Oxford Lane Capital Corp. (OXLCI) Q2 2022 Earnings Report, Transcript and Summary

Hello, and welcome to the Oxford Lane Capital Corp. Second Fiscal Quarter Earnings 2022 Conference Call. My name is Alex, and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Jonathan Cohen from Oxford Lane, Chief Executive Officer. Jonathan, over to you.

Thanks very much. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. Second Fiscal Quarter 2022 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; and Deep Maji, our Senior Managing Director and Portfolio Manager. Bruce, could you open the call with a disclosure regarding forward-looking statements.

Sure, Jonathan. Today's call is being recorded. An audio replay of the call will be available for 30 days. Replay information is included in our press release that was issued earlier this morning. Please note that this call is the property of Oxford Lane Capital Corp. Any unauthorized rebroadcast of this call in any form is certainly prohibited. At this point, please direct your attention to the customary disclosure in this morning's press release regarding forward-looking information. Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, future events and financial performance. We ask that you refer to our most recent filings with the SEC for important factors that can cause actual results to differ materially from those indicated in these projections. We do not undertake to update our forward-looking statements unless required to do so by law. During this call, we will use terms defined in the earnings release and also refer to non-GAAP measures. For definitions and reconciliations to GAAP, please refer to our earnings release posted on our website at www.oxfordlanecapital.com. With that, I'll turn the presentation back to Jonathan.

Thank you, Bruce. On September 30, 2021, our net asset value per share stood at $6.97 compared to a net asset value per share of $6.56 as of June 30, 2021. For the quarter ended September, we recorded GAAP total investment income of approximately $45.2 million, representing an increase of approximately $3.5 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of $43.6 million from our CLO equity investments and $1.6 million from our CLO debt investments and from other income. Oxford Lane also recorded GAAP net investment income of approximately $26.8 million or $0.24 per share for the quarter ended September 30, compared to approximately $25.3 million or $0.25 per share for the quarter ended June. Our core net investment income was approximately $41 million or $0.36 per share for the quarter ended September 30 compared with approximately $42.4 million or $0.41 per share for the quarter ended June 30. During the quarter ended September 30, we issued a total of approximately 8.7 million shares of our common stock pursuant to an aftermarket offering, resulting in net proceeds of approximately $62 million. For the quarter ended September 30, we recorded net unrealized -- net realized gains of approximately $5.8 million or $0.05 per share. We recorded net unrealized depreciation on investments of approximately $32.7 million or $0.29 per share. We had a net increase in net assets resulting from operations of approximately $65.3 million or $0.58 per share for the second fiscal quarter. As of September 30, the following metrics applied. We note that none of these metrics represented a total return to shareholders. The weighted average yield of our CLO debt investments at current cost was 13.3%, down from 13.6% as of June 30. The weighted average effective yield of our CLO equity investments at current cost was 16.3%, unchanged from 16.3% as of June 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 27.7%, unchanged from June 30. We note that the cash distribution yields calculated on our CLO equity investments are based on the cash distributions we received, for which we were entitled to receive at each respective period end. During the quarter ended September, we made additional CLO investments of approximately $322.8 million, and we received approximately $89.7 million from sales and repayments. In addition, during the quarter ended September, we completed an underwritten public offering of 20 -- 2.7 million shares of our newly designated 6% Series 2029 term preferred stock at a public offering price of $25 per share, raising approximately $65 million in net proceeds. On October 28, our Board of Directors declared monthly common stock distributions of $0.075 per share for each of the months of January, February and March of 2022. With that, I'll turn the call over to our Portfolio Manager, Deep Maji.

Thank you, Jonathan. During the quarter ended September 30, 2021, the U.S. loan market modestly strengthened versus the quarter ended June 30, 2021. U.S. loan prices, as defined by the S&P/LSTA Leveraged Loan Index increased from 98.37% of par as of June 30 to 98.62% of par as of September 30. According to LCD, during the quarter, BB-rated loan prices increased 13 basis points, single B-rated loan prices increased 4 basis points and CCC-rated loan prices increased 26 basis points on average. The 12-month trailing default rate for the S&P/LSTA Leveraged Loan Index decreased to 35 basis points by principal inbound at the end of the quarter after starting the quarter at 1.25%. Note that this rate is just 14 basis points above the post-global financial crisis low. Additionally, the distress ratio, defined as a percentage of loans with a price of below 80% of par, ended the quarter at approximately 70 -- [ 0.72% ], the lowest level in nearly 7 years and below levels seen in June of 2020. During the quarter, the increase in loans -- U.S. loan prices led to an increase in U.S. CLO equity net asset value. According to Wells Fargo, during the quarter, the median U.S. CLO equity NAV modestly improved from approximately 59% of par to approximately 61% of par, while the median over collateralization cushion increased from 354 basis points to 373 basis points. Additionally, according to Wells Fargo, the loan pools within CLO portfolios generally maintained their weighted average spreads at 340 basis points compared to 341 basis points the previous quarter as heavier supply in the loan market continued to weigh on spreads. Issuance in the CLO primary market continues at a historical place. Year-to-date, through September 30, approximately $130 billion of new issued deals had priced in the primary market compared to the prior full year record of $129 billion set in 2018. And approximately $191 billion of refinancings and resets in price in the primary market compared to the prior full year record of $167 billion set in 2017. Oxford Lane was able to take advantage of the strength in the primary market this quarter, does make 9 new issue CLO equity investments, refinancing 5 deals to lower the cost of debt financing of those deals and resetting 2 deals. As a function of our activity in the primary market this quarter, we were able to lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio from September of 2023 to March of 2024. From a trading perspective, we had one of our busiest quarters to date, as Jonathan mentioned. We were able to source investments in both the primary and secondary markets, with over 50% of our purchases in the primary market on a market value basis. In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy across U.S. CLO equity, debt and warehouses, as we look to maximize our long-term total return. And as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investment strategy. With that, I will turn the call back over to Jonathan.

Thanks very much, Deep. We note that additional information about Oxford Lane's second fiscal quarter performance has been uploaded to our website at www.oxfordlanecapital.com. With that, operator, we're happy to poll for any questions.

[Operator Instructions] We have a question from Matthew Howlett from B. Riley.

Jonathan, the question with the access here, the [ 6% ] term preferred, I think it's a record low for the company. I think you have a [ 24 ] debt maturity that's callable. How are you thinking about issuing and looking at the capital structure going forward, given these new low rates that you're achieving? Do you think over time, could they -- could they go lower? Would you look to extend duration?

Thank you, Matthew, for the question. Historically, we've taken, I think, an opportunistic approach to raising both equity and debt. We're looking at the cost of capital of our equity. We're looking certainly at the cost of capital of the debt. And we're trying to make sure that we stay in balance. We're ensuring that we stay in balance so far as our preferred level of leverage are concerned at any given moment. Against those things, we're looking very carefully at the opportunity side. We're looking at what we can buy and the risk-adjusted returns we can achieve in the primary market with respect to our warehousing activity and certainly in the secondary market where we continue to be very active. So to answer your question, Matthew, we don't have a specific target in mind in terms of our cost of capital on the debt side. But as you note, the market has provided us, especially recently with opportunities to raise longer-term capital at a cost of capital that we think is sufficiently compelling. But in terms of future target, we haven't really spoken to that.

Got you. I mean you were very active in the quarter. It was one of the biggest quarters in terms of deployment in CLO equity. When you look at the new issue calendar, in the year, again, with your lower cost of capital, do you expect that to be sustained? Do you think you'll take more share given you're armed with, again, a lower -- looks like cheaper access to the capital markets? Just talk a little bit about what can we expect in terms of capital deployment here looking at the next few quarters out?

Sure. We've seen, Matthew, the continuation of a very robust primary market, coupled with significantly elevated levels of trading activity in the secondary market where we continue to be quite active. So far as the primary market is concerned, our thesis is that some of this primary market activity is likely being driven by the transition from LIBOR to SOFR. So there may be some diminishment in that -- concurrent with that event. But at the same time, we think that the arbitrage is compelling. We think the risk-adjusted return has and continues to be compelling, not only for us as principally equity investors, but really down the entire capital stack. So our -- part of our thesis is that this market has been and should continue to remain reasonably healthy. That said, we've seen dislocations in the past, and we've tried to prepare ourselves for those possibilities.

Great. Got you. And I guess my last question, if I could put one more in there. You look at the returns of CLO equity, they've just been superb. Your GAAP yields are in the high teens and cash is way above that. There's an article in the Wall Street Journal about how CLO equity trends have surpassed S&P and equity. Looking for this asset class, how long do you think these yields are sustainable? Do things tightened eventually as people catch on to the strength of the asset class? Just talk a little, Jon, to where your first mover towards it, you're the largest buyer of it. How long are these [ yields ] going to be made -- or going to be available for someone like you to go in?

Matthew, it's an excellent question. It's one that we do not have the answer for. We started investing in CLO tranches, junior debt equity tranches back in 2009. We launched Oxford Lane in early 2011. And as you note, our level of activity, our scale and our scope have increased substantially since then. We have tried to stay ahead of our competition in terms of our research, our analytics, our ability to source transactions and assets. But in terms of the duration of the current market, that is an extraordinarily difficult thing to try to estimate, and we probably wouldn't try.

Well, congrats on a great quarter, congrats on the dividend increase.

[Operator Instructions] We no longer have any more questions. I'll hand back to Jonathan for any closing remarks. Jonathan, over to you.

All right. Well, I'd like to thank everybody for their interest in Oxford Lane Capital Corp. and their participation on this call. We look forward to speaking to you again soon. Thanks very much.

Thank you for joining today's call. You may now all disconnect.