OFS Capital Corp. Aktie

Good day, and welcome to the OFS Capital Corporation First Quarter 2026 Earnings Conference Call.[Operator Instructions]Note that this event is being recorded.

I would now like to turn the conference over to Steve Altebrando. Please go ahead.

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

Before we begin, please note that the statements made on this call and webcast may constitute forward-looking statements as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital management concerning anticipated results, are not guarantees of future performance and are subject to known and unknown risks, uncertainties and and other factors that could cause actual results to differ materially from such statements.

The uncertainties and other factors are in some way beyond management's control, including the risk factors described from the time to time in our filings with the SEC. Although we believe these assumptions are reasonable, any of those assumptions could prove incorrect, and as a result, the forward-looking statements based on those assumptions also could be incorrect.

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

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

Thank you, Steve. Yesterday afternoon, we reported our first quarter results. Net investment income totaled $0.18 per share, covering our distribution of $0.17 per share despite being down $0.02 per share from the prior quarter. The decline was again primarily driven by a lower net interest margin. This reflects the higher interest costs on our unsecured notes issued last year, which replaced debt issued in a historically low rate environment.

That said, this new debt has allowed us to meaningfully extend our debt maturities. In addition, benchmark rate reductions by the Fed last year have lowered yields across our loan portfolio further impacting our net interest margin.

Our net asset value at quarter end was $8.16 per share compared to $9.19 per share in the prior quarter. The decrease was primarily due to unrealized depreciation on our CLO equity holdings driven by spread tightening in the underlying loan collateral as well as a decrease in loan prices due to overall market sentiment.

Overall, our nonaccrual investments as a percentage of our total portfolio at fair value decreased slightly quarter-over-quarter by 0.7%. During the quarter, we exited 1 of our long-time nonaccrual loans. In addition, we placed 1 small loan representing just 0.3% of the total portfolio at fair value on nonaccrual status. Despite this more were remaining current on its interest payments, the loan was placed on nonaccrual status due to an internal credit rating downgrade.

We remain focused on improving our net investment income over the long term. As discussed on prior calls, this includes our ongoing efforts to monetize our minority equity position in [indiscernible]. The largest position in our portfolio, which had a fair value of approximately $80.4 million at quarter end. We continue to be encouraged by the company's operational momentum and believe its long-term outlook remains compelling. A successful exit could increase the likelihood of improved net investment income and reduced portfolio concentration.

At the same time, we remain disciplined in balancing the timing of a potential exit with the realization value of the asset in order to maximize our overall returns. Since our initial $200,000 investment in 2014 our position in Fan Steel has generated approximately $5.1 million in distributions to date, representing roughly a 23x return on our cost.

Looking ahead, the macroeconomic environment remains uncertain. However, we believe we have constructed our loan portfolio to be resilient. We maintain diversification and avoid highly cyclical industries. We continue to monitor potential disruptions related to AI and at this time, have not observed material impacts on our loan portfolio.

We have limited direct enterprise software exposure and no reliance on annual recurring revenue or ARR based lending in our loan portfolio. Instead, we are focused on originating loans based on profitability of the borrowers. We are closely watching geopolitical developments, specifically the complex in the Middle East, and there are potential implications for inflation and interest rates. However, we have not seen direct effects on our loan portfolio today.

Importantly, our disciplined underwriting approach remains unchanged. Our loan portfolio is entirely composed of first and second lien senior secured loans with 98% of our loan holdings in first lien positions based on fair value, underscoring our focus on maintaining a senior position in the capital structure.

Turning to originations. Middle market M&A activity has remained below expectations to start the year. However, we remain actively engaged with our existing portfolio companies and stand ready to deploy additional capital where appropriate. We have also continued to strengthen our balance sheet. Over the past several months, we have extended all near-term debt maturities with our earliest remaining maturity in 2028. In addition, we have reduced our total debt balance by $45.6 million over the last 4 quarters for the deleveraging -- and focus on resonating loans based on profitability over the fourth quarter -- the last 4 quarters, further deleveraging the balance sheet.

During the quarter, we fully repaid the remaining balance on our unsecured notes that were scheduled to mature in February 2026.

In early January, we extended the maturity of our Bank of California facility to February 2028. In February, we entered into a new credit facility with Natixis refinancing our prior facility with BNP. We believe that this new facility, which matures in 2021, further enhances our balance sheet positioning. As we navigate an uncertain environment, we remain confident in the experience and capabilities of our advisers with approximately $4.2 billion in assets under management across the loan and structured credit markets, deep expertise across industries and a track record spanning more than 25 years and multiple credit cycles, we believe we are well positioned to navigate the current landscape and respond to evolving conditions.

With that, I'll turn the call over to Kyle Spina, our Chief Financial Officer; to give you more details and color for the quarter.

Thanks, Bilal, and good morning, everyone. As Bilal mentioned, we planned investment income of $2.5 million or $0.18 per share for the first quarter of 2026, covering our quarterly distribution of $0.17 per share for the second consecutive quarter, despite the decline of $0.02 per share from the fourth quarter of 2025. Top line income decreased $465,000 quarter-over-quarter, partially offset by a $233,000 decrease in total expenses resulting in the decline in net investment income.

We announced that we are maintaining our quarterly distribution at $0.17 per share for the second quarter of 2026. At March 31, our quarterly distribution rate represented a 19.2% annualized yield based on the market price of our common stock. We remain focused on improving our long-term returns, portfolio diversification and leverage position as we continue exploring avenues to monetize our equity investment in Fan Steel.

Our net asset value per share decreased by approximately 11% or $1.03 this quarter to $8.16. As Bilal described, the decline in our NAV was largely related to net unrealized depreciation in our CLO holdings totaling $9.1 million, which was attributable to spread tightening in the underlying loan collateral and declines in loan prices driven by overall market sentiment. We also recognized unrealized depreciation of $2.3 million on 1 existing nonaccrual loans.

As Bilal mentioned, during the quarter, we exited 1 of our long-time nonaccrual loans. We also placed 1 small loan on nonaccrual status representing just 0.3% of the total portfolio at fair value. While the issuer remains current on its interest, we felt it prudent to place the loan on nonaccrual status following an internal credit rating downgrade. Overall, our loan portfolio at fair value was relatively stable quarter-over-quarter based on our internal credit ratings.

At quarter end, our regulatory asset coverage ratio was 154%, a decrease of 2 percentage points from the prior quarter. As Bilal described, during the quarter, we completed the final $16 million repayment of our 4.75% unsecured notes, which were scheduled to mature in February. We also reduced our net exposure outstanding on our revolving lines of credit like $2 million, totaling $18 million of aggregate debt repayments from the prior quarter end.

In February, we entered into a credit facility with Natixis, which provides borrowing of up to $80 million. This new facility has a 3-year reinvestment period and 5-year maturity. In addition, the coupon interest rate on the new financing is 30 basis points higher than our prior facility with BNP. In connection with the closing of the Natixis facility, we fully repaid our credit facility with BNP. We also executed 2 amendments to our credit cities at Banc of California during the quarter, extending the maturity by 2 years to February 2028 while also reducing our total commitment from $25 million to $15 million to better align with the current size of our balance sheet.

Following the completion of these various transactions, we've extended our debt maturities and operational flexibility with our earliest maturity outstanding at February 2028. And -- we continue to closely monitor our leverage position in consideration of the market backdrop and valuation pressures.

Turning to the income statement. Total investment income decreased approximately 5% to $8.9 million this quarter. This was primarily driven by a decrease in interest income attributable to lower yields on our CLO equity securities due to underlying loans spread compression. In addition, we also had lower interest income on our loan portfolio due to a decrease in portfolio size and the impact of lower base rates stemming from the 50 basis points of rate cuts in Q4 2025. This was partially offset by the accrual of a nonrecurring dividend of $874,000 from our equity investment in Fan Steel.

Total expenses decreased by approximately 3% during the period to $6.4 million. The decrease was primarily attributable to a $379,000 decrease in interest expense related to lower outstanding debt balances.

Looking ahead, we continue to observe net interest margin compression following the final redemption of our February 2026 unsecured notes completed during the quarter, which had carried a low 4.75% coupon rate priced during the near 0 rate environment in early 2021. In addition, we anticipate further overall top line attrition due to our ongoing efforts to delever our balance sheet. We also do not expect to benefit from the heightened level of dividend income we recognized this quarter due to the nonrecurring nature of the dividend received from Fan Steel.

Turning to our investments. Most of our loan portfolio investments continue to perform to expectations. However, we continue to closely monitor certain borrowers experiencing syncratic stresses. Overall, our nonaccrual investments as a percentage of our total portfolio at fair value decreased slightly quarter-over-quarter by 0.7%. With respect to our loan portfolio, we remain committed to being senior in the capital structure with 98% of our loan holdings being in first lien positions based on fair value. Additionally, as Bilal noted, much of the observed broader market price decline in loans during the quarter was heavily concentrated in the enterprise software sector, driven by AI disruption peers. As we evaluate that risk, we note that we have limited sector exposure in our loan portfolio, with just 2.7% of our total loan portfolio at fair value, whose primary business is in enterprise software sales.

In addition, we have no reliance on annual recurring revenue or ARR based lending in our loan portfolio.

From a deployment perspective, we continue to focus on add-on opportunities for growth with our existing issuers while selectively evaluating new opportunities and as of quarter end had $7.8 million in unfunded commitments to our portfolio companies.

Based on amortized cost is at quarter end, our investment portfolio was comprised of approximately 64% senior secured loans, 25% structured finance securities and 11% equity securities.

At the end of the quarter, we had investments in 56 unique issuers totaling $308.1 million of fair value on the interest-bearing portion of the portfolio, the weighted average performing investment income yield decreased approximately [indiscernible] to 12.5% quarter-over-quarter. The decrease in yield was primarily due to the decline in earned yields on our structured finance securities attributable to the aforementioned spread compression dynamics pressuring cash flows to the -- this metric includes all interest, prepayment fee and amortization of deferred loan fee income but excludes syndication fee income if applicable.

With that, I'll turn the call back over to Bilal for concluding remarks.

Thank you, Kyle. As we continue to navigate today's uncertain economic environment, we remain firmly focused on preserving capital and strengthening our balance sheet. As discussed, we have extended our debt maturities, which span from 2028 to 2031, providing us with enhanced operational flexibility in the years ahead. We are also focused on defensively positioning our balance sheet, are continuing to reduce our overall debt, which has already been lowered by $45.6 million over the past year.

We believe our loan portfolio remains well diversified across multiple industries, and we continue to emphasize investing higher in the capital structure. We believe this positioning supports resilience across a range of market conditions. We remain focused on driving growth in net investment income over time. A key component of this effort is the monetization of select noninterest-earning equity positions, including our investment in an Fan Steel. as we look to redeploy capital into income-generating assets.

Our team's long-standing experience and investment discipline has driven consistent results. Since 2011, the BDC has invested more than $2.1 billion with an annualized net realized loss of just 0.28%, while continuing to deliver attractive risk-adjusted returns on our portfolio.

Finally, we continue to benefit from the scale and capabilities of our adviser. With a $4.2 billion corporate credit platform and affiliation with a $32 billion asset management group, our adviser provides deep credit experience and long-standing banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the last 25-plus years.

Importantly, our adviser and affiliates remain strongly aligned with shareholders as we maintain an approximately 23% ownership in the BDC.

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

[Operator Instructions]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the OFS Capital Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steve Altebrando. Please go ahead.

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

Before we begin, please note that the statements made on this call and webcast may constitute forward-looking statements as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital management concerning anticipated results are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from such statements.

The uncertainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the SEC. Although we believe these assumptions are reasonable, any of those assumptions could prove incorrect. And as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements. OFS Capital undertakes no duty to update any forward-looking statements made herein, and all forward-looking statements speak only as of the date of this call.

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

Thank you, Steve. Yesterday, we announced our fourth quarter earnings. Net investment income totaled $0.20 per share, down from $0.22 per share in the prior quarter. The decline was primarily driven by a lower net interest margin resulting from higher interest rates on our new unsecured notes. These notes refinanced our existing debt that was issued in a historically low interest rate environment.

In doing so, we were able to meaningfully extend the maturity of our debt. In addition, the interest rates on our loan portfolio have been impacted by the Fed's continued reduction in benchmark rates, which also had an effect on our interest margin. Our net asset value at December 31 was $9.19 per share compared to $10.17 per share in the prior quarter. The decline was primarily due to further markdowns of a couple of nonperforming loans.

In addition, we experienced unrealized depreciation on our CLO equity holdings due to spread tightening in the underlying loan collateral. Overall, we believe our credit portfolio is stable. During the quarter, we placed one loan on nonaccrual. However, we placed one loan back on accrual status following the completion of a restructuring transaction.

While we remain committed to preserving capital, we continue to be focused on improving our net investment income over the long term. This includes our efforts to monetize our minority equity position in Pfanstiehl, our largest position in the portfolio with a fair value of approximately $79.4 million at quarter end. We are encouraged by the company's continued operational momentum and in our view, believe its long-term outlook remains compelling. A successful exit could improve net investment income and reduce portfolio consolidation.

At the same time, we remain disciplined in balancing the timing of a potential exit with the realization value of the asset in order to maximize our overall returns. Since our initial $200,000 investment in 2014, our position in Pfanstiehl has generated approximately $4.2 million in distributions to date, representing roughly a [ 19x ] return on our cost.

As we look ahead, the macroeconomic environment remains uncertain. From a monetary standpoint, the Fed held rates steady in January following 3 cuts in 2025. However, there remains potential for additional reductions in the near term. because most of our loan portfolio is floating rate, further rate cuts could put additional pressure on our net investment income.

On the other hand, further cuts would continue to reduce the interest burden on our portfolio companies and help improve their cash flows. We have deliberately constructed our loan portfolio to be resilient by avoiding highly cyclical industries and maintaining our strong diversification. Our loan portfolio is entirely composed of first and second lien senior secured loans with 95% of our loan holdings in first lien positions based on fair value, reflecting our commitment to positioning higher in the capital structure.

As for new originations, middle market M&A activity this year has remained below expectations. However, we remain actively engaged with our existing portfolio companies and are prepared to deploy additional capital if needed. As discussed on prior calls, we continue to pursue efforts to strengthen our balance sheet by extending our debt maturities and reducing our outstanding debt.

We have successfully pushed out all near-term maturities of our debt so that the earliest remaining maturity is in 2028. We have also lowered our total debt balance by $18.8 million to further deleverage the balance sheet. Last month, we fully repaid our unsecured notes that were scheduled to mature in February 2026. In addition, in early January, we extended the maturity of our $25 million Banc of California facility to February 2028.

Last month, we also entered into a credit facility with Natixis, which allowed us to refinance our existing facility with BNP. We believe that this new facility which matures in 2031, further strengthens our balance sheet positioning. As we continue to operate in an uncertain environment, we remain confident in the experience and capabilities of our adviser. With approximately $4 billion in assets under management across the loan and structured credit markets, deep expertise across industries and a track record spanning more than 25 years and multiple credit cycles, we believe we are well positioned to navigate the current landscape and respond to evolving conditions.

With that, I'll turn the call over to Kyle Spina, our Chief Financial Officer, to give you more details and color for the quarter.

Thanks, Bilal, and good morning, everyone. As Bilal mentioned, we posted net investment income of $2.7 million or $0.20 per share for the fourth quarter, which was down $0.02 per share from the third quarter. Top line income decreased $1.2 million quarter-over-quarter, partially offset by a $937,000 decrease in total expenses, resulting in the decline in net investment income.

We announced that we are maintaining our quarterly distribution at $0.17 per share for the first quarter of 2026. At December 31, our quarterly distribution rate represented a 14.3% annualized yield based on the market price of our common stock. While we concentrate on preserving capital, we remain focused on improving our long-term returns as we continue exploring avenues to monetize our equity investment in Pfanstiehl.

Our net asset value per share decreased by approximately 10% or $0.98 this quarter to $9.19. As Bilal described, the decline in our investment portfolio at fair value was most pronounced in a few loans performing below expectations. We also observed more meaningful net unrealized depreciation in our CLO equity holdings, totaling $3.2 million attributable to spread tightening in the underlying loan collateral.

Placed one loan on nonaccrual status during the quarter, representing 1.2% of the total portfolio at fair value. However, we placed one loan back on accrual status during the quarter, representing 1.1% of the total portfolio at fair value following the completion of a restructuring transaction. Additionally, after quarter end, we exited one of our long-time nonaccrual loans for a partial recovery. Overall, our loan portfolio at fair value was relatively stable quarter-over-quarter based on our internal credit ratings.

At quarter end, our regulatory asset coverage ratio was 156%, a decrease of 1 percentage point from the prior quarter. As Bilal described, during the quarter, we continued the repayment of our 4.75% unsecured notes, which were scheduled to mature in February 2026. We repaid $15 million in late December and completed the final $16 million redemption in early February. Additionally, shortly after quarter end in early January, we executed a 2-year maturity extension of our $25 million credit facility with Banc of California to February 2028. Last month, we also entered into a credit facility with Natixis, which provides for borrowings of up to $80 million. This new facility has a 3-year reinvestment period and a 5-year maturity. In addition, the coupon interest rate on the new financing is 30 basis points tighter than our prior facility with BNP.

In connection with the closing of the Natixis facility, we fully repaid our credit facility with BNP. Following the completion of these various transactions, we've extended our debt maturities and operational flexibility with our earliest maturity now standing at February 2028.

Turning to the income statement. Total investment income decreased approximately 11% to $9.4 million this quarter. This was primarily driven by a decrease in nonrecurring dividend, fee and certain interest income recognized during the prior quarter, totaling approximately $0.8 million.

Interest income was also impacted by the new nonaccrual loan investment and a smaller interest-bearing portfolio. Total expenses decreased by approximately 12% during the period to $6.7 million. The decrease was primarily attributable to a $607,000 decrease in the incentive fee. Looking ahead, we anticipate further net interest margin compression attributable to lower reference rates following the Fed's aggregate 50 basis point rate cuts in the fourth quarter of 2025 with 175 basis points of cumulative rate cuts dating back to September 2024.

We expect this will impact yields on our predominantly floating rate loan portfolio. In addition, we continue to observe net interest margin compression following the partial redemption of our February 2026 unsecured notes completed in the third quarter of 2025.

Turning to our investments. We believe the majority of our loan portfolio remains solid, while we continue to closely monitor certain borrowers performing below our expectations. As mentioned, overall, the number of issuers with loans on nonaccrual status was unchanged quarter-over-quarter with one loan placed on nonaccrual status and one loan placed back on accrual status during the fourth quarter.

With respect to our loan portfolio, we are committed to being senior in the capital structure and selective in our underwriting with 95% of our loan holdings being in first lien positions based on fair value. From a deployment perspective, we continue to focus on add-on opportunities for growth with our existing issuers and as of quarter end, had $13.2 million in unfunded commitments to our portfolio companies. The majority of our investments are in loans and 100% of our loan portfolio was senior secured at quarter end.

Based on amortized cost as of quarter end, our investment portfolio was comprised of approximately 65% senior secured loans, 24% structured finance securities and 11% equity securities. At the end of the quarter, we had investments in 57 unique issuers totaling $342.0 million at fair value. On the interest-bearing portion of the portfolio, the weighted average performing investment income yield increased modestly to 13.5%, which is up about 0.2% quarter-over-quarter. The increase in yield was primarily due to an increase in earned yields on our structured finance securities attributable to certain deal reset transactions executed during the quarter. This metric includes all interest, prepayment fee and amortization of deferred loan fee income, but excludes syndication fee income if applicable.

With that, I'll turn the call back over to Bilal for concluding remarks.

Thank you, Kyle. In today's uncertain economic environment, we remain focused on preserving capital and strengthening our balance sheet. As we mentioned, we have extended the maturities of our debt, which now matures between 2028 and 2031. We expect that this will give us operational flexibility over the coming years. As we look ahead, we are focused on defensively positioning our balance sheet by continuing to reduce our overall debt, building upon the $18.8 million in debt reduction during the quarter.

We believe our loan portfolio remains diversified across multiple industries and is well positioned to withstand this market. We continue to maintain our focus on investing higher in the capital structure. As with prior quarters, we remain focused on increasing our net investment income over the long term, specifically through our efforts to monetize certain noninterest-earning equity positions, including our investment in Pfanstiehl.

Our team's long-standing experience and investment discipline has driven consistent results. Since 2011, the BDC has invested more than $2 billion with an annualized net realized loss of just 0.25%, while continuing to generate attractive risk-adjusted returns on our portfolio. As always, we will continue to rely on the size, experience and reputation of our adviser. With a $4 billion corporate credit platform and affiliation with a $32 billion asset management group, our adviser brings deep credit experience and long-standing banking and capital markets relationships.

Our corporate credit platform has gone through multiple credit cycles over the last 25-plus years. Our adviser and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the BDC. With that, operator, please open up the call for questions.

[Operator Instructions]

Showing no questions, this will conclude our question-and-answer session as well as conference call. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the OFS Capital Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Steve Altebrando. Please go ahead.

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

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

Although we believe these assumptions are reasonable, any of those assumptions could prove incorrect, and as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements. OFS Capital undertakes no duty to update any forward-looking statements made herein, and all forward-looking statements speak only as of the date of this call.

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

Thank you, Steve. Yesterday, we announced our third quarter earnings. Net investment income was $0.22 per share compared to $0.25 per share in the prior quarter. This decline was primarily due to higher interest costs, which were expected as part of our ongoing initiative to refinance our existing bonds and extend the maturities of our debt.

Net asset value at September 30 was $10.17 per share compared to $10.91 per share in the prior quarter. The decrease was largely driven by a markdown on our equity investments, most notably our position in Pfanstiehl Holdings and unrealized depreciation on our CLO equity investments attributable to underlying loan spread tightening.

Overall, we believe our credit portfolio is stable. During the quarter, we had one loan placed on nonaccrual status and one loan was taken off of nonaccrual and moved to performing status. While we remain steadfast on preserving capital, we are strategically focused on efforts to improve our net investment income over the long term. This includes ongoing efforts to monetize our minority equity position in Pfanstiehl, our largest position in the portfolio with a fair value of approximately $78.5 million at quarter end. The fundamental performance of the company continued to improve and the long-term outlook remains strong in our view.

The reduced valuation mark reflects the challenging market conditions to monetize this asset despite the improved performance. While we remain confident in the portfolio company's long-term potential, a near-term exit could improve our net investment income and reduce concentration risk. However, we recognize this may come at the cost of realizing the investment's full fundamental value. As a reminder, our initial $200,000 investment in Pfanstiehl in 2014 has generated approximately $4.2 million in distributions to date, an approximately 20x return on our cost.

Looking forward, the broader economic outlook remains uncertain. On the monetary front, so far this year, the Fed has lowered interest rates by 50 basis points, and there is potential for further reductions in the near term. Given that the vast majority of our loan portfolio is floating rate, continued rate cuts could reduce our net investment income.

Despite this backdrop, we remain comfortable with the overall health of our portfolio. We have deliberately constructed our loan portfolio to be resilient by avoiding highly cyclical industries and maintaining our strong diversification. Our loan portfolio is entirely composed of first and second lien senior secured loans, reflecting our commitment to positioning higher in the capital structure. As for new originations, middle market M&A activity this year has remained below expectations. However, we remain actively engaged with our existing portfolio companies and are prepared to deploy additional capital if needed.

As we mentioned on our last call, early in the third quarter, we began the process of refinancing our $125 million unsecured notes that were due to mature in February 2026. In July, we completed a $69 million unsecured public bond offering. These new public notes mature in July 2028. In August, we continued the refinancing process by completing a private placement of a $25 million unsecured note. This new private note matures in August 2029. Following the completion of these offerings, we repaid $94 million of the February 2026 notes in August, resulting in a leverage-neutral refinancing. We believe these actions have further strengthened our capital position and enhanced our operational flexibility.

In addition, the public bonds have a non-call period of only 1 year, while the private unsecured note is prepayable at any time, providing us additional flexibility in an evolving rate environment. We expect to repay the remaining $31 million on the February 2026 notes ahead of the maturity.

Additionally, during the quarter, we elected to reduce the size of our floating rate facility with BNP Paribas from $150 million to $80 million. We took this action as we embark on delevering the balance sheet. We believe our liquidity position remains sufficient, supported by our $25 million Banc of California floating rate corporate line of credit, which was undrawn at the end of the quarter.

As we continue to navigate this uncertain environment, we remain confident in the experience and capabilities of our adviser with approximately $4.1 billion in assets under management across the known and structured credit markets, deep expertise across industries and a track record spanning more than 25 years and multiple credit cycles, we believe we are well positioned to manage through this ongoing uncertainty.

With that, I'll turn the call over to Kyle Spina, our Chief Financial Officer, to give you more details and color for the quarter.

Thanks, Bilal, and good morning, everyone. As Bilal mentioned, we posted net investment income of $2.9 million or $0.22 per share for the third quarter, which was down $0.03 per share from the second quarter. Top line income increased $75,000 quarter-over-quarter. However, expenses increased by $418,000, leading to the decline in net investment income.

As we alluded to on our last call, we announced yesterday that we are reducing the quarterly distribution to $0.17 per share for the fourth quarter of 2025. This adjusted distribution rate represented an implied 8.8% annualized yield based on the market price of our common stock as of September 30. In light of ongoing interest rate cuts, coupled with our increased cost of financing, we determined it an appropriate time to better align our distribution rate with our net investment income. We believe this step will allow us to preserve capital as we focus on deleveraging and strengthening our balance sheet in this uncertain economic environment.

Despite this reduction, we remain focused on improving our long-term returns as we continue exploring avenues to monetize our equity investment in Pfanstiehl. Our net asset value per share decreased by approximately 7% or $0.74 this quarter. As Bilal described, the decline in our investment portfolio at fair value was most pronounced in our equity holdings, including $4.5 million of unrealized depreciation on our equity investment in Pfanstiehl. We also observed more meaningful net unrealized depreciation in our CLO equity holdings totaling $4.0 million attributable to spread tightening in the underlying loan collateral.

We placed one loan on nonaccrual status during the quarter, representing 1.8% of the total portfolio at fair value. We also placed one loan back on accrual status during the quarter following the completion of a restructuring transaction. Overall, our loan portfolio was relatively stable quarter-over-quarter based on our internal credit ratings.

At quarter end, our regulatory asset coverage ratio was 157%, a decrease of 3 percentage points from the prior quarter. As we discussed last quarter, we closed on $94 million of new bond issuances during the quarter between a public and private offering, the proceeds of which were utilized to partially refinance our 4.75% unsecured notes scheduled to mature in February 2026 in leverage-neutral transactions. We are pleased with the execution on these deals, which extended our debt maturities, though obviously, they are priced wider than where our existing notes were issued in early 2021 in a near 0 rate environment.

Following the completion of these transactions, we have a more manageable $31 million remaining outstanding on our February 2026 unsecured notes, which we intend to repay in advance of the maturity date.

Turning to the income statement. Total investment income increased approximately 1% to $10.6 million this quarter. This was primarily driven by nonrecurring dividend and fee income recognized during the quarter, totaling approximately $0.6 million. Total expenses increased by approximately 6% during the period to $7.6 million. This was primarily due to an approximately $700,000 increase in total interest expense, largely driven by the higher coupon on our new unsecured note issuances.

Looking ahead, we anticipate further net interest margin compression attributable to lower reference rates following the Fed's aggregate 50 basis point rate cuts so far this year and the impact of any potential future reductions. We expect this will impact yields on our predominantly floating rate loan portfolio. In addition, we anticipate higher interest costs related to the refinancing of our February 2026 unsecured notes.

Turning to our investments. We believe the majority of our loan portfolio remains solid, while we continue to closely monitor certain borrowers performing below our expectations. As mentioned, overall, we were neutral relative to the number of issuers with loans on nonaccrual status quarter-over-quarter with one new loan placed on nonaccrual status and one loan placed back on accrual status during the third quarter. With respect to our loan portfolio, we are committed to being senior in the capital structure and selective in our underwriting, with 88% of our loan holdings being in first lien positions based on fair value.

During the quarter, we committed $8.3 million to a new middle-market debt investment. In addition, we continue to focus on add-on opportunities for growth with our existing issuers and as of quarter end, had $18.3 million in unfunded commitments to our portfolio companies. The majority of our investments are in loans and 100% of our loan portfolio was senior secured at quarter end. Based on amortized costs as of quarter end, our investment portfolio was comprised of approximately 69% senior secured loans, 23% structured finance securities and 8% equity securities.

At the end of the quarter, we had investments in 57 unique issuers totaling $370.2 million at fair value. On the interest-bearing portion of the portfolio, the weighted average performing investment income yield decreased modestly to 13.3%, which is down about 0.3% quarter-over-quarter. The decrease in yield was primarily due to the impact of net change in nonaccrual positions. This metric includes all interest, prepayment fee and amortization of deferred loan fee income, but excludes syndication fee income if applicable.

With that, I'll turn the call back over to Bilal for concluding remarks.

Thank you, Kyle. In today's continued uncertain economic environment, we remain focused on preserving capital and strengthening our balance sheet. In that regard, we have taken meaningful steps to extend the maturities of our debt and secure financing that gives us operational flexibility over the coming years.

As we look ahead, we are focused on defensively positioning our balance sheet, which includes our decision to reduce the distribution rate as well as our ongoing plans to reduce our debt. We believe our loan portfolio remains generally stable and well positioned to withstand this market. Its diversification across multiple industries continues to serve us well, and we maintain our focus on investing higher in the capital structure.

As with prior quarters, we remain focused on increasing our net investment income over the long term, specifically through our efforts to monetize certain noninterest-earning equity positions, including our investment in Pfanstiehl.

Our team's long-standing experience and investment discipline has driven consistent results. Since 2011, the BDC has invested more than $2 billion with an annualized net realized loss of just 0.25%, while continuing to generate attractive risk-adjusted returns on our portfolio. As always, we will continue to rely on the size, experience and reputation of our adviser. With a $4.1 billion corporate credit platform and affiliation with a $30 billion asset management group, our adviser brings deep credit experience and long-standing banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the last 25-plus years.

Our adviser and affiliates are also strongly aligned with shareholders as they maintain an approximately 23% ownership in the company.

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

[Operator Instructions]

This concludes our question-and-answer session and concludes the conference call today. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the OFS Capital Corporation Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to hand the call to Steve Altebrando. Please go ahead.

Good morning, everyone, and thank you for joining us. Also on the call today are Bilal Rashid, our Chairman and Chief Executive Officer; and Kyle Spina, the company's Chief Financial Officer and Treasurer. Before we begin, please note that the statements made on this call and webcast may constitute forward-looking statements as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital management concerning anticipated results are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from such statements.

The uncertainties and other factors are in some way beyond management's control, including the risk factors described from time to time in our filings with the SEC. Although we believe these assumptions are reasonable, any of those assumptions could prove incorrect. And as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements. OFS Capital undertakes no duty to update any forward-looking statements made herein, and all forward-looking statements speak only as of the date of this call.

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

Thank you, Steve. Yesterday, we announced our second quarter earnings. Our results were in line with our preliminary earnings announcement on July 15, which we issued in advance of our bond offering. As for the second quarter results, our net investment income was fairly stable at $0.25 per share compared to $0.26 per share in the prior quarter. Our net asset value at June 30 was $10.91 per share compared to $11.97 per share in the prior quarter. This drop in NAV was primarily due to a decline in the value of our equity investments. This includes a decrease of $7.8 million on our equity investment in Pfanstiehl Holdings. Overall, the health of our credit portfolio remained stable with no new nonaccruals.

We continue to work on improving our net investment income in the long term by rotating certain noninterest-earning equity positions into interest-earning assets, specifically by continuing to explore potential ways to monetize our minority equity investment in Pfanstiehl. This is our largest position in the portfolio with a fair value of approximately $83 million at quarter end.

Fundamentally, we continue to believe in the long-term prospects of this portfolio company. At the same time, we also realize that achieving a near-term exit of this position provide us with an opportunity to improve our net investment income and mitigate concentration risk.

However, we understand that achieving this short-term exit may come at the cost of realizing the full fundamental value of the investment. As we have previously discussed on these calls, our investment in Pfanstiehl over the last 11 years has generated approximately $3.9 million in distributions or approximately 18x our cost, which was only $200,000 in 2014.

In terms of our view of the economic outlook, there continues to be significant uncertainty surrounding tariffs and U.S. monetary policy and the potential impact this may have on our portfolio companies is unclear. That being said, we remain satisfied with the current overall quality of our portfolio with no new nonaccruals this quarter, as I just mentioned.

We believe that we have constructed our loan portfolio to withstand the challenges of this continuing uncertain macroeconomic environment, specifically by avoiding highly cyclical industries and maintaining strong diversification. We remain focused on investing higher in the capital structure with 100% of our loan portfolio in first lien and second lien senior secured loans.

As we navigate these uncertain times, we are focused on maintaining a consistent dialogue with our portfolio companies and supporting them with additional capital, if appropriate. As it relates to new originations, M&A activity has remained subdued for the year. We believe that the macroeconomic uncertainty will continue to impact the prospects of increased M&A activity in the second half and therefore, we are continuing to be cautious in deploying new capital.

As I mentioned at the top of my remarks, shortly after quarter end, we began the process of refinancing our $125 million unsecured notes that are maturing in February 2026. Given the size of those notes, we thought it was prudent to take advantage of receptive market conditions to start paying them down and extend our overall debt maturities. In July, we completed a $69 million unsecured note offering in a leverage-neutral transaction. The new notes mature in July 2028, carry a 7.5% coupon and have a 1-year no-call provision.

Of the $125 million outstanding on February 2026 notes, we intend to pay off a total of $94 million in August. These efforts reinforced our capital position, which we believe provides us operational flexibility. 74% of our outstanding debt is unsecured at the end of the quarter. Our nonrecourse $150 million floating rate facility with BNP Paribas matures in June 2027. Finally, our $25 million Banc of California, floating rate corporate line of credit provides us additional liquidity and flexibility.

As we look to navigate this market, we will continue to rely on the long-standing experience of our adviser, which manages approximately $4.1 billion across the loan and structured credit markets, has expertise in multiple asset classes and industries and has a more than 25-year track record through multiple credit cycles.

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

Thanks, Bilal, and good morning, everyone. As Bilal mentioned, we posted net investment income of $3.3 million or $0.25 per share for the second quarter, which was down $0.01 per share from the first quarter. Top line income increased $181,000 quarter-over-quarter. However, expenses increased by $363,000, leading to a slight decline in net investment income. We announced that we are maintaining our quarterly distribution at $0.34 per share for the third quarter of 2025.

At June 30, our quarterly distribution rate represented a 16.1% annualized yield based on the market price of our common stock. We continue to evaluate the level of our distribution in light of the current macroeconomic environment and in consideration of the new cost of our debt capital. We remain focused on improving our long-term returns while concentrating on preserving capital.

Our net asset value per share decreased by approximately 9% or $1.06 this quarter, primarily attributable to net unrealized depreciation on our investment portfolio. As Bilal described, the depreciation was most pronounced in our equity holdings, including $7.8 million of unrealized depreciation on our equity investment in Pfanstiehl. As we have mentioned before, we continue to pursue the potential sale of this minority equity position.

We had no loans placed on nonaccrual during the quarter, and our loan portfolio was generally stable based on our internal credit ratings. At quarter end, our regulatory asset coverage ratio was 160%, a decrease of 5 percentage points from the prior quarter and approximately 74% of our outstanding debt was unsecured. As Bilal discussed, subsequent to quarter end, we closed a $69 million public bond offering with a 7.5% coupon and a 3-year maturity.

We intend to utilize the proceeds from this offering to partially refinance our 4.75% unsecured notes scheduled to mature in February 2026 and a leverage neutral transaction. We believe this new issuance is an attractive pricing in the current market, though, obviously, it is wider than where our existing notes were issued in early 2021 in a near 0 rate environment.

Now turning to the income statement. Total investment income increased approximately 2% to $10.5 million this quarter. This was primarily driven by nonrecurring fee income recognized during the quarter and a modest improvement in our loan portfolio yield. Total expenses increased modestly by approximately 5% during the period to $7.2 million.

Turning to our investments. We believe the vast majority of our loan portfolio remains healthy, while we continue to closely monitor our handful of borrowers performing below our expectations. As mentioned, we had no new nonaccrual loans in the second quarter. With respect to our loan portfolio, we are committed to being senior in the capital structure and selective in our underwriting, with 85% of our loan holdings being in first lien positions based on fair value.

During the quarter, we invested $7.9 million in a new middle market debt investment. In addition, we continue to focus on add-on opportunities for growth with our existing issuers and as of quarter end had $16.1 million in unfunded commitments to our portfolio companies. The majority of our investments are in loans and 100% of our loan portfolio was senior secured at quarter end.

Based on amortized cost as at quarter end, our investment portfolio was comprised of approximately 70% senior secured loans, 23% structured finance securities and 7% equity securities. At the end of the quarter, we had investments in 60 unique issuers totaling $382.7 million at fair value.

On the interest-bearing portion of the portfolio, the weighted average performing investment income yield increased modestly to 13.6%, which is up about 0.2% quarter-over-quarter. The increase in yield was primarily due to the net contribution from the aforementioned new investment in our middle market loan portfolio. This metric includes all interest, prepayment fee and amortization of deferred loan fee income but excludes syndication fee income, if applicable.

With that, I'll turn the call back over to Bilal for concluding remarks.

Thank you, Kyle. As we continue to navigate the current macroeconomic uncertainty, we believe our portfolio is defensively positioned to withstand the pressures of this challenging environment. We had no new non-accruals in the quarter. Our portfolio remains diversified across multiple industries, and we continue to be committed to investing higher in the capital structure.

Looking ahead over the long term, we are focused on increasing our net investment income, specifically through our efforts to monetize certain noninterest-earning equity positions, including our investment in Pfanstiehl. We took advantage of favorable market conditions to extend the maturities of our debt, which we believe gives us operational flexibility over the coming years.

We continue to focus on capital preservation, which is especially critical during these uncertain economic times. We believe our long-standing experience and investment discipline have served us well over the past 14 years. Since the beginning of 2011, the BDC has invested more than $2 billion with a cumulative net realized loss of just 3.5%, while generating attractive risk-adjusted returns on our portfolio.

As always, we will continue to rely on the size, experience and reputation of our adviser. With a $4.1 billion corporate credit platform affiliated with a $30 billion asset management group, our adviser has broad expertise including long-standing banking and capital markets relationships. Our corporate credit platform has gone through multiple credit cycles over the last 25-plus years. Our adviser and affiliates are strongly aligned with the shareholders as they maintain an approximately 23% ownership in the company.

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

[Operator Instructions] And this will conclude today's question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation, and you may now disconnect.