OFS Capital Corp's Q3 2025: Contradictions Emerge on Net Investment Income, Pfanstiehl Monetization, Dividend Strategy, Debt Refinancing Costs, and Equity Monetization Shifts

Date of Call: October 31, 2025

Financials Results

• Revenue: $10.6M total investment income, up ~1% quarter-over-quarter
• EPS: $0.22 net investment income per share, down $0.03 from prior quarter (prior $0.25)

Guidance:

• Reduced quarterly distribution to $0.17 per share for Q4 2025 (implied 8.8% annualized based on 9/30 market price).
• Expect further net interest margin compression from Fed rate cuts and higher financing costs.
• Plan to delever: repay remaining $31M of Feb 2026 notes ahead of maturity and reduce BNP facility from $150M to $80M.
• Continue to pursue monetization of Pfanstiehl equity to improve net investment income and reduce concentration risk.

Business Commentary:

• Net Investment Income and Net Asset Value Decline:
• OFS Capital reported net investment income of $0.22 per share in Q3, down from $0.25 per share in the prior quarter.
• Net asset value per share decreased by approximately 7% or $0.74 this quarter.

• The decline was primarily due to higher interest costs from refinancing bonds and markdowns on equity investments, particularly in Pfanstiehl Holdings.

• Interest Rate and Financial Cost Impact:

• The Federal Reserve lowered interest rates by 50 basis points this year, which could further reduce net investment income due to the majority of OFS's loan portfolio being floating rate.
• Interest expenses increased by approximately $700,000, largely driven by higher coupons on new unsecured note issuances.

• These factors are impacting yields on the loan portfolio and increasing financing costs.

• Equity Investment and Portfolio Management:

• OFS's equity investment in Pfanstiehl Holdings experienced $4.5 million of unrealized depreciation during the quarter.
• The company is strategically focused on monetizing this position to improve net investment income and reduce concentration risk.

• Despite the near-term challenges, the investment has generated approximately 20x return on cost since 2014, reflecting confidence in the long-term potential.

• Balance Sheet and Debt Management:

• OFS completed a leverage-neutral refinancing by repaying $94 million of a February 2026 note, with remaining $31 million to be repaid.
• The company reduced its floating rate facility with BNP Paribas from $150 million to $80 million and maintained an undrawn line of credit with Banc of California.
• These actions aim to strengthen the capital position, enhance operational flexibility, and support debt reduction efforts.

Sentiment Analysis:

Overall Tone: Neutral

• Management emphasized preservation of capital and balance-sheet strengthening: NII of $0.22/sh (down $0.03 QoQ) due to higher interest costs; NAV declined to $10.17 from $10.91; distribution cut to $0.17/sh; portfolio described as "stable" while pursuing Pfanstiehl monetization and deleveraging actions.

Contradiction Point 1

Net Investment Income and Interest Costs

It involves changes in financial performance, specifically the impact of increased interest costs on net investment income, which directly affects the company's earnings and financial stability.

How will the decline in net investment income and rising interest costs affect future net investment income? - Ryan McKeveny (Wells Fargo)

2025Q3: The decline in net investment income was primarily due to higher interest costs, which were part of our initiative to refinance existing bonds and extend debt maturities. - Bilal Rashid(CEO)

Are there any questions? - Operators (Call Operator)

2025Q2: Our net investment income was stable at $0.25 per share. - Bilal Rashid(CEO)

Contradiction Point 2

Monetization of Pfanstiehl Holdings

It involves the company's strategy for monetizing a significant equity investment, which could impact the company's capital structure and financial position.

Can you explain the recent equity investment mark-down in Pfanstiehl holdings and the monetization outlook? - Tom Ray (Jefferies)

2025Q3: We are exploring avenues to monetize this position to improve net investment income and reduce concentration risk, although this may come at the cost of realizing its full value. - Bilal Rashid(CEO)

No question asked? - Operators (Call Operator)

2025Q2: Over the last 11 years, our investment in Pfanstiehl has generated approximately $3.9 million in distributions. - Bilal Rashid(CEO)

Contradiction Point 3

Dividend Distribution Strategy

It involves changes in dividend distribution strategy, which are critical for investors regarding the company's payout policy and shareholder returns.

What led to the reduction in the quarterly distribution and what is the rationale behind this decision? - Doug Harter (Credit Suisse)

2025Q3: We have reduced the quarterly distribution to $0.17 per share for the fourth quarter of 2025, representing an 8.8% annualized yield. This decision was made in response to ongoing interest rate cuts and increased cost of financing, aiming to preserve capital and align distribution rates with net investment income. - Kyle Spina(CFO)

What are the key changes in the Blackwell GPU, and how do they impact revenue and customer reactions? - Vivek Arya (Bank of America Securities)

2025Q1: We continue to prioritize capital preservation and are maintaining our current quarterly distribution rate of $0.19 per share. - Kyle Spina(CFO)

Contradiction Point 4

Debt Refinancing and Costs

It involves changes in financial strategies, particularly related to debt refinancing and its impact on net investment income, which are critical for investor understanding of the company's financial health and future prospects.

How will the increase in interest costs affect future net investment income given the decline in current net investment income? - Ryan McKeveny (Wells Fargo)

2025Q3: The decline in net investment income was primarily due to higher interest costs, which were part of our initiative to refinance existing bonds and extend debt maturities. Despite this, we believe our credit portfolio is stable, and we are strategically focused on long-term improvements. The reduced financing costs and extended maturities will support future net investment income. - Bilal Rashid(CEO)

What changes in Blackwell GPU have impacted revenue and customer reactions? - Vivek Arya (Bank of America Securities)

2025Q1: We remain focused on a disciplined debt strategy and believe we will benefit from future favorable financing conditions. - Bilal Rashid(CEO)

Contradiction Point 5

Monetization of Equity Investments

It involves changes in the company's strategy and expectations regarding the monetization of equity investments, which impacts financial performance and risk management.

Can you explain the recent equity investment mark-down, specifically in Pfanstiehl, and the outlook for monetizing this position? - Tom Ray (Jefferies)

2025Q3: The mark-down on Pfanstiehl holdings reflects challenging market conditions for monetization despite the company's improved performance. We are exploring avenues to monetize this position to improve net investment income and reduce concentration risk, although this may come at the cost of realizing its full value. - Bilal Rashid(CEO)

- Unknown

2024Q4: Our largest equity position, whose fair value continued to increase in the quarter due to improved fundamental performance, appreciating by $15.6 million to $89.3 million at quarter end. - Bilal Rashid(CEO)