OCCI: Reaping Benefits From Improving CLO Conditions

Overview - Closed-end funds, such as OFS Credit Company (OCCI), are currently attractive for higher yields despite their poor historical price performance, with OCCI's price declining by 60.7% since inception in 2018, but offering a total return of 11.5% when including distributions [2][3][23] - OCCI primarily invests in collateralized loan obligation (CLO) equity and debt securities, aiming for high current income, with a current dividend yield of 18.6% [2][11] Portfolio Strategy - OCCI's portfolio consists of 76% CLO equity and 23.3% CLO debt, maintaining a high-risk profile due to its significant exposure to CLO equity, which absorbs losses first [5][4] - The fund's diversification across industries helps mitigate sector concentration risks, with notable exposure to high-tech industries (9.7%) and banking, finance, insurance, and real estate (9.4%) [5][6] Performance - OCCI has outperformed similar funds like Eagle Point Credit (ECC) and Oxford Lane Capital (OXLC) in terms of total return and price change [7] - The fund's net asset value (NAV) has decreased from $8.48 to $7.34 per share, but net assets have increased from $91.7 million to $117.6 million over the past year [10][12] Dividend - The dividend was recently raised by 9.5% to $0.115 per share, resulting in a yield of 18.6%, with distributions paid monthly, appealing to income investors [11][12] - The fund has maintained its distribution rate since inception, with core net investment income (NII) covering distributions by 154% [12][14] Valuation & Outlook - OCCI currently trades at a slight premium to NAV of 2.3%, with expectations that this premium may grow if interest rates are cut [16][18] - A lower interest rate environment could improve the quality of underlying assets and decrease default rates, benefiting OCCI's performance [23][19] Risk Profile - The fund's exposure to lower-quality debt (B and B- rated) presents inherent risks, particularly in a high-interest-rate environment that can lead to increased default rates [21][19] - Historical data shows that defaults are primarily concentrated in lower-rated tranches, indicating potential vulnerabilities in OCCI's portfolio [20][21]