OFS Capital Prices Baby Bonds

BDC OFS Capital (NASDAQ:OFS) has priced their new issue of baby bonds with a coupon of 6.50%.

The issue has a maturity date of 10/31/2025 with an early redemption available starting on 10/31/2020.

The pricing term sheet can be found here.

The issue will not trade on the OTC Grey market since it is debt, but will trade on the permanent exchange (NASDAQ) under the ticker OFSSB within a week or so.

19 thoughts on “OFS Capital Prices Baby Bonds”

    1. Hi G—I don’t know what to think of Egan-Jones. Seems like they would have to have a reliable rating, but investors seem to think they are ‘bogus’. Personally I would prefer S&P, Moodys or Fitch to rate these.

      1. Tim, in NO WAY would I ever trust Egan Jones; as I find their ratings as a joke and seems that if you pay them enough they will “gift” the companies preferreds an “A” rating:
        The SEC warned Egan-Jones in October 2011 of a possible enforcement action. On April 24, 2012, the SEC charged Sean Egan with numerous offenses including: making false and misleading statements in the firm’s application to become a Nationally Recognized Rating Agency, violations of conflicts-of-interest and record keeping, and falsely stating that he was unaware if his paid clients were long or short specific securities that Egan-Jones rated. The Securities and Exchange Commission issued charges against the company, and its founder, Sean Egan, for “material misrepresentations and omissions in the company’s July 2008 application to register as a Nationally Recognized Statistical Rating Organization (NRSRO) for issuers of asset-backed securities (ABS) and government securities” as well as “material misrepresentations in other submissions furnished to the SEC and violations of record-keeping and conflict-of-interest provisions governing NRSROs.”The SEC alleged that among other violations EJR “allowed two analysts to participate in determining the credit ratings for issuers whose securities they owned”, and “EJR also (1) failed to make or retain a record of the procedures and methodologies it used to determine credit ratings”.
        On Jan. 22, 2013 the SEC announced that Egan-Jones has agreed to settle charges that they made willful and material misstatements and omissions when registering to become a NRSRO for asset-backed and government securities. Under the terms of the agreement, the firm is barred from rating government and asset-backed securities as a NRSRO for at least 18 months.
        I urge all investors to do your own deep due diligence and not listen to these paid shills. Wishing you profitable investing, Nomad

          1. Tim, there are many issue with the SEC and Egan Jones, this is the latest https://www.sec.gov/litigation/opinions/2018/34-83827.pdf
            Also, Egan was banned a few years back. There is great need for another “quality” rating agency in addition to Fitch, S&P and Moody’s; I doubt Egan is the answer to help investors sift through what is quality and what is really junk. Time flies over us but leaves it’s shadow behind, Nomad

            1. Nomad, Correct me if I am wrong, but I swear I have NEVER seen an Egan rating below A. I have seen them rate small issue plus 9% preferreds an A rating before in recent past. Totally useless info to me when it comes from them.

              1. Reminds me of some of the college courses I have seen. If you have a pulse, you have a “B”. Show any sign of life and it’s an “A”.

                Credit rating is a wide-moat business. It’s pretty much impossible to break into the industry, except at the bottom, which perfectly describes EJ. For the big 3, It’s obscenely profitable.

                Egan Jones is a joke. It’s a joke on the retail investor, who, not knowing, might rely on their ratings. Wholesale investors pay them zero attention. To me, I’d much rather have an honest issue, WITH NO RATING, than an Egan Jones rating. I own lots of NR pfds and bbs, but little if anything with an EJ rating.

            2. Nomad, you have given me hope though…They do have ever credit ratings at their disposal besides A…You just proved it! 🙂

  1. When there is a new issue with an Egan Jones “rating” (smirk) and Landenberg Thallman as underwriter I see a big caution sign. This is a very small BDC with a 2/20 fee structure, externally-managed, that barely makes a profit. Paid $8 million in management fees/incentives in 2017 but next to no profit. Recently reduced asset coverage from 200 to 150%, which is what this issue is about.

    In a day when one can get food F2F issues at around 6% YTC, with a floating rate to the upside, this is a big pass for me.

    1. Hi Bob-in-DE—would tend to agree with you–although I haven’t taken a good look I did note that they had net assets of under 200 million and I am cautious with small BDC’s – although quite honestly I am always caution with business development companies.

      1. Tim, I do not believe any BDC has ever filed for a bankruptcy? Are you aware of any? Wishing you profitable investing, Nomad

        1. Hi Nomad–not certain whether any have gone bk, but they have a very short history–less than 20 years generally. I have owned the Gladstone Capital and Gladstone Investment term preferreds for years without issue–but my caution comes when we approach a recession which will show us which BDC has taken down too much risk.

          Another issue is all (almost) of their holdings are Level 3–the assets that you have to just ‘trust’ management on their valuation–I don’t trust management too much to correctly value assets.

          My caution also stems from the change in the coverage ratio–to 150% from 200%. When I look at Gladstone Investment from 2007 to 2010 their net asset value per common share fell from $13.46 to $8.74–yikes. Of course with the benefit of hindsight it was probably a buying opportunity. I don’t know how the preferreds performed but likely was a hell of a buying opportunity also.

          For know an income investor can probably hold most preferreds and debt without issue–but down the road a bit who knows.

          Here is some history from Blue Vault Research

          Business Development Company (BDC) History
          A business development company (BDC) is an SEC-registered investment company that invests in primarily private U.S.-based businesses. This form of company was created by Congress in 1980 as amendments to the Investment Company Act of 1940. BDCs are typically taxed as regulated investment companies (RICs). Similar to REITs, BDCs are required to distribute at least 90% of taxable income as dividends to investors, and the company itself pays little or no corporate income tax.

          Although the regulation for BDCs was passed in 1980, the creation of these companies did not come until the late 1990s and early 2000s. Furthermore, they did not begin to gain popularity until Apollo Investment Corporation raised $930 million in three months in 2004. This ignited a stream of BDC IPOs over the years following. Still, the BDC industry remains relatively small when compared to mutual funds, REITs, and other investments. Total BDC assets in the traded and nontraded industry are estimated to be nearly $45 billion.

          Investments of BDCs

          BDCs invest in primarily private companies. They are required to invest 70% or more of their assets in U.S.-based private companies. This is an investment type that was previously limited to institutional and wealthy individuals through private equity and private debt funds. Through these SEC reporting funds, retail investors now have access to private equity and debt investments.

          Many times, BDCs will invest in smaller or medium-sized businesses. BDCs may be diversified in the industries they invest in or have a specific industry specialization (i.e., energy, technology, healthcare). Additionally, they may focus on equity investments in companies, debt investments in companies, or a hybrid of the two. BDCs utilize management teams and advisors to underwrite investments and make loans or equity investments into companies. So far, nontraded BDCs have primarily been focused on investing in the debt side of businesses.

          Additionally, BDCs are required to offer operational or management assistance to the companies they invest in. This provides a layer of support that the companies would not have previously had. Many times the managers of BDCs are experienced at improving companies’ operations and profitability.

          Traded and Nontraded BDCs

          Historically, BDCs have been traded on public exchanges. Mirroring what happened about a decade ago in the REIT industry, nontraded BDCs have become available in the past few years. The first nontraded BDC, FS Investment Corporation, became effective in January 2009. Another nontraded BDC did not become effective until 2011, with Corporate Capital Trust

          1. Tim, thank you for your reply. I believe you and I are both conservative investors and will only invest in securities we trust and understand. I have an extensive portfolio that keeps me busy watching and waiting for opportunities I believe are appropriate for my risk tolerance. I have always invested with the thought “I’d rather be out of the market wishing I was in than in the market wishing I was out”. Thank you for all your efforts and research on your readers behalf. Be Well, Nomad

  2. Reminds me of some of the college courses I have seen. If you have a pulse, you have a “B”. Show any sign of life and it’s an “A”.

    Credit rating is a wide-moat business. It’s pretty much impossible to break into theindustry, except at the bottom, which perfectly describes EJ. For the big 3, It’s obscenely profitable.

    Egan Jones is a joke. It’s a joke on the retail investor, who, not knowing, might rely on their ratings. Wholesale investors pay them zero attention. To me, I’d much rather have an honest issue, WITH NO RATING, than an Egan Jones rating. I own lots of NR pfds and bbs, but little if anything with an EJ rating.

    1. I agree, Bob. 2/3 rds of my issues are not rated. This past week I picked up a couple of CHS preferreds on nice dips and BANFP and none of those are rated, but they are all very decent quality issues. Actually I dont own any preferreds Egan has ever rated.

  3. The Chicken Soup prospectus was a most interesting read. They actually have a good but very small balance sheet but no earnings. I didn’t spend the time to figure it out as I had no plan to invest.

    It’s run by people with very good resumes but it seems to be more of a hobby than a business. Perhaps they’re building it for acquisition. In any event the preferred offering seemed almost more appropriate for a Go Fund Me page.

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