Good morning, And welcome to the OFS Capital Corporation First Quarter 2022 Earnings 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.

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 first quarter results and filed our Form 10-Q. Each of the 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 as defined under applicable securities laws. Such statements reflect various assumptions, expectations and opinions by OFS management 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. During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Investor Relations section of our website, under the heading Tax and Non-GAAP Information. With that, I’ll turn the call over to Chairman and Chief Executive Officer, Bilal Rashid.

Thank you, Steve. Good morning. We are pleased to report another strong quarter. Some key takeaways. Our net asset value per share increased to $15.52, another historical high for the company. We have increased our quarterly distribution to $0.39 per share for the second quarter, up from the $0.28 per share we paid for the first quarter, marking the seventh consecutive increase in our quarterly distribution. Net investment income was $0.22 per share. Adjusted net investment income was $0.30 per share, which excludes the accrual for the capital gains incentive fee. We had no new loans or non-accrual in the quarter. In fact, we have not placed any loans or non-accrual for seventh consecutive quarters. We deployed $55 million in new investments and made $15.1 million in add-on investments with existing portfolio companies. OFS Capital is approaching its 10th Anniversary as a public company. Since our IPO, OFS has paid out $11.77 per share in distributions and our net asset value per share exceeds our IPO price of $15 per share. We believe this performance puts us in select company among peers. We believe that we are well-positioned to benefit from higher interest rates, as our loans are largely floating rate, and our financing is primarily fixed rate. Our financing continues to provide us operational flexibility. As of the quarters end, more than 67% of our debt matures in 2025 or later, and more than half of our debt is unsecured. In addition, our senior loan facility matures in 2024 and is non-recourse to the BDC. Our corporate line of credit is flexible, with no mark to market provisions. In terms of our investment activity, we are cognizant of macro economic, and geopolitical uncertainties and continue to remain cautious. We believe that our disciplined approach, along with the strength of…

Thanks, Bilal. Good morning everyone. We continue to be encouraged by our overall performance. Last quarter, we generated an increase of more than 2% in our net asset value from the prior quarter to $15.52, which is once again at historical high. It is also 24% above our pre-pandemic level at the end of the fiscal year 2019. As Bilal said, our net asset value per share at this quarter exceeds our IPO price of $15 per share. And since our IPO, we've made cumulative distributions of $11.77 per share. This quarter, we increased our distribution to $0.29 per share, a seventh consecutive quarterly increase. We posted net investment income of $0.22 per share, and excluding the accrual of capital gains, incentive fee, our adjusted net investment income of $0.30 per share was strong and $0.02 above last quarter's distribution. To get into more specifics, the increase in our net asset value is primarily driven by higher fair value marks on select equity investments, as was the case with our equity investment in Pfanstiehl, as well as our equity investment in [Indiscernible]. Higher valuation marks on the equity portfolio were partially offset by lower margin and structured finance notes and more liquid [ph] senior debt investments due to spread-wise in an liquid protocols. Since our IPO, we had invested $45 million in the equity or receive warrants in more than 40 portfolio companies. To-date, we have net realized gains of approximately $23 million, which equates to a 1.8 times multiple on invested capital. As of March 31, our net unrealized gain is just over $70 million on the remaining invested capital of $17.7 million, which equates to approximately five times. We believe that these metrics demonstrate the strength of our investment process and are one of the reasons for a…

Thank you, Jeff. In closing, we are pleased with our first quarter performance. Our net asset value has continued to grow, driven by the performance of both our debt and equity investments. We increase our distribution for the seventh straight quarter, reflecting our view of our improved performance, and our expected outlook for the quarters ahead, even in light of this uncertain economic environment. Since the beginning of 2011, OFS has invested more than $1.7 billion with a cumulative net realized loss of just 2% over the last 11 years, while generating attractive yields on our portfolio. Our loan portfolio is almost completely comprised of senior secured loans, standing at 97%. And our financing is primarily long term, with 67% of our debt maturing in 2025 and beyond. In addition, more than half of our outstanding debt was unsecured. We believe that this gives us operational flexibility to execute on our business plan. Lastly, we believe the size, experience and reputation of our advisors has continued to benefit our business. With a $3.1 billion corporate credit platform within a more than $30 billion Asset Management Group, our advisor has broad resources, including long standing banking, and capital markets relationships. It has gone through multiple credit cycles over the past 25 years, and has a strong alignment of interest with a 22% ownership of the BDC. With that operator, please open up the call for questions.

We will now begin the question and answer session. [Operator Instructions] The first question comes from Mickey Schleien with Ladenburg. Please go ahead.

Yes. Good morning, everyone. Hope you're all well. Bilal, with all this volatility in the private markets for much of this year. Are you seeing more deal flow migrating to direct lenders like OFS? And what kind of quality are you seeing in the pipeline?

Yes. So, Mickey, I think that we're not seeing yet, because of the volatility in the public markets. I mean, we're not seeing a lot of deal flow coming in from that market to the private markets, certainly in the lower middle market where we play. But I think that it's still early as it relates to the volatility in the public markets. So, that may happen over time. And with respect to the quality of the deal flow, I think the quality still remains fairly good. We're not seeing any major changes in the quality of the deal flow, compared to before this whole volatility began. So, again, I think it's still early in this high volatility environment. But so far we are seeing relative stability in the private lending market.

Bilal, that volatility in the public markets is obviously reflecting all these headwinds, whether it's inflation or the political unrest in Europe, or Fed tightening. And -- you and the rest of your team have a lot of experience in the credit markets. So, we have defaults at record lows and all this volatility. What's your view on the trajectory for defaults over the next couple of years?

Yes. No, I think that's a very good question. And we, Mickey, we think about that all the time. I think that, as you just pointed out, I think there are two big risks, and you have the inflation risk, and you have a potential recession risk. And both of them happening at the same time, obviously, poses some challenges to the economy. And the way we have dealt with it in the past, I think we're -- our plan is to deal with it in the same way. One, staying senior secured in the capital structure. So, as you see, vast majority of our loan portfolio is senior secured. So I think that helps mitigate some of that risk. And I think that, clearly, if you have an environment where you have inflation and you have potential for recession in the next couple of years, you would likely see default rates across the industry creeping up. But what I would say there is that things you will see in the capital structure, certainly mitigate that risk. And then, clearly the underwriting experience that the team has, really, through multiple credit cycles at this point, I think, we expect that that will certainly help us as we navigate through this uncertain environment?

Thanks for that explanation, Bilal. That's helpful. But if I can ask, in terms of the senior secured portion of the portfolio. How does that break down between first-lien unitranche and second-lien?

Yes. Mickey. Thanks for the question. This is Jeff. So, about 16%, 15% to 16% in second-lien, and the remainder is first-lien. I don't have a split out at my fingertips as I would consider unitranche, but I would say that most of our unitranche loans are still at relatively low leverage points. And I would say that our second-lien book tends to be a little larger, a little more liquid type names, and it's a pretty granular portfolio. So most of the names there tend to be smaller than the average size. So, we feel really good about the quality of our book. And quarter-over-quarter, we've continued to see revenue and EBITDA growth with the vast majority of the businesses. So we -- very limited companies on the watch list. So we feel very, very good about the portfolio.

Thanks, Jeff. That's helpful. My last question, obviously, the forward LIBOR and SOFR curves are steep, and nominal rates on your debt investments could go up fairly sharply over the near term, and I think you talked about that in your prepared remarks. But that's going to make us debt a lot more expensive for borrowers over time. How much of that increase in nominal rates? You think the private lenders like OFS, will keep versus maybe seeing some spread compression due to competition or just to help, support your portfolio companies?

Look, because the LIBOR and SOFR tend to be a relatively small portion of the overall coupon, I think that we will -- look, we've seen this before, where LIBOR has spiked up. I think it was maybe in 2019. And the portfolio performed well. Three-month LIBOR, I thin, went from 30 basis points to well over 2%. And it did not have a meaningful impact on the portfolio. So, when you look at the coupons on our book, I think that we feel that as floating rates continue to increase, the companies will see some strain. But we've modeled that in as Bilal said into our downsides for these investments. We always include a sensitivity of interest rates to ensure there's adequate cushion and we don't expect that to be a major issue in our book.

That's interesting and helpful. Thanks, Jeff. Those are all my questions this morning.

Thanks Mick.

This concludes our question and answer session and today's OFS Capital Corporation first quarter 2022 earnings call. Thank you for attending today's presentation. You may now disconnect.