Good morning, and welcome to the OFS Capital Corporation's Second Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Steve Altebrando, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. With me today is Bilal Rashid, Chairman and Chief Executive Officer of OFS Capital and Jeff Cerny, the company's Chief Financial Officer and Treasurer. Please note that we issued a press release this morning announcing our second 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 as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital management's 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 way 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 also could be incorrect. You should not place undue reliance on these forward-looking statements. OFS Capital undertakes no duty to update any forward-looking statements made herein, and all forward-looking statements speak only as of the date of this call. With that, I'll turn the call over to Chairman and Chief Executive Officer, Bilal Rashid.

Thank you, Steve. Good morning, and welcome. The second quarter was a strong period for us. We generated net investment income per share of $0.34, which is in line with our distribution. Since our IPO, we have declared 23 straight quarterly distributions of $0.34 per share. Our ability to maintain our distribution over this time period puts us in select company within the BDC sector. As we noted in our prior calls, our goal is to grow our earnings while maintaining the quality of our portfolio. We are happy with the overall quality of the portfolio, as evidenced by the increase in our NAV this quarter, which grew from $13.67 per share to $13.70 per share. We mentioned on our last call that we expected an increase in our net investment income starting this quarter as we deployed the cash in our SBIC. The increase in net investment income in the second quarter is a result of our efforts to prudently reinvest this cash. We deployed $47 million in the second quarter. Year-to-date, we have deployed more than $160 million in capital. We have been able to maintain this healthy pace of deployment while remaining very selective. Over the last 12 months, we saw more than 700 deals and executed on only a small fraction of those deals. The interest of the shareholders are aligned with those of our adviser, which is the single largest shareholder of the BDC. One significant transaction for the quarter was our investment in Performance Team, a Los Angeles-based, third-party logistics and distribution provider. We led the $38 million non-sponsored transaction to support Performance Team's recapitalization. The BDC funded approximately $20.3 million at closing, and we also brought in a co-investor to participate in the deal. Performance Team, which has been in business for more…

Thanks, and good morning, everyone. As Bilal mentioned, we had a strong second quarter, highlighted by a net investment income covering our distribution and then increasing our net asset value per share. Starting with the income statement. For the second quarter, we derived approximately $10.3 million in total investment income during the quarter, a $1.3 million increase over the first quarter. Net investment income was $4.6 million or $0.34 per share, an increase of $800,000 over the first quarter. This $0.34 per share compares to $0.29 per share in the first quarter. The increase was primarily driven by an increase in investment assets, including a full quarter of earnings from the strong deployment in the first quarter and continued deployment in the second quarter along with LIBOR increases. Total expenses of $5.7 million increased compared to $5.2 million in the prior quarter. The increase was driven by higher management fees due to higher invested balances, along with increased incentive fees based on stronger net investment income for the quarter. Turning to our balance sheet. Our net asset value at the end of the quarter was $13.70 per share compared to $13.67 per share at the end of the prior quarter. The increase was primarily due to unrealized gains on certain investments. At the end of the quarter, we had approximately $23 million of cash, of which $21 million was in our SBIC. We also had another $42 million in availability on our line of credit. I would also like to note that in May, our board authorized a $10 million stock repurchase program. We have a 10b5 buying program in place, and we also intend to utilize the program opportunistically. With the asset and liability profile at quarter's end, for each 50 basis points of LIBOR increase, we realized an…

Thank you, Jeff. We are happy with the significant increase in earnings this quarter and the overall quality of our portfolio, as highlighted by the increase in NAV per share. Going forward, we are confident in the earnings power of the BDC, considering the debt capital availability we have to grow our assets and our earnings. As you know, our SBIC debt does not count towards our leverage test. This fixed-rate, long-term debt with a weighted average coupon of 3.18% still represents a vast majority of our outstanding debt. Our goal is to grow our earnings while maintaining the quality of our portfolio, as we have done since our IPO. Our balance sheet is very well-positioned for a rising interest rate environment. 77% of our loans at fair value were floating rate, while 96% of our debt was fixed rate at the end of the second quarter. We are proud of the ROE we have generated for our shareholders since our IPO, which is a testament to our origination platform and our underwriting and portfolio management process. We will continue to focus on capital preservation, as highlighted by our low loss experience. Our investment platform has been in existence since 1994 and has gone through multiple credit cycles. We believe that it will help us navigate changing market conditions in the future. With that, operator, please open up the call for questions.

[Operator Instructions] Our first question will come from Christopher Testa of National Securities Corp.

Bilal, I was just curious, so you had discussed the context of higher leverage and possibly using some more lower-yielding loans. If you were above 1:1 debt-to-equity tomorrow, how many more opportunities kind of in your pipeline do you think would fit the BDC than what's currently being funded at the current leverage levels?

Yes. So I think, as we mentioned, the -- our target for the leverage with the current portfolio is 1.3 times to 1.4 times, and so that would be another $50 million to $60 million range.

No, what I was getting at is, like, so if right now, let's say, LIBOR plus 8% loans work on the balance sheet, so how much, if the increased balance sheet leverage is going to allow you to make, let's say, an L plus 5 or L plus 6 loan on the balance sheet, like, how much of those are you seeing? Like, how much would we expect your originations to basically increase if you could flip a switch tomorrow? That's kind of what I'm getting at. Like, how much -- how many of these lower-yielding deals are you already kind of seeing in your pipeline?

We're actually seeing a significant number. As we mentioned on the -- in the prepared remarks, we have a platform that is worth $2 billion of AUM. And the majority of those loans are actually first lien senior secured loans at the yield that you're talking about. So we are already seeing those types of transactions. And so I think it will be -- they'll be fairly good for us to flip the switch there.

And should we expect -- like what, I guess, target leverage should we expect more on those lower-yielding loans to come online? Should that be when your overall debt to equity gets past 1.8? I mean, does it start earlier at 1.6? I mean, how should we kind of think about it?

Yes. I think that once we clear the 1.4 kind of range, then I think then any additional assets that we want to put on there will be with those lower-yielding assets. I think we won't be comfortable going above that leverage target with the same asset mix. I think once we cross that, then it will be additional -- the additional loans will be those lower-yielding loans.

And is the -- in the current credit facility, is that -- does that have a covenant for 200% asset coverage?

It does correctly, and -- but we don't think we're going to have any issue resolving that and amending that.

So Jeff, the plan would to be kind of just amend that to allow you guys to go to 150% and possibly maybe, I would guess, upsize it concomitantly?

That's right, Chris.

And also, I think in addition to that, as we mentioned, Chris, that we're part of a group of investment platform that has over $30 billion of AUM. So we have very strong relationships across the board with the commercial banks across the U.S. So getting financing is not going to benefit for us.

I wouldn't expect it to be. I was just curious, is there a potential for you guys to maybe tap the unsecured debt market again as well? Or would you guys really want to keep it more mass fund with floating rate revolvers?

Yes, we're certainly open to that. I think, as we mentioned, I mean, having long-term fixed-rate unsecured debt, I mean, has some attraction to it, so we're certainly open to that if that makes sense.

Yes, no, absolutely. And just curious, obviously, we've seen across the whole market, there's been spread compression and terms have been weak. Have you experienced any, I guess, increased inclination of some maybe larger funds that you haven't seen before kind of stepping down into the lower middle market? Has there been any one or any confluence of people that have been maybe driving terms weaker, driving pricing down and kind of you're part of the same box?

I think we're beginning to see some of those types of funds, but more on the sponsored side. And so I think we're not seeing those guys coming into the non-sponsored space. So we are picking our spots in the sponsored space in companies that we like, but we don't have competition from some of these larger guys. And then, obviously, focusing on the non-sponsored side of the market. So as we mentioned, one of the deals that we did, that was a non-sponsored transaction. It was not a bank deal. There was no option. It was directly originated with the owners of the company. And so because of that, we were able to get some attractive yield and attractive leverage profile. So I would say that it's easy, but it is very hard, and it requires a lot of work but we have the whole origination platform. As you know, we have offices in New York, Chicago, L.A. and pretty robust team and long-standing relationships with market participants. So I think that will be coming into play for us here. And it's a lot of hard work, but we are still finding good deals.

This concludes our question-and-answer session. I would like to turn the conference back over to Bilal Rashid for any closing remarks.

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

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