OFS Capital Corporation (NASDAQ:OFS) Q2 2020 Earnings Conference Call - Final Transcript

Jul 31, 2020 • 10:00 am ET

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OFS Capital Corporation (NASDAQ:OFS) Q2 2020 Earnings Conference Call - Final Transcript

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Q & A
Analyst
Mickey M. Schleien

between prices in the leveraged loan market and risk? And is -- apart from follow-on deals in companies that you know well that are COVID-defensive do you think the risk reward ratio in the market is interesting today?

Executive
Bilal Rashid

Yes. I think beyond those -- the two types of investments that I spoke about earlier, I think I agree with you on that front. I think that it is possible that at least the broadly syndicated loan market may have gotten a little bit ahead of itself, because I think in many of those situations we still haven't received the Q2 financials yet. And so I think that that's the reason why our initial focus is going to be on add-ons and sectors that are fairly COVID-defensive.

And I think -- and because I think there still remained quite a bit of remains quite a bit of uncertainty going forward not just on the health care front obviously we are still -- t here's uncertainty related to a vaccine and other treatments, but I think just the impact of almost 35% decrease in GDP in the last quarter, I think those impacts still are unfolding.

Analyst
Mickey M. Schleien

Yes. I definitely agree. And in terms of the effect of the pandemic Bilal, how is that playing out in terms of competition amongst direct lenders like you in the middle market? We did see a dislocation of deal terms seem to be improving maybe not so much in terms of spreads but structures seem to be certainly better today than pre-COVID. Is that attracting actually more competition into the market and making it more difficult for you?

Executive
Bilal Rashid

Actually, what I would say is that, in the middle market space, I mean, the deal flow has not been that great so far. And then I think that I -- from what I hear from others is that others are also focusing on companies that they are very familiar with. And so the investing in a new Company where potentially, it's hard to do the due diligence because just practically speaking it's hard to travel and meet the borrowers and visit the plant etc.

So I think, because of some of those restrictions, there hasn't been a lot of activity in new issue transactions within the middle market. So it's hard to gauge how much competition we'll have, once the deal flow starts becoming normalized. But I think that, at this point, I would say, there's just not enough information to opine on that.

Analyst
Mickey M. Schleien

I understand. And my last question, sort of, a housekeeping question, but Jeff you mentioned climbing the capital stack. Could you break down your senior secured loan bucket between first lien and second lien please?

Executive
Jeffrey A. Cerny

Sure. Mickey, about 23% of our overall senior secured loans are second lien and those do tend to be to some of the larger borrowers. And so, they have some liquidity in the market and they are tradable if we want to create liquidity with those loans. But,