FS Credit Opportunities (FSCO) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The Fund reported a return of 7.5% for the second quarter, with net income fully covering distributions of $0.15 per share and NAV appreciation of $0.33 per share [1] - As of August 18, 2023, the Fund's NAV increased by approximately 3.9%, bringing year-to-date NAV-based returns to 14.9% [2] - The annualized distribution rate increased by 15% to approximately 9.9% based on NAV as of August 18, marking the second increase since the Fund's shares were listed [2][4] Business Line Data and Key Metrics Changes - The portfolio's split between public and private investments was 55% and 45% respectively as of June 30, 2023 [6] - Senior secured debt represented 77% of the portfolio's fair value as of June 30, 2023, with floating rate assets comprising approximately 58% [7] Market Data and Key Metrics Changes - Year-to-date, high yield bonds and loans returned 5.9% and 8.4% respectively, with lower-rated credits outperforming higher-rated ones [9] - Default rates have risen, with high yield defaults at 2.71% and loan defaults at 2.94%, although they remain below long-term averages [11] Company Strategy and Development Direction - The Fund aims to provide a differentiated value proposition by being one of the largest credit-focused closed-end funds, allowing for better deal flow and risk mitigation [5] - The strategy is dynamic, allowing investments across public and private credit based on risk-adjusted return opportunities [6] - The focus remains on senior debt investments with strong terms and attractive yields, while avoiding high-risk areas [20] Management's Comments on Operating Environment and Future Outlook - The management expressed caution regarding the economic outlook, anticipating potential volatility and a higher interest rate environment [18][19] - The portfolio is positioned to withstand economic downturns, with a focus on businesses with strong cash flows and moderate leverage profiles [12][20] Other Important Information - The Fund's leverage was reported at 34% on a debt-to-asset basis as of June 30, 2023, with a mix of approximately 40% debt and 60% preferred stock [24] - The non-accrual rate as of June 30 was approximately 2%, which includes investments purposely bought while non-accruing [44] Q&A Session Summary Question: What is your leverage at the end of the quarter? - The leverage was 34% on a debt-to-asset basis, translating to 52% on a debt-to-equity basis, with a mix of approximately 40% debt and 60% preferred [24] Question: Can you provide some more color on the net asset value move in the quarter? - NAV increased to $6.68 per share at June 30, compared to $6.35 per share the prior quarter, representing a 5.2% increase [26] Question: Can you discuss your current fee structure and how it compares to your peers? - The management fee is 1.35%, reduced from 1.5% upon listing, with an incentive fee of 10% on investment income, subject to a 6% hurdle [45] Question: What industries are you seeing the best opportunities? - Opportunities have been found in healthcare and financial services, focusing on businesses with steady operating margins [37] Question: What are your plans to close the discount to net asset value? - The focus is on solid performance and outreach to the investment community to help close the discount over time [39] Question: Can you comment on your approach to share buybacks? - The company is assessing all options, including share repurchases, mindful of leverage and liquidity [40] Question: What is the dividend policy going forward? - The policy is to pay out net income while ensuring that distributions are covered by earnings [41] Question: What is the non-accrual rate as of June 30? - The non-accrual rate is approximately 2%, which includes investments bought while non-accruing [44]