Steve Altebrando – Vice President-Investor Relations Bilal Rashid – Chairman and Chief Executive Officer Jeff Cerny – Chief Financial Officer and Treasurer.

Mickey Schleien – Ladenburg Terry Ma – Barclays Christopher Testa – National Securities Corp.

Good morning and welcome to the OFS Capital Corporation Q1 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Steve Altebrando, Vice President of Investor Relations. Please go ahead..

Thank you. Good morning, everyone, and thank you for joining us. With me today is Bilal Rashid, our Chairman and Chief Executive Officer; and Jeff Cerny, our Chief Financial Officer and Treasurer. Please note that we issued a press release this morning announcing our first quarter results.

This press release 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 the 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 are not guarantees of future performance, and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from such statements.

The uncertainties and other factors are in some ways beyond management’s control including the risk factors described from time-to-time in our filings with the SEC.

Although we believe these assumptions are reasonable, any of those assumptions could prove inaccurate and as a result, the forward-looking statements based on those assumptions could also be incorrect. You should not place undue reliance on those 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 of this call. Our comments may reference adjusted net investment income and non-GAAP measure. Please refer to our earnings press release for a reconciliation.

With that, I’ll turn the call over to our Chairman and Chief Executive Officer, Bilal Rashid..

Thank you, Steve. Good morning and welcome. The first quarter of 2016 give us a solid start to the year with continued increases in net investment income and net asset value compared to the first quarter of last year.

Applying a strict underwriting standards, focusing on the credit quality of our portfolio and diligently sourcing new investments has enabled us to prudently grow our business in a market environment that has been somewhat challenging.

Specifically, our net investment income increased to $0.38 per share compared to $0.28 in the first quarter of last year. Our adjusted net investment income and non-GAAP measure was $0.36 per share compared to $0.29 in the year earlier period.

This growth was mainly due to an increase in the weighted average yield on the portfolio as we continue to shift towards the lower middle market. Our adjusted net investment income per share has exceed our distribution for four consecutive quarters and was 113% of our distribution.

Our net asset value was relatively stable at $14.65 per share compared to $14.76 per share in the prior quarter and up from $14.24 per share at March 31, 2015.

We credit our stable net asset value to the strength of our underwriting standards and the alignment of interest between the shareholders of the BDC and our external managers, which owns more than 30% of the company.

In the first quarter, we realized a gain of approximately $2.6 million or $0.26 per share related to our warrant position in a portfolio company called Health Fusion. This marks the third quarter for the past year that we have had a significant realization on our warrant.

We have just one loan on nonaccrual at the end of the quarter representing less than 1% of the portfolio at fair value. Since the beginning of 2011, we have invested $618 million and had a cumulative net realized loss of just $600,000, which is less than 1/10th of 1%.

We will continue to focus on the underserved lower middle market especially in the nonsponsored segment. Given our long-standing relationships and track record in the non-sponsor segment of the market, we foresee continued opportunity to generate strong risk adjusted returns in that part of the market.

We believe that OFS Capital benefits from the strength of our external manager which has a $1.85 billion credit and has weathered multiple credit cycles since its inception in 1994.

Our team has the size and breadth of expertise across all parts of the leverage loan market and this provides us considerable capital markets intelligence as we realized expertise across industries. On our last call in March, we mentioned a lower amount of deal growth in the first two months of 2016, which in part was related to seasonal factors.

Given our focus on selectivity and a cautious approach to investing, we did not deploy a significant amount of capital in the first quarter. Given recent repayments and lighter investment activity earlier in the year, we expect second quarter net investment income to be below the first quarter.

However, we expect our net investment income to continue to grow over time given the amount of capital we have at hand and the attractive long-term financing we have in place already. We have seen an improvement in our deal flow, typically there is a two to three lag to close deals.

We will continue to rely on our team’s longstanding sourcing relationships which allow us to see a broad array of potential transactions and to be highly selective in making investments. Although, we are committed to growing our originations as always we remain highly selective and cautious.

We believe our singular focus on credit quality has led to long-term stability in our net asset value, low non-accruals, and strong investment track record. Overall, our investment capacity and the strength of our balance sheet puts us in a strong position.

Looking ahead, we will continue to focus on what has benefited shareholders most over the past several quarters. One, maintaining our strict underwriting standards. This has resulted in low non-accruals and in avoidance of portfolio companies in the highly cyclical oil and gas sector.

Two, being responsive to our borrowers needs by providing flexible capital solutions. This has led to repeat business, a reputation as a reliable partner, and ultimately good quality deal flow. Three, always focusing on the best risk adjusted returns for the long-term.

In terms of investment capacity, we have significant capital resources on hand and several additional sources to raise new capital to grow net investment income and our distribution. As of the end of the first quarter, we had number one, $42 million in cash.

Number two $20 million invested in the senior club loan portfolio that can be redeployed in higher yielding investments. Number three an untapped $50 million revolving credit facility. Number four, the ability to raise additional capital in the bank loan or the bond market. As a reminder SBIC debt does not count towards the BDC leverage test.

So we have not tapped any of our available statutory leverage. Number five, our second SBIC license was submitted last year. If approved, we would have access to additional capital in the SBA debentures.

We do not have an update regarding its timing and status, but we continue to have an ongoing dialogue with the SBA as our portfolio continues to perform. We will continue to work hard to generate long-term value for our shareholders through strong current cash flows and stability in the value of our portfolio.

As we have done so far, we will continue to finance the company in a thoughtful manner and only raise additional capital if it is accretive. We have $150 million in fixed rate SBA debentures with a weighted average coupon of 3.18% with no maturities until 2022. Our portfolio is positioned to benefit from a meaningful increase in interest rates.

If and when that were to happen. A majority of our loan assets are floating rate while our debt is 100% fixed rate. At this point I will turn the call over to Jeff Cerny, our Chief Financial Officer..

Thank you,, we are pleased with our first-quarter results. As Bilal just mentioned, we continue to focus on the credit quality and stability of our portfolio. We have 30% of our net asset value in cash and the potential to borrow additional capital.

As you probably know, our only debt is long- term fixed rate SBA debentures with a weighted average coupon of 3.18%. This debt does not count towards our leverage test. It gives us flexibility and room to grow and net investment income even in a tough equity capital raising environment.

Turning to our portfolio, this quarter we had investments in 36 companies totaling $245.4 million on a fair value basis equating to 100.5% of cost. The debt portfolio is at 98.4% and the equity portfolio is at 116.8% of cost.

The fair value of our loan portfolio declined slightly primarily due widening credit spreads in particular in the larger second lien market. As a percentage of fair value our investments were approximately 61% senior secured loans 26% subordinated debt and 13% equity as a percentage of cost our equity investments were just under 11%.

More than one third of these equity investments have contractual coupons attached to them. Our average investment in each portfolio company was $6.8 million at fair value or 2.8% of the total portfolio. The overall weighted average yield to fair value on our debt investments continues to move in a positive direction.

It increased 33 basis points since last quarter to 12.34%. At the end of the quarter, 61% of our loan portfolio had floating rate coupons. Non-accruals consist of a single loan, Phoenix Brands, with the principal balance of less than $1 million and a fair value of $743,000. This loan when on non-accrual during the third quarter of 2015.

We derived approximately $7.8 million in total investment income in the first quarter, compared with $8.9 million last quarter. This quarter-over-quarter decrease was largely due to a decline in the acceleration of original issue discount and a decrease in prepayment fees due to several investments being repaid in the prior quarter.

Expenses totaled $4.2 million for the quarter compared with $4.6 million for the prior quarter. The $400,000 decrease in expenses was largely driven by a decline in the incentive fee expense due to lower net investment income, and a decrease in administrative fees.

Net investment income for the quarter was approximately $3.6 million or $0.38 per share, which decreased compared to the prior quarter's net investment income of $0.44 per share. On an adjusted basis which is a non-GAAP measure, first-quarter net investment income was $0.36 which exceeded our distribution of $0.34.

As Bilal previously mentioned we have fully covered our distribution on this basis for four consecutive quarters. As far as deal activity, during the first quarter we closed transactions in two portfolio companies with an aggregate investment amount of $6.7 million.

We have the ability to execute on our investment strategy with approximately $42 million of cash, $20 million remaining in lower yielding assets, and the potential to borrow significant additional capital. We continue to prudently deploy capital and generate liquidity on a timeline that allows us to maximize our interest income.

We intend to sell lower yielding assets or otherwise raise capital when we believe it is accretive and can be deployed in a timely manner. With that, I will turn the call back over to Bilal..

Than you, Jeff. We are pleased with our start of 2016 with a strong first quarter. Our results demonstrate the strength of our investment platform, and our increased brand awareness among borrowers. Our investment track record has been solid and our net asset value has been stable.

This highlights the strength of our underwriting standards and the alignment of interest between the shareholders of the BDC and our external manager. OFS Capital has strong value-added origination capabilities. Our focus has been to deliver capital to the lower middle market especially to the non-sponsored community.

This underserved segment requires specialized expertise and a network of relationships. This is where we continue to find attractive, risk adjusted returns, compared to other parts of the middle market. Our team's underwriting expertise and sourcing relationships have allowed us to successfully participate in that part of the middle market.

In terms of our balance sheet, we have attractive long-term fixed rate financing through the SBIC program that positions us well for an expected increase in interest rates. And, we have sufficient capital available to take advantage of opportunities in the market.

OFS capital remains committed to providing long-term value to all its stakeholders, including both shareholders and borrowers. As a lender, we remain focused on being responsive to the needs of our borrowers by providing them flexible capital solutions. We think this goes hand-in-hand with creating value for our shareholders.

With that, operator, please open the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Mickey Schleien of Ladenburg. Please go ahead..

Yes, good morning Bilal and Jeff. My first question relates to the health of your borrowers. Because we're seeing a very mixed-signal in the more liquid markets.

We saw a week job reports number today and generally speaking if you look at, sort of that performance of S&P 500 companies, earnings are confronting headwinds related to slowdowns abroad and maybe the strong dollar and things like that. But we haven't seen that trickle down yet into the middle market.

And I'm trying to understand, why we haven't seen that.

And do you have a thesis in that and when you expect perhaps a slowdown to be more evident in the metrics, whether it's revenue or EBITDA for middle market borrowers?.

Yes, Mickey, hi, this is Jeff. We would agree that the lower middle market has been a little more insulated from some of these trends. We remain very close contact with our borrowers. We think that the structures and the covenants in our particular loans allow us to kind of head off issues sooner rather than later with respect to credit.

The overall leveraging in our portfolio remains, and this includes the senior [indiscernible] through the lowest tranche under four times.

And so I think, while each credit and company is different, I would say on an overall basis as we make the performance of our portfolio and the underlying companies, from a top line and EBITDA perspective, we’ve been pretty stable..

Okay. Thanks for that information. And just one follow-up.

Can you remind me when you applied for the second SBA license?.

Yes. We applied for that in the first-quarter of last year..

Okay. So we're a year into the process. And my question, Bilal, usually the second license gets approved in the neighborhood of six months, maybe nine months. So you know, from our perspective it appears there is some sort of issue.

Is there any color you can provide whether it’s the SBA concerned or wants to see how the portfolio performs with the change in management a while back? Or is there something else that's stopping them from giving you that second license?.

Yes I mean that I think that, you know, there are times I believe where the second SBIC licenses have come in earlier. But we continue to be in dialogue with the SBA. We provide them quarterly information on the portfolio. The portfolio performance as you know has been very good. So we've been quite good about it.

So I think from our standpoint – although it has been more than a year, we continue to have a very positive dialogue with the SBA. And have been provide them with all the information as a relates to, progressing on the second SBIC license.

Having said that, I should just step back from – although we're working very, very diligently to get the second SBIC license and we – as I mentioned we have a good relationship with the SBA. I would say that our business plan is not dependent on getting the second SBIC license.

As I mentioned earlier on, we have significant amount of cash that we are sitting on. We also have some lower yielding, loans that we can monetize. We have a credit facility that we have. In addition to that, we had tapped the bank loan market for bigger credit facility. We also have bond market we can tap into.

So, although – I would say that it's been more than a year since we applied for the SBIC license. And we having said that, that process, we continue to have a dialogue with the SBA. It's – and provide them with all the information they need. And I would say that we have several financing options are available to us as well.

So we will continue with our investment strategy and our business plan regardless. .

Okay. I understand. Just one more follow-up if I may.

Has there been any delay on OFS's behalf in responding to comment letters you received from the SBA?.

No. I mean, we – no, we continue to provide them with the information that we are requested – that is requested from us. And so I would say that – I would say no to that. .

Okay. Thank you for your time. Those are all my questions..

Thank you..

And our next question comes from Terry Ma of Barclays. Please go ahead. .

Hey guys, I mean it sounds like deal flow has picked up a little bit in the second quarter relative the first quarter but it still – it sounds like it's a lot lower than you were expecting.

Can you may be just talk about what's driving that and also the pricing in the level of competition you're seeing in the market right now?.

Yeah, I think the deal flow as I mentioned on our call about six or 12 weeks ago, back in March – I think the – it's in our opinion a lot of it has to do with the seasonal factors Q1 tends to be a little bit lower in general. So and as we mentioned, it's the deal flow has improved since the first couple of months of the year.

And we have several term sheets that are out there. Now as you mentioned, there are generally a two to three-month lag to close deal transactions and there are several – there are some transactions that don't get to the final closing. But so I would say, I would actually attribute a lot of the slowness to seasonal factors in Q1.

And but having said that, the deal flow is picking up now. There is also a lag between originations and earnings. But over time, we feel very, very good about the ability for us to grow our net investment income and we have no reason to believe that deal flow will not be good going forward from here.

In terms of pricing I would say the competition within our market, within the lower middle market especially the large [ph] sponsor part of the market, I think it hasn't, you know change dramatically. So that is one of the reasons why we like this part of the market.

So, I think, we don't see that types of pricing pressure that you see the sometimes in the broader market. So I would say that, from a yield standpoint, we believe that it will be stable – relatively stable..

Okay, got it. And can you just talk about dividend policy? I think you guys have said you cover the dividend last two quarters.

What point would you at the board feel comfortable increasing the dividend at all [ph]?.

Yes. I mean that's a good question. I mean we have actually been having the dialogue with the board on that matter. And I think it's hard to pin down the timing here. But we take it – we take that seriously. So we don't have any specific timing on that, but it certainly something that we are – that we will consider very seriously going forward..

Okay got it. And then just a couple of housekeeping questions.

Can you give us a sense of the level of repayments going forward next couple of quarters? And also on the $6.7 million of interest income, how much accelerated OID was in there?.

As far as prepayments in the portfolio going forward, it's obviously a little bit difficult to predict. I mean that does – sometimes you have very strong quarters and very weak quarters. I mean, yes, I really hate the throughout a number on that.

As far as the NII – and you're asking what amount related to OID accelerations on the mandatory [ph] accelerations?.

Yes.

Was there any accelerated OID?.

Yes, accelerated OID was a little over $100,000..

Okay. All right. Thank you..

Thank you..

[Operator Instructions] Our next question comes from Christopher Testa of National Securities Corp. Please go ahead..

Hey, good morning, Bilal, Jeff.

How are you?.

Good..

Good morning..

So just given kind of the volume that's been a little wide and that seems to be the same across the lower middle market.

Just wondering if you had obtained the SBIC license – the second license already, whether a deal you passed on during the first quarter that would have only fit into the SBIC, could that be something that could potentially drive volume if and when you are granted the second license?.

Chris, this is Jeff. I mean, there are – it's rare for a deal to only fit into the SBIC. I'd say, it's actually the other way where it might not fit into the SBIC, so we’ll take it into the BDC. We've got sufficient capital as Bilal described and we have not been passing on any deals as result of inability to fund..

Yes, I think I agree with Jeff. I mean, I think if anything it's the opposite, I mean the capital that we have outside the SBIC, is more flexible. As you know we have to follow certain criteria when we’re investing in assets within the SBIC..

Got it.

And out of the roughly $4.1 million of unrealized marks in the quarter, how much of that was technical versus credit specific and have you seen those marks change quarter to dart so far?.

Most of the marks for the first quarter were really not credit-related, really technical-related. And some of that was a reversal of marks shifting into realize. So we're – I would say as you look at the overall net loss, it was not material and it was mostly driven by the technical factors in the second week spreads..

Got it. And just with Phoenix brands, I know it’s small, seems like the fair value went down a bit again this quarter.

Has there been any significant news, anything new coming out of that company that you’d have seen?.

We generally don't discuss specific credits, but I guess I would say, I think it's probably more related to delays – and the change was relatively immaterial I would say, but really more delays in the sale process and discount rate.

But I think that credit – the principal balance is under $1 million and the fair value is about $700,000, so relatively immaterial..

Great. That's all for me thank you..

Thanks, Chris..

And our next question comes from [indiscernible] of BBC Income. Please go ahead..

Hey, guys. I appreciate you on taking the time to answer my question. I was just more curious about your focus on the lower middle market and sponsored transactions.

Do you guys have a breakout in your portfolio of what is sponsored versus and sponsored and you guys see any type of shift in that breakout or that metric going forward?.

Yes. James, this is Jeff Cerny. I think if you look across our portfolio, I would say, probably and these are big picture numbers let's call it maybe a third sponsored kind of.

When we talk about unsponsored that could be working with the management team, but that could also be working with a fund less sponsor who raises capital through its relationships on a deal by deal basis.

So I would say, it's probably about a third kind of direct with the company and the management team and another third where there is kind of a fund less sponsor. So hopefully that gives you a decent feel for that..

Got it. And then Mickey kind of brought this up earlier.

But just regards to the leverage multiples and how those trended over time, do you have any just data on just level of EBITDA from the past 12 quarters if you are going more up in the lower middle market or down or how have those, have those trended the past 12 months or so?.

You're saying in an overall folio basis?.

Yes, on an overall portfolio basis..

That’s kind of – I would say probably relatively flat to slightly up. I mean it’s really tough to say over the last 12 quarters or 12 months, but we did have a senior loan fund there tended to larger companies where we exited – we exited there primarily last May and those tended to be kind of on average $20 million-plus type EBITDA companies.

Our lower middle market portfolio is tends to be closer to $8 million, $9 million, $10 million EBITDA companies on average. So I would on an overall portfolio basis relatively flat..

Great. That’s it from me. Thank you..

And this concludes the question-and-answer session. I’d like to turn the conference back over to Bilal Rashid for any closing remarks..

Thank you all for joining us all today and we look forward to speaking with everyone again next quarter. Operator, you may now and the call. Thank you..