Good day. And welcome to the OFS Capital Second Quarter 2021 Earnings Conference Call. 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 Steve Altebrando, Vice President of Capital Markets. Please go ahead, sir.

Good morning, everyone. And thank you for joining us. Also on the call 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 2021 results. This press release was subsequently filed on Form 8-K with the SEC. Both documents can be obtained under our 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 as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS Capital's 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, everyone, and welcome. I hope that everyone and their families remain healthy and safe. We are pleased with the company's performance during the second quarter, as we continue to grow our earnings. Our net asset value has improved to $13.42 per share, which is approximately 8% above pre-pandemic levels at the end of 2019. There are some key takeaways from the quarter. Net investment income of $0.24 per share, up approximately 26% compared to the first quarter's net investment income. As a reminder, we had approximately $564,000 or $0.04 per share of duplicate interest costs in the first quarter related to our bond refinancing, an increase of approximately 12% in our NAV, which was $13.42 per share as of June 30. We increased our quarterly distribution by 9% compared to last quarter from $0.22 per share to $0.24 per share, marking our fourth consecutive quarterly distribution increase. Lastly, we had no new loans on non-accrual, which we believe demonstrates the continued improvement in the performance of our portfolio companies. The increase in our net investment income was largely driven by additional fee income and lower borrowing costs, resulting from our bond offering in the first quarter. We anticipate that there may be a future opportunity to further reduce the cost of borrowing on our existing debt, which in turn will help grow our earnings. The increase in our net asset value was largely driven by improvements in the performance in our debt investments and strong growth in our equity investments. One of these equity investments, Pfanstiehl, a global manufacturer of high-purity pharmaceutical ingredients, has performed especially well. While we primarily invest in senior secured loans, our investment strategy allows us to selectively make equity investments when we identify a strong opportunity. Since our IPO, we…

Thanks, Bilal. Good morning, everyone. As Bilal just discussed, we continue to be encouraged by the overall performance of our portfolio companies and the increase in the fair value of our debt and equity investments, driving a 12.2% increase in our net asset value over the prior quarter. Turning to our financial results. Starting with our balance sheet, we had $35.2 million of cash at the end of the quarter, of which $15.5 million of that cash was in our SBIC. At quarter's end, we had $95.5 million left in outstanding SBA debentures. As Bilal mentioned, 90% of our debt matures in 2024 or later and 63% of our outstanding debt at quarter end was unsecured. We feel good about the composition of our liabilities. It should be noted that $78.4 million of the unsecured debt is callable later this year, adding to our flexibility to manage our liabilities and potentially reduce the cost of our borrowings. Excluding our SBIC debt, our debt-to-equity ratio improved to approximately 1.3 times at the end of the quarter compared to 1.4 times at the end of last quarter. Our net asset value continues to show a strong recovery since the onset of the pandemic. Net asset value per share of $13.42 at the end of the second quarter exceeds our pre-pandemic net asset value per share of $12.46 at fiscal year end 2019. Also, our net asset value per share at the end of the quarter was 12.2% higher than the prior quarter. The increase was primarily driven by higher fair value marks on our investments, especially as Bilal discussed, the increase in our unrealized gain on our equity investment in Pfanstiehl. OFS Capital has a long standing track record of making accretive equity investments. Since the BDC's inception, we have invested approximately…

Thank you, Jeff. In closing, we are pleased with our performance in the second quarter. Our net asset value has continued to improve, reaching above pre-pandemic levels and driven by the performance of both our debt and equity investments. Once again, we increased our distribution, reflecting both the improved performance and our expected outlook for the quarters ahead. We maintained a solid liquidity position, which we believe will help us in this current economic environment, as we seek to take advantage of potential new investment opportunities and support our existing portfolio companies. We continue to remain focused on capital preservation. Since the beginning of 2011, OFS has invested approximately $1.6 billion with a cumulative net realized loss of principal of only $24.7 million or an annualized loss percentage of approximately 0.15%, while generating attractive yields on our portfolio. Over time, we have been steadily increasing our allocation to senior secured loans, which now constitute the majority of our loan portfolio as we continue to increase our exposure to larger borrowers. Our financing is primarily long term with 90% of our debt maturing in 2024 and beyond. We believe that this gives us operational flexibility to execute on our business plan. Lastly, we believe the size, experience and reputation of our adviser has continued to benefit our business. With a $2.5 billion corporate credit platform within a $30 billion asset management group, our adviser has broad resources including long-standing banking and capital market relationships. It has gone through multiple credit cycles over the past 25 years, and it has a strong alignment of interest with all shareholders with a 22% ownership interest in the BDC. Finally, I want to thank our employees for their continued dedication. While the impact of this pandemic continues to evolve, we believe our hard work and diligence has helped us successfully navigate a challenging time thus far. With that, operator, please open up the call for questions.

Thank you. [Operator Instructions] And the first question will come from Mickey Schleien with Ladenburg. Please go ahead.

Yes. Good morning, everyone. Hope, everyone is well. I'd like to ask about your outlook for the loan market. Considering both the private debt and private equity markets have a lot of dry powder and spreads are tightening, which we all know can result in higher repayments. But the economy is growing sharply and M&A is very active, and I'm getting the sense that borrowers seem to be gravitating more and more and more to private debt solutions. So I realize repayments can be a function of vintage and call protection. But broadly speaking, how would you characterize the outlook for organic growth in the leveraged loan market versus re-financings? And what are your expectations for OFS' originations versus repayments for the rest of the year?

Thanks, Mickey. That's a very good question. So I think that you're right. I think there is a decent amount of capital in the private debt market right now. And it - a lot of it actually has been raised for the upper part of the middle market, in the sponsored space. The part of the market that we play in, the lower middle market, is somewhat insulated, but not completely insulated, obviously. So I think that as it relates to repayments, I think that we will likely see that repayment activity does continue. But then I think at the same time, there's a lot of M&A activity that is also happening in this space, which will require a decent amount of capital to finance that M&A activity. I think in the past, when you saw a lot of refinancing activity, maybe a couple of years ago, you weren't seeing a lot of new capital that was required. The M&A activity was not as strong. I think with a strong backdrop in the economy, we are seeing the M&A activity picking up as well. So although repayment activity, I believe, will continue, but at the same time, the demand for capital will also continue. And so we think that the - our origination book and the new origination activities would, I believe, would grow over time. And our expectation is that the new originations would outpace, in my opinion, the prepayments. I would also mention that in addition to making new loans, we, excuse me, we also can look at other parts of the credit market. So as you know, we have expertise not just in the middle market loan origination, we also have expertise in the structured credit market as well, looking at CLO equity and CLO debt as well. So given that we have a broad platform, if market gets frothy in one part of that market, we can certainly look at the other parts of that market as well. So as you've seen, we have a fairly diversified portfolio across those different sub asset classes within the credit and structured credit space.

Thank you for that explanation, Bilal. I appreciate the - your insight. Just one follow-up, sort of housekeeping question since we haven't seen the 10-Q. Could you just describe what drove the realized - the net realized loss this quarter?

Yes. So I think - and Jeff, please chime in. I think that was - those were loans that were already marked down to, I believe, close to zero. And it was just a reversal of them from going from unrealized to realized. Is that correct?

That's correct. That makes up the predominant portion of it, yes.

All right. That’s it from me this morning. I appreciate your time. I hope everyone has a good weekend. Thank you.

Thanks, Mickey. Thank you.

The next question will come from David Grusky with Parika [ph]

First, gentlemen, I just want to congratulate you on a fantastic quarter and doing a fantastic job for the shareholders through this crisis. Just want to ask you about the equity investment in Pfanstiehl and what your thoughts are in terms of liquidity?

Yeah. David, thank you very much, first of all, and this is Jeff. We are primarily a platform that invests in senior secured loans, but we do make selective equity investments when we find a private company. And Pfanstiehl is a good example of that. That was an investment that we made many years back. It's about a $400,000 basis. And the fair value is around $49 million right now. So we continue to see a lot of growth trajectory for this company. And while we think there is liquidity, we think it's too early to tell. We still think there's some strong appreciation here, and we believe there's some tailwinds in this industry. So - and the company is largely unlevered. So they have a lot of flexibility to work through any issues. So we feel real good about that investment.

That’s great. Thank you.

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

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 has now concluded. Thank you for attending today's presentation. You may now disconnect.