OFS Capital (OFS) risk factors, FY2024 10-K

Other

1. 01We are subject to risks related to our business and structure
2. 02We are subject to risks related to OFS Advisor and its Affiliates
3. 03We are subject to risks related to our investments
4. 04We are subject to risks related to our securities and an investment in our common stock

Risks Related to Our Business and Structure

1. 05Global economic, political and market conditions may adversely affect our business, our ability to access capital, and our results of operations and financial condition, including our revenue growth and profitability
2. 06Due to economic disruptions, we may not be able to increase our dividends and may reduce or defer our dividends and choose to incur U.S. federal excise tax in order to preserve cash and maintain flexibility
3. 07We are dependent upon the OFSC senior professionals for our future success and upon their access to the investment professionals and partners of OFSAM and its affiliates
4. 08Our financial condition and results of operation will depend on our ability to manage our business effectively
5. 09To the extent PIK interest and PIK dividends constitute a portion of our income, we will be required to include such income in taxable and accounting income prior to receipt of cash representing such income
6. 10We may finance our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us
7. 11burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the base management fee payable to OFS Advisor
8. 12(1) Assumes $409.7 million in investments at fair value, $248.4 million in outstanding debt, $172.2 million in net assets, and an average cost of funds of 6.17% as of December 31, 2024. Our investment portfolio must experience an annual return of 3.74% at least to cover interest payments on the outstanding debt
9. 13Insufficient cash flows may increase our risk of default of our debt obligations, including under our Unsecured Notes and our BNP Facility
10. 14Because we received the approval of our Board, we became subject to 150% asset coverage effective May 3, 2019
11. 15Changes in interest rates will affect our cost of capital and net investment income
12. 16We may enter into reverse repurchase agreements, which are another form of leverage
13. 17Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited
14. 18We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings
15. 19We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses
16. 20We may suffer credit losses
17. 21We will be subject to U.S. federal income tax at corporate rates if we are unable to maintain our tax treatment as a RIC
18. 22Our subsidiaries and portfolio companies may be unable to make distributions to us that will enable us to meet RIC requirements, which could result in the imposition of an entity-level tax
19. 23We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income
20. 24will be included in income before we receive any corresponding cash payments. We also may be required to include certain other amounts in income that we will not receive in cash
21. 25In the future, we may choose to pay distributions in our own stock and stockholders may be required to pay tax in excess of the cash they receive
22. 26Because we expect to distribute substantially all of our net ordinary income and net realized capital gains to our stockholders, we may need additional capital to finance our growth and such capital may not be available on favorable terms or at all
23. 27Loss of tax treatment as a RIC would reduce our NAV and distributable income
24. 28Adverse developments in the credit markets may impair our ability to secure debt financing
25. 29Recent developments in the banking sector could materially affect the success of our activities and investments
26. 30depository institution fails to return these deposits or is otherwise subject to adverse conditions in the financial or credit markets, our access to invested cash or cash equivalents could be limited which would adversely impact our results of operations or financial condition
27. 31Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws or regulations, could have a material adverse effect on our, and our portfolio companies’ business, results of operations or financial condition
28. 32We cannot predict how new tax legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business
29. 33Changes to U.S. tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us
30. 34The effect of global climate change or the legal, regulatory or market responses to such change may impact the operations of our portfolio companies
31. 35Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval
32. 36Efforts to comply with the Sarbanes-Oxley Act involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act, including a failure to maintain effective internal controls over financial reporting in accordance therewith, may adversely affect us and the market price of our securities

Risks Related to OFS Advisor and its Affiliates

1. 37We have potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients
2. 38We have potential conflicts of interest related to the purchases and sales that OFS Advisor makes on our behalf and/or on behalf of Affiliated Accounts
3. 39Our independent directors may face conflicts of interest related to their obligations to the Affiliated Funds for which they also serve as independent directors
4. 40Members of the Advisor Investment Committees, OFS Advisor or its affiliates may, from time to time, possess material non-public information, limiting our investment discretion
5. 41The valuation process for certain of our portfolio holdings may create a conflict of interest
6. 42We may have additional conflicts related to other arrangements with OFS Advisor or its affiliates
7. 43The Investment Advisory Agreement with OFS Advisor and the Administration Agreement with OFS Services were not negotiated on an arm’s length basis and may not be as favorable to us as if they had been negotiated with an unaffiliated third party
8. 44Our ability to enter into transactions with our affiliates is restricted, which may limit the scope of investments available to us
9. 45accounts is not permitted or appropriate under this guidance when there is an opportunity to invest in different securities of the same issuer or where the different investments could be expected to result in a conflict between the BDC’s interests and those of other accounts
10. 46Our base management fee may induce OFS Advisor to cause us to incur leverage
11. 47Our incentive fee may induce OFS Advisor to make certain investments, including speculative investments
12. 48Our incentive fee structure may create incentives for OFS Advisor that are not fully aligned with the interests of our stockholders
13. 49We may pay an incentive fee on income we do not receive in cash
14. 50OFS Advisor’s liability is limited under the Investment Advisory Agreement, and we have agreed to indemnify OFS Advisor against certain liabilities, which may lead OFS Advisor to act in a riskier manner on our behalf than it would when acting for its own account
15. 51OFS Advisor can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations
16. 52OFS Services can resign from its role as our Administrator under the Administration Agreement, and we may not be able to find a suitable replacement, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations

Risks Related to BDCs

1. 53Regulations governing our operation as a BDC affect our ability to and the way in which we raise additional capital. As a BDC, we will need to raise additional capital, which will expose us to risks, including the typical risks associated with leverage
2. 54Our ability to invest in public companies may be limited in certain circumstances
3. 55As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our assets, as defined by the 1940 Act, are qualifying assets

Risks Related to Our Investments

1. 56Economic recessions or downturns could impair our portfolio companies and harm our operating results
2. 57Our investments in the debt instruments of leveraged portfolio companies may be risky and, due to the significant volatility of such companies, we could lose all or part of our investment in bankruptcy proceedings or otherwise
3. 58The effects of inflation may adversely affect the business, results of operations and financial condition of our portfolio companies
4. 59Fluctuations in interest rates could have a material adverse effect on our business and that of our portfolio companies
5. 60Any of our portfolio companies operating in the Health Care and Social Assistance industry are subject to extensive government regulation and certain other risks particular to that industry
6. 61Our investments in private and middle-market portfolio companies are generally considered lower credit quality obligations, are risky, and we could lose all or part of our investment
7. 62Investments in equity securities involve a substantial degree of risk
8. 63Our equity ownership in a portfolio company may represent a control investment. Our ability to exit a control investment in a timely manner could result in a realized loss on the investment
9. 64Our investments in Structured Finance Securities carry additional risks to the risks associated with investing in private debt
10. 65Our investments in Structured Finance Securities are more likely to suffer a loss of all or a portion of their value in the event of a default
11. 66We will have no influence on the management of underlying investments managed by non-affiliated third-party CLO collateral managers
12. 67We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient
13. 68relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value, causing us to suffer losses
14. 69The lack of liquidity in our investments may adversely affect our business
15. 70Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our NAV through increased net unrealized depreciation
16. 71We are a non-diversified management investment company within the meaning of the 1940 Act, and therefore we are not limited by the 1940 Act with respect to the proportion of our assets that may be invested in securities of a single issuer
17. 72Our portfolio may be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if any of these companies default on their obligations under any of their debt instruments or if there is a downturn in a particular industry
18. 73Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio
19. 74Because we generally do not hold controlling equity interests in our portfolio companies, we may not be able to exercise control over our portfolio companies or prevent decisions by management of our portfolio companies that could decrease the value of our investments
20. 75Defaults by our portfolio companies will harm our operating results
21. 76Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies
22. 77We may not have the ability to control or direct such actions, even if our rights are adversely affected
23. 78If we make subordinated debt investments, the obligors or the portfolio companies may not generate sufficient cash flow to service their debt obligations to us
24. 79The disposition of our investments may result in contingent liabilities
25. 80We may expose ourselves to risks if we engage in hedging transactions
26. 81Investments in securities of foreign companies, if any, may involve significant risks in addition to the risks inherent in U.S. investments
27. 82We may not realize gains from our equity investments
28. 83Since we may incur leverage to make investments, our net investment income depends, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds
29. 84principal of, our indebtedness, and our net investment income could be adversely impacted, as well as our capacity to pay distributions to our stockholders
30. 85In addition, increasing interest rates may lead to higher prepayment rates, as corporate borrowers look to avoid escalating interest payments or refinance floating rate loans. Further, a general rise in interest rates will increase the financing costs of CLOs

Risks Related to Our Securities and an Investment in our Common Stock

1. 86There is a risk that stockholders may not receive distributions or that our distributions may not grow over time and a portion of our distributions may be a return of capital
2. 87impact of one or more of the risk factors described in this Annual Report on Form 10-K. Due to the asset coverage test applicable to us under the 1940 Act as a BDC, we may be limited in our ability to make distributions
3. 88The market price of our common stock may fluctuate and decrease significantly
4. 89Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock
5. 90Certain provisions of the Delaware General Corporation Law and our Certificate of Incorporation and Bylaws could deter takeover attempts and have an adverse impact on the price of our common stock
6. 91Our common stock may trade below its NAV per share, which limits our ability to raise additional equity capital
7. 92If we issue preferred stock, debt securities or convertible debt securities, the NAV of our common stock may become more volatile
8. 93Holders of any preferred stock that we may issue will have the right to elect members of our Board and have class voting rights on certain matters
9. 94Our Unsecured Notes are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and will rank pari passu with, or equal to, all outstanding and future unsecured, unsubordinated indebtedness issued by us and our general liabilities
10. 95The Unsecured Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries
11. 96The indenture under which the Unsecured Notes were issued contains limited protection for holders of the Unsecured Notes
12. 97In addition, the indenture does not require us to make an offer to purchase the Unsecured Notes in connection with a change of control or any other event
13. 98We may choose to redeem the Unsecured Notes when prevailing interest rates are relatively low
14. 99We may experience fluctuations in our quarterly operating results
15. 100We incur significant costs as a result of being a publicly traded company
16. 101We are subject to risks related to corporate social responsibility, and compliance with ESG-related regulations may impose additional capital and operational expenditures on our business
17. 102Increased data protection regulation may result in increased complexities and risk in connection with the operation of our business
18. 103We are subject to risks associated with artificial intelligence and machine learning technology
19. 104We are subject to risks in using custodians, counterparties, administrators and other agents
20. 105Increased geopolitical unrest, terrorist attacks, acts of war, global health emergencies or natural disasters may impact the businesses in which we invest and harm our business, operating results and financial condition
21. 106Further downgrades of the U.S. credit rating, impending automatic spending cuts or a government shutdown could negatively impact our liquidity, financial condition and earnings