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CLO Owner OFS Credit Continues to Perform Well (or at least OK)

OFS Credit posted their earnings today.

While I don’t own any of the term preferreds from Collateralized Loan Obligation owner OFS Credit Company (OCCI) I do a quick review on all of the CLO owners whenever they release earnings since I do own shares in the Eagle Point Income (EIC) 7.75% term preferred (EICC), the Carlyle Credit Income Fund 8.75% term preferred (CCIA) and the Priority Income Fund 6% term preferred (PRIF-H)–all companies that are similar to OFS.

Almost all of the composition of collateralized loan obligations is composed of companies with credit ratings in the ‘B/B-‘ area–meaning they are kind of junky. Just because you toss a couple hundred loans into a CLO doesn’t make them safer–you just have a collection of junky issues with the hopes that financial issues of these companies happen over the course of years – not all at once.

OFS showed a portfolio value of $180 million with total liabilities of about $63 million. The company uses only term preferreds as their leverage–they have just shy of $60 million in preferreds outstanding. So assets are about 3X their liabilities and this is the 1st item I look at–as a holder of senior securities you want to have plenty of coverage for the preferreds you hold. The next item I focus on is where is the net asset value per common share going–up or down? OFS saw their net asset value per share move lower by a fair amount – from $8.48 a year ago to $7.34 now. If I had common shares I would be concerned with a fairly rapid erosion in net asset values (caused by realized and unrealized losses)–although over the course of the last year you would have received about $1.70 in distributions so overall you would have a gain. BUT as holder of senior securities (debt or preferred stock) I care most about the asset coverage ratio and that is darned good at almost 300%.

So even as the common share NAV erodes the coverage on the senior securities has grown stronger as the company has sold enough common shares to generate investable cash which bolsters senior securities.

Of course I glance at income statements and the normal financial items one would obviously look at, but the above gives me fairly good hint whether I feel relatively safe holding their securities.

While I don’t add either issues from OFS I would feel good about having a modest position in these issues.

4 thoughts on “CLO Owner OFS Credit Continues to Perform Well (or at least OK)”

  1. Tim this fund is primarily invested in CLO equity not CLO debt. Comparisons are always good, but the other named funds income funds which invest primarily in CLO debt.

    1. Just a quick look at some of the most recent info I could find…
      Carlyle CCIF – 97+% CLO Equity
      OFS OCCI – roughly 1/3 debt, 2/3 equity
      Eagle Point EIC – rough 3/4 debt, 1/4 equity
      I hold a very outsized position (5%) in EICC as I believe it is the safest with highest yield (8%).

      1. I haven’t looked at PRIF before but just pulled the semiannual report and it looks to be 75% CLO equity, 25% debt. I had thought it was predominately debt.

      2. When the word income is in the name it is primarily a debt fund. When it has the word income in the title it is primarily a debt funds.

        Eagle Point Income Fund has more CLO debt
        Eagle Point Credit Fun has more CLO equity

        Carlyle Credit has gone all in on CLO equity – but this is a relativly new fund in the sense that they are chaning over from a real estate debt fund to a CLO focused fund. So maybe this will change?

        Equity is the first loss position in the CLO structure – kind of like bank common equity is the first loss position in a bank’s capital structure.

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