OFS Credit Company, Inc. (OCCIN)

OFS Credit Company, Inc. (NASDAQ: OCCIN) shares the same fundamental business model as its sister ticker OCCIM: lending to mid-sized companies and earning income from interest and fees. Both tickets represent interests in the same underlying closed-end investment company. The company was formed to serve the growing demand for lending to businesses too large or specialized for traditional bank lending but too small or risky to access the public credit markets. Over the past several years, OFS Credit has positioned itself as a scaled player in the middle-market credit space by building origination relationships, assembling a seasoned credit team, and using securitisation to amplify its reach.

Founding and early growth

OFS Credit was incorporated as a Business Development Company in 2016. The timing was purposeful — the years following the 2008 financial crisis saw a persistent retreat by traditional banks from middle-market lending. Regulatory capital requirements and risk appetite had shifted, leaving a funding gap for companies with enterprise values in the $50 million to $1 billion range. OFS Credit and competitors like Sixth Street Specialty Lending, Goldman Sachs BDC, and Ares Capital stepped in to fill that gap, backed by institutional capital and permanent pools of equity from parent sponsors (in OFS’s case, partly seeded by Oaktree Specialty Lending).

In its early years, OFS built its origination platform, hired experienced credit professionals, and established relationships with middle-market sponsors — private-equity firms that use debt to finance their buyouts. The business model was straightforward: originate loans, hold a tranche directly, syndicate the rest to other lenders, and earn fees upfront and interest on held positions. The appeal was immediate — middle-market loans typically carried higher yields than large corporate loans because the borrowers were riskier and less liquid, and yield-hungry investors in a low-rate environment were willing to take that trade.

Securitisation and scaling

A turning point in OFS Credit’s evolution was its move into securitisation. Rather than simply hold loans on balance sheet and fund them with equity and warehouse lines, the company began managing collateralised debt obligations — assembling pools of loans and issuing notes backed by those pools. This created multiple benefits: it allowed OFS to generate management fees on a pool of assets without putting all the equity capital at risk, it allowed institutional investors to take different tiers of risk via the tranches of notes, and it freed up balance-sheet capacity for OFS to originate and hold additional loans. The CDO business became a material pillar of economics, with OFS as a special servicer earning monitoring and management fees and potentially holding equity tranches for upside.

By the late 2010s and into the early 2020s, OFS had become a recognizable player in the non-bank lending landscape. It had originated a significant loan portfolio, was running multiple CDO vehicles, and had attracted attention from institutional investors seeking yield in a still-accommodative rate environment.

Navigating the pandemic and rate shock

The COVID-19 pandemic tested every lender’s credit quality in early 2020. OFS, like the rest of the business development company sector, saw some borrower stress and loan deferrals, but the scale of the problem was manageable — the company did not face a wave of defaults that would have severely impaired values. The swift policy response and the quick bounce-back in credit markets helped.

A larger challenge arrived in 2022-2023 as the Federal Reserve raised interest rates sharply to combat inflation. Rising rates had two effects on OFS Credit: first, the cost of the company’s leverage rose (especially the portions funded at short-term rates), which squeezed net interest margins; second, the mark-to-market value of the portfolio fell as discount rates applied to future cash flows increased. For shareholders, this translated to declines in net asset value per share and pressure on distributable income. The pace of new originations also slowed as borrowers became cautious and spreads (the gap between what OFS earned and what it cost to borrow) compressed.

Scale and concentration today

As of the mid-2020s, OFS Credit is one of dozens of business development companies competing for lending opportunities. The sector has become crowded, with both traditional BDCs and newer entrants from large alternative-asset managers pushing into the space. Loan pricing has tightened, and the pool of attractive opportunities for any single lender is smaller relative to the amount of capital chasing deals. OFS’s scale — a loan portfolio in the multi-billion range across dozens of positions — is substantial but not unique. The company’s competitive position rests on its origination network, the reputation of its credit team, and its ability to syndicate or securitise positions efficiently.

The business remains profitable during stable credit periods, but profitability is tightly tied to credit spreads and default rates. A prolonged economic downturn would test both, forcing OFS to either cut distributions (if earnings fall) or erode net asset value (if it maintains distributions from capital rather than earnings).

The capital structure today

OFS funds its lending through three main sources: shareholder equity (the OCCIM and OCCIN shares), bank leverage (typically credit lines that are renewed quarterly or annually), and securitisation proceeds (bonds issued backed by loan pools). The combination varies with market conditions — when leverage is expensive or unavailable, OFS curtails lending. When rates fall and capital is abundant, the company accelerates. This responsiveness is both a strength (capital discipline) and a weakness (pro-cyclical deployment, which can mean buying risk when it is most expensive).

How to research OFS Credit

Start with the company’s SEC filings under CIK 0001716951. The form N-CSR (annual) and N-CSRS (quarterly) reports are filed with detailed schedules of every loan, the yield of each, and the default status. These are dense but essential reading. Pay close attention to the portfolio-weighted-average yield (the actual income the company earns) and compare it to the stated distribution yield — the gap reveals whether distributions are sustainable or eating into capital.

Monitor the leverage ratio — how many times the company is borrowing relative to equity. Higher leverage amplifies returns on the way up but also amplifies losses on the way down. In times of economic stress, lenders may demand faster deleveraging, which can force asset sales.

Watch for increases in loans on non-accrual (stopped accruing interest because the borrower defaulted or is near default). This is an early signal of credit deterioration. The quarterly earnings call and fact sheet (published on the company website) provide management commentary on the credit environment, origination pipeline, and any significant portfolio changes.