Oxford Lane Capital Corp. (OXLC) Q2 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Oxford Lane Second Fiscal Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jonathan Cohen, CEO, please go ahead.

Thanks very much. Good morning and welcome everyone to the Oxford Lane Capital Corp. second fiscal quarter 2016 earnings conference call. I'm joined today by Saul Rosenthal our President and Bruce Rubin our Chief Financial Officer and Treasurer. Bruce, could you open the call today, with the discussion regarding forward-looking statements?

Sure, Jonathan. Today's call is being recorded. An audited replay of the conference call will be available for 30 days. Replay information is included in our press release that was released last evening. Please note that this call is a property of Oxford Lane Capital Corp. and the unauthorized rebroadcast of this call in any form is strictly prohibited. I'd also like to call your attention to the customary disclosure in our press release from last night regarding forward-looking information. Today's conference call includes forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those projections. We do not undertake to update our forward-looking statements, unless required to do so by law. To take copies of our latest SEC filings please visit our Web site www.oxlc.com. With that I'll turn the presentation over to Jonathan.

Thanks, Bruce. For the quarter ended September 2015, Oxford Lane Capital Corp. recorded GAAP total investment income of approximately $14.5 million, representing a decrease of approximately $100,000 when compared to the quarter ended June 30, 2015. This decrease primarily represented a decline in GAAP income recorded on our CLO equity investments. The September quarter's GAAP income from our portfolio was produced as follows; approximately $13.9 million from our CLO equity investments; approximately $200,000 from our CLO debt investments; and approximately $400,000 from all other income. Oxford Lane also reported GAAP net investment income of approximately $5.9 million or $0.33 per common share for the quarter ended September 30th, compared with the prior quarter's $7.3 million or $0.44 per share. The net investment income was impacted by a one-time $500,000 write-off of unamortized deferred issuance cost in connection with the July 24, 2015 redemption of all of the Series 2017 term preferred shares which equates to approximately $0.03 per share. We note that the diminishment in our GAAP net investment income for the quarter was primarily driven by reduced effective yield projections, which were in turn driven by weakness in the broader corporate loan market. As of September 30, 2015 the following weighted average yields were calculated. The weighted average GAAP yield of our CLO debt investments at current cost was approximately 8.2% compared with 7.9% as of June 30, 2015. The weighted average GAAP effective yield of our CLO equity investments at current cost was approximately 13.9% compared to 16.1% as of June 30, 2015 and the weighted average cash distribution yield of our cash income producing CLO equity investments at current cost was approximately 26.6% compared to 27.3% as of June 30, 2015. We note that the cash yield calculated on our CLO equity investments is based on the cash distributions we received or were entitled to receive at each respective period end and excludes those CLO equity investments which had not yet made their inaugural payments. Our taxable income which we estimate approximates our cash income is substantially higher than our GAAP NII due to the accounting for CLO equity investments under GAAP and for the quarter was estimated at $13.2 million or $0.74 per common share. This estimate of distributable net investment income represents that portion of our estimated annual taxable income available for distribution to our common shareholders that we estimate to be attributable to the quarter. The Fund’s Board of Directors has declared a distribution of $0.60 per common share for the third quarter of fiscal 2016 payable on December 31, 2015 to stockholders of record as of December 16th. Additionally the Board has declared the required monthly dividend of approximately $0.16 and $0.17 respectively on our Series 2023 and 2024 term preferred shares each payable of December 31, 2015, January 29, 2016 and February 29, 2016. For the quarter ended September 30th we also recorded net unrealized depreciation of approximately 41.1 million as our CLO equity positions suffered significant price declines during the quarter. As a result of those unrealized losses we had a net decrease in net assets resulting from operations of approximately 35.2 million or $1.97 per share for the quarter. We note that each of our CLO equity positions held during the quarter produced full equity distributions to us and that no equity payment was diverted during the quarter. At September 30, 2015 our net asset value per share stood at $11.33 compared to the net asset value at June 30, 2015 of $13.88. During the quarter ended September 30th we made additional investments totaling approximately $31.8 million. Those additional investments consisted of $20 million in a warehouse facility and approximately $11.8 million in CLO equity investments. Also during the same quarter we recognized portfolio license of approximately $5.1 million from sales of existing investments. During the quarter ended September 30th the CLO market suffered its worst price declines in several years consistent with price declines in the syndicated loan assets which represent the underlying collateral CLOs for those vehicles. Much of that weakness was driven by commodity oriented sectors such as the oil and gas and metals and mining sectors. Besides those sectors the loan market also graded down more broadly in conjunction with the high yield in equity markets. The S&P/LSTA leverage loan index stood at 96.58% as of June 6/30/2015 and 94.21% as of 9/30/2015. According to Morgan Stanley average 2.0 CLO equity NAVs were down by approximately 20% at par at the end of the third quarter 2015 compared to the end of the second quarter of 2015. Consequently during the quarter the market saw certain CLO equity tranches trading at significant discounts from a cash price perspective as portfolio collateral composition became much more closely watched by investors. The combination of the crest NAVs and weakness in the broader markets and actual trades of CLO equity at these lower levels have contributed to the lower marks on our CLO equity portfolio and for the CLO equity market as a whole. Given the meaningful dislocation that has occurred in the CLO market, we have started to see a more compelling investment opportunity set relative to the last 12 months. Especially as certain portfolios continue to differentiate themselves from a credit perspective. Since we began investing in the CLO market we've focused on both the primary and the secondary markets and we've varied our emphasis according to which offer better relative values at various times. Given our active participation in both markets, we believe we have a strong understanding of market trading dynamics, especially in period with market volatility. We continue to deploy our CLO investment strategy where we see opportunities to generate attractive current cash flows and/or the potential for capital appreciation. As part of that opportunity and because we've also seen a similarly pronounced dislocation in CLO in your debt markets, we may more opportunistically invest in CLO debt tranches that can provide compelling risk adjusted and absolute returns. Lastly, we plan to continue to rotate out of certain older vintage CLO equity tranches when we see attractive bids or redemption opportunities. During these periods of mark-to-market volatility we continue to benefit from the lock in term financing of our CLO vehicles which may benefit from the current wider corporate spread environment over the longer term, as well as from our permanent capital base which affords us the ability to hold these investments through periods of price volatility. Additional information about Oxford Lane's second fiscal quarter performance has been posted to our Web site at www.oxlc.com. And with that operator, we'd like to see if there are any questions from the participants.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will be from Steven Bavaria of -- a private investor and a journalist. Please go ahead.

Maybe it's already obvious, so I just wanted to ask a question, if you in theory, if the -- if your -- if a CLO is leveraged say 10 to one and you have a 1% drop in the market price of the loans that comprise that CLO, then in theory you could recreate that CLO for 10% less. So, that would account again in theory for a possible 10% drop in the equity value of that CLO, right? Which would translate into a drop in your NAV for that amount, without it having any impact at all on the cash flow potential of the assets in the CLO, is that essentially right?

I think that is essentially right, Steve. Your larger point I think is the correct one, which is CLO equity tranches are levered investments and they are significantly levered against the syndicated corporate loan market and the syndicated loan assets and collateral CLOs that they hold. So, to the extent that there is a drop in the syndicated corporate loan market which we certainly saw in the third calendar quarter, and in the second fiscal quarter for the Oxford Lane. The magnitude of that drop is magnified by the leverage within the CLO structures. So, yes, that is correct. At the same time, we continue to see strong cash flows produced from our CLO equity portfolio the cash flows within these various vehicles continue to be strong.

It sort of further emphasizes the fact that big changes in your NAV can occur without any real impact, without it reflecting any real impact on your cash flow capacity?

Sure I mean that’s I think a generally true statement over some period of time, obviously over a longer period of time, diminishments in NAV will necessarily affect the ability for any portfolio to generate cash flows because there will be a smaller base of assets, especially to the extent that that losses are realized overtime upon which to generate a return. So, I think a fundamentally true statement is that you have made, but again with the notion of timing being important.

Our next question comes from Mickey Schleien of Ladenburg. Please go ahead.

You have 13 investments which are now callable. Can you tell us what your expectations are for those given the current market conditions?

Right, to a certain extent Mickey the market environment and to a substantial extent the market environment needs to be a factor when making decisions about optimal call points. So to the extent that NAVs have been diminished all things held equal which is a difficult assumption to make but all things held equal there would likely be a lengthening in the call expectation or a delay in the call expectation relative to a market in which NAVs originally remain stable. But we are certainly watching very closely. We have always very watched very closely the optimal call calculation with respect to our division, especially positions where we own a significant piece of the equity tranche.

Of the unrealized depreciation in the first half, not the second quarter, the first half which totaled $43 million, can you give me a sense of how much of that was mark-to-market, how much of it was the positive impact of reductions to cost given the difference between effective yield and cash and how much were reversals if any?

The very substantial majority of that, Mickey, I believe we are essentially marks-to-market.

Okay, mostly mark-to-market. Jonathan or Bruce I noticed the G&A in the first half was almost equal to all of what you reported for fiscal year ’15, can you -- was there something extraordinary in that number, what’s going on there?

Sorry Mickey, what was the end of that question, I am sorry?

Okay. So G&A in the first half of this fiscal year was almost equal to what you reported for the entire fiscal year 2015. I am asking whether there was something non-recurring in the G&A number?

There was some excise taxes Mickey that were paid I believe those approximated about $190,000, there was also some write-off associated with an expiring or expired shelf registration which was a bit more than that I believe.

Okay, thank you.

It will generally be non-recurring unless obviously there were to recur.

Okay. Last question, I can’t get the base management feet to foot it usually runs very close to 2% of assets but that ratio increased in the first half of this fiscal year. Is there something specific going on there Bruce that I should be aware of?

We raised some capital I think at the end of June Mickey that may account for the math.

Okay. But 2% run rate on a status quo basis is still correct, is that right?

That is correct Mickey yes.

This concludes our question-and-answer session. I would like to turn the conference back over to Jonathan Cohen for any closing remarks.

I would like to thank very much everyone for their interest in Oxford Lane Capital Corp. and for their participation on this call. We look forward to speaking to you all in the near future. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.