OFS Capital (NASDAQ:OFS) reported first-quarter 2026 net investment income of $0.18 per share, covering its $0.17 per share distribution for a second consecutive quarter, but down $0.02 per share from the prior quarter as net interest margin pressures persisted. Management attributed the decline primarily to higher interest costs on unsecured notes issued last year that replaced lower-coupon debt from a historically low-rate period, as well as lower asset yields following Federal Reserve benchmark rate cuts in late 2025.
Quarterly results and dividend
According to prepared remarks read on the call, net investment income totaled $2.5 million, or $0.18 per share. Chief Financial Officer and Treasurer Kyle Spina said total investment income fell about 5% sequentially to $8.9 million, while total expenses decreased about 3% to $6.4 million. Spina said the top-line decline was “primarily driven by a decrease in interest income attributable to lower yields on our CLO equity securities due to underlying loan spread compression,” alongside lower interest income from the loan portfolio reflecting a smaller portfolio size and lower base rates after the Fed’s 50 basis points of rate cuts in the fourth quarter of 2025.
OFS Capital said it will maintain its quarterly distribution at $0.17 per share for the second quarter of 2026. Spina added that as of March 31, the quarterly distribution rate represented a 19.2% annualized yield based on the company’s market price.
Net asset value drop tied to CLO equity marks
Net asset value declined to $8.16 per share at quarter-end from $9.19 per share in the prior quarter. In the company’s opening remarks on the call, management said the decrease was “primarily due to unrealized depreciation on our CLO equity holdings,” driven by spread tightening in underlying loan collateral and loan price declines tied to overall market sentiment.
Spina similarly pointed to CLO-related valuation changes, describing the quarter’s NAV decline as “largely related” to marks on CLO holdings totaling $9.1 million that he attributed to spread tightening and declines in loan prices. He also noted the company recognized $2.3 million of unrealized appreciation on one existing non-accrual loan.
Credit quality and portfolio positioning
Management said non-accrual investments as a percentage of the total portfolio at fair value decreased slightly quarter-over-quarter by 0.7%. During the quarter, OFS Capital exited one longtime non-accrual loan. The company also placed one small loan—representing 0.3% of the total portfolio at fair value—on non-accrual status, even though the borrower remained current on interest payments. Management said the move followed an internal credit rating downgrade.
Spina said the loan portfolio at fair value was “relatively stable” quarter-over-quarter based on internal credit ratings, and that most portfolio investments continue to perform to expectations, though the company is monitoring certain borrowers experiencing “idiosyncratic stresses.”
OFS Capital continued to emphasize its senior-secured orientation. Management said the loan portfolio is entirely first- and second-lien senior secured loans, with 98% of loan holdings in first-lien positions based on fair value.
Spina also discussed market concerns around enterprise software and artificial intelligence disruption, noting that broader loan price declines during the quarter were “heavily concentrated” in enterprise software. He said OFS Capital has limited exposure to the sector, with 2.7% of the total loan portfolio at fair value tied to issuers whose primary business is enterprise software sales, and “no reliance on annual recurring revenue or ARR-based lending in our loan portfolio.”
Fansteel monetization remains a key focus
Chairman and Chief Executive Officer Bilal Rashid said the company remains focused on improving net investment income over the long term, including “ongoing efforts to monetize” its minority equity position in Fansteel, the largest position in the portfolio. Management said the investment had a fair value of approximately $80.4 million at quarter-end.
Rashid said management remains encouraged by Fansteel’s operational momentum and believes its long-term outlook remains compelling, while stressing the company is balancing timing and realization value “in order to maximize our overall returns.” He added that since the company’s initial $200,000 investment in 2014, the Fansteel position has generated about $5.1 million in distributions, representing “roughly a 23 times return on our cost.”
In his outlook, Spina said the company does not expect to repeat the “heightened level” of dividend income recorded in the quarter because the Fansteel dividend was non-recurring.
Deleveraging and refinancing extend maturities
Management highlighted multiple balance sheet actions aimed at extending maturities and reducing leverage. Rashid said the company has reduced total debt by $45.6 million over the last four quarters and extended near-term maturities so the earliest remaining maturity is now in 2028.
Spina said the company completed the final $60 million repayment of its 4.75% unsecured notes that had been scheduled to mature in February 2026. He added that OFS Capital reduced net exposure on its revolving lines of credit by $2 million, bringing aggregate debt repayments to $18 million from the prior quarter end.
The company also refinanced and amended credit facilities:
- Natixis facility: Spina said OFS Capital entered into a new credit facility in February providing up to $80 million of borrowings, with a three-year reinvestment period and a five-year maturity. He said the coupon rate is 30 basis points tighter than the prior BNP facility, which was repaid in full upon closing.
- Banc of California facility: Spina said OFS Capital executed two amendments extending maturity to February 2028 while reducing total commitment from $25 million to $15 million to better align with the current balance sheet size.
Following these steps, Spina said the company’s earliest maturity now stands at February 2028. Rashid said maturities now span from 2028 to 2031, which he said provides enhanced operational flexibility.
Rashid also pointed to a softer middle-market M&A environment, saying activity has remained below expectations to start the year, while the company remains engaged with portfolio companies and prepared to deploy capital selectively.
As of quarter-end, Spina said the company had $7.8 million in unfunded commitments. He also provided portfolio composition details, stating that based on amortized cost the portfolio was approximately 64% senior secured loans, 25% structured finance securities, and 11% equity securities, with investments in 56 unique issuers totaling $308.1 million at fair value.
Spina said the weighted average performing investment income yield on the interest-bearing portion of the portfolio decreased about 1% quarter-over-quarter to 12.5%, primarily due to lower yields on structured finance securities amid spread compression that has pressured cash flows to CLO equity tranches.
About OFS Capital (NASDAQ:OFS)
OFS Capital Corporation (NASDAQ: OFS) is a business development company (BDC) that provides customized debt and equity financing solutions to U.S. middle-market companies. As an externally managed BDC, OFS Capital focuses on sponsoring capital structures that support growth initiatives, recapitalizations, acquisitions and other strategic transactions. The firm targets companies that demonstrate strong cash flow potential and scalable business models across a range of industries.
The company’s investment portfolio typically includes senior secured loans, unitranche facilities, mezzanine debt and equity co-investments.
