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OC

OFS Capital Corp (OFS)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 2025 delivered mixed results: total investment income rose slightly to $10.551m while net investment income (NII) per share declined to $0.22 due to higher interest costs from refinancing; NAV fell to $10.17 on realized/unrealized losses, notably from Pfanstiehl/Fansteel equity marks .
  • Versus estimates: revenue beat consensus ($10.551m vs $9.8m), but EPS missed slightly ($0.22 vs $0.24); only one covering estimate per metric, limiting confidence in consensus signals [GetEstimates]*.
  • Board cut the Q4 2025 dividend to $0.17 (from $0.34), aligning payouts with lower NII amid rate cuts and higher debt coupons; management emphasized deleveraging and liquidity preservation as near-term priorities .
  • Strategic refinancing extended maturities (new $69m 7.50% notes due 2028 and $25m 8.00% note due 2029) and reduced reliance on shorter-dated paper, though at higher coupons; BNP facility reduced to $80m to support balance-sheet defense .
  • Potential stock catalysts: dividend reset, progress on monetizing the large equity stake in Fansteel/Pfanstiehl, and clarity on non-accruals and CLO equity marks amid further rate moves .

What Went Well and What Went Wrong

What Went Well

  • Revenue resilience: total investment income increased q/q to $10.551m, helped by non-recurring dividends/fees, partially offsetting lower loan interest from a new non‑accrual .
  • Portfolio seniority and floating-rate positioning: 100% of loans are senior secured (first/second lien), 89% floating rate; weighted-average performing income yield remained robust at 13.3% .
  • Maturity extension and flexibility: $69m public notes (7.50%, due 2028) and $25m private note (8.00%, due 2029) completed; public notes have a one-year non‑call and private note is prepayable anytime, enhancing optionality in a changing rate environment .
    • “We have taken meaningful steps to extend the maturities of our debt and secure financing that gives us operational flexibility over the coming years.” — CEO Bilal Rashid .

What Went Wrong

  • EPS and NAV pressure: NII/share decreased to $0.22 (from $0.25) on higher interest expense; NAV/share declined to $10.17 (from $10.91) on realized/unrealized losses including $4.5m depreciation in Pfanstiehl/Fansteel equity and CLO equity marks .
  • Higher funding costs: interest expense rose ~$0.7m q/q due to refinancing at higher coupons (weighted-average debt rate up to 6.67%) .
  • Credit blemishes: one new non‑accrual added (fair value $6.8m), taking non‑accruals to 6.2% of fair value; although one loan returned to accrual status post restructuring, elevated non‑accrual ratio and realized losses ($4.6m) weighed on results .

Financial Results

Core Results vs Prior Periods and Estimates

MetricQ1 2025Q2 2025Q3 2025
Total Investment Income ($USD Millions)$10.295 $10.476 $10.551
Net Investment Income ($USD Millions)$3.465 $3.283 $2.940
Net Investment Income per Share ($USD)$0.26 $0.25 $0.22
Net Increase (Decrease) in Net Assets per Share ($USD)$(0.54) $(0.72) $(0.40)
Weighted-Average Performing Income Yield (%)13.4% 13.6% 13.3%
NAV per Share ($USD)$11.97 $10.91 $10.17
NII Margin (%) (NII/Investment Income)33.7% 31.3% 27.9%

Notes: NII Margin is computed from cited values; all other figures as reported.

Results vs S&P Global Consensus

MetricQ1 2025Q2 2025Q3 2025
Revenue Actual ($USD)$10,295,000 $10,476,000 $10,551,000
Revenue Consensus ($USD)$11,900,000*$10,000,000*$9,800,000*
Revenue SurpriseMiss $(1.605)m*Beat $0.476m*Beat $0.751m*
EPS Actual ($USD)$0.26 $0.25 $0.22
EPS Consensus ($USD)$0.33*$0.24*$0.24*
EPS SurpriseMiss $(0.07)*Beat $0.01*Miss $(0.02)*

Values retrieved from S&P Global.*

Portfolio Composition (Fair Value)

Asset Class ($USD Millions)Q1 2025Q2 2025Q3 2025
Debt Investments$215.9 $211.2 $205.6
Equity Investments$107.7 $98.9 $98.4
Structured Finance Securities$79.5 $72.6 $66.2
Total Investments$403.1 $382.7 $370.2

KPIs and Balance Sheet

KPIQ1 2025Q2 2025Q3 2025
% Floating-Rate Loans90% 90% 89%
% First Lien Loans85% 85% 88%
Weighted-Average Performing Income Yield13.4% 13.6% 13.3%
Weighted-Average Realized Yield11.6% 11.9% 11.5%
Non‑Accruals (% of Investments at FV)4.2% 4.0% 6.2%
Regulatory Asset Coverage Ratio—160% 157%
Avg Dollar Borrowings ($USD m)$248.7 $248.3 $270.2
Weighted-Average Effective Interest Rate6.29% 6.21% 6.67%
Cash & Equivalents ($USD m)$4.1 $10.2 $5.0
Total Outstanding Debt – Principal ($USD m)$248.1 $243.4 $239.2

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Common Dividend per ShareQ4 2025$0.34 (Q3 2025 dividend) $0.17 Lowered
Debt Maturity ProfileOngoing$125m notes due Feb 2026 outstanding $94m redeemed; $31m remaining targeted for early repayment Extended maturities; proactive repayment
BNP Revolving Facility SizeOngoing$150m commitment Reduced to $80m Lowered
Formal Revenue/Margin/Tax GuidanceQ4 2025None providedNone providedMaintained (no formal guidance)

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2 2025)Current Period (Q3 2025)Trend
Macro & RatesFed cuts reduced asset yields; cautious outlook Further net interest margin compression anticipated with additional rate reductions Deteriorating NIM
Distribution PolicyMaintained $0.34 in Q1/Q2; monitoring debt cost Cut to $0.17 to align with NII and deleveraging focus Defensive stance
Debt RefinancingAnnounced plan to refinance $125m due 2026; $69m notes at 7.5% Added $25m 8.0% private note; redeemed $94m; public note non‑call 1yr; private prepayable Maturities extended; costs higher
Portfolio Credit QualityNo new non‑accruals; credit stable One new non‑accrual; one back to accrual; overall stable per ratings Slightly weaker headline
Equity Concentration (Fansteel/Pfanstiehl)$7.8m unrealized depreciation (Q2); monetization explored $4.5m unrealized depreciation (Q3); continued focus on monetization; largest position ~$78.5m FV Ongoing headwind; exit optionality
CLO Equity MarksNoted sensitivity; stable prior More meaningful unrealized depreciation (~$4.0m) due to spread tightening Negative mark-to-market
Origination/M&A ActivitySubdued; selective deployment New $8.3m middle market debt commitment; $18.3m unfunded commitments Opportunistic adds

Management Commentary

  • “Net investment income was $0.22 per share… decline primarily due to higher interest costs… as part of our ongoing initiative to refinance… and extend the maturities of our debt.” — CEO Bilal Rashid .
  • “We remain focused on defensively positioning our balance sheet… reduce the distribution rate as well as our ongoing plans to reduce our debt.” — CEO Bilal Rashid .
  • “Total expenses increased… primarily due to an approximately $700,000 increase in total interest expense, largely driven by the higher coupon on our new unsecured note issuances.” — CFO Kyle Spina .
  • “We recognized a net loss on investments of $7.8 million… primarily due to… $4.5 million on our common equity investment in Pfanstiehl Holdings, Inc.” — Press Release .
  • “Public bonds have a non‑call period of only one year, while the private unsecured note is prepayable at any time, providing us additional flexibility.” — CEO Bilal Rashid .

Q&A Highlights

  • The call concluded without substantive Q&A; no analyst questions were recorded, leaving limited incremental guidance clarification beyond prepared remarks .

Estimates Context

  • Consensus coverage is thin (one estimate for revenue and EPS each), but Q3 showed a revenue beat and a slight EPS miss: revenue $10.551m vs $9.8m*, EPS $0.22 vs $0.24*; Q2 had modest beats on EPS and revenue, while Q1 missed both [GetEstimates]* .
  • With higher funding costs and anticipated rate reductions, Street models may drift lower on NII near term; upside hinges on monetizing the large equity stake and stabilizing non‑accruals .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Dividend reset to $0.17 reflects prudent capital preservation and lower NII; near-term yield compression is likely until funding costs normalize or monetization actions lift NII .
  • Higher coupons on refinanced debt materially increased interest expense; despite extended maturities and flexibility, earnings headwind persists into coming quarters .
  • Non‑accrual ratio rose to 6.2% of investments at FV; credit stabilization is critical for maintaining portfolio yield and limiting realized losses .
  • Large equity stake (Fansteel/Pfanstiehl) continues to drive NAV volatility; any partial/near-term exit could improve NII and reduce concentration risk but may crystallize value below intrinsic estimates per management .
  • Revenue resilience from non-recurring items is not sustainable; focus should be on core loan yields and minimizing non‑accrual drag amid a falling reference-rate backdrop .
  • Trading: dividend cut and NAV decline are negative sentiment drivers; watch for updates on early repayment of remaining $31m 2026 notes and any asset sales as potential positive catalysts .
  • Medium term: deleveraging, disciplined underwriting (100% senior secured), and advisor alignment/scale support credit outcomes across cycles; monitor CLO equity marks with spread dynamics .