OFS is very diverse in nature and spreads its exposure across many different industries. The manufacturing sector makes up the largest allocation of their portfolio, making up 28%. This is closely followed by health care and social assistance, making up 20.1% of the portfolio. The portfolio is spread across 14 different sectors and has 43 different obligors. Their strategy is to avoid exposure to any sectors that have cyclical vulnerability. Additionally, this level of di ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 or ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 814-00813 OFS CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 46-1339639 State o ...