Overview

OFS Capital Corporation is a business development company (BDC) that provides financing solutions to middle-market companies in the United States. The company’s key financial metrics for the second quarter of 2025 and year-to-date 2025 show a mixed performance.

OFS Capital’s net asset value (NAV) per common share decreased from $11.97 at the end of the first quarter to $10.91 at the end of the second quarter, primarily due to net losses on investments. However, the company’s total investment income increased slightly in the second quarter compared to the prior quarter, driven by higher non-recurring fee income.

The company’s total outstanding debt decreased from $248.1 million at the end of the first quarter to $243.4 million at the end of the second quarter. OFS Capital’s weighted-average debt interest costs remained relatively stable at around 6.2% during the second quarter.

Financial Performance

For the second quarter of 2025, OFS Capital reported net investment income of $3.3 million, or $0.25 per common share, compared to $3.5 million, or $0.26 per common share, in the prior quarter. The slight decrease in net investment income was primarily due to higher incentive fees.

The company recognized a net loss on investments of $12.9 million in the second quarter, compared to a net loss of $10.8 million in the prior quarter. The net loss was primarily attributable to net unrealized depreciation on the company’s common equity investment in Pfanstiehl Holdings, Inc. and its non-accrual debt investments.

For the six months ended June 30, 2025, OFS Capital reported a net decrease in net assets resulting from operations of $16.9 million, or $1.26 per common share, compared to a net increase of $1.3 million, or $0.10 per common share, in the same period of the prior year. The significant decrease was driven by the net losses on investments recognized during the current year period.

Portfolio Composition and Investment Activity

As of June 30, 2025, the fair value of OFS Capital’s debt investment portfolio totaled $211.3 million, with approximately 85% in first lien debt and 15% in second lien debt. The company also had $98.9 million in equity investments and $72.6 million in Structured Finance Securities.

The three largest industries in OFS Capital’s portfolio by fair value were Manufacturing (35.3%), Health Care and Social Assistance (20.3%), and Administrative and Support and Waste Management and Remediation Services (6.8%), collectively accounting for 62.4% of the portfolio.

During the six months ended June 30, 2025, the company had net repayments and sales of portfolio investments of $12.2 million, primarily due to $36.9 million in cash received from principal repayments, sales, and distributions from Structured Finance Securities, partially offset by $24.7 million in new portfolio investments.

Risk Monitoring and Non-Accrual Loans

As of June 30, 2025, approximately 4.0% of OFS Capital’s total investments at fair value were in non-accrual status, with an aggregate fair value of $15.2 million. This was a decrease from the 4.6% of total investments at fair value that were on non-accrual status as of December 31, 2024.

The company categorizes its debt investments into seven risk categories, with the majority (70.4%) classified as “Average” risk as of June 30, 2025. Investments classified as “Special Mention” and “Substandard” accounted for 24.9% and 3.9% of the debt investment portfolio, respectively.

Liquidity and Capital Resources

As of June 30, 2025, OFS Capital had $10.2 million in cash and cash equivalents, as well as $25.0 million in unused commitments under its Banc of California Credit Facility and $86.6 million in unused commitments under its BNP Facility, subject to borrowing base and other covenants.

The company’s total outstanding debt decreased from $248.1 million at the end of the first quarter to $243.4 million at the end of the second quarter. OFS Capital’s weighted-average debt interest costs remained relatively stable at around 6.2% during the second quarter.

Subsequent to the end of the second quarter, OFS Capital took several actions to manage its debt:

1. The company caused notices to be issued to the holders of its Unsecured Notes Due February 2026 regarding the exercise of its option to redeem $94.0 million of the outstanding notes in August 2025.

2. The company closed a public offering of $69.0 million aggregate principal amount of its new Unsecured Notes Due July 2028, which will extend the company’s debt maturity profile.

As of June 30, 2025, OFS Capital had $16.1 million in unfunded commitments to ten portfolio companies, which can be funded using the company’s current cash and available credit facilities.

Outlook and Risks

OFS Capital’s financial performance in the second quarter and year-to-date 2025 was negatively impacted by net losses on investments, primarily due to unrealized depreciation on certain equity and debt investments. The company’s NAV per share decreased as a result, which could make it more challenging for the company to raise additional equity capital if needed.

The company’s liquidity position remains relatively strong, with cash on hand and available credit facility capacity. However, the upcoming maturity of the BNP Facility in June 2027 presents a potential risk if OFS Capital is unable to extend the reinvestment period or enter into a new credit facility. This could significantly reduce the company’s short-term liquidity.

Additionally, the company’s exposure to non-accrual loans, which accounted for 4.0% of the total investment portfolio at fair value as of June 30, 2025, represents a risk that could further impact the company’s financial performance if the underlying borrowers continue to experience difficulties.

Overall, OFS Capital’s mixed financial results in the first half of 2025, combined with the potential liquidity and credit risks, suggest the company may face challenges in the near-term. Investors should closely monitor the company’s ability to manage its debt, maintain sufficient liquidity, and improve the performance of its investment portfolio.