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OFS Credit Company Compared To Two CLO CEF Peers: OXLC And ECC

Jan. 24, 2023 2:26 PM ETOFS Credit Company Inc (OCCI)ECC, OXLC79 Comments


Apple in good condition looking at itself in the mirror while its back is rotten. Deception

What do you see when you look at CLO CEFs?

Gustavo Muñoz Soriano

OFS Credit Company, Inc. (NASDAQ:OCCI) is a non-diversified closed-end fund or CEF which invests primarily in collateralized loan obligations (CLO). It is a micro-cap peer to both Eagle Point Credit Company Inc. (ECC) and Oxford Lane Capital (


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This article was written by

Ryan Bowen profile picture
Joined the Seeking Alpha team as a Senior Editor in 2023. As part of being an Editor I no longer can write for the site but instead focus on ensuring we curate quality content.
I am a self-taught value investor along the Graham and Dodd line. My first objective is to not lose money. I seek to do this by ensuring any position I enter has a discernible margin of safety. The second thing I aim for is above-average returns.

Always open to questions and dialogue as I believe it only serves to improve us all.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ACR, ACR.PC, BRSP, TRTX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (79)

TTurk profile picture
Your article is excellent. I have never invested in CLO's but I guess I was too lazy to take the time to learn about them. Your article gave me as much information as i need if I should ever look at them again.
I almost did not finish your article because of the information you provided about any person's article on the topic. The information you provided is valuable in its own right and IMHO there is no need to mention the opinion's of others. I am now following you.
Good Job
Ryan Bowen profile picture
@TTurk really appreciate the feedback here, and point heard. I look forward to offering my humble opinion to you in the future!
hueyuh1 profile picture
How did OCCI end up #1 on SA's Quant Ratings? But then, 6 out of 10 of them are in South America? seekingalpha.com/...
Ryan Bowen profile picture
@hueyuh1 did not catch that so thanks for flagging. Interesting list. The parent $OFS was included there too.

Not sure I agree with the ratings, but then again I’m not a “quant”.
@Ryan Bowen I have held and traded OCCI for almost 2 years now. My largest position and most reliable. People love or hate it but if you learn the patterns it is an excellent stock to work with.
hueyuh1 profile picture
@daddy stockbucks The company is putting out a whopping, theoretical 23% dividend. A shame that dividend isn't all in real cash.
I'd love to hear your opinion on OFS capital corp (OFS) itself! This was a very well presented argument.
Dr. Tan profile picture
As of October 31, 2022 insiders owned over 7% which is substantial.
Please write bearish articles for all my holdings. They are all above the price where I would buy, I haven't had a trade opportunity for a couple of days now. I want to buy more in the mid 8s before the next dividend announcement, after which it goes back above 10.

OCCI sucks, everyone; sell sell sell!
Ryan Bowen profile picture
@daddy stockbucks if you own OXLC I wrote perhaps not a bearish article on their publicly traded preferreds and notes. Does that count?

Damon Judd profile picture
Not sure you actually read the working paper from Philadelphia Fed that you referenced. The abstract of that paper stated:

"CLO equity tranches earn positive abnormal returns from the risk-adjusted price differential between leveraged loans and CLO debt tranches. Debt tranches offer higher returns than similarly rated corporate bonds, making them attractive to banks and insurers that face risk-based capital requirements. Temporal variation in equity performance highlights the resilience of CLOs to market volatility due to their closed-end structure, long-term funding, and embedded options to reinvest principal proceeds."
Ryan Bowen profile picture
@Damon Judd I'm not sure you read this article. Since you missed where I also highlighted their "positive abnormal results":

According to a working paper from the Philadelphia Fed investigating CLO performance, the average IRR for CLO equity tranches was 9.88%. They stated further that:

“Our central finding is that CLO equity tranches provide statistically and economically significant abnormal returns, or "alpha," against a variety of public benchmarks. Using the generalized public market equivalent (GPME) framework of Korteweg and Nagel (2016), we find that the average completed CLO equity investment offers a net present value (NPV) of 66 cents per dollar invested, net of fees. This estimate equates to approximately $33 million, or 6.6% of total assets, for the typical deal.”
Damon Judd profile picture
@Ryan Bowen yet you make this statement in your conclusion, which makes no sense at all since REITs originate completely different types of loans that are much higher risk. You seem to confuse CLOs with CDOs as many others have that have commented on CLOs.

"I think investors are much better off looking away from this entire category of funds and instead looking to companies like commercial mREITs which originate these types of loans directly."
M Plaut profile picture
It was suggested that part of the dividends must be used to buy new shares to replace the excess capital that is distributed.
irst, thanks for a very insightful and informative article.
Secondly, as can see from a number of post, no amount to clarion info on exorbitant fees or NAV erosion will convince some folks from seeing the validity of your point(s). Their reasons are varied but undoubtedly hinge on the blinding light of the gargantuan yield- and that’s fine for them.
Thirdly, I would add that after looking in to OCCI and associated ilk, I have concluded that these are not investments; but rather, they are trading tools- pure and simple. As such, just put in a buy limit at the 52-week low of $7.82 and/or the three-year low of $4.90- or something in between and wait for it to come to you. Then you may well come out ahead!
Ryan Bowen profile picture
I'm glad you enjoyed the article @jeffrg. Thanks for adding some reflection here as well.

Indeed it is a trading tool, and folks will trade! No judgment. May success come to those who seek it.
@jeffrg in the end everything is a trade if you want to maximize returns. 180 pages of trades from Oct 20 to today have helped me recuperate from a 30% loss from buying and holding too long. From down 30% Oct 20 to down 8-9% Feb 7. Trading OCCI was just one among many. I own about 50 different assets that consist of mreits, emerging and developed market sovereign and corporate bond funds,CLO floating rate debt,CLO equity, floating rate bdcs. I take profits from one position to cost avg down on others, trim losers I do what I have to in order to preserve and grow my capital while generating a total portfolio yield of 15% right now. When yield goes below 14%,I rebalance accordingly
The Fed is investigating CLO equity? I had no idea. Source please.
Ryan Bowen profile picture
@curtis cohen the source is included in the article. Here's the link again for your reference:

@Ryan Bowen This is a working papers research document. No investigating going on.
Ryan Bowen profile picture
@daddy stockbucks research is investigation.
There are many who simply cannot look past the over-sized dividends that CLO funds pay. I used to be included in that camp until I studied total return of these funds since inception. At the time, only ECC had produced a respectable TR of 7%. The rest have proven to be either serial destroyers of capital, or have produced meager low digit TR. In this case, these funds are what I would class as annuity alternatives as is also the case with most CEF's. If you are in the later stages of life, and are willing to trade your capital for income these might be right for you. For younger retirees, you are more likely to get trapped in these funds with a buy and hold strategy over time. Having an income focused strategy for the last 20 years, I have learned these funds and most CEF's end up being a trap. I have watched the following formula play-out repeatedly.

1. Decline in results. (Market or market sector)
2. Fund de-leverages
3. Dividend cut
4. Recapitalization via share issuance
5. Repeat
The end result is ongoing share price decline and an ever-smaller dividend on cost.
If you are an older retiree and want to hold CEF's as an alternative to annuities, that is fine. But for those not yet retired or younger retirees, you are much better off holding the stock of individual companies, preferred, and baby bonds as the best way to grow capital and income over time.
I really hate to see SA authors who are mostly inexperienced themselves touting portfolios loaded with very high yield CEF's likely to erode capital and trap investors. I suggest you study TR since inception before investing in any fund.
Ryan Bowen profile picture
@Alr8908 thanks for adding your thoughts and experience here. The pattern you note is one that seems consistent while management continues to get paid.
@Ryan Bowen Indeed! With incentives too often not in line with shareholder interests.
AKA707 profile picture
Thank's for the article.
Ryan Bowen profile picture
@AKA707 thanks for reading! Hope you found something useful in it.
In this sector, it is probably more productive to analyze total return over particular periods and given various entry points rather than lifetime "NAV destruction." And in assessing risk, expenses, and return v. CLO equity, leverage needs to be analyzed.
Ryan Bowen profile picture
In analyzing the fund my first assumption is that it's a business. If it's a business then I'm going to review how they have grown or not grown that over time. A good measure of this is reflected by Net Asset Value. That NAV destruction is a real loss of capital and represents an eroding asset base.

It'd be one thing if they were able to maintain NAV while paying out a double-digit dividend. In that case, we might expect total returns to approximate the dividend yield.

But when NAV is declining year-after-year that means the business is destroying capital. At that point of analysis why spend more time looking at total return and their use of leverage?

I don't know why looking at this from the perspective of the CLO CEF sector should alter any of that. But that's just me.
@Ryan Bowen In just any investment I'd look at the TRN. It's the bottom line that counts.
If distributions were higher than NAV loss, I should still be fine.
Ryan Bowen profile picture
@monnemvonne if distributions are consistently higher than NAV loss the company would eventually cease to exist.

You still should be fine though! The business on the other hand...
Treading Softly profile picture
I'll point out that OCCI is the CLO fund that Rida, myself, and all of HDO has repeatedly advised others to avoid: seekingalpha.com/...
Ryan Bowen profile picture
Appreciate you clarifying where you all at HDO sit on OCCI for readers @Treading Softly!
chris.strickland profile picture
OOCI is not an investment, it’s a trade. It’s real yield after cap losses is 8-10%. Way less than the advertised yield, but still nothing to sneeze at.
Ryan Bowen profile picture
@chris.strickland anything can be a trade. Every trade has winners and losers so here's to being on the right side of it!
At the right price, CLOs are worthy. Three years of OXLC dividends and I'm currently 30%+ in equity, nevermind the dividends I've been collecting.

As for OCCI, I wouldn't buy at this level/discount. When numbers become more favorable I'll reconsider.
@TBG_MK I load up every time it is in the low 8s or below. Sell some shares in the high 9s and 10s while keeping the lions share for steady dividend income. Haven't lost yet with that approach.
Ryan Bowen profile picture
@TBG_MK agreed that anything may be worthy at the right price. Thanks for chiming in
hsrendeb profile picture
On 10/11/19 I bought 200 shares. On 11/18/19 I bought 300 shares. invested $4725. All dividends were re-invested. My position today is worth $7528. there have been two market crashes during this time period. Tell me again what a poor performer it has been.
Damon Judd profile picture
@hsrendeb as the ignorant bashing of CLO funds continues, those of us who understand the income potential reap the benefits. Long OXLC, ECC, XFLT, EIC.
@Damon Judd Interesting how this sell article comes out as SA has raised the quant from hold to strong buy - I just noticed this changed three days ago.

OCCI is more than half my retirement portfolio, at tens of thousands of shares, and between understanding and trading the range, and the fat dividend (which is issued mostly in shares but you can sell them when you receive them so I am fine with that,) I have zero complaints. Keep writing articles like this sir; I'd love to buy any shares on the random dip...
Ryan Bowen profile picture
@hsrendeb glad you've seen success. I hope you continue to see it.
@Damon Judd would love an example from the article of this "ignorant bashing" that I was doing. Not sure I follow.

@daddy stockbucks keep buying on the dips, sir, if it so pleaseth.

And thanks for reading!
Well depicted OCCI performance "OFS Credit company has established a five year trend of value destruction, ownership dilution, and expense extraction."
Ryan Bowen profile picture
@MLian just one person's opinion :).

Thanks for reading.
@Ryan Bowen , but I'm holding it and collecting cash. BTW, its pay day coming on 1/31.
Ryan Bowen profile picture
@MLian may you find success.
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