OFS Capital (NASDAQ:OFS) reported third-quarter 2026 net investment income of $719,000, or $0.05 per share, down from $0.08 per share in the second quarter, as the business development company continued to reduce debt and prepare to redeploy capital from a recent sale of interests in a subsidiary holding its Pfanstiehl investment.
The company maintained its fourth-quarter distribution at $0.17 per share. The third-quarter net investment income did not cover that distribution, though management said proceeds from the subsidiary transaction could support income growth as capital is invested in new income-producing assets.
“We believe the SBIC equity transaction marks an important inflection point for OFS Capital,” Chairman and Chief Executive Officer Bilal Rashid said. He said the transaction reduced a major portfolio concentration, strengthened financial flexibility and created capital for redeployment.
SBIC Transaction and Pfanstiehl Dispute
On Oct. 6, OFS Capital announced the sale of approximately 57% of the limited partnership interests in OFS SBIC I, LP for gross proceeds of $52.3 million. The subsidiary holds OFS Capital’s common equity investment in Pfanstiehl. OFS Capital retained the remaining 43% limited partnership interest and continues to serve as the partnership’s general partner.
Rashid said the transaction was intended to strengthen the balance sheet, improve liquidity and reduce concentration risk. Pfanstiehl represented about 35% of OFS Capital’s portfolio at fair value as of Sept. 30.
Management said it plans to deploy the proceeds primarily into income-generating investments, with the aim of increasing net investment income over time. Rashid said the company will continue to focus principally on senior secured lending while selectively making equity investments where it sees significant growth potential.
The company’s Pfanstiehl investment began as an approximately $200,000 equity investment in 2014, according to Rashid.
However, Pfanstiehl filed a complaint in Delaware Chancery Court on Oct. 26 challenging the transaction, among other matters. Rashid said OFS Capital believes the claim is meritless and intends to defend the matter vigorously.
NAV Falls as Investments Decline in Value
Net asset value fell to $7.38 per share at Sept. 30 from $8.41 per share in the previous quarter, a decline of approximately 12%, or $1.03 per share.
Chief Financial Officer and Treasurer Kyle Spina said the decline was primarily attributable to $6.8 million of depreciation in the Pfanstiehl equity investment, along with $3.2 million in net realized and unrealized losses across the credit portfolio, particularly in CLO equity holdings.
Total investment income declined approximately 13% from the previous quarter to $5.9 million. Spina attributed the decline largely to the company’s deleveraging efforts, which reduced the size of its interest-bearing portfolio. Investment income also included certain non-recurring interest and fee income tied to loan repayments during the quarter.
Total expenses declined about 10% to $5.2 million, led by a $556,000 reduction in interest expense from lower outstanding debt balances.
- Third-quarter net investment income: $719,000, or $0.05 per share
- Third-quarter total investment income: $5.9 million
- Net asset value per share: $7.38, down from $8.41
- Fourth-quarter distribution: $0.17 per share
- Gross proceeds from SBIC transaction: $52.3 million before transaction costs
Debt Reduction and Credit Portfolio
OFS Capital repaid $31.4 million of debt during the quarter, using proceeds from several large loan repayments. Its regulatory asset coverage ratio rose three percentage points sequentially to 164%.
Over the past 12 months, the company reduced total outstanding debt by approximately $84.8 million, according to management. Its earliest debt maturity is now in 2028, with maturities extending through 2031.
The company also completed a partial refinancing of higher-coupon unsecured notes using its lower-cost credit facility. Rashid said this is expected to generate net interest expense savings going forward. He also said recent increases in base rates are expected to be accretive to earnings.
New investment deployment was modest at $7.7 million during the quarter as the company prioritized deleveraging. At quarter-end, the portfolio had investments in 50 issuers with total fair value of $252.1 million.
Based on amortized cost, the portfolio consisted of approximately 61% senior secured loans, 21% structured finance securities and 18% equity securities. The company said 97% of its loan holdings were first-lien positions based on fair value.
Non-Accrual Activity and Deployment Outlook
During the quarter, loans to one borrower were removed from non-accrual status after restructuring transactions, while loans to two borrowers were placed on non-accrual. The newly non-accruing positions totaled $2.1 million at fair value and had already been subject to heightened credit-risk monitoring, Rashid said.
One of the borrowers placed on non-accrual continues to make contractual interest payments but was moved to non-accrual based on OFS Capital’s internal credit-risk assessment.
On a net basis, non-accrual loans at amortized cost declined by $2.3 million from the prior quarter. However, non-accrual investments as a percentage of total portfolio fair value increased 2.1%, which Spina said was primarily due to the smaller overall portfolio.
The weighted average performing investment income yield on the interest-bearing portfolio increased about one percentage point from the prior quarter to 13.1%, primarily reflecting non-recurring interest and fee income from repaid loans.
Looking ahead, management said it will assess opportunities in middle-market lending as well as infrastructure credit, real estate credit, asset-backed finance, liquid credit and structured credit. Rashid said the company’s investment approach will remain centered on disciplined underwriting, capital preservation and sustainable income generation.
About OFS Capital (NASDAQ:OFS)
OFS Capital Corporation (NASDAQ:OFS) is a business development company that provides financing to privately owned U.S. companies. The company primarily invests in lower middle-market businesses, which are generally companies that may have limited access to traditional bank financing or public capital markets.
OFS Capital’s investment activities focus on providing secured loans, subordinated debt and, to a lesser extent, equity investments. Its financing may support acquisitions, recapitalizations, refinancing, growth initiatives and other corporate activities.
