OFS Capital (OFS) risk factors, FY2025 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 secure debt financing, and our results of operations and financial condition, including our revenue growth and profitability94% rewritten
2. 06uncertainties or deterioration in the United States and worldwide. For example, there is currently geopolitical, economic and financial market instability in the United States, the United Kingdom, the European Union and China, and as a result of the ongoing war between Russia and Ukraine and activity in South AmericaNew
3. 07Events outside of our control, including public health crises, rapidly changing interest and inflation rates and significant market volatility, have negatively affected, and could continue to negatively affect, our investments and our results of operationsNew
4. 08Due 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
5. 09We 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 affiliates20% rewritten
6. 10could limit our ability to achieve our investment objective and operate as we anticipate. This could have a material adverse effect on our financial condition and results of operationNew
7. 11Our financial condition and results of operation will depend on our ability to manage our business effectively23% rewritten
8. 12To 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
9. 13We 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 us42% rewritten
10. 14(1) Assumes $342.0 million in investments at fair value, $220.5 million in outstanding debt, $123.2 million in net assets, and an average cost of funds of 6.47% as of December 31, 2025. Our investment portfolio must experience an annual return of 4.17% at least to cover interest payments on the outstanding debt
11. 15Insufficient cash flows may increase our risk of default of our debt obligations, including under our Unsecured Notes, our Natixis Facility and our Banc of California Credit Facility
12. 16We are subject to reduced asset coverage for borrowings, which increases the maximum amount of leverage we may incurNew
13. 17Changes in interest rates will affect our cost of capital and net investment income41% rewritten
14. 18rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 ActNew
15. 19We may enter into reverse repurchase agreements, which are another form of leverage
16. 20Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited34% rewritten
17. 21We 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 borrowings35% rewritten
18. 22We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses37% rewritten
19. 23We may suffer credit losses
20. 24We will be subject to U.S. federal income tax at corporate rates if we are unable to maintain our tax treatment as a RIC
21. 25Our 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 tax24% rewritten
22. 26We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income76% rewritten
23. 27In 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
24. 28Because 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
25. 29Loss of tax treatment as a RIC would reduce our NAV and distributable income
26. 30Adverse developments in the credit markets may impair our ability to secure debt financing58% rewritten
27. 31Ongoing developments in the banking sector could materially affect the success of our activities and investments
28. 32limit. If a depository 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
29. 33Changes 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 condition23% rewritten
30. 34We cannot predict how new tax legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business28% rewritten
31. 35Changes to U.S. tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us62% rewritten
32. 36The effect of global climate change or the legal, regulatory or market responses to such change may impact the operations of our portfolio companies
33. 37Our Board may change our investment objectives, operating policies and strategies without prior notice or stockholder approval25% rewritten
34. 38Efforts 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. 39We have potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients
2. 40We 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. 41Our independent directors may face conflicts of interest related to their obligations to the Affiliated Funds for which they also serve as independent directors
4. 42Members 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. 43The valuation process for certain of our portfolio holdings may create a conflict of interest
6. 44We may have additional conflicts related to other arrangements with OFS Advisor or its affiliates
7. 45The 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. 46Our ability to enter into transactions with our affiliates is restricted, which may limit the scope of investments available to us75% rewritten
9. 47engaging in purchases or sales of assets or joint transactions with the registered investment company’s officers, directors, and employees, and advisor (and its affiliates)New
10. 48In addition, we have submitted a new application for exemptive relief that, if granted, would supersede our existing Order and permit us to co-invest pursuant to a different set of conditions than those in our existing Order. However, there is no guarantee that the SEC will grant such applicationNew
11. 49Our base management fee may induce OFS Advisor to cause us to incur leverage
12. 50Our incentive fee may induce OFS Advisor to make certain investments, including speculative investments
13. 51Our incentive fee structure may create incentives for OFS Advisor that are not fully aligned with the interests of our stockholders
14. 52We may pay an incentive fee on income we do not receive in cash
15. 53OFS 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 account30% rewritten
16. 54OFS 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 operations20% rewritten
17. 55OFS 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 operations24% rewritten

Risks Related to BDCs

1. 56Regulations 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 leverage28% rewritten
2. 57Our ability to invest in public companies may be limited in certain circumstances
3. 58As 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. 59Economic recessions or downturns could impair our portfolio companies and harm our operating results20% rewritten
2. 60Our 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. 61The effects of inflation may adversely affect the business, results of operations and financial condition of our portfolio companies57% rewritten
4. 62Fluctuations in interest rates could have a material adverse effect on our business and that of our portfolio companies28% rewritten
5. 63Any 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. 64Our investments in private and middle-market portfolio companies are generally considered lower credit quality obligations, are generally illiquid, are risky, and we could lose all or part of our investment
7. 65Investments in equity securities involve a substantial degree of risk
8. 66Our 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. 67Our investments in Structured Finance Securities carry additional risks to the risks associated with investing in private debt
10. 68Our 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. 69We will have no influence on the management of underlying investments managed by non-affiliated third-party CLO collateral managers
12. 70We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient46% rewritten
13. 71The lack of liquidity in our investments may adversely affect our business
14. 72Price 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 depreciation38% rewritten
15. 73We 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
16. 74Our 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 industry41% rewritten
17. 75Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio25% rewritten
18. 76Because 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
19. 77Defaults by our portfolio companies will harm our operating results
20. 78Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies
21. 79We may not have the ability to control or direct such actions, even if our rights are adversely affected
22. 80If we make subordinated investments, the portfolio companies may not generate sufficient cash flow to service their debt obligations to us
23. 81The disposition of our investments may result in contingent liabilities
24. 82We may expose ourselves to risks if we engage in hedging transactions
25. 83Investments in securities of foreign companies, if any, may involve significant risks in addition to the risks inherent in U.S. investments
26. 84We may not realize gains from our equity investments
27. 85Since we may incur leverage to make investments, our net investment income depends, in part, on the difference between the rate at which we borrow funds and the rate at which we invest those funds86% rewritten
28. 86In addition, fluctuating interest rates may influence prepayment rates, as corporate borrowers seek to avoid escalating interest payments or to refinance floating rate loans. Further, a general rise in interest rates will increase the financing costs of CLOs26% rewritten
29. 87which may in turn adversely affect our cash flows and results of operations. Unless spreads are adjusted to account for such increases, these negative impacts may worsen as the amount by which the 3-month term rate exceeds such other chosen term SOFR or other benchmark rateNew

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

1. 88There 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 capital73% rewritten
2. 89The market price of our common stock may fluctuate and decrease significantly
3. 90Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock
4. 91Certain 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
5. 92Our common stock may trade below its NAV per share, which limits our ability to raise additional equity capital20% rewritten
6. 93If we issue preferred stock, debt securities or convertible debt securities, the NAV of our common stock may become more volatile
7. 94Holders 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
8. 95Our 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
9. 96The Unsecured Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries
10. 97The indenture under which the Unsecured Notes were issued contains limited protection for holders of the Unsecured Notes
11. 98In 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
12. 99We may choose to redeem the Unsecured Notes when prevailing interest rates are relatively low33% rewritten
13. 100We may experience fluctuations in our quarterly operating results
14. 101We incur significant costs as a result of being a publicly traded company35% rewritten
15. 102Our business faces increasing public scrutiny related to ESG activities, which are often perceived to contribute to the long-term sustainability of a company’s performance. A variety of organizations measure the performance of companies on ESG topics, and the results of these assessments are widely publicizedNew
16. 103Increased data protection regulation may result in greater complexities and risk in connection with the operation of our business
17. 104We are subject to risks associated with artificial intelligence and machine learning technology50% rewritten
18. 105We are subject to risks in using custodians, counterparties, administrators and other agents
19. 106Increased 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
20. 107Further downgrades of the U.S. credit rating, impending automatic spending cuts or a government shutdown could negatively impact our liquidity, financial condition and earnings41% rewritten