Bill Mendel – IR Bilal Rashid – Chairman & CEO Jeff Cerny – CFO & Treasurer.

Welcome to OFS Capital Corporation's Third Quarter 2014 Earnings Conference Call. (Operator Instructions). It is my pleasure to turn the call over to Mr. Bill Mendel. Mr. Mendel, you may begin..

Thank you. Good morning, everyone. With me today is Bilal Rashid, Chairman and Chief Executive Officer, and Jeff Cerny, our Chief Financial Officer and Treasurer. Please note we issued a press release this morning announcing our third quarter results. This was press releases was subsequently filed on Form 8-K with the SEC.

Both documents can be obtained under the Investor Relations section of our website at ofscapital.com. Before we begin please note that statements made on this call and webcast may constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended.

Such statements reflect various assumptions by OFS Capital concerning anticipated results and are not guarantees of future performance, and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements.

Uncertainties and other factors are in many ways beyond management's control including the risk factors described from time to time in our filings with the Securities and Exchange Commission.

Although we believe these assumptions are reasonable, any of those assumptions could prove to be inaccurate and as a result the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on the forward-looking statements.

OFS Capital undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as of the date and time of this call. Before we begin, a replay of this call will be available until November 17th, beginning approximately one hour after we conclude this call.

Alternatively, the webcast will be available for the next 90 days. To access either replay please visit the Investor Relations section of our website at ofscapital.com. With that I will turn the call over to Bilal..

Good morning and welcome. As you probably saw, we issued a press release earlier this morning detailing our performance in the third quarter. I'm happy to report that we have made significant progress in increasing the origination of assets in our SBIC while maintaining our longstanding underwriting standards.

On today's call I would like to highlight three key points. First, I would like to comment on our increased origination activities in the SBIC. Second, I want to focus on the increase in our earnings and the reasons for this increase. And third, I would like to outline our growth plans for the future.

To my first point, our origination efforts are bearing fruit, and months of deliberate and thoughtful effort is beginning to pay off. As you saw from the press release, new originations in the SBIC for the third quarter were $65.1 million which significantly exceeded our quarterly target of $30 million.

The higher dollar amount is a direct result of intense focus by our originations and underwriting team, greater efficiency in deal sourcing and evaluation, and the benefits of our external manager's previous efforts to enhance our origination resources. The OFS brand is increasingly being recognized by middle market borrowers.

They are rewarding us for our responsiveness in providing flexible capital solutions. This increase in brand awareness among market participants has also made the sourcing of deals more efficient. This has also led to repeat business. As a result, we are seeing a higher percentage of potential deals that fit our underwriting criteria.

Additionally, our success in originating our own deals is having a multiplier effect on our overall origination capacity. As resource deals and bring other lenders into our deals, these same lenders are bringing us into their deals. As we continue to grow our origination pace, I would like to emphasize that we will not compromise credit quality.

As an experienced manager, we are committed to making loans only when they meet our time tested investment criteria and provide the right risk-reward for our shareholders. We are especially attuned to protecting the interests of the shareholders since the external manager owns over 30% of the company.

As an asset manager of scale, the external manager has added and continues to add resources in anticipation of this origination growth. The company is well positioned to process this increased deal flow. So far in the quarter we have invested $11 million in the SBIC and I feel very good about our pipeline.

Now I would like to turn your attention to my second point for the call, the increase in our earnings. As you may have seen from the press release today, the net investment income has increased to $0.30 per share in the third quarter from $0.22 per share in the second quarter.

This is a direct result of the sizable increase in originations in our SBIC. As the proportion of investments held in the SBIC has increased from 33% in the second quarter to 50% in the third quarter, the average yield on the portfolio has increased from 8.1% in the second quarter to 9.1% in the third quarter.

Originating new loans at high yields combined with the attractive 2 to 1 leverage available through the SBA has been instrumental in increasing our earnings. We expect to continue to prudently deploy capital in the SBIC in the fourth quarter.

Now turning to my last point, as I mentioned, we have made significant progress on our originations and improving our earnings. As a result, the management team recognizes the need to raise additional capital and efficiently position our balance sheet for future growth.

This will allow us to continue to support the growth in our originations and increase our earnings. Any actions taken in this regard will be in a manner that is accretive to shareholder value. We have started working on the following initiatives. First, we’re beginning internal preparations for a second SBIC license application.

If a second license is approved by the SBA, it would give us access to as much as $75 million in additional long-term financing. Second, we are working on a shelf registration that would allow us to issue debt in the public market. As you know, we currently have a shelf registration related to issuing common stock.

Third, we are looking to modify or refinance the existing debt facility related to our non-SBIC portfolio. We believe that this would allow us to increase the yield of our non-SBIC portfolio and further support our growing origination efforts.

As Jeff is about to describe, and I will have additional comments afterwards, real progress has been made, and our renewed sense of urgency is translating into real results. I feel confident in our ability to continue to execute on behalf of our shareholders. With that, I'll turn the call over to our Chief Financial Officer, Jeff Cerny..

Thank you, Bilal. Turning to our third quarter results, our investment portfolio totaled $266.2 million on a fair value basis as of September 30th equating to 98% of cost. The portfolio was comprised of 57 companies, 39 in the senior loan fund and 18 in the SBIC fund.

As a percentage of fair value at quarter-end, our investments were comprised of approximately 88% in senior secured loans, 7% in subordinated debt investments and 5% in equity investments. At September 30th, the 57 companies in our portfolio were diversified across 19 industries.

Our largest portfolio company accounted for 5.5% of the aggregate fair value of our portfolio. Additionally, our five largest investments accounted for just over 23% of the portfolio's total fair value at September 30th. Our average investment in each portfolio company was approximately $4.7 million at fair value as of September 30th.

The weighted average yield to fair value on our debt investments was approximately 9.1% versus 8.1% as of June 30th. This 1% pickup in weighted average yield to fair value reflects the ramp-up in our SBIC fund relative to the scene your loan fund and was driver of our $0.08 increase in net investment income per share since the second quarter.

As of September 30th, the weighted average yield to fair value was 6.8% on debt investments in the senior loan fund and 11.8% on investments in the SBIC fund. Our two non-accruals were omitted from the weighted average yield to fair value calculation. At the end of the third quarter, floating rate loans comprised 82% of our loan portfolio.

All of our floating rate loans contain LIBOR floors. During our second quarter earnings call on August 8th, we noted that the company could benefit from a potential decline in repricing amendments in the senior loan fund.

This held true as re-pricings for the third quarter were essentially nonexistent in the senior loan fund after several quarters of numerous downward repricings. As I noted earlier we had two nonaccruals at September 30th.

Our debt investment in Strata Pathology which had a fair value of $765,000 compared to approximately $700,000 at June 30th and has been on non-accrual since the first quarter of 2013 and Tangible Software, which had a fair value of $5.6 million compared to approximately $6 million at June 30th, and was placed on non-accrual status in June of this year.

Since being put on non-accrual in June, it is worth noting that Tangible has made all of its cash interest payments. We are actively monitoring this investment and continue to deploy the necessary resources to maximize repayment.

Moving on to deal activity, during the third quarter, we closed 12 new investments in our SBIC fund with an aggregate principal amount of $65.1 million.

These investments included $54.7 million of investments in new portfolio companies, a $7 million refinancing of an existing portfolio company and $3.4 million in follow-on investments to existing portfolio companies.

These investments included senior secured loans, subordinated loans, preferred stock, common ownership interest and warrants with approximately 95% constituting loan investments. So far this quarter we’re pleased with the status of our pipeline.

We have completed one loan investment totaling $11 million with a 13.75% coupon including 12% cash pay and we have signed letters of intent with several potential borrowers. We derived approximately $6.2 million in total investment income from our portfolio in the third quarter of this year compared with $4.7 million in the second quarter.

The improvement was largely due to a strong quarter of new investments in the SBIC fund which was partially offset by prepayments and amortization in the senior loan fund and an increase in the weighted average yield to fair value quarter-over-quarter.

Approximately $2.7 million of this quarter's total investment income was derived from our senior loan fund, and $3.5 million came from our SBIC fund. The percentage of our income derived from the SBIC fund now makes up 56% of our total after this quarter's 16% increase.

Expenses totaled $3.3 million for the three months ended September 30th, compared to $2.6 million for the prior quarter. This increase in expenses was largely driven by our external manager earning a $723,000 incentive fee.

Overall interest expense was stable with a decline in interest expense at the senior loan fund being offset by an increase in interest expense relating to the SBIC fund.

In the aggregate, the total amount of administrative fee, professional fees and general and administrative expenses was largely unchanged in the third quarter compared to the prior quarter. Net investment income for the third quarter was approximately $2.9 million or $0.30 per share, compared to $2.1 million or $0.22 per share in the prior quarter.

As Bilal discussed, this improvement was largely driven by an increase in the pace of investments at the SBIC fund which was offset by a decline in outstanding loan balances in the senior loan fund. This resulted in the 1% increase in weighted average yield to fair value.

For the three months ended September 30th, we had a net increase in net assets resulting from operations of $3.8 million or $0.40 per share, compared with $0.6 million or $0.06 per share for the three months ended June 30th.

As noted on our last earnings call, OFS Capital funded the remaining $13.6 million of its $75 million commitment into the SBIC fund in July. On September 19th we received SBA approval for the remaining leverage which resulted in access to as much as $150 million in SBA debentures.

As of today we have capacity to make additional investments in the SBIC fund of approximately $87 million which includes $84.5 million in incremental SBA debenture borrowing capacity. With that I'll turn the call back over to Bilal..

Thank you, Jeff. To summarize, we’ve prudently increased the pace of originations in our SBIC portfolio and significantly increased our net investment income. We feel good about the quality and quantity of deals in our pipeline.

As a result of our increased pace of originations, we have also increased our efforts to raise additional capital to grow our company. Rest assured, we will only do it in a manner that is accretive to shareholders. Overall, I'm encouraged by how OFS Capital is working. The company is well positioned to win deals in the middle markets.

We are working smarter and getting more efficient in sourcing, evaluating and closing transactions. There is a sense of excitement among the staff about our performance. We have also been receiving positive feedback from our clients, which has manifested itself in repeat business. With that, operator, please open up the call for questions..

(Operator Instructions). As we have no questions, our question and answer portion of the call has closed. I will now turn it back over to Bilal Rashid for any final comments..

Thank you all for joining our call today. We look forward to speaking with everyone again on our next call. Operator, you may now end the call..

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