OFS Capital Corporation 4.95% Notes due 2028

What they do

OFS Capital Corporation is an externally managed BDC that originates and invests in debt securities, predominantly first and second lien loans, to U.S. small and middle-market companies. As of June 30, 2026, 93% of its loan portfolio (by fair value) consisted of floating-rate loans and 100% of first or second lien loans. The company is advised by OFS Advisor and is part of the OFSAM-affiliated fund complex. It generates income primarily from interest on its loan portfolio and also invests in structured finance securities and other debt instruments.

Revenue drivers

• Interest-bearing loans (first and second lien) — Core income source; 100% of loan portfolio is first or second lien, with 93% floating-rate. Weighted-average performing income yield was 12.1% for Q2 2026.
• Structured finance securities — Includes CLO investments; contributed to portfolio but with lower earned yields in Q2 2026, driving the decrease in weighted-average yield from 12.5% to 12.1%.
• Other debt investments and fees — Includes origination, amendment and other fee income on loans; net investment income was $0.08 per share in Q2 2026, down from $0.18 in Q1 2026.

Recent performance

For Q2 2026 (ended June 30, 2026), OFS Capital reported net earnings of $0.42 per common share, driven by net unrealized appreciation of $0.79 per share, offset by a net realized loss of $0.45 per share. Net investment income fell to $0.08 per share from $0.18 in the prior quarter, primarily due to a $2.1 million decrease in total investment income. Net asset value per share rose from $8.16 to $8.41 quarter-over-quarter. Total investments at fair value were $297.8 million, and total outstanding debt principal was $185.8 million as of June 30, 2026. The company placed one new portfolio company on non-accrual during the quarter.

Strategy

OFS Capital focuses on originating floating-rate, senior secured loans to U.S. small and middle-market companies to generate current income. The company maintains a portfolio of essentially all first and second lien loans, aiming to preserve capital and reduce credit risk. Management has been managing leverage, as evidenced by reducing total debt principal from $202.5 million to $185.8 million during Q2 2026. The company also closely monitors credit quality and places non-performing loans on non-accrual status. The declared Q3 2026 distribution of $0.17 per share remains consistent with prior quarters.

Risks

• Credit risk and non-accruals — One portfolio company was placed on non-accrual status in Q2 2026, and further credit deterioration could reduce investment income and NAV.
• Interest rate sensitivity — While most loans are floating-rate, declines in benchmark rates like SOFR or Prime could lower earned yields and net investment income.
• Leverage and financing risk — The company relies on secured credit facilities (e.g., Banc of California, Natixis) and incurred a loss on extinguishment of debt in Q1 2026, indicating refinancing costs or difficulty.
• Valuation uncertainty — A significant portion of the portfolio is marked at fair value by OFS Advisor as valuation designee, creating potential conflicts and volatility in NAV.

Outlook

Management expects continued focus on maintaining a high-quality portfolio of senior secured loans, with floating-rate exposure to benefit from potential rate changes. The company will continue to manage its leverage and liquidity, having recently repaid and terminated the BNP Facility in February 2026. The Board declared a Q3 2026 distribution of $0.17 per share, payable October 5, 2026, indicating a stable payout. The weighted-average performing income yield declined to 12.1%, and management will monitor portfolio yields and credit quality.